“As a pillar of the economy, the banking system still shows good profitability and high growth rate despite the Covid-19 pandemic,” ACB Securities Company (ACBS) said in its recently released Banking industry report.
According to ACBS, banking is one of the industries most resistant to the Covid-19 epidemic, thanks to: tighter credit policies than in the previous period, helping to reduce credit risks and reduce new bad debts; retail lending trend helps to disperse risks; Outstanding loans in the fields heavily affected by the epidemic (tourism, restaurants, hotels, …) only accounted for a low proportion.
Not only that, the epidemic also caused input deposit rates to decrease and CASA to increase, thereby helping to improve NIM’s net profit margin and increase profits of banks.
Although the epidemic is complicated, ACBS still highly appreciates the profit prospect of banks in 2021, for many reasons.
Firstly, credit growth will continue to remain at a relatively high level.
“Although the credit growth rate has slowed down since 2018 until now, it is still quite high, from 12-14%/year. Credit growth is higher than nominal GDP growth rate. Vietnam’s credit balance to GDP will increase to 143% by the end of 2020. However, we think this number is not worrisome since Vietnam’s economy is still growing well and this will support future solvency”, the ACBS expert group stated.
In addition, despite the possibility that the epidemic could last through 2021 (equivalent to the 7-8% credit growth scenario of the State Bank) but according to ACBS, in fact, credit growth in the first 6 months of 2021 was much higher than the expectations of the State Bank (which is always cautious) thanks to the low lending interest rate, by June 21, 2021 reached 5.47%, much higher than the same period last year of 2.45%.
“We expect credit demand to continue to be strong and credit growth to remain high in the second half of 2021, especially in the fourth quarter of 2021. We maintain our credit growth forecast. in 2021, reaching 14%, equivalent to the highest target of the State Bank,” said the expert group.
As for private banks, generally have a higher capital adequacy ratio (CAR) than state-owned banks, so these banks are often granted a higher credit growth limit. Credit growth of these banks may reach 15 20%, higher than the whole industry in 2021.
The second reason to support the bank’s profit outlook is that system liquidity is still abundant and stable, keeping deposit rates low.
Looking back, in 2020, deposit growth reached 14% while credit growth was lower, reaching only 12% due to Covid-19, causing a liquidity surplus in the banking system in the second half of 2020. Some banks such as Techcombank, TPBank and MSB took advantage of the abundant liquidity to increase borrowing in the interbank market with low interest rates, thereby helping these banks reduce capital costs and improve NIM.
The liquidity surplus eased in the first 6 months of 2021 as deposit interest rates remained low, causing deposit growth to be lower than credit growth. As of June 21, 2021, credit grew by 5.47%, while deposits from credit institutions only increased by 3.13%.
Deposit growth was slower than credit, causing the deposit-credit gap to decrease by VND 100 trillion compared to the peak of excess last year, however, according to ACBS, this is consistent with the trend of improving the LDR ratio to optimized balance sheets of most banks, not yet a sign that system liquidity is under stress.
The overnight interest rate on the interbank market, although slightly increased by 1 percentage point from nearly 0% last year, is still at a very low level compared to previous years. Meanwhile, government bond yields have remained at low levels since the beginning of the year. This shows that system liquidity is still abundant and stable.
ACBS also sees a number of supportive factors for banking system liquidity in 2021. The first is the tendency to retain profits instead of paying cash dividends. Listed banks retained 92.6% of profits in 2020, much higher than 42.4% in 2013.
Along with that, liquidity was also supported by sudden revenues such as from the sale of 49% of capital at VPBank’s FE Credit (32 trillion dong) and prepaid fees received from exclusive bancassurance agreements (Vietcombank: 9 trillion dong, VietinBank: 8.5 trillion dong, ACB: 8 trillion dong,…).
In addition, banks are continuing to supplement long-term capital by issuing certificates of deposit, bonds and stocks.
In particular, although credit demand is still strong, it will not be too much higher than deposit growth because the State Bank is still controlling the credit growth limit of banks.
In addition, the State Bank’s purchase of US$6.7 billion in the first quarter of 2021 and the launch of VND 150 trillion in the third quarter of 2021 will also help the mobilized interest rate remain low until at least the end of 2021.
The third reason for bank profitability is that there is still plenty of room to expand NIM’s net margin.
Looking back, since the third quarter of 2020, the NIM of banks has improved significantly, thanks to a decrease in deposit interest rates of about 2 percentage points due to excess liquidity. In addition, the social distancing situation promotes the trend of online payment, thereby helping the proportion of demand deposits (CASA) increase, thereby helping banks’ capital costs drop sharply.
Meanwhile, banks’ asset yields fell less than the cost of capital as lending rates fell in general less than deposit rates and some fixed-rate loans and bonds.
In the long term, ACBS believes that NIM still has room for improvement because: CASA continues to grow thanks to accelerating the digitization process and promotional campaigns to promote online transactions; increase the proportion of retail loans (individuals and small and medium enterprises), with better interest rates than wholesale loans (large enterprises); The pressure to reduce lending interest rates to support the economy from the State Bank only has a great impact on state-owned banks, partly because lending rates follow market rules, on the other hand The lending rate must also be at a level to ensure revenue for weak banks to maintain operations.
In addition, banks allocate assets more efficiently, reducing the holding of low-interest assets such as government bonds and increasing the proportion of higher-interest assets such as credit institutions, corporate bonds.
The cost of credit provision may decrease in 2021 is the fourth factor supporting bank profits.
In general, ACBS believes that provision expenses will decrease in 2021 due to many reasons. The first is that asset quality is improving. The ratio of bad debt (group 3-5) and overdue debt (group 2-5) at the end of the first quarter of 2021 increased slightly compared to the fourth quarter of 2020 due to seasonal factors but decreased compared to the same period last year and 2019.
Banks also actively made provisions, helping to improve the bad debt coverage ratio, thereby reducing the pressure of provisioning in 2021. Outstanding debts from the previous period and VAMC bonds have been make substantial provision for the period 2018-2020.
Along with that, the lending process is stricter than in the previous period, helping to limit new bad debts. The fields that are heavily affected by the epidemic (tourism, restaurants, hotels, …) only account for a very small proportion (about 1%) in the loan balance structure of banks.
“Although there are some concerns about the sharp increase in provision costs due to Circular 03/2021/TT of the State Bank, according to which banks will have to make provision according to the schedule of 30%, respectively, 60% and 100% in 2021, 2022 and 2023. However, we find that the restructuring debt of banks is not a cause for concern, “emphasized ACBS’s expert team.
The reason is because the restructuring debt balance has decreased since the second quarter of 2020 as the financial situation of many customers has recovered and actively paid the restructured debts. For listed banks, the restructuring loans tend to decrease gradually and account for only 1.4% of the total outstanding loans of these banks.
As for the restructured debt (remaining the debt group 1), ACBS found that the majority of banks are quite optimistic about the ability to recover these restructured debts with a recovery rate of over 90%.
“The positive earnings in the fourth quarter of 2020 – the first quarter of 2021 (and most likely the second quarter of 2021) show that the banking industry has endured well before the economic disruptions caused by Covid-19. Although the fourth wave of the epidemic may cause temporary economic disruption in some areas, with the Government’s drastic disease control and vaccinations starting to be implemented, we expect the The economy will soon return to operation,” the group of experts said.
The fifth factor supporting bank profitability is that non-interest income will continue to grow significantly.
Statistics show that non-interest income of banks on ACBS’s watch list has grown at a compound rate of 25.6% over the past 8 years.
ACBS expects profit from services to continue to grow well in the long term thanks to the following factors. The first is that the development of the economy will be accompanied by the growth of domestic trade and import and export activities, which will boost the service income of banks from international trade and payment finance activities.
“Although currently many banks are offering free online transactions to change consumer behavior, in the future, this will be a great potential source of revenue when the online payment trend is developing very strongly in Vietnam. Vietnam”, in the opinion of the expert group.
At the same time, Vietnam’s life insurance market still has a lot of room for growth when the proportion of the population with life insurance only reached 11% at the end of 2020. Therefore, income from distribution commissions Insurance will increasingly contribute to income from services.
Some banks such as ACB, VietinBank and MSB will start recording prepaid fees from exclusive bancassurance agreements from 2021.
Along with that, the stock market still has a lot of potential for development, helping income from brokerage, proprietary trading and securities underwriting activities to grow positively in the coming years.
As for other non-interest income, ACBS believes that profits from securities trading of some banks are likely to decline because government bond yields are unlikely to continue to fall as deeply as in the period of 2018-2020. Therefore, it will be difficult for banks to continue to record profits from securities trading as in this period.
However, the revenue from the recovery of off-balance sheet debt is very remarkable in the coming years, because after the process of setting up provisions and writing off bad debts in the period 2015-2020, the off-balance-sheet outstanding loans of banks stock is at a very high level. ACBS estimates that at the end of 2020, Vietcombank’s off-balance sheet balance will be about VND 20,000 billion, VietinBank about VND 19,000 billion, MB about VND 13,000 billion and TCB about VND 10,000 billion.
Are bank stocks still attractive?
From ACBS’s perspective, the price of bank stocks is now quite reasonable, not much different from the average of the last 5 years, amid optimistic expectations for 2021 that have been largely reflected in the share price.
This securities company believes that banking is one of the industries that are most resistant to the impact of the Covid-19 epidemic, so it recommends watching for Banking stocks. Market corrections will be an opportunity to increase the proportion of bank stocks in the portfolio.
ACBS selected TCB, CTG and MBB with the following thesis and expectations: business results continue to grow strongly on the basis of a solid balance sheet, valuation remains at a reasonable level, stable macro environment creating favorable conditions for banks to maintain profitability and high growth rate.
“The group of banks with solid balance sheets, strong business results and still reasonable valuations will be reliable investment opportunities in the context of the epidemic is still rekindling.” according to the opinion of ACBS.
Source: vietnamfinance.vn – Translated by fintel.vn