Analysts have recently been bombarded with a question by investors: will bank shares continue to be attractive this year?
This follows certain changes to the government’s policies related to the banking industry.
The government has indicated it will remain steadfast in its monetary stabilisation policy and give top priority to constraining inflation and stabilising the exchange rate.
The State Bank of Vietnam (SBV) has already announced that the banking sector’s credit growth will be capped at 14 per cent this year, and instructed banks to focus on short-term and working capital loans. The stock market would be responsible for providing long-term loans.
Meanwhile, a report by Rong Viet Securities Joint Stock Company said the banking sector saw high profit growth last year but is showing signs of rising bad debts due to a sharp increase in consumer lending.
Most banks are investing in upgrading digital core banking systems. Deposit interest rates are rising.
This means the lenders, particularly smaller ones, will find it difficult to reduce costs this year or even next year.
Profits will be an inevitable casualty.
An analyst at Vietinbank Securities Company said though most banks’ shares have fallen to much cheaper levels than those a year ago, they would not be too attractive this year.
Another reason was when the Basel II standards were applied at the banking system, the banks would have to strongly shift their business from lending to providing services.
This would also affect the banks’ profit in a short term.
Bad debts remain another challenge for the banks in 2019.
Earlier this year, the government issued Resolution No 01/NQ-CP on major tasks and solutions to carry out the Socio-Economic Development Plan.
In particular, with the banking sector, the government required a solution to increase capital for commercial banks. At the same time, the policy makers expected to reduce the internal non performing loans (NPL) ratio to below 2 per cent and the NPL and potential NPL to bad debts ratio (including bad debts, bad debts sold to Vietnam Asset Management Company (VAMC) not yet processed and debts with re-structured repayment period which potentially become bad debt) to below 5 per cent, much lower than now.
Settling the bad debts often affected the banks’profits, thus also effecting the attractiveness of bank shares.
But other analysts believed bank shares remain very attractive and among the top picks so far this year.
They especially pointed to Vietcombank, Asia Commercial Bank, Military Bank and Techcombank.
Investors are also keeping an eye on Sacombank, Vietinbank and HDBank, they said.
Experts said if comparing Vietnamese banks’ price to book ratio (P/B) with their return on equity (ROE) in recent years, Vietnamese banks’ shares were rather cheaper than those of many other countries in the region, and therefore they are more attractive than their peers in neighbouring countries.
Experts from Bao Viet Securities Joint Stock Company, however, said Vietnamese banks’ shares are now traded at below their real value if their current P/B are compared with ROE in 2019.
Supporting industry, focus of auto companies
If Vietnam wants to develop its automobile parts industry, it needs to ensure the auto industry remains large enough over the long term to encourage supporting industry companies to invest in technology and equipment.
This was suggested by a spokesman of Truong Hai Auto Joint Stock Company (Thaco), one of Vietnam’s leading auto makers, which hopes to enter the parts industry.
According to the Ministry of Industry and Trade, the capacity of the auto parts industry has recently been enhanced as shown by the increase in the use of locally made components in some vehicles.
Data from the Vietnam Register shows that the auto industry’s production capacity was over 322,000 units in 2017, of which cars accounted for nearly 130,000, and buses, trucks and others making up the rest.
The local parts rate in cars was only 7-10 per cent as against targets of 40 per cent and 60 per cent set for 2005 and 2010.
Industry insiders said the main reason for the low rate of use of local parts is the slow development of the auto industry, which is still only one-fifth the size of Thailand’s and one-sixth Indonesia’s.
According to Solidiance, a corporate strategy consulting firm with a focus on the Asia Pacific, in spite of the strong growth in recent years, Vietnam’s auto ownership ratio is only 16 per 1,000 population. It is 341 in Malaysia, 196 in Thailand and 55 in Indonesia.
It said while the automobile industry in many regional countries had been developing for 30 or 40 years, it has been barely a decade for the Vietnamese industry.
Not surprisingly, Vietnam has around 250 parts suppliers, while Thailand has 2,400, and most of the former are labour-intensive. As a result, production costs in Vietnam are 20 per cent higher than in other Southeast Asian countries.
It is not clear how much more realistic the Ministry of Industry of Trade has become: its new target is to have a highly competitive supporting industry by 2020, meeting 35 per cent of the demand for parts.
Its other goals are that between 2021 and 2025, the supporting industry will gradually and increasingly participate in the global supply chain, becoming an important supplier to the regional automobile industry and supplying 65 per cent of the components to the domestic auto industry by 2035 at the latest.
Analysts said the development of the supporting industry is vital not only in the auto industry but also for many others.
Vietnam now has around 1,800 companies in supporting industries but only 300 of them are able to supply foreign companies operating in the country.
Many parts suppliers admit it is impossible for them to enter overseas supply chains.
Vietnamese suppliers’ biggest problems are quality and delivering in time.
Experts said the government should come out with policies to enable supporting industries to automate so that they could turn out quality products and meet supply deadlines.
The policies should also offer incentives to foreign-owned companies to buy products from Vietnamese firms, they said.
They stressed the need for Vietnamese companies to establish close ties with foreign businesses to exactly know what they want so as to seek opportunities to participate into their production chains.
But experts pointed out that development of the parts industry depends on development of downstream industrial segments, who could supply it.
Nevertheless, they said, the auto industry should take advantage of market opportunities created by the government’s new policies, and set up large manufacturing or assembling projects, increasing demand for parts.
