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VCB – Time to add a best-in-class asset quality bank – Update

Company Note 02/02/2021    290

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  • VCB’s 4Q20 net profit grew 29% yoy and 42% qoq thanks to impressive loan growth.
  • FY20 net profit remained flat yoy due to heavy provisioning.
  • Upgrade our rating to Add with higher TP of VND111,400 given higher earnings expectation in long-term.

Market price

Target price

Dividend yield

Recommendation

Sector

VND 91,100

VND 111,400

0.86%

ADD

FINANCIALS

Robust 4Q20 net profit growth thanks to non-II surge

4Q20 total operating income soared by 35% yoy to VND10,390bn, driven by a 20% yoy growth in net interest income (NII) and a double surge in non-interest income (non-II) as the bank booked c.VND1,800bn of upfront payment fees from FWD deals. On the expense side, a double increase in provision expenses dragged 4Q20 net profit to only grow 29% yoy, to VND5,670bn.

FY20 net interest income inched up on yoy basis

VCB posted VND36,225bn in NII in FY20, +5% yoy, on the back of 14% yoy increase in loan balance and lower NIM. As at end-2020, VCB’s credit grew 14% YTD, above the system’s credit growth of 12%. FY20 NIM slipped 18bps yoy due to the stimulus packages to support clients hit by Covid-19.

FY20 net profit stayed flat on heavy provisioning

We observed that the bank was aggressive in both writing off bad debts and booking provisions. FY20 provision expenses grew 46% yoy, leading to a spike in loan loss reserves (LLR) to 370% at end-2Q20, from 180% at end-FY19, the highest among its peers. Non-performing loan ratio (NPL) was cut to 0.6%, from 0.8% at end-2Q19, lowest in the bank’s history.

We revise forecasts downward 5– 6% in FY21-22F, upward 8% in FY23F

We revise down 7.5/9/4% our NII forecasts in FY21/22/23F due to lower NIM projections. The bank has extended its credit stimulus package to support corporates activities. Thus, we expect VCB’s FY21-22F NIM to maintain FY20’s level. However, we revise down provision expense forecasts in view of VCB’s highest-among-peers’ pre-emptive provisioning in banking industry. Thus, our earnings forecasts for FY21-22F are cut by 5.3 – 6% while our FY23F earnings expectation is increased by 8% based on lower provisioning.

Upgrade to Add rating and a higher TP of VND111,400

The stock price slid 7.5% in the recent 1 month due to the market’s strong sell-off. We believe this is an opportunity for investors to accumulate a best-in-class Vietnamese bank with solid asset quality and strong earnings growth. We upgrade our rating to Add, with a higher TP of VND111,400 based on equal weighting of residual income valuation (COE: 13.0%; LTG: 4.0%) and 3.3x FY21F P/BV. Our higher TP is based on higher earnings expectations in FY23F, as we revise up our earnings forecast in FY23F.

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