Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
The pandemic has strained
Consequently, we have downgraded
KEY RATING DRIVERS
IDRS AND VR
MB's IDRs are driven by its standalone credit profile, as reflected in its VR. The bank has a growing franchise as well as profitability and capital ratios that are higher than those of domestic peers. However, capital buffers remain thin and we assess the bank to have a relatively high risk appetite, which would be exacerbated if it came under pressure to support weak borrowers. The current adverse business environment and significant uncertainty are putting significant pressure on the bank's asset quality and profitability factor scores.
We have lowered the bank's asset quality factor midpoint to 'b' with a negative outlook to account for higher credit risks amid the deteriorating economic environment . MB's rapid growth in retail lending and the unsecured consumer sector in recent years has increased its credit exposure to these segments and makes it more vulnerable to a spike in unemployment and lower consumer incomes.
Fitch also expects MB's profitability to weaken as a result of the authorities' drive to reduce lending rates, which would lead to margin compression, as well as from higher credit charges from soured loans. Therefore, core earnings will come under pressure even though the announced regulatory relief on debt classification will temper any increase in credit impairment and provisioning in the near term. As a result, we have maintained its earnings and profitability factor midpoint at 'b+', but changed the outlook to negative from stable.
We see limited risks of capital erosion under our base case of slower growth and continued profitability. This led us to affirm MB's capitalisation and leverage factor score at 'b' with a stable outlook. The bank's
Fitch affirmed MB's factor midpoint for funding and liquidity at 'b+' with a stable outlook. We believe smaller private commercial banks like MB would be at a funding disadvantage against larger state-owned peers in times of market stress as depositors seek refuge in implicit state support. Lower deposits rates may also drive depositors to seek higher yielding financial assets. However, the bank's largely deposit-funded balance sheet and focus on retail banking offer it a degree of funding stability. Its loan-to-deposit ratio at end-2019 was also acceptable at 86%.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating of '5' and Support Rating Floor of 'B-' reflect Fitch's assessment that state support may be possible, if needed, but cannot be relied upon. This takes into account the bank's modest market share of about 3% of system assets, large banking system relative to GDP as well as the sovereign fiscal flexibility, as reflected in the sovereign's 'BB' rating.
ESG - Governance: MB has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk stemming from its corporate governance framework, for example due to its low representation of independent directors on its board, which is a common trait of many Vietnamese banks. This has a negative impact on the rating in conjunction with other factors.
ESG - Financial Transparency: MB also has an ESG Relevance Score of 4 for Financial Transparency, incorporating our view that
RATING SENSITIVITIES
IDRS AND VR
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
MB's rating outlook could be revised to Stable should
Its VR could be upgraded to 'bb-' and its Long-Term IDR to 'BB-' if Fitch upgrades our assessment of the operating environment to 'bb-', the bank's asset quality remains stable near current levels and its FCC ratio rises close to 12% on a sustained basis. In the current environment, we think this is a high bar to clear.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
MB's VR could be downgraded to 'b' and its Long-Term IDR to 'B' if deterioration in the economic environment exceeds our base case projection, leading to significantly weaker asset quality and profitability. In quantitative terms, we may downgrade the bank's ratings if its problem loan ratio were to rise closer to 5% (end-2019: 2.3%) or if its operating profit/risk-weighted assets ratio deteriorated below 1.25% (end-2019: 2.4%).
Higher concentration in higher-risk sectors, such as the unsecured consumer sector, would also put pressure MB's VR, especially if there is no commensurate improvement in capital buffers. However, unless there are government pressures to do so, a heightening of risk appetite in the current operating environment seems unlikely in our view.
SUPPORT RATING AND SUPPORT RATING FLOOR
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
MB's Support Rating is sensitive to perceived changes in the state's ability and propensity to support the bank. An increase in the state's ability to extend support, as may be reflected in an upgrade of the sovereign rating without system leverage increasing, may lead to an upgrade in the bank's Support Rating and Support Rating Floor.
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
We may assign a 'No Floor' on the bank's Support Rating Floor if we see evidence of deterioration in the state's ability or propensity to provide support.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
MB has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk stemming from its corporate governance framework, for example due to its low representation of independent directors on its board, which is a common trait of many Vietnamese banks. This has a negative impact on the rating in conjunction with other factors.
MB also has an ESG Relevance Score of 4 for Financial Transparency, incorporating our view that
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Military Commercial Joint Stock Bank LTIDR B + Affirmed B+
ST IDR B Affirmed B
Viability b+ Affirmed b+
Support 5 Affirmed 5
Support Floor B- Affirmed B-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
(C) 2020 Electronic News Publishing, source