The trend of retail lending and the firm credit growth rate have opened a new prospect for Vietnamese banking. Talking with VIR about banking development, Barry Weisblatt, head of research at Viet Capital Securities, has expressed his belief in the Vietnamese banking sector, especially in Techcombank.
What is your outlook for the Vietnamese banking sector?
We are generally quite positive in our outlook for the Vietnamese banking sector. 18 per cent credit growth was quite solid in 2017 and was not the kind of window dressing we have seen in previous years where growth accelerates in the last two weeks of the year to reach the SBV’s target but, rather, was stable throughout the year. Moreover, we are seeing a shift into retail lending, which is having several positive impacts.
First, the higher yields on retail assets helped keep net interest margins (NIMs) of the banks we cover stable at 2.99 per cent despite rising funding costs.
Second, we are seeing non-interest income (NOII) make a more significant contribution to banks’ bottom lines. NOII increased from 12 per cent of Total Operating Income (TOI) for our coverage universe to 18 per cent in just two years due to triple-digit increases at some banks.
Much of this is coming from the distribution of new products, like bancassurance. Transaction banking to wholesale and SME clients is also a key growth driver. Capitalisation levels are still low in some cases and Basel II implementation by 2020 will be a challenge for several banks, but NPL resolutions have been moving at a good pace, especially at state-owned commercial banks (SOCBs) and we are seeing banks fully writing off their VAMC debts.
How about Techcombank?
Techcombank (TCB) has some of the strongest returns in our research coverage universe. It recorded a 2.6 per cent return on assets for the latest 12 months against the 0.9 per cent for its Vietnamese peers and a 27.7 per cent return on equity compared to 14.9 per cent for the peers.
We expect more than 50 per cent earnings growth this year largely due to 20 per cent loan growth and an even higher 35 per cent growth of profitable mortgage loans from its PFS (retail) segment. Furthermore, TCB’s fee income grew at a 69.5 per cent compound annual growth rate from 2015-2017, impressive given the relatively high proportion of fee income in the TOI mix.
It also does a good job controlling costs. Its 29 per cent cost-to-income ratio is by far the lowest of the banks that we cover (though this includes one-off items). At the same time, the bank has maintained a healthy balance sheet. Its 12.7 per cent capital adequacy ratio (CAR) is well above the regulatory limit and it has kept its non-performing loan ratio below 2 per cent with prudent lending policies.
What do you see as its competitive strengths?
We believe TCB’s greatest strength is in its mortgage lending business. Mortgage loans make up 69 per cent of TCB’s retail loan book, compared to 35 per cent for its private bank peer group. It added more than VND8 trillion ($350 million) of mortgage loans in 2017 and had 16 per cent market share. We believe that TCB’s mortgage business will expand further in 2018 as its key ecosystem partner, Vingroup, expands into the mass-affluent market with its VinCity projects.
Mortgages are a smart way to grow your lending business in Vietnam as they enjoy a more favourable risk-weighing than loans directly to developers and therefore require less capital. Of course, Vietnam has enjoyed a good real estate market over the past five years and we believe this will continue, especially in the mass-affluent segment for at least a few more years to come. We also estimate that in 2016, total mortgage loans made up only 4.7 per cent of Vietnam’s GDP against 16 per cent in Thailand and 44 per cent in Malaysia, so there is plenty of room for expansion.
Another key area for TCB will be its bancassurance business. In 2017, TCB signed a 15-year arrangement with Manulife. This was similar to deals by other industry players, such as Dai-ichi Life with Sacombank and AIA with VPBank. Vietnam has an under-penetrated life insurance market. According to Frost & Sullivan, in 2016, life premia were 1 per cent of the GDP in Vietnam against 3.2 and 3.7 per cent for Malaysia and Thailand.
Furthermore, Frost and Sullivan reports that bancassurance represented only 2 per cent of Vietnam’s life insurance against 35 per cent or more for each of the other countries. With this in mind, we expect TCB’s net fee income from bancassurance to grow at a 70 per cent CAGR during 2017 -2020 (even excluding upfront fee elements associated with Manulife “access fees”) and make an increasingly significant contribution to overall fee income.
Several other areas of TCB’s business are also certainly worthy of mention. Its transaction banking division contributed 33 per cent to net fee income (excluding one-off components) with an emphasis on SME growth. Its investment banking team is a leader in Vietnam’s corporate bond market. Its credit card net-fee income increased by 22 per cent in 2017 as its active card ratio improved from 62 to 70 per cent. We believe the active card ratio can reach 85 per cent by 2020 while the total number of cards in circulation should rise at a 12 per cent CAGR from 2017-2020.
What risks does Techcombank face?
Mortgages are a significant part of TCB’s business and, of course, the property market is cyclical. A downturn in the market could hurt new mortgage origination and lower collateral values on existing loans, but we think this risk is quite manageable. First off, we continue to see high transaction volumes especially in the mass-affluent segment of the property market.
Our real estate analyst is quite optimistic that this will continue. Also, although Vietnam has had a very strong property market for the past five years, we have not seen exorbitant price increases in most areas so that we do not think property values are inflated to risky levels.
At the same time, TCB’s largest ecosystem partner, Vingroup, is shifting its emphasis from affluent to mass-affluent buyers. This will create a new set of borrowers for TCB. The bank must be careful to adjust its credit policies to reflect the change in buyer behaviours. However, we see TCB’s $324 million IT capex plan through 2021 as a good indicator of its investment into risk management efforts.
What challenges must it overcome?
Many domestic banks are facing serious headwinds to their NIMs right now because of rising funding costs. TCB has enjoyed a favourable funding cost structure due to its increasing CASA ratio from 20.6 to 24.1 per cent over the past three years.
In order to achieve our forecasts, the bank will need to increase the CASA ratio further to 35 per cent by 2020. We believe this is achievable by boosting: targeting “mass” segment via digital channels for the PFS (retail) division and FX and overseas remittances for business banking.
How about the IPO and listing? Was it successful?
The IPO was very successful. There was $3.5 billion of demand, which was 15.8-times the $225 million offered to non-cornerstone investors so that many of them were not even able to receive shares. While the majority of demand came from Asian investors, we saw strong participation from the US and EMEA accounts as well. Unfortunately, as a result of this success, there was no remaining room available for foreign investors on the listing date and local investors are often less interested to participate in new listings because the stock is not yet available for margin lending. The listing therefore did not get off to a good start with the shares falling to their floor price on the opening day.
Following the initial declines, what is your outlook for the share price?
We remain confident in their long-term value. We initiated our research coverage with a target price of VND153,000 ($6.75) over the next 12 months. This implies a target price to book ratio of approximately 3.5x, which we think is very reasonable compared to other Vietnamese banks.
Furthermore, we see a short-term catalyst coming for retail investors. On June 14, TCB will seek approval at its extraordinary general meeting for a 200 per cent stock dividend (each existing share receives two new shares). This will increase the bank’s charter capital from VND11.65 trillion to VND35 trillion ($514.347 million $1.545 billion) and should also improve the trading liquidity.
http://www.vir.com.vn/the-bright-outlook-for-techcombank-59888.html
