Commercial banks have traditionally been the main suppliers of funding in Vietnam, since bank deposits remain the most popular form of investment for Vietnamese households. Even though credit growth has cooled as the government prioritises macroeconomic stability, the compound annual growth rate of 14.2% recorded in the 2011-16 period is significant even in a fast-growing economy like Vietnam. In the coming years credit growth may be around 15-17%, and banks’ core earnings are likely to rise at an even faster rate.
Beside interest income, Vietnam’s commercial banks also generate non-interest income. This revenue stream is currently quite low, but is expected to surge with the rise of new value-added services. The developments in the banking sector mean it is fair to expect earnings before non-performing loan (NPL) provisions to increase by 12-14% a year in 2017-20.
On The Bourse
Banking stocks, however, underperformed the VN-Index in 2016. The total market capitalisation of the sector is $18bn and has assets of some $300bn, which are rising at a rate of 15%.
The underlying reason for this deep discount is investors’ concerns regarding commercial banks’ asset quality. In 2012 the Vietnamese government took a bold step with regards to the banking sector’s financial health by disclosing the “real” NPL level at 17% and starting a painful restructuring process which cut strong banks’ bottom line by two-thirds on average and forced weaker banks to merge or to be restructured or acquired by the State Bank of Vietnam, the central bank.
After that, the sector’s return on equity (ROE) and return on assets (ROA) dropped to 5-7% and 0. 4-0.5%, respectively, from the 2010 levels of 14.56% and 1.29%. The stock prices of listed banks has remained distressed since that time.
Clean Up Efforts
In the past four years, the entire banking system has worked hard to clean banks’ balance sheets, which has yielded results. Some VND350trn ($15.7bn) worth of NPLs were dissolved, while another VND230trn ($10.3bn) was locked in the Vietnam Asset Management Company (VAMC) as special bonds, for which full provision will be made in next four to five years for healthy depository institutions. For the strongest banks, provisions for VAMC bonds will be speeded up.
In addition to NPL provisions, the sector’s core earnings continued to register healthy growth at 15% in 2016, while ROE and ROA before tax and provision remain at around pre-2012 levels. Due to this, we expect the best banks’ first earnings to jump, while overall sector earnings growth for 2017 is estimated in the range of 10-12%.
Legal Review
In 2016 the government started the legal review process to accelerate collateral asset sales, so that banks can acquire or dissolve collateral assets more easily in order to resolve their NPL assets. It should be noted that most loans in Vietnam have properties as collateral. According to the State Bank of Vietnam, 90% of the NPLs have collateral assets with values equal to or higher than the loan principle. In early 2017 the central bank submitted a new law to support banks in restructuring and dissolving NPL. This bill is now awaiting review by the National Parliament. If the legal process is shortened, the NPL-dissolving process will be quicker, and some banks might receive extraordinary earnings from booked provisions.
Accordingly, it seems to us that banking stocks, especially those of the top-performing banks, are seeing a turning point after four years of concerted clean-up efforts. The sector’s ROE and ROA are expected to double to pre-2012 level of 15% and 1.2%, respectively, in four to five years, while asset growth remains at 13-15% a year. Current investors have waited for this turning point for years, and for new investors, it will offer attractive opportunities.
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