FINANCIAL INSTITUTIONS

SECTOR IN-DEPTH Banks – Vietnam

16 January 2023
Risks from real estate and rising interest
rates will undermine banks' credit profiles
Summary
Liquidity in Vietnam's (Ba2 stable) corporate bond market has declined significantly in recent
months, following a tightening of bond issuance rules under Decree 651, issued by the State
Bank of Vietnam (SBV) in September 2022, while high-profile corporate arrests during the
Contacts
government's anti-graft crackdown shook investor confidence. This triggered an almost
Joyce Ong +65.6311.2608
immediate liquidity crunch in the real estate sector, that spilled over to banks through credit
AVP - Analyst
joyce.ong@moodys.com exposure, secondary impact on banks' deposit funding as well as perceived ties.
Rebecca L Tan +65.6311.2610 » Rising asset risk from real estate and construction sectors. Banks have material
Vice President - Senior Analyst
rebecca.tan@moodys.com
exposure to the real estate and construction sectors. Some highly leveraged real estate
and construction companies will face difficulties making repayments on their bank loans
Chong Jun (CJ) Wong +65.6311.2616
Analyst
as operating cash flow from projects that used to be funded by bond issuances is curtailed
chongjuncj.wong@moodys.com due to project delays.
Alka Anbarasu +65.6398.3712 » Sharp increase in deposit and interbank interest rates will hurt banks’
Associate Managing Director
alka.anbarasu@moodys.com
profitability. Tight corporate bond market liquidity has intensified banks' competition
for deposits as companies tap on excess bank deposits to meet immediate cash flow
CLIENT SERVICES needs. Rising interbank interest rates will further increase banks' cost of funds. Banks can
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mitigate by repricing existing loans to higher rates and expanding their share of high-
yielding loans, but to a limited extent because of regulatory constraints.
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100 » Private commercial banks are most at risk. Compared with state-controlled banks,
private commercial banks have significant exposure to the real estate and construction
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companies and are highly reliant on interbank borrowings that render them more
vulnerable to the rising interbank interest rates.

» Banks with ties to real estate face greater scrutiny from depositors. Banks with
ownership links to real estate, actual or perceived, face higher level of scrutiny from
depositors amid the ongoing liquidity crunch in the real estate sector. This can exacerbate
the already elevated liquidity risk private commercial banks face due to their heavy
reliance on market funds, that tend to dry up during periods of tight banking system
liquidity and volatile markets. State-controlled banks are less affected because they are
less reliant on market funds owing to robust deposit franchise. Further, public trust in the
state-controlled banks is high because of their government ownership.
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Rising asset risk from real estate and construction sectors

Vietnamese banks have material exposure to the real estate and construction-related sectors (see Exhibit 1), which are experiencing
stress because more stringent bond issuance rules accompanied with a number of high-profile anti-graft corporate arrests in the real
estate sector have limited corporate issuers' access to the bond market and eroded investors' sentiment.

Exhibit 1
Vietnamese banks' combined exposure to the real estate and construction-related sectors is material
% of adjusted gross loans as of end of 2021

Real estate loans

4% Construction loans
7% Non-bank corporate bonds
2%

Mortgages
21%

Loans to other sectors

66%

Most non-bank corporate bonds held by the banks are issued by the real estate and construction companies.
Source: Rated banks' financials, Vietnam Bond Market Association and Moody's Investors Service

Decree 65
In September 2022, SBV issued Decree 65 that imposed more stringent issuance conditions and disclosure requirements. This triggered a
number of high-profile real estate corporate bond redemptions due to alleged incompliance with the tightened requirements. Liquidity in the
corporate bond market dried up as these events weakened investors' sentiment. Key changes under Decree 65 include:

1. Disallowing bond proceeds to be used for working capital purposes or refinancing of debts for subsidiaries and/or affiliated
companies of the issuer;

2. Restricting the use of bond proceeds to implementation of programs, investment projects and restructuring of its principal
indebtedness; and

3. Restricting the investment of corporate bonds to only certified professional investors with a minimum securities portfolio
value of VND2 billion.

Highly leveraged real estate and construction companies that previously relied on bond issuances for cash flow will face difficulties
making repayments on their bank loans as operating cash flow from projects is curtailed due to project delays.

The real estate sector is more affected than others because it accounts for the highest share of non-bank bond issuances in Vietnam:
more than half of total non-bank bonds issued between 2020 and 2022. Construction companies will likewise be affected given their
economic links to real estate companies.

Real estate projects typically have a long investment cycle of at least five years and are funded mainly by frequent refinancing of bank
borrowings or bond issuances with tenors of one to three years, as well as presale funds from property buyers. The reliance on frequent

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the
most updated credit rating action information and rating history.

2 16 January 2023 Banks – Vietnam: Risks from real estate and rising interest rates will undermine banks' credit profiles
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

refinancing and long cash conversion cycles renders real estate companies more susceptible to refinancing difficulties when market
liquidity tightens.

Should developers' cash flow issues persist, home buyer sentiment may turn cautious at the prospect of delays in the completion of
real estate projects, which will worsen the cash flows of real estate companies. We expect banks have limited ability to immediately
supplant the cash flow shortfalls at these real estate companies because of the credit growth limits imposed by SBV.

Additionally, retail mortgage loans could also come under pressure if the developers' cash flow issues lead to prolonged project delays.

Sharp increase in deposit and interbank interest rates will hurt banks’ profitability
Tighter corporate bond market liquidity has intensified banks' competition for deposits as companies tap on excess bank deposits to
meet immediate cash flow needs.

Corporate deposits are a key source of deposit funding for banks in Vietnam, accounting for 50% of total deposits in the system as of
end of October 2022. Already, growth in corporate deposits has slowed markedly in the first ten months of 2022 compared with that
of system credit (see Exhibit 2), resulting in the tightening of banking system liquidity. Retail deposit growth picked up pace during the
same period but is not sufficient to compensate the slowdown in corporate deposit growth.
Exhibit 2
A slowdown in corporate deposit growth in the first ten months of 2022 is the key contributor to the widening gap between system deposit
and credit growth.
Corporate deposits growth rate Retail deposits growth rate System credit growth rate
25%

20%

15%

10%

5%

0%
2017 2018 2019 2020 2021 YTD Oct 2022

Source: State Bank of Vietnam

Stiffer competition for deposits led to an increase in deposit interest rates (see Exhibit 3) as banks needed to pay more to attract and
retain deposits necessary to fund their credit growth.

Interbank interest rates have also increased significantly in the second half of 2022 (see Exhibit 4) driven by a decline in interbank
liquidity and an increase in policy rate by 200 basis points in that period. This will further increase banks' cost of funds and weigh on
their profitability.

3 16 January 2023 Banks – Vietnam: Risks from real estate and rising interest rates will undermine banks' credit profiles
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 3 Exhibit 4
Deposit interest rates in Vietnam increased significantly in second Interbank rate in Vietnam increased significantly in second half of
half of 2022 due to stiff competition 2022 and will remain high in 2023
Range of 12-month deposit interest rates offered by Vietnam banks Three-month interbank interest rate
12

10
Jun-22
8

Jan-23 2

Feb-22

Mar-22

May-22
Jan-22

Jun-22
Apr-22

Jul-22

Oct-22
Aug-22

Sep-22

Nov-22

Dec-22
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

Source: Published banks' deposit interest rates and Moody's Investors Service Source: State Bank of Vietnam

Banks can counter the higher cost of funds by repricing existing loans to higher rates and expanding their share of high-yielding retail
and small and medium-sized enterprise (SME) loans. These measures are limited, however, because of regulatory and social pressures
on Vietnam banks to keep borrowers' debt burden manageable amid rising inflation and interest rates, which hampers their ability to
fully pass on the incremental funding costs to borrowers. At the same time, the extent to which banks can increase lending to retail and
SME borrowers is capped by credit growth limits that SBV imposes to control inflation.

Private commercial banks most at risk

Compared to state-controlled banks2, private commercial banks have significant exposure to real estate and construction companies
and are highly reliant on interbank borrowings that render them more vulnerable to the rising interbank interest rates.

As shown in Exhibit 5, private commercial banks have chunky credit exposure to the real estate and construction companies and, many
have thin capital to withstand unexpected credit losses in the event of severe stress in the real estate sector.

Exhibit 5
Many private commercial banks have significant loans to real estate and construction companies and have thin capital to withstand credit
losses
(Loans to real estate and construction companies + corporate bonds) as % of shareholders' equity
350%

300%

250%

200%

150%

100%

50%

0%
MB

VPB
Viet Capital

HDB

Vietcombank
Nam A

TCB

ABB

OCB
TPB

SeA
SHB

MSB

ACB
BIDV

LVPB

Agri

Sacom
Vietin

VIB

Data as of end of 2021. For rated banks' full names, see this endnote3
Source: Published financials of rated banks and Moody's Investors Service

Private commercial banks are more reliant on interbank borrowings than the state-controlled banks because of their modest deposit
franchises. Further, these private commercial banks materially increased short-tenor interbank borrowings in 2021 (see Exhibit 6),

4 16 January 2023 Banks – Vietnam: Risks from real estate and rising interest rates will undermine banks' credit profiles
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

motivated by low interest rates during the pandemic, which exposes them to rapid increase in cost of funds amid the rising interbank
interest rates.

Exhibit 6
Private commercial banks increased interbank borrowings materially in 2021 in contrast to the state-controlled banks
Due to financial institutions / total assets
2019 2020 2021
20%
18%
18%

16%
13%
14% 13%

12% 11%
10%
7%
8% 7%
6%

4%

2%

0%
Private commercial banks State-controlled banks

Source: Moody's Investors Service

Banks with ownership links to real estate face greater scrutiny from depositors
Banks with ownership links to real estate, actual or perceived, face higher level of scrutiny from depositors due to the ongoing stress
in the real estate sector, as evident in the deposit run at Saigon Joint Stock Commercial Bank after the chairwoman of Van Thinh Phat
Group was arrested on financial fraud charges in October 2022.

This exacerbates Vietnamese banks' already elevated funding and liquidity risk, stemming from their heavy reliance on market funds
(see Exhibit 7) amid a significant tightening of system liquidity (see Exhibit 8). Market funds in emerging markets like Vietnam are
confidence-sensitive and prone to flight when faced with market uncertainty and adverse news.
Exhibit 7 Exhibit 8
Vietnamese banks' reliance on market funds is higher than regional Liquidity has tightened significantly in 2021 and 2022, and will
peers likely persist as the gap between credit growth and deposit growth
Market funds / tangible banking assets (2021) widens
20% System credit growth rate System deposit growth rate
20%
18%
18%
16%
16%
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2% 2%
0% 0%
Vietnam Thailand Philippines Indonesia 2017 2018 2019 2020 2021 YTD Oct 2022

Asset-weighted average of rated banks Source: State Bank of Vietnam

Source: Rated banks' financials and Moody's Investors Service

State-controlled banks are less affected because they are less reliant on market funds (see Exhibit 9) owing to robust deposit franchise.
Further, public trust in the state-controlled banks is high because of their government ownership.

5 16 January 2023 Banks – Vietnam: Risks from real estate and rising interest rates will undermine banks' credit profiles
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 9
State-controlled banks in Vietnam are less reliant on market funds
Market funds / tangible banking assets (2021)

Commercial banks

State-controlled banks

0% 5% 10% 15% 20% 25% 30%

Source: Moody's Investors Service

6 16 January 2023 Banks – Vietnam: Risks from real estate and rising interest rates will undermine banks' credit profiles
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Moody’s related publications

Banks - Vietnam: Deposit run highlights governance risks at banks

Endnotes
1 Decree 65 tightened the scope of use of bond proceeds and the eligibility of investors in September 2022.
2 State-controlled banks refer to banks that are wholly or majority owned by the Vietnam government.
3 Vietnam Bank for Agriculture and Rural Development (Agri); An Binh Commercial Joint Stock Bank (ABB); Orient Commercial Joint Stock Bank (OCB) ;
Ho Chi Minh City Development JSC Bank (HDB); Asia Commercial Bank (ACB); JSC Bank for Foreign Trade of Vietnam (Vietcombank); Southeast Asia
Commercial Joint Stock Bank (SeA); Lien Viet Post Joint Stock Commercial Bank (LVPB); Vietnam JSC Bank for Industry and Trade (Vietin); JSC Bank for
Investment & Development of Vietnam (BIDV); Vietnam Technological and Commercial Joint Stock Bank (TCB); Vietnam Prosperity Jt. Stock Commercial
Bank (VPB); Military Commercial Joint Stock Bank (MB); Tien Phong Commercial Joint Stock Bank (TPB); Saigon Thuong Tin Commercial Joint-Stock Bank
(Sacom); Saigon - Hanoi Commercial Joint Stock Bank (SHB); Vietnam Maritime Commercial Joint Stock Bank (MSB); Nam A Commercial Joint Stock Bank
(Nam A); Vietnam International Bank (VIB); Viet Capital Bank (Viet Capital). Breakdown of Viet A Commercial Joint Stock Bank (VAB)’s real estate and
construction loan exposure is not available and excluded in this chart. See here for full list of rated Vietnam banks' ratings and related publications.

7 16 January 2023 Banks – Vietnam: Risks from real estate and rising interest rates will undermine banks' credit profiles
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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