LPB – Positive factors priced in – Update

• LPB’s 3Q20 net profit surged 42.5% yoy on impressive credit growth and lower provisioning.
• LPB’s 9M20 pretax profit grew 6.4% yoy to VND1,741bn, driven by higher loan and fee income growth, fulfilling 91% of our FY20F forecast.
• Downgrade to Hold rating with a higher TP of VND13,100 in response to higher loan and non-interest income growth.

Double surge in 9M20 non-interest income

Non-II was VND483bn (+99% yoy) in 9M20 on surging net fee income (+79% yoy), driven by active promotion of card products, and the change in accounting policy. Of which, expenses from other activities were reclassified into operating expenses since late 2Q19. Due to the accounting change, both 9M20 net income from other activities and operating expenses increased, 3.4x and 12% yoy respectively. However, fee income was the main contributor to 9M20 non-II, accounting for 74% of non-II.

Deteriorating asset quality raised our concern

In 9M20, non-performing loans (NPL) grew fast with NPL ratio rose from 1.44% at end-FY19 to 1.64% at end-3Q20. We believe the increase in bad debts was due to LPB’s restructuring lending strategy towards individual lending. Furthermore, loan-loss reserve (LLR) ratio dropped sharply to 73% at end-3Q20 from 85% at end-FY19 while annualized write-off ratio maintained at a low level (0.02%).

We raise FY20/21F earnings forecasts by 12-15%

Higher net profit forecast is based on: 1) higher new credit growth; 2) higher fee income estimation, driven by new launching digital banking services and strong insurance income growth. We maintain our provision expenses forecasts with a higher credit cost (0.42%) than the current level (0.29%) as we are of the view that asset quality risks might emerge in the near term. As a result, we project 7.6%-20.2% yoy net profit growth for FY20-21F, respectively.

Downgrade to Hold rating with higher TP of VND13,100

Our new target price is based on equal weight of residual income valuation (COE: 14.5%; LTG: 3.0%) and 0.8x FY21F P/BV. The share price rallied 38% since the bank submitted its registration documents to the main bourse (Hochiminh Stock Exchange). Thus, we downgrade LPB to HOLD as the share price is close to fair value. A possible upside to our TP is the success of the private placement for foreign investors. Downside risk is lower-than-expected NIM.

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