Among listed banks, VPBank is one of the most undervalued banks in terms of both Price to Earnings ratio (P/E) and Price to Book ratio (P/B).
Closing the session on December 9th, the P/E in the last four quarters of VPBank was 5.7 times, lower than other big banks which were also undervalued, including Asia Commercial Joint Stock Bank (ACB, 6.5 times), Military Commercial Joint Stock Bank (MB, 6.6 times), Vietnam Technological and Commercial Joint Stock Bank (Techcombank, 8.7 times), and much lower than the sector’s average P/E which was about12 times.
Meanwhile, VPBank’s P/B was only1.15 times, significantly lower than the above mentioned banks, such as ACB (1.5 times), MB (1.32 times) or Techcombank (1.35 times).
If the bank’s capitalisation is kept unchanged, and VPBank only needs to accumulate more than six trillion dong in equity, its P/B will be less than one time a low valuation rarely seen for a large bank.
Based on the pre-tax profit of over 2.2 trillion dong in the third quarter of 2019, to accumulate six trillion dong, VPBank only needs to retain the after-tax profit of the next three quarters, that is until mid-2020.
This estimation somewhat suggests a rare investment opportunity.
To assess this investment opportunity, it is necessary to separate the parent bank and FE Credit, because while in most other banks, the importance of subsidiaries cannot compare with the parent bank, VPBank is a special case when it consists of two equally important halves: the parent bank and FE Credit.
In periods, FE Credit even contributed more than half of VPBank’s profits, more than the parent bank.
In the first nine months of 2019, the parent bank VPBank unexpectedly recorded an after-tax profit decline of up to 26 percent compared to the same period of last year. This development surprised many investors at that time, in the context when VPBank was an embodiment of the strong rise of the private banking group.
In addition to the reduction in the profit from FE Credit due to the less favourable business activities, another reason for the profit decline of the parent bank is the increase in provisions.
In the first three quarters of 2019, the provisioning expenses for credit risks of the parent bank VPBank increased by up to 52 percent over the same period of last year.
The sharp increase in provisioning expenses was not due to a sudden increase but because VPBank actively increased provisions to create sources to handle bad debts. In fact, in the first nine months of 2019, the bank has dealt with most of the bad debts at Vietnam Asset Management Company (VAMC), helping to reduce bad debt ratio (both on-balance sheet bad debts and unsettled off-balance sheet bad debts at VAMC) from 4.08 percent at the beginning of the year to 2.97 percent as of late September 2019.
The bank’s bad debt coverage ratio also rose from 35 percent to 54 percent in the same period.
Although the developments are positive, with a bad debt ratio reaching nearly three percent and a fairly low bad debt coverage ratio, it can be seen that VPBank has not yet settled bad debt thoroughly.
If continues aggressive move, VPBank may quickly handle bad debts but it will have to sacrifice profit growth. If the bank is unable to withstand the pressure of growth, the bad debt problem will have to be handled over the years, or the bank has to wait for an appropriate time to sacrifice profit for the purpose of thoroughly tackling bad debts.
For the development prospect of the parent bank VPBank, this is probably a rare minus point.
Statistics showed that for many years, the parent bank recorded impressive business results with an average growth in 2016 2018 period of up to 47%, after excluding the income impact from FE Credit. If including the income from FE Credit, the bank’s average profit growth rate was 59 percent per annum).
This achievement not only came from the growth of net interest income from credit segment, it also came from service segment with the lead of three pillars including credit cards, payment and insurance.
In addition, there is certain contribution from the revenue from the debts of which risks have been provisioned and the revenue from the debt trading, etc.
However, it should be noted that the slow settlement of outstanding bad debts also contributes to the higher profit growth than the average level.
In the future, the above factors are likely to continue leading the profit growth of the parent bank, in the context when the capital adequacy ratio (CAR) is fairly high (about10 percent according to Basel II standards, compared to the minimum requirement of eight percent) and Lending to Deposits ratio (LDR) has been extended by five percentage points from 2020 under the new regulations of the SBV.
In addition, the proportion of operating costs in total operating income is forecasted to continue decreasing thanks to the digital transformation campaign which has been implemented in recent years.
The only significant factor affecting the future profitability of the parent bank VPBank, as mentioned, comes from the settlement of bad debt issue, because the use of provisions to clear off bad debts as well as increase bad debt coverage ratio to about 70-80 percent also “consumes” considerable resources.
FE Credit and the impact of Circular18
VPBank’s “goose that lays golden eggs” FE Credit is growing slowly when the SBV has made quiet drastic moves in stopping the hot growth momentum of consumer finance market to target more sustainable development.
The issuance of Circular18/2019/TT-NHNN amending Circular 43/2016/TT-NHNN stipulating consumer lending of finance companies is considered a “key” policy move, after initial concerns which were somewhat more extreme.
Specifically, Circular18 aims to gradually reduce the proportion of outstanding loans directly disbursed to customers compared to the total outstanding loans to 30%. However, this regulation only applies to customers with total outstanding loan of more than 20 million dong.
The roadmap to reduce the total outstanding directly disbursed loans to customers of finance companies lasts in about four years from 2021 to 2024. This ratio is at a maximum level of 70 percent in 2021, and then reduced to 60 percent in 2022, 50 percent in 2023 and 30 percent from January1st 2024.
The long-term policy concerns are one of the key factors that made VPBank shares to be undervalued and it is most likely that the concerns have been reflected in prices.
Nevertheless, the valuation can still be maintained at low level if FE Credit’s business results see a negative growth, in which the influence from Circular18 plays an important role.
According to Saigon Securities Incorporation (SSI), of the three consumer finance companies under listed banks (FE Credit of VPBank, HDSaison of HCM City Development Commercial Joint Stock Bank (HDBank) and MCredit of Military Commercial Joint Stock Bank (MB)), FE Credit is the most affected one.
SSI said that FE Credit’s lending structure focuses heavily on cash loans. The product structure includes 76 percent of cash loans, eight percent of motorbike loans, 4.7 percent of electronics loans, and11.4 percent of loans for credit cards.
However, the proportion of cash loans of FE Credit to customers with total outstanding loans of over 20 million dong is currently less than 70%.
Therefore, according to SSI experts, in the next two years (2020 and 2021), the influence is low because the roadmap has not deeply affected the business activities of FE Credit. Nevertheless, from 2022 to 2024, FE Credit may have to sacrifice a part of its Net Interest Margin (NIM) to achieve a more balanced loan portfolio structure.
Meanwhile, Viet Capital Securities Company (VCSC) also said that FE Credit’s lending interest rates will decline because the proportion of cash loans must be adjusted according to Circular18, making VPBank’s consolidated NIM to be negatively affected in the period of 2021-2024.
Previously, assessing the impact of Circular18, JP Morgan stated that FE Credit will gradually reduce the proportion of cash loans to 28%, causing the annual NIM of VPBank to fall by more than 0.8 percentage point and Return on Equity to decline from15-16 percent from 20%.
However, not only lowering the proportion of cash loans, Circular18 also tightened the regulations for finance companies in promoting debt collection. This will have a certain influence on the debt recovery schedule and efficiency of consumer finance companies, including FE Credit.
Maintaining higher annual profit growth rate than the sector’s average is not an easy task for Vietnam Prosperity Commercial Joint Stock Bank (VPBank) in the context of the new policies. When FE Credit’s growth prospect is significantly affected by circular18, VPBank’s reasonable choice is likely to be extending the time to settle the remaining bad debt problem and also to improve bad debt coverage ratio. However, this option will make many investors “confused” when pouring money to buy VPBank shares, but many investors will accept this option because the valuation is at a very attractive level.
