Banking sector – “The glass is half full”

• Concerns over stagnant property market persisting in FY23F will lead banks to rebalance the risk dynamics between earnings growth and asset quality.
• We expect earnings growth of banks under our coverage to grow modestly 10-11% yoy in FY23-24F (+32% yoy in FY22F).
• However, we see market stress has been largely factored in current valuation, opening an attractive risk/reward profile for long-term investment.

Multiple macro headwinds persist in FY23F
First, SBV has increased policy rates by 200bps and this rate hike will inevitably put pressure on banks’ NIM next year as cost of funds (COF) rises and a full pass-through into lending rates is unlikely. Second, stagnant property market and sluggish corporate bond (CB) recovery will stress banks’ asset quality and liquidity. Third, capital raising need will once again take the centre stage during FY23-24F, especially for SOCBs. All in all, we expect earnings growth of banks under our coverage will slow down to 10-11% in FY23-24F from 32% in FY22F, following weaker credit growth, softer NIM, and higher credit cost.

Cautious in 1H23F but more optimistic in 2H23F
We take a cautious stance on banks outlook in 1H23F as liquidity constraints and CB default risks still persist. About VND46tr value of CB is schedule to mature in 1H23F, which will be a stress-test for the financial system. However, we will look for a recovery in 2H23F once interest rates and FX pressure start easing, in pace with improving liquidity thanks to stronger public investment. Downside risks include (i) higher-than-expected rate hike, (ii) higher-than-expected bad debt, and (iii) prolonged scrutiny in property and CB markets.

Price correction offers attractive valuation for the whole sector
“An optimist says the glass is half full.” Vietnamese banks are healthier than ever before and still the best proxy to Vietnam’s robust economic expansion. Thus, current sector valuation at all-time-low level of 1.1x P/B FY23F (equal to 3-year average minus 2SD range) provides an attractive risk/reward profile for long-term investment. We remain cautious in the near term and prefer banks with strong provision coverage for their loan-at-risk and well-equipped to weather the uncertainties, thus VCB and ACB are our safe choices. However, once the sky is brighter, we turn to be more aggressive with TCB and VPB given its attractive valuation, strong capital base, and great exposure to property and CB, which still have low penetration and huge potential to grow in the upcoming years.

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