JP Morgan’s Asia-Pacific Securities Research Department had just released its first report on Vietnam’s banking sector with relatively positive comments. Specifically, this financial giant said that Vietnamese banks were becoming one of the few examples in combining the two factors of high and stable profit growth over a long period. From JP Morgan’s point of view, that, along with a favourable credit cycle, would bring significant profits to Vietnamese banks over the years. Investment opportunities in Vietnam’s banking industry were similar to those of Indonesia from 2005 to 2013 and India from 2010 to 2017.
The prospect of high nominal Gross Domestic Products (GDP) growth and the current account surplus of the economy allowed a reliable forecast of income and credit growth in Vietnam. However, the proportion of debit balance on GDP of about 104 percent was high, equivalent to $2,500 per person, which may be a factor to curb the momentum of increase in the next few years.
JP Morgan rated positive (overweight) with several bank stocks in the portfolio, such as Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) (HoSE: VCB), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) (HoSE: TCB), Asia Commercial Joint Stock Bank (ACB) (HNX: ACB); and neutral assessment (neutral) with Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) (HoSE: VPB). These stocks were expected to grow by 14 percent to 68 percent in the next 12 months.
This US financial institution predicted that banks within the study range would record a Return On Equity (ROE) of 15 percent to 21 percent over two years. Credit was still under control, compounded annual growth rate (CAGR) would be at 16 percent in the next five years, coupled with nominal GDP growth of nine percent, would be the driving force for banks. That would keep the net interest margin (NIM) ratio reasonable (3.58 percent, except for VPB), although demand deposits (CASA) were low (22 percent). The balance of payments (2.5 percent of GDP) was the key to the liquidity and growth of the system, especially in the context of 94 percent of Loan-to-Deposit-Ratio (LDR).
Having a favourable cycle factor was one of the highlights of Vietnam’s banking system. That sector had asset quality issues from 2012 to 2013 but had been managed well. The key to solving this problem was the born of Vietnam Asset Management Company (VAMC), which was a tool to extend the bad debt settlement period by five years. Also, banks sold debt and recorded VAMC bonds, which enabled sustained earnings growth.
JP Morgan expected CAGR of four stocks in the research range to be at about 12 percent from 2019 through 2021, CAGR for loans at 16 percent, and NIM to decrease by six to 13 basis points (except for VPB). Loan expansion for retail would attract profits. The elimination of VAMC’s bad debts would bring prospects for income growth.
The charter capital of banks (in the process of moving from Basel I to Basel II), though, was still low, making the capital adequacy ratio (CAR) at about 12.2 percent. However, high ROE, limited dividend payment (0 percent to 17 percent) and consistent risk asset growth (13 percent to 19 percent) helped the core capital demand of the bank remain guaranteed.
The credit ratio of Vietnam’s economy at 104 percent of the adjusted GDP was considered to be high. That might come from the efficiency of low capital use in state-owned enterprises. Retail lending had proliferated in recent years. However, high consumer leverage would eventually limit growth and lead to bad debt.
JP Morgan also put some risks when investing in Vietnamese banks. The first was Moody’s considering lowering credit ratings of 17 banks, due to delayed government debt payment. Any downgrade could negatively impact stocks. The second was that foreign exchange rates could reduce profits on the dollar for investors. The third was that Vietnam was one of the countries on the watch list of the US Treasury on monetary manipulation. The last risk was that a sharp change in current account surplus and balance of payments could lead to tightening liquidity and limiting credit growth itself.
