Fitch Ratings-Singapore-05 November 2014: Fitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) and Support Rating Floors (SRFs) of two Vietnamese government-owned banks - Vietnam Bank for Agriculture and Rural Development (Agribank) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) - to 'B+' from 'B'.

The upgrade of the banks' ratings follows the upgrade on Vietnam's sovereign rating. The Outlook has been revised to Stable from Positive, reflecting a similar revision to the sovereign's Outlook. A full list of rating actions is provided at the end of this rating action commentary.

KEY RATING DRIVERS - IDRs, Support Ratings and SRFs of Agribank and Vietinbank

The upgrade on both banks' IDRs reflects Fitch's view that the sovereign's ability to provide extraordinary support, if needed, has improved. It follows an upgrade in Vietnam's ratings to 'BB-' from 'B+' on 3 November 2014, which takes into account the improvement in macroeconomic stability and favorable external finances, despite large contingent risk due to the weak banking sector. For more details on the rating upgrade on the sovereign, see the rating action commentary "Fitch Upgrades Vietnam to 'BB-'; Outlook Stable", dated 3 November 2014.

The Long-Term IDRs of Agribank and Vietinbank are driven by state support. Their Support Ratings (SRs) and SRFs reflect Fitch's expectation of likely extraordinary state support as both banks are majority-owned by the government and they are among the most systemically important banks with quasi-policy functions in the domestic economy. Agribank, and Vietinbank are the largest and second-largest banks by asset size in Vietnam with dominant domestic franchises.

The banks' ratings are notched one down from the sovereign rating to take into consideration the government's finances, which may limit the timeliness of its extraordinary support to the banks.

The Stable Outlook of Agribank and Vietinbank reflect the Stable Outlook on Vietnam's sovereign rating.

RATING SENSITIVITIES - IDRs, SRs and SRFs of Agribank and Vietinbank

The state-support driven ratings are sensitive to changes in the sovereign's ratings, and maybe hurt by any perceived weakening in the government's propensity to support the banks. However, either prospect is remote, considering the recent sovereign rating upgrade and strong linkage with the government.

The current one-notch differential could be closed by equalising the bank's ratings with that of the sovereign if the sovereign's financial ability to provide support improves substantially and there is a clear indication of the government's strong propensity to provide timely support.

KEY RATING DRIVERS AND RATING SENSITIVITIES - Senior Debt of Vietinbank

Vietinbank's senior notes are rated at the same level as its Long-Term IDR. This is because the notes constitute direct, unsubordinated and senior unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations. In line with Fitch's criteria, Recovery Ratings are assigned to entities with an IDR of 'B+' or below. Vietinbank's senior debt will likely be impacted by changes to the bank's IDR.

The rating actions are as follows:
Agribank
- Long-Term IDR upgraded to 'B+' from 'B'; Outlook revised to Stable from Positive
- Short-Term IDR affirmed at 'B'
- Support Rating Floor revised to 'B+' from 'B'
- Support Rating affirmed at '4'

Vietinbank
- Long-Term IDR upgraded to 'B+' from 'B'; Outlook revised to Stable from Positive
- Short-Term IDR affirmed at 'B'
- Viability Rating unaffected at 'b-'
- Support Rating Floor revised to 'B+' from 'B'
- Support Rating affirmed at '4'
- USD250m 8% notes due 2017 upgraded to 'B+' from 'B'; Recovery Rating affirmed at 'RR4'