Hanoi (VNS/VNA) – Vietnamese banks are forecast to gain inprofitability this year, but raising capital will be a key focus for banks tomeet the State Bank of Vietnam’s strict Basel II requirements.

According to a report released on Monday by ratings agency Moody’sInvestors Service, Moody’s-rated banks in Vietnam have shown higherprofitability through wider net interest spreads and lower credit costs, whichled in turn to improvements in asset quality because the banks utilised theprofit growth to write off remaining legacy problem loans.

The report showed the banks achieved a higher aggregate return on assetsfor a second year running, registering a rise of 1.1 percent in 2018 from 0.9percent in 2017.

Aggregate net income for the banks also rose 35 percent to 70 trillion VND(3 billion USD) last year from the previous year, despite a moderation ofcredit growth.

"For 2019, Vietnamese banks that Moody’s rates will achieve a furtherimprovement in profitability, again because of wider net interest spreads andlower credit costs," said Rebaca Tan, a Moody’s analyst.

"Credit growth will stay stable over the same period because oftighter control by the State Bank of Vietnam, and asset quality will improvefurther, as the banks continue cleaning up their balance sheets," addedTan.

Capitalisation would strengthen because of stronger profitability andstable credit growth.

However, the Moody’s report also noted most banks would still lacksufficient capital to meet the Basel II requirements that take effect in 2020as planned by the State Bank of Vietnam, so raising capital, primarily fromforeign investors — due to the underdevelopment of the domestic capital market— would be a key focus for banks in 2019.

Moody’s points out that despite the banks’ improved financial health,greater competition to attract private investments would make it morechallenging for Vietnamese banks to raise capital in 2019.

Earlier, Fitch Ratings also said the Vietnamese banking system could facea capital shortfall of almost 20 billion USD, equal to 9 percent of GDP, tomeet Basel II and to increase allowance coverage to a level that reflectedunderlying asset-quality problems.

Fitch forecast banks were likely to step up capital issuance over the next18 months, which could improve the credit profiles of rated banks if it resultedin a meaningful and sustained increase in capitalisation. However, a lack ofdepth in the domestic capital market could create challenges, particularly assome banks were close to or at the limit for foreign ownership.

As most banks still made their profits from credit, local expertspredicted they would have to rush in a survival race to increase capital tomeet the central bank’s Basel II requirements this year if they didn’t want toface a sharp reduction in profits as some suffered last year.

The central bank issued a warning in the middle of last year saying itwould grant a credit growth quota for each commercial bank depending on thehealth and capital hike capacity of the bank in 2019. The regulation aims toforce local banks to meet capital standards according to Basel II – a set ofbanking standards and principles issued by the Basel Committee on bankingsupervision to enhance competition and transparency in the banking system andmake banks more resistant to market changes.

Economist Le Xuan Nghia said raising capital would be the biggest problemfor banks in 2019, explaining that only by increasing capital could banks get acredit growth quota from the central bank to enable them to make profits.

It is forecast the race to increase capital would be fiercer this year asmany banks failed to do so last year. In early 2018, nearly 20 banks targetedto raise capital, but only a few succeeded at the end of the year.-VNS/VNA