The prospect of an increase in share price of Asia Commercial Joint Stock Bank (ACB) may be attractive if looking at the valuation based on Price per Earning ratio (P/E) but not very bright if considering the profit growth prospect and capital raising potential.
Recently, a legal entity based in the “tax havens” Cayment Islands has purchased the entire amount of five-year bonds with interest rate of 20 percent per annum worth 1.402 trillion dong issued by Hong Hoang Trading Investment Joint Stock Company.
The notable point is that Hong Hoang company used nearly 61 million shares of ACB as collateral for the above corporate bonds.
According to investors, this deal is probably a way where foreign investor got around the regulation on foreign ownership room in the context when ACB’s ownership room for foreign investors has always been fulfilled at 30 percentthe maximum level according to the law.
Particularly, on the outside, the foreign investor spent 1.402 trillion dong to buy corporate bonds but actually indirectly owned nearly 61 million shares of ACB in five years.
The interest rate of 20 percent per annum shows that the parties expect ACB shares will double at least after five years.
However, there is another expectation that that the time the bonds mature, the foreign ownership room At ACB has enough room for the foreign investor to transfer from indirect to direct ownership. This scenario is likely to happen if within the next five years, the government decides to loosen foreign ownership room at banks. Whatever the expectation, the above deal shows that foreign investors are highly appreciate the prospect of ACB shares.
Low valuation is the first reason that most investors mention when it comes to ACB stock prospect.
For a bank that has completely solved its bad debt problem for more than two years before bringing the bad debt ratio (both on-balance sheet and off-balance sheet bad debts at Vietnam Asset Management Company (VAMC)) to less than one percent in the period from 2017 to September 2019, and maintaining the bad debt coverage ratio among the highest in the system (130 percent at the end of 2017, 150 percent at the end of 2018 and 159 percent in late September 2019), the P/E in the last four quarters of just around 6.6 times (compared to the industry average level of about 12 times) is really a low valuation.
In addition to valuation, another factor that is also very important is in assessing the stock prospect is the prospect of future profits.
ACB is well-known for being a bank that emphasizes safety, initially seen in its extremely low bad debt ratio, very high bad debt coverage ratio and very low accrued interest rate.
This safety is also shown in the maintenance of a higher proportion of medium and long-term loans with higher interest rates than short-term loans of 50 percent throughout the period of 2011 to September 2019. This is a low proportion in the banking system.
In the segment of home loans which is a “very hot” business in recent year, ACB has only focused on residential housing loans instead of lending to projects like most other banks to minimise risks. In fact, loans to buy residential houses have been deployed by ACB for 20 years.
As revealed by ACB’s leaders at the meeting with investors held in July 2019, the outstanding loans for buying and repairing houses of ACB account for nearly 35 percent of the bank’s total retail loans (equivalent to 45.5 trillion dong), which is equal to less than 20 percent of total outstanding loans, indicating that ACB is still focusing on low-risk loan portfolio. Following low-risk lending also means that ACB’s ability to increase profit margin in credit segment is more limited.
In addition, having no advantage in current and savings account ratio (CASA) and high leverage ratio (ACB’s ratio of total assets on equity is high in the system, reaching about 14 times in late September 2019) also limits ACB’s capability to increase the profit margin in credit segment by lowering the proportion of capital costs.
In the context when raising profit margin in credit segment is facing narrow doors, the move to loosen the ratio of Lending to Deposits (LDR) from the current 80 percent to 85 percent from 2020 according to Circular 22/2019/TT-NHNN is really a “gift” from the State Bank of Vietnam (SBV) for private banks in general and ACB in particular.
In fact, ACB’s LDR at the end of 2018 was 77 percentclose the 80 percent limit, leaving the bank with no significantly available room for increasing credit profit margin by raising LDR. With the new Circular, ACB has an additional five percent.
However, in general the prospect of increasing the profit margin of ACB is not high in the medium and long term if the bank is still focusing on low-risk lending, while the profit margin in credit segment is restricted by the annual credit growth limit. It means that ACB is somewhat more disadvantaged than other banks in terms of profit prospect in credit segment, while credit has always been the mainstay of this bank.
Although the profit growth is limited, the low risk is a fair trade-off compared to the fast-growing but high-risk model, because the high risks require high provisioning costs, which will then significantly erode profit.
Nevertheless, in the case of ACB, the provisioning expenses are already low, reaching only 161 billion in the first nine months of 2019, equivalent to less than three percent of the net profit. It shows that the bank can hardly further cut provisioning costs.
Meanwhile, it is not easy to reduce the growth rate of operating expenses, especially in the period when ACB still has to invest heavily in technology (an average of about 25-30 million US dollar per year, as revealed by the bank’s leaders). In addition, ACB is planning to have a building or a campus as its new symbol. That also limits the ability to cut costs.
In such context, without accepting the higher risk lending portfolio which offers higher profit margin, the credit segment will not become a motivation for ACB to record higher profit growth than its rivals in the coming years.
Exclusive bancassurance contracts can be considered a rare bright spot in the prospect of ACB’s profit growth.
The bank’s board of leaders once said that the bank’s policy is to cooperate with the current insurance partner and will sign contract with another partner in the near future. Many aspects will be put into consideration to open exclusive contract with one of the two partners by auction.
Once the exclusive bancassurance contract is completed, ACB can receive a large advance, along with an income from the annual fee.
In addition to valuation and profit prospect, another factor also affects the increase prospect of ACB share price. That is the capital increase potential.
Although ACB’s Capital Adequacy Ratio (CAR) is current good (the bank’s separate CAR was 9.48 percent and consolidated CAR was 10.26 percent as of late June 2010, according to Basel II standards, significantly higher than the minimum requirement of eight percent), the bank has almost no room to raise capital by issuing privately to foreign investors because its foreign ownership room is always closed at the ceiling level of 30%.
Meanwhile, carrying out private placement to domestic investors is also difficult to carry out because it may greatly affect the balance of power at this bank.
