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VPB – Strong earnings growth on positive operating jaws – Update

Company Note 11/11/2020    252

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  • VPB’s 3Q20 net profit was flat yoy at VND2,252bn.
  • Strong 9M20 net profit growth of 31% yoy was underpinned by a significant drop in provision expenses; 9M20 net profit formed 91% of our FY20F.
  • We upgrade to Add from Hold with a higher TP of VND28,000, as we raise our loan growth assumptions and lower our opex forecasts for FY20-22F.

Market price

Target price

Dividend yield

Recommendation

Sector

VND 23,750

VND 28,000

0%

ADD

Banks

9M20 net interest income (NII) rose 5.3% yoy on credit spike

VPB posted NII of VND3,606bn in 9M20, on the back of 16.5% yoy credit growth despite a 77bp yoy drop in NIM. 9M20 blended NIM slipped to 8.5% from 9.3% in 9M19 as a result of lacklustre credit growth at the bank’s consumer finance arm, FE Credit. Loan growth remained strong at 9% yoy in 3Q20 after VPB restructured its lending portfolio, and after the State Bank of Vietnam lifted the credit growth quota (includes loans and corporate bonds) for VPB from 13% to 21.5% in FY20F. Thus, we revise up our forecast for consolidated loan book growth from 7.4% to 10.2% in FY20F.

Better operating cost controls thanks to digitalisation

VPB’s cost-to-income ratio (CIR) fell sharply from 34.7% in 9M19 to 30.5% in 9M20, the lowest among listed banks, thanks to investment ramp-up in digital banking. The bank was almost the first mover to be fully compliant with all eKYC (contactless onboarding) regulations, allowing customers to open accounts and conduct transactions online within several minutes. By end-3Q20, the number of digital users at the parent bank reached 1.3m (+75% yoy). We expect digitalisation will improve VPB’s performance efficiency and help the bank to maintain its low CIR levels (32%) in FY20-22F.

Assets quality showed signs of deterioration

Non-performing loan (NPL) ratio inched up to 3.6% at end-3Q20 from 3.5% at end-3Q19 as NPL ratio of FE Credit jumped to 6.5% at end-3Q20 from 5.2% at end-3Q19. We believe the increase in bad debts was due to the negative impact of Covid-19 on the mass customer segment, which is a major focus area for the consumer finance company. Furthermore, loan-loss reserve (LLR) fell to 48% at end-3Q20 (the lowest among HOSE listed banks) from 50% at end-3Q19 while annualised write-off ratio decreased by 4bp yoy to 4.75% in 9M20.

Upgrade to Add with a higher TP of VND28,000/share

We raise our EPS forecasts for FY20-22F by 6.1-17.9% on the back of higher credit growth and lower operating expense assumptions. As a result, our target price rises 12% to VND28,000, based solely on the residual income valuation (COE: 14.3%, LTG: 3.0%). Downside risks could come from higher-than-expected credit costs. Potential re-rating catalysts include better-than-expected asset yields and equity raising via the sale of a 49% stake in FE Credit with higher-than-expected valuation to strategic investors.

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