Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) on Vietnam-based Asia Commercial Joint Stock Bank (ACB) to 'BB-' from 'B+'. The Outlook is Stable. Fitch has also upgraded its Viability Rating to 'bb-' from 'b+'.

Fitch is withdrawing ACB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, Fitch has assigned ACB a Government Support Rating (GSR) of 'b'. A full list of rating actions is at the end of this commentary.

ACB's Long Term IDR is driven by its VR. The upgrade on the bank's VR is driven by Fitch’s assessment that Vietnam's banking system operating environment (OE) factor score has returned to a pre-pandemic level of 'bb-' with stable outlook as the economic impact from the Covid-19 pandemic has been substantially less severe than we had originally expected. 

Vietnam's economy underwent notable deceleration in 2020 and 2021, but Fitch believes its medium-term fundamentals remain intact and growth prospects remain strong. The upward revision of the OE score has led Fitch to reassess the other key rating drivers, consistent with Fitch's Bank Rating Criteria, which discriminate financial profile scores depending on the OE category score.

The supportive economic environment has over the years benefitted ACB's credit profile and Fitch expects it to continue support the bank's asset quality and profitability, which are above the peer average, over the next 12 months. The rating also considers the bank's high proportion of secured lending; moderate, albeit improving, capitalisation; as well as its status as a mid-sized bank in Vietnam, with market share of about 3% in system assets and loans.

Fitch has revised the bank's business profile score to 'b+'/stable from 'b'/stable amid gradual improvement in its share of system loans and assets in recent years, which indicates its growing franchise as one of the leading private-sector banks in Vietnam. ACB is a retail-centric bank based in southern Vietnam that targets the upper mass-market segment. The retail banking portfolio accounts for around 62% of its loans and 80% of its deposits.

ACB's reported non-performing loan (NPL) ratio rose to 0.8% by end-September 2021 from 0.6% at end-2020 following a GDP contraction in 3Q21. ACB's asset-quality metrics continue to benefit from regulatory forbearance, which allows banks to avoid classifying exposures affected by the pandemic as NPLs. ACB's NPL ratio remains the lowest among its local rated peers despite the deterioration, and we believe its asset quality will continue to outperform its peers, given its focus on higher-income borrowers and a high degree of collateralisation. Therefore, Fitch has upgraded the bank's asset quality score to 'bb-'/stable from 'b+'/stable.

Fitch has revised the bank's earnings and profitability score to 'bb-'/stable from 'b+'/stable as the OE score has moved into the 'bb' category. Fitch expects the bank's profitability to improve gradually in 2022, as some pressure in net interest margins is likely to be offset by a decline in credit provisions, higher loan volume, and sustained strong growth in its bancassurance businesses. ACB's operating profit/risk-weighted assets is higher than its local rated peers' average, helped by its better asset quality and larger proportion of higher-yielding retail loans.

Fitch raised the bank's capitalisation and leverage score to 'b+'/stable from 'b'/stable. ACB's Fitch Core Capital ratio continued to improve gradually to 10.9% at September 2021, but remained moderate in the context of risks in the operating environment. Nonetheless, its capital ratio is higher than that of state-owned peers thanks to better internal capital generation, which has also outpaced the growth in risk-weighted asset in the past few years. Fitch expects this trend to continue, aiding capitalisation. However, any improvement in capital ratios is likely to be tempered by its high loan-growth targets and capital-management approach.

Fitch has revised up the bank's funding and liquidity score to 'bb-'/stable from 'b+'/stable in line with the higher OE score. The bank's loan-to-deposit ratio of 92% at end-September 2021 indicates a satisfactory liquidity position. Customer deposits accounted for around 87% of its funding, with current and savings accounts and retail deposits comprising roughly 23% and 80% of its total deposit base, respectively, which provides a degree of funding stability. Foreign-currency deposits account for only about 3% of its total deposits.

Fitch affirmed the Short-Term IDR on ACB at 'B' which corresponds with a 'BB' category Long-Term IDR, consistent with Fitch's Bank Rating Criteria.

ACB's GSR of 'b' reflects our view of a limited probability of extraordinary support from the state, in times of need. Fitch’s view takes into consideration the bank's modest size and systemic importance, with market share of around 3% in system assets, as well as the banking system's size relative to GDP, and the state's fiscal flexibility to provide support - as reflected in the sovereign rating of 'BB' with Positive Outlook.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

IDRS AND VR

Fitch may downgrade the bank's VR and IDR should any of the following occur:

- NPL ratio rises above 1% for a sustained period.

- Operating profit/risk-weighted assets below 2% for a prolonged period.

This could occur should Fitch see sustained economic weakness, which is not Fitch’s base-case scenario.

The Short-Term IDR is unlikely to be downgraded unless the Long-Term IDR was downgraded by four or more notches.

Deterioration in the sovereign's ability to support the bank, which may be reflected in negative action on the sovereign rating, may lead us to downgrade the bank's GSR. This is unlikely as Fitch has a Positive Outlook on the sovereign rating.