LPB – Low credit costs supported 1Q23 earnings – Update

• 1Q23 net profit (NP) declined by 12.5% yoy to VND1.2tr, fulfilling 26% of our full-year forecast.
• Given solid 1Q23 results, we maintain our FY23-24F earnings forecasts at VND4.9tr/5.6tr, respectively, which imply solid earnings growth of 8%/16% from high base in FY22.
• Reiterate ADD with unchanged TP of VND17,400.

1Q23 recap: low credit costs helped offset weaker total operating income (TOI)

LPB reported TOI and NP of VND3.1tr (-3.9% yoy) and VND1.2tr (-12.5% yoy), fulfilling 22% and 26% of our FY23F forecasts, respectively. The decline in TOI was driven by (1) a 3.5% decrease in NII due to softer net interest margin (NIM) and (2) a 6.5% decline in in non-interest income due to a VND12bn net other operating loss vs. a VND191bn gain in 1Q22, partially offset by strong FX gain of VND145bn vs. a VND15bn loss in 1Q22 and a 4.0% yoy increase in net fee income (NFI). Lower TOI and and a 16.6% yoy increase in operating expenses drove pre-provision operating profit (PPOP) to drop by 15.1% yoy. Importantly, credit costs declined by 28.2% yoy and 82.9% qoq, which helped buffer earnings to decline by only 12.5% you.

Weaker NIM as expected while credit / funding growth was decent

NIM contracted by 70bps yoy in 1Q23, driven by a 200bps yoy increase in cost of funds (COF) partially offset by a 105bps yoy increase in asset yield. Weaker NIM was not surprising considering the rapid increase in deposit rates during 4Q22. Credit to customers grew by 2.7% ytd, slightly better than industry growth at 2.1% ytd. Customer deposits growth continued to be robust at 5.3% qoq (vs. 11.6% growth in 4Q22) as customers continued to shift out of riskier assets such as stock, corporate bonds, and real estate into safer bank deposits.

Write-off stepped up in the quarter but overall asset quality remains solid

NPL inched up slightly yoy by 10bps to 1.5% but was flat qoq. Group 2 loans % increased by 50bps qoq to 2.0%, suggesting somewhat weaker asset quality but nothing alarming yet in our view. Notably, the bank wrote off VND1.2tr of bad debts in 1Q23, which was significant when compared to VND1.4tr of write-off for the entire FY22. Despite large write-off, credit costs only amounted to VND226bn or 0.4% of average loans as LPB released some of the reserve cushion it had built in FY22. As a result, loan loss ratio (LLR) declined from 142% at end-FY22 to 111% at end-1Q23.

No material changes in our FY23-24F earnings outlook

We tweak our NIM, TOI, and provision expenses lower but overall maintain our FY23-24F earnings forecasts at VND4.9tr/5.6tr. With deposit rates on the downtrend and Circular 02 helping the industry to better control NPL formation/provision, we remain comfortable that LPB can achieve our forecasts with ease.

Reiterate ADD rating with higher TP of VND17,400

LPB is now trading at only 0.8x FY23F P/B, well below its 3-year average of 1.2x. At this valuation, we continue to see long-term value in the stock. Reiterate ADD with higher TP of VND 17,400. Upside catalysts include (1) stronger-than-expected NIM and (2) private placement to foreign investors. Downside risks include (1) weaker-than-expected loan growth and (2) higher-than-expected bad debt provision.

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