Banking sector – Inflection point in sight

• Banks still recorded robust profitability in 1Q22 given strong credit growth, robust fee incomes and well-controlled credit cost.
• We believe the recent market sharp correction has brought banking sector back to buy territory with intact outlook over FY22-23F.
• Top pick for the sector are VPB, HDB and TCB.

Banks still delivered robust profitability in 1Q22…
Vietnam banks posted earnings growth of 29% yoy and ROE of c.23% in 1Q22 given steady credit expansion, robust fee incomes and well-controlled credit cost. System credit grew 6% ytd at end-1Q22, much higher than that of 3.45% ytd at end-1Q21 thanks to huge loans demand to resume business activities after the pandemic. Banks’ asset quality has been relatively affected as a consequence of the pandemic, in which 1Q22 average non-performing loan (NPL) ratio rose while loan loss reserve (LLR) slightly reduced compared with the levels at end-4Q21; however they are still manageable.

… and still intact over FY22-23F

We expect the economy to gather pace in 2022-23 driven by robust export growth, demand recovery and fiscal policy support and banks would be the best proxy to Vietnam economic resurgence. Although NIMs are difficult to expand due to higher deposits rate, banks will maintain strong earnings growth of c.25% and robust profitability of c.22% this year given solid credit growth, fast-growing fee incomes and well-managed credit cost.

Valuation has been depressed; inflection point is near

Recent market correction has brought banking sector valuation down to 1.53x FY22F P/BV which is much lower than its 3-year average of 2x. Banking sector has faced headwinds due to the market concern of inflation, NIM compression and bad debt rising after the end of Circular 14. Furthermore, the sentiment for banks has been even worse as investors have over-reacted to the scrutiny on Vietnam capital market regardless those regulators aim to improve market integrity and sustainability in the long run. We believe these concerns are not as bad as fear as Vietnam banks will be able to weather any asset quality risks thanks to already strong provisioning buffer and well-controlled exposure to high-risk property segments; and this ‘panic-selling’ period has provided a very attractive valuation for the whole sector. In specific, we prefer VPB, HDB and TCB as they have unique stories besides of their solid fundamentals.

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