Fitch Ratings has revised the outlook on the Long-Term Issuer Default Ratings (IDRs) of two state-owned banks and a wholly foreign-owned bank in Vietnam to Stable from Positive, and the outlooks for two joint stock commercial banks to Negative from Stable.

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These actions stem from the sharply lower - albeit positive - growth that Vietnam faces from the Covid-19 pandemic and its potential to negatively affect the banks' credit profiles in the near term, at least. The IDRs of all five banks were affirmed at existing levels as Fitch expects a firm economic recovery in 2021, although there will be lingering effects on the banks.

Fitch Ratings previously revised the outlook on Vietnam's IDR to Stable from Positive and affirmed the rating at 'BB'.

Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), and ANZ Bank (Vietnam) Limited (ANZV) had their outlooks lowered to Stable from Postive. Meanwhile, Fitch lowered the outlooks of Asia Commercial Joint Stock Bank (ACB) and Military Commercial Joint Stock Bank (MB) to Negative from Stable.

Vietnam's GDP growth slowed to 3.8% in the first quarter (Q1) of 2020 from 7% in the previous quarter and Fitch forecasts full-year growth at 3.3%, which would be slowest pace since the first year of the Doi Moi reforms in 1987.

The sharp economic shock will cause unemployment to rise and can quickly tip Vietnam's large proportion of informal workers and micro business owners into severe financial hardship.

In response, the State Bank of Vietnam (SBV) cut its policy rates and directed banks to extend debt relief to affected borrowers, while easing requirements on loan classification and provisioning. As a result, the banking sector has become a key intermediary - and will likely bear much of the policy burden - of financial relief.

Fitch has lowered Vietnam's operating environment midpoint to 'b+' from 'bb-', but kept the outlook at stable as the rating agency expects the slowdown to be sharp before a sizeable recovery in 2021, with growth forecast at 7.3%.

The sudden loss of economic momentum that banks in Vietnam have grown accustomed to in recent years will most directly affect their asset quality and earnings. Moreover, risk appetite, capitalization and governance scores could also be lowered should pressure for banks to undertake policy lending manifest in large scale non-risk-based lending.

The negative outlook also considers banks' rapid credit growth in recent years, especially in consumer loans and unsecured lending, which have not been tested through a down cycle. Some banks' credit allowances have lagged their dash for market share, such that loss-absorption buffers remain thin at many banks. More than a few banks continue to hold Vietnam Asset Management Company bonds - a legacy of bad debt from the 2010-11 downturn.

It is expected profitability to come under significant pressure due to waning credit demand and lower lending rates after the SBV's rate cuts and authorities' orders to reduce debt burden for affected borrowers.

Fitch’s assessment of banks' funding and liquidity has not changed materially as a result of the Covid-19 pandemic. Meanwhile, the agency’s expectations of slower credit growth and highly accommodative liquidity management from the SBV have kept the factor outlook at stable. Fitch expects the SBV will continue to provide liquidity to the system as directed by the government.