TCB – Re-rating on better credit growth prospects – Update

• We forecast 18.5% EPS CAGR in 2021-23F, supported by steady credit growth and stable NIM.
• We reiterate our Add rating with a higher TP of VND40,400 due to lower cost of equity and higher P/BV assumptions.

2021F credit jump on improving residential property market

We forecast Techcombank’s (TCB) credit book to rise 15% yoy in 2021F, given the growing supply of residential property. We project new condo supply to rise 10-15% yoy to 17,000 units in HCMC and 50-60% yoy to 23,000 units in Hanoi in 2021F, which should help TCB expand mortgage loan. We believe that the bank’s credit growth estimate of 12% yoy in FY20F is achievable considering its performance of 9.2% YTD in 9M20, and as in 4Q20 the bank’s credit cap was lifted to 23% yoy in 2020. We expect NIM to expand 7bp yoy to 4.6% in FY21F due to low funding cost of 3.5% on high CASA ratio of 36% and improved asset yield of 7.6%.

Bad debts to remain under control in 2021F

TCB made provisions proactively for bad debts in 9M20. As a result, non-performing loan (NPL) ratio fell to 0.6% at end-3Q20, the lowest among peers; its loan loss reserve (LLR) rose to 148% at end-3Q20, the second highest in the industry. Hence, we expect bad debts to remain manageable in 2021F. We forecast a credit cost of 1.1%, maintaining NPL ratio below 1% and a decent LLR exceeding 100% at end-2021F.

EPS CAGR of 18.5% in 2021-23F

We anticipate NII CAGR of 14% in 2021-23F driven by a 15% credit book CAGR and stable NIM. We expect non-II CAGR to grow 14% driven by a 19% NFI CAGR in 2021-23F. We maintain CIR at c.35% in 2020-22F (2019: c.35%). Hence, we estimate TCB’s earnings CAGR at 18.5% in 2021-23F.

Reiterate Add with a higher TP of VND40,400

We reiterate our Add rating with a higher TP of VND40,400, still based on residual income valuation (COE: 12.7%, LTG: 4%) and 1.7x FY21F P/BV, weighted equally. Cost of equity is decreased to 12.7% from 13.7% due to lower risk free rate of 3% from 4% previously. We raise our valuation multiple from 1.2x to 1.7x FY21F P/BV. TCB is trading at 1.4x FY21F P/BV which is lower than regional peers’ average of 1.6x FY21F P/BV. In our view, TCB deserves to trade at a higher level as it should have higher profitability growth and higher ROE than regional peers’ average.

Re-rating catalysts and downside risks

A potential re-rating catalyst is higher-than-expected credit growth. A downside risk is lower-than-expected NIM expansion.

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