A new report by Fitch Ratings says that the major Vietnamese banks' risk profiles will remain vulnerable in view of the country's below-par economic performance, high asset-quality risks, poor transparency and slow pace of banking restructuring, alongside persistent global headwinds.

Stable macro-policies since early 2011 have led to lower volatility in interest rates, exchange rates and inflation. But sustaining a broadly steady backdrop raises the chances of a banking recovery. However, State-led reforms have been slow, in part because authorities probably fear exacerbating problems in a fragile economy.

Fitch forecasts Vietnam's gross domestic product (GDP) growth to rise modestly to around 5 percent in 2013 and 5.5 percent in 2014-15 - low relative to the country's record over the past decade.

Efforts to spur domestic demand have not been effective as banks and borrowers are wary of an uncertain operating environment. Reported loan growth was just 6 percent for this year to August.

The agency expects any recovery in the banking system to be gradual, depending on the pace and effectiveness of reforms and regulatory discipline.

The Vietnam Asset Management Company (VAMC) may not tackle many of the asset-quality issues in the near term because some aspects of its operations are still unclear and regulatory rules to improve asset-quality data transparency have been delayed until June 2014.

Banking consolidation and reform of State-owned enterprises are likely to progress slowly in the medium term.

Vague non-performing loan (NPL) transparency and tough economic conditions still pose impairment risks to major banks. VAMC can remove bad debt from banks, but not losses.

A "true" level of the NPL ratio, which Fitch estimates at 15 percent relative to the officially-reported 3-4 percent, and an 80 percent loss rate, would cut core tier 1 capital adequacy ratio (CAR) of large lenders to about 1 percent from the reported 10 percent by June.

This, together with pressure on banks' asset quality and profit generation, underlines the need for fresh capital, which Fitch believes will be hard to acquire, especially for small and medium-sized banks.

Restrictive foreign ownership laws are deterring foreign investment, while there may not be much investor appetite locally because of the uncertain domestic economy.

Downside rating risks could arise if the operating environment becomes even more challenging and threatens banks' solvency, a loss in depositors' confidence occurs, and/or if there is a negative rating action on the country.

Fitch says the outlook is stable, however, as the banks' rating is in the single ‘B' category in light of the Vietnamese sovereign's stable outlook.-VNA