The credit rating agency has also affirmed the Hanoi-based bank’s B2 long-term local and foreign currency issuer ratings and b3 baseline credit assessment (BCA) and adjusted BCA.
SHB’s local and foreign currency Counterparty Risk Ratings and Counterparty Risk Assessment are also confirmed at B1/NP and B1(cr)/NP(cr), respectively.
According to Moody’s, the affirmation of SHB’s B2 deposit and issuer ratings reflects the bank’s b3 BCA and a one-notch uplift based on Moody’s assessment of a moderate probability of support from the Vietnamese government (Ba3 stable) in times of need.
SHB’s b3 BCA considers its weak asset quality, which is strained by its large stock of legacy problem assets, modest profitability, as a result of high credit costs, as well as its weak capitalisation.
Moreover, the bank’s higher than system average loan growth in 2014-17 and its large exposure to cyclical sectors like agriculture, construction and real estate pose further downside risks to its asset quality. Finally, the BCA also reflects SHB’s modest funding and liquidity.
SHB reported total assets of VND323.27 trillion ($13.9 billion) as of December 31, 2018.
As of year-end 2018, SHB’s problem loan ratio was stable from a year earlier at 7.8 per cent. In Vietnam, Moody’s defines problem loans as loans under categories 2-5 of Vietnamese accounting standards, and gross bonds issued by the Vietnam Asset Management Company (VAMC).
However, in assessing the bank’s asset quality, Moody’s also factored in other problematic assets that originated from the bank’s merger with Hanoi Building Commercial JSB (Habubank) in 2012, including VND600 billion ($25.8 million) of foreclosed assets, VND700 billion ($30.1 million) of debt granted to the troubled Vietnam Shipbuilding Industry Group, and VND1.8 trillion ($77.42 million) of doubtful debt from entrusted investments of Habubank.
Including the other problematic assets, SHB’s problem assets ratio would increase to 9 per cent as of end December 2018.
The bank’s loss absorbing buffers remain thin relative to its large stock of problem assets. Problem loans accounted for 104 per cent of the bank’s credit reserves and tangible common equity as of the end of December 2018.
Moody’s expects it will take time for SHB to build up its loan-loss reserves, as provisions for problem loans transferred from Habubank and VAMC bonds will be gradually made between 2016 and 2024 under the central-bank-approved restructuring plan.
SHB’s return on tangible assets improved mildly to 0.59 per cent in 2018 from 0.54 per cent in 2017. Total revenue improved in line with loan growth and margin expansion, although the improvement was offset by high operating and credit costs. Moody’s expects SHB’s profitability to hover at current levels as the bank continues to make provisions against its large stock of problem assets.
SHB is largely funded by deposits, although its deposit base is made up primarily of more expensive term deposits, while low-cost current accounts and savings accounts made up only 8.42 per cent of customer deposits at the end of 2018. As a result, SHB’s cost of deposits was 5.22 per cent in 2018, the highest among Moody’s-rated Vietnamese banks.
SHB’s liquid banking assets as a percentage of tangible banking assets increased to 22 per cent at the end of 2018 from 17 per cent at the end of 2017. However, high-quality liquid assets, such as cash, balances with the central bank and government securities, constituted 7.29 per cent of tangible banking assets at the end of 2018, one of the lowest levels among Moody’s-rated banks in Vietnam.
Moody’s assessment of a moderate probability of government support rendered to SHB in the event of financial distress considers the bank’s modest 3 per cent share of system assets and system deposits at the end of 2018, as well as the history of regulatory forbearance in Vietnam.