NEWS & ANALYSIS

Credit implications of recent worldwide news events

Karolyn Seet Assistant Vice President - Analyst +65.6398.8303 karolyn.seet@moodys.com Kevin Tseng Associate Analyst +65.6398.8339 kevin.tseng@moodys.com

Saigon-Hanoi Banks Takeover of Habubank Is Credit Negative

On 5 May, Saigon-Hanoi Commercial Joint Stock Banks (SHB; B2 review for downgrade; E+/b2 review for downgrade)10 shareholders approved a plan to merge with troubled lender, Hanoi Building Commercial Joint Stock Bank (Habubank; unrated), following Habubanks shareholders supporting the transaction on 28 April. The Vietnamese regulator, the State Bank of Vietnam (SBV), has also indicated that it supports the agreement. Despite shareholders and regulators approving the deal, it is credit negative for SHB as Habubanks weak credit profile and the materiality of the transaction relative to SHBs size suggest the merger will put downward pressure on its credit quality. As a result of the merger, we placed all of SHBs ratings on review for downgrade last Friday. Specifically, we expect SHBs asset quality and liquidity metrics to deteriorate. SHBs reported nonperforming loan (NPL) ratio was 2.2% at the end of 2011, while Habubanks was 4.4%. In addition, SHB has limited earnings capacity, and we understand that Habubank has not fully provisioned for its significant exposures to the troubled Vietnam Shipbuilding Industry Group (Vinashin; unrated). If we include Habubanks loans to Vinashin, we estimate its NPL ratio would be a much higher 16.7%. Therefore, the merged entity may report higher NPL ratios than either SHB or Habubank is now reporting, depending on how it intends to manage provisions for its NPLs. Furthermore, Habubanks liquidity ratio is substantially weaker than SHBs, with a gross customer loans-to-gross customer deposits ratio of 120% at the end of 2011, compared with 84% for SHB. Another challenge this merger could pose to SHB relates to integrating two sizable operations with little perceived synergies. Habubanks assets are no less than 58% of SHBs total assets. With a registered capital of around VND4 trillion, Habubank has over 80 banking units and a securities enterprise. SHB, meanwhile, has VND4.8 trillion in registered capital, a network of over 150 units, and an asset management firm. Habubanks limited distribution network may restrict cross-selling opportunities given the possible overlapping of branches between the two banks, which will use the SHB name post-merger. More broadly, this merger might be the start of the SBVs plan to consolidate five to eight ailing banks in the second quarter of this year, which the regulator announced earlier this year it would undertake as part of the banking systems restructuring and consolidation. The central bank has signaled that it would encourage lenders to merge voluntarily, but added that it would force ailing ones to do so if necessary. Soaring inflation and the collapse of the property market have led to unsustainably high levels of bad debt at a number of Vietnamese banks, and the SBV last year responded by launching a plan to restructure the sector through mergers and acquisitions of the weakest lenders.

10

The bank ratings shown in this article are the banks foreign currency deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks.

28

MOODYS WEEKLY CREDIT OUTLOOK

14 MAY 2012