VietNamNet Bridge – Viet Nam's central bank's plans to consolidate the country's banking system, and introduce new rules involving ownership structure under Circular 36 are likely to benefit the sector, said Fitch Ratings.

Banks with a more than 5 per cent stake in other credit institutions will have a year till February 1, 2016 to divest their shareholdings or merge with the relevant entities in compliance with new regulations. — Photo foca.vn

However, the agency noted, that the implementation of the rules might prove to be a challenge, while long-term structural problems, such as weak asset quality and low capital buffers, remain.

Consolidation is likely to improve efficiency through better economies of scale, and reduce supervisory burden. The State Bank of Viet Nam (SBV) had announced plans during the recent months for approving M&A deals among the country's lenders in 2015 to reduce the number of banks to between 15 to 17 banks by 2017, from around 40.

Fitch expects the bulk of the consolidation to be led by the merger of weak, smaller banks with large State-owned commercial banks. It also believes that the impact on State-owned commercial banks will be manageable as potential targets remain smaller, relative to their suitors' total assets, although absorbing weaker banks could heighten asset quality and execution risks in the near term.

In addition, new regulations under Circular 36, which took effect from February 1, and allow banks to hold a less than 5 per cent stake each in a maximum of two other credit institutions, are likely to help reduce the high level of inter-bank ownership in the sector, which overstates capitalisation in the banking system and raises corporate governance concerns.

Banks with a more than 5 per cent stake in other credit institutions will have a year till February 1, 2016 to divest their shareholdings or merge with the relevant entities in compliance with new regulations.

The agency said the minimum capital requirements under Circular 36 remain unchanged at 9 per cent for the total capital adequacy ratio (CAR)–and are unlikely to have a major impact on Fitch-rated commercial banks. Fitch-rated commercial banks had reported CAR ranging from 12.6 to 14.4 per cent, as of June 2014.

A more concrete implementation of banking sector reforms, however, is likely to remain challenging in Viet Nam as highlighted by the slow progress of State-owned enterprise' (SOE's) privatisation, and the multiple delays in implementing Circular 2–a set of tighter loan classification rules, aimed at improving asset-quality transparency.

The agency said consolidation is also unlikely to act as a panacea for the country's banking-sector challenges, considering that high asset-quality risks and low capital buffers will continue to weigh on the industry.

VNS