VIB – Asset quality to bear in mind – Update

• VIB’s 1Q23 net profit grew 18.2% yoy to VND2,155bn (filling 23% of our FY23F forecast).
• VIB’s NP growth is expected to slow down to 13%/18% yoy in FY23-24F (CAGR 2020-22 of 35%).
• Reiterate ADD with unchanged TP of VND27,000.

Provisioning expenses put a lid on 1Q23 NP growth
VIB posted a steady 1Q23 net interest income growth of 22.4% yoy thanks to c.30bps NIM expansion and 9.6% yoy of earning assets. VIB has successfully maintained its robust NIM until 1Q23 thanks to a huge individual lending exposure in loan mix and ample liquidity (discussed below). CIR is still controllable with 33.4% in 1Q23 (vs. 34.7% in 1Q22), leading to a 26% yoy growth in PPOP. However, provisioning expenses spiked 68.2% yoy (provision/PPOP was 20% – higher than the average levels in previous quarters – figure 5), denting the bank’s 1Q23 NP growth to 18.2% yoy (VND2,155bn – filling 23% our FY23F forecast).

One of a few banks having capabilities to mitigate NIM contraction risk
We see the increase in corporate lending and individual deposits as the key trends among the sector now, putting downward pressure on NIM in overall (see our note here). However, banks with (1) high retail lending exposure and especially (2) ample liquidity can mitigate NIM contraction in this tough time; and VIB is a prominent name for this. We believe VIB is still able to manage the rising COF given benign liquidity position with a (1) relatively low LDR of 71% and (2) diversified funding mix with a decent amount of borrowing from interbank besides its exposure to customer deposits (figure 6). We estimate VIB’s NIM will just shrink c.6bps to 4.7% during FY23-24F.

However asset quality needs to bear in mind
The high interest rate environment has dampened consumer spending and the ability to fulfill obligations, thus diminishing loan demand. Otherwise, banks will be more conservative to lend this group to minimize bad debt in this circumstance. As a prominent retail banking name focusing on mortgage and car loans (c.50% and 40% loan mix, respectively), VIB’s loan book has been narrowed down 1.2% ytd (+7% yoy – figure 6). Asset quality also deteriorated because of that: NPL ratio spiked to 2.6% (vs. 1.8% at end-FY22) and LLR decreased to 38% (vs. 54% at end-FY22) at end-1Q23. We expect things will get better from 2H23, given (1) the effects of supportive measures (see our note here) and (2) the SBV had three-time reductions in its policy rates, marking a reversal in the monetary policy to support economic recovery.

Reiterate ADD with unchanged TP of VND27,000
We expect VIB’s NP growth to slow down to 13%/18% yoy in FY23-24F (2020-22 CAGR of 35%), as its pressure from building up provisions persist though robust NIM could be maintained. Currently, VIB’s valuation is only 1.17x P/B FY23F (peers’ average of 1.2x); this level is below its -1SD range of 3-year P/B average, implying an attractive entry point. Our TP is based on the combination of FY23F P/B of 1.5x and residual income valuation approach (COE: 16.7%, LTG: 3%), weighting equally. Downside risks include (1) slower-than-expected interest rates cool down, (2) higher-than-expected bad debt spike, and (3) slower-than-expected of policies’ effects.

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