Strong Customer Loans Lead to Strong Bank Growth

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Invest in Vietnam: Your 2016 Outlook Part 2

March 07, 2016

Disclaimer: The opinions expressed herein are that of HSC Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.


  • ACB released unaudited consolidation numbers in line with EBT grew slightly.
  • Customer loans and deposits increased moderately.
  • NII recovered however total non-interest income dropped significantly.
  • Overall provision rose also.
  • For FY2016, HSC forecast 22.00% y/y in EBT.
  • CAR is still high, LDR is fairly low.
  • FOL is full however some blocks might come to the market this year.
  • Reiterate Outperform.

ACB (HNX: Outperform) unaudited consolidation numbers in line. Decent forward prospects

MAIN TAKEAWAY – EBT in line. Both customer loans and customer deposits increased moderately while NIMS recovered supporting strong NII. However a sharp decrease in total non-interest income given provisioning against securities investments offset much of this. Overall provisions rose also. Going forward HSC forecasts FY2016 EBT will up 22.00% y/y thanks to accelerated lending growth; recovery in non-interest income and a significant drop in provision expense.

ACTION – Reiterate Outperform. CAR is high while LDR is still fairly low. And with balance sheet restructuring moving into the final stages we think growth will recover here. And then while the FOL is full we see some blocks coming to the market this year.

ACB (HNX: Outperform) released unaudited consolidation results for FY2015 showing EBT of VND1,314 billion (+8.12% y/y) and thus fulfilled 100% of bank’s initial plan given decent growth in both customer loans & customer deposits. Total provision expenses remain high although we seem to be in the final stages of balance sheet restructuring.

Customer loans grew 15.22% y/y to VND134.03 trillion – Amongst which, short-term loans grew by 6.90% y/y, medium term loans grew 12.05% and long-term loans grew 29.37% y/y. Thus, the weighting of medium and long-term loans increased from 49.65% as at FY2014 to 53.29% as at FY2015 (VND71.42 trillion). As for the breakdown by currency, we saw 17.85% y/y growth in VND loans to VND125.10 trillion and 12.19% y/y drop in foreign currency loans to the equivalent of VND8.93 trillion. As a result, the total weighting of foreign currency denominated loans dropped from 8.74% to only 6.66% of the total loan book.

Despite the lack of segment breakdown, we assume that most of the long-term loans growth came from retail lending (such as mortgage loans, car loans, etc.) a traditional strength of ACB for many years. We note that lending was capped at 13% y/y growth for FY2015 until the SBV raised the cap to 15% y/y at the end of Nov 2015. Thus, customer loans growth was constrained.

Customer deposit grew 13.12% y/y to VND174.91 trillion – Amongst which, CASA grew 26.30% y/y to VND28.57 trillion and term deposit grew 10.88% y/y to VND146.34 trillion. The weight of CASA deposits grew from 14.63% to 16.33% of total customer deposits. As for the breakdown by currency, we saw a higher growth in foreign currency denominated customer deposits (+20.59% y/y), thus, their weight rose from 7.19% to 7.66% of total customer deposits.

Pure LDR increased slightly from 75.2% to 76.6% – Of this the pure LDR for VND increased 74% to 77.5% while pure LDR for foreign currency decreased significantly from 91.5% to only 66.6% as at end FY2015. Looking at ACB’s liquidity risk, we note that 81.36% of the customer deposits base has less than 1-year to maturity and 48.11% has less than 3 months to maturity. These are the most positive ratios among listed peers and gives ACB scope to boost lending. The equivalent ratios are 92.6% & 62.24% for VCB, 89.9% & 52.1% for CTG, 89.9% & 59.5% for MBB and then 97.5% & 64.21% for BID respectively.



NIMs increased 41 bps to 3.44% – From 3% last year. Driven by a 79 bps drop in average gross yield to 8.23% and vs. a 85 bps drop in average funding cost to 4.70%. On the asset side, gross yields on customer loans dropped by 72 bps to 8.78% with gross yields for other interest earning asset categories almost flat. Gross yield for interbank lending dropped by 30 bps to 5.17%. While the gross yield for the fixed income portfolio dropped by 7 bps to 6.82%. As for structure, the weight of customer loans was still around 73% (+15.22% y/y) of total IEA while bonds came to 21.6% (+3.33% y/y) and interbank loans came to 5.6% (-96.1% y/y).

On the funding source side, gross yields for customer deposits dropped significantly by 91 bps from 5.51% to 4.59%. As for structure, the weight of customer deposits rose from 95.41% to 97.24% as at FY2015. The balance came from VND154,613 billion to VND174,918 billion. NIM benefitted from a rising LDR; and an improved product mix for loans.

NII grew by 29.07% y/y to VND5.88 trillion – Despite the less than average growth in customer loans; the gain in NIM helped NII increase to VND5.88 trillion (+29.07%). Meanwhile, accrued interest dropped 14.00% y/y to VND2,798 billion. FY2015 was the fifth year in succession we have seen a drop in accrued interest suggesting in this case a steady improvement in the quality of the loan portfolio over that period. Which works also to improve the quality of NII (as it reduces the impact of any future accrued interest reversal).

Non-interest income streams fell by 77.52% y/y – Total non-interest income streams decreased to VND336.76 billion mainly driven by a large provision expense item related to corporate bond investment which was recorded under investment securities income instead of the provision expense line in the P&L according to Cir 49/2014/TT-NHNN. Thus, we saw a huge loss of VND(761) billion recorded for investment securities income (-430.27% y/y). Due to about VND1,400 billion worth of provision expenses.

Other non-interest income streams were mixed with a 394.27% y/y increase in other income (to VND242.48 billion), offset by a 17.34% y/y drop in net service income to VND745.22 billion, a 34.31% drop in FX gains to VND120.62 billion and a loss in trading securities income totaling VND(31.29) billion.

As a result total operating income came to VND6,220 billion (+2.71% y/y).

Total operating expenses increased slightly by 4.09% y/y – To VND4,021 billion. Staff related compensation increased 14.78% y/y to VND1,998 billion given 6.87% y/y growth in employee numbers to 9,935 as at FY2015) and higher average compensation. It’s weight thus increased from 45.53% to 49.70% of total operating expenses. Meanwhile, assets related costs increased 13.08% y/y to VND811.93 billion. Insurance on customer deposits expense increased 10.72% y/y while other expense was nearly flat at 3.23% y/y to VND1,020 billion. During FY2015, ACB did not book provision expenses in operating expenses as they did in FY2014.


Then after adjust all provision expenses related to NPLs back to the provision expense lines, we calculate CIR rising to 64.69% vs. 59.89% as at FY2014. This is very high ratio however FY2015 can be viewed as the last year of major restructuring for ACB. Even so we hope ACB can turn the extra staff into revenues quite soon.

Then net operating income came to VND2,198 billion (+0.27% y/y).

Provision expense decreased 8.12% y/y to VND884 billion – This is not the full story. And if we calculate full provision expense after adding back other provisions related to legacy assets which were classified in other categories then this jumped by 233.75% y/y to VND2,284 billion. Of this, we estimate that;

(1) VND411.95 billion was for NPLs (-21.81% y/y); about VND225 billion was related to VAMC bonds (+255.25% y/y) and then VND245 billion was for interbank related NPLs.

(2) VND1,400 billion consisted of provisions against investment securities activities; of this about VND700 billion worth of provision expense was against the Mr. Kien related “Group of 6” companies, VND300 billion was against Vinalines bonds and then about VND400 billion was against other equity investments.

Then we estimate that the total face value of VAMC special bonds as at FY2015 is now VND2,500 billion. Which means that from FY2016, ACB will have to create at least VND500 billion worth of provision expenses against VAMC bonds alone unless they can improve collection of the underlying NPLs.

Post write-off NPLs dropped sharply to only 1.32% from 2.18% in FY2014 – Group 5 loans accounted 0.8% of loans or VND1,062 billion); Group 3 was 0.13% or VND174 billion and Group 4 was 0.4% or VND530 billion.

LLR improved from 62% to 87% and cumulative provision expense now stands at 1.15% of the total loan book as at end FY2015. Written off NPLs came to VND449 billion (-9.47% y/y) or 0.33% of the loan book although we lack details of how much of this was against VAMC swaps and how much was other NPLs write-offs. However, we also note here that, ACB also wrote off about VND700 billion of provisions against bad debts related to deposits at Vietinbank.

CAR under Circular 36 was estimated at around 12.8% – Which is still well above the minimum requirement of SBV at 9%. This high ratio affords ACB the luxury of very aggressive customer loans growth in FY2016 if they so please. This assumes compliance with Basel 2 also. And therefore we think ACB will not need to raise more Tier 1 equity until FY2017.

For FY2016, HSC forecasts that EBT will increase 22.00% y/y – To VND1,603 billion driven by 20% y/y growth in customer loans and a 111.7% y/y drop in provision expense to VND1,872 billion. We assume the following;

1. Customer loans to grow 20% y/y to VND160.83 trillion and customer deposits to grow more slowly by 17% y/y to VND204.65 trillion. Thus, pure LDR will increase slightly from 77% to 78.5%. Note that ACB was under restructuring and closely supervised by SBV from 2012-2015. Hence the moderate growth cap for customer loans applied over that period. And we expect that from FY2016, ACB will accelerate customer loan growth to around 20%.

2. Assume NIMs to expand 20 bps to 3.64% thanks to the increase of both gross yields and weights of customer loans. Besides, the faster growth of loans over deposits is also a key factor.

3. Thus, we project that NII rises by 23.42% y/y to VND7,261 billion. Meanwhile, we expect non-interest income streams to recover by 117.7% y/y to VND733.27 billion as we expect ACB will not have to book any further major provisions against securities investments.


4. Expect operating expense will increase 12.38% y/y to VND4,519 billion and CIR will drop to 56.53% which is still quite high.

5. Besides, we assume provision expense will drop by 111.7% y/y to VND1,872 billion. Of this we assume (a) VND500 billion provision against VAMC bonds (+121.09% y/y). As we estimate that VAMC bonds stand at VND2,500 billion as at end FY2015. Then (b) VND672 billion provision against NPLs (+63.18% y/y) and (c) More VND700 billion worth of provisions against the “Group of 6” companies.

6. We also assume that ACB will issue about VND2,000 billion worth of long-term loans to boost their Tier 2 capital in order to enhance their CAR around 12.3% in FY2016. And after that, they may go out the market for equity issuing in FY2017.

FOL is full but blocks will be made available this year – The FOL for ACB has been full for quite a long time. However given the statements by the long term strategic shareholder, namely Standard Chartered Bank which holds 15% of the OS we suspect some blocks may be made available this year. And indeed apart from that we suspect other holders may also be sellers at the right price. The question comes down to premium of course.

Valuations are reasonable given growth potential – With this we value the bank at a FY2016 forward P/B of 1.28xs which is in line with average of listed peers. However, we emphasize that following the shrinkage in IEA over the last few years and extensive restructuring we believe that ACB has mostly overcome their troubles. Given a steady effort to repair its balance sheet. And now with a low LDR and high CAR, ACB is well placed to accelerate growth and thus boost pretax profits from this year should it so choose. Longer term, armed with a strong branch network; retail banking and SME franchise and a good reputation in the marketplace we believe ACB will regain its lost market share over the next few years. Stock price has moved defensively despite the sharp correction in banking stocks since Q3. Valuations are not that cheap in relative terms anymore but there is upside potential given the serious growth credentials. We keep our OUTPERFORM rating.





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Copyright 2015 Ho Chi Minh Securities Corporation (HSC). All rights reserved. This report has been prepared and issued by HSC or one of its affiliates for distribution in Vietnam and overseas. Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of HSC and are subject to change without notice. HSC has no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. The information herein was obtained from various sources and we do not guarantee its accuracy or completeness. Prices and availability of financial instruments are also subject to change without notice. This published research may be considered by HSC when buying or selling proprietary positions or positions held by funds under its management. HSC may trade for its own account as a result of short term trading suggestions from analysts and may also engage in securities transactions in a manner inconsistent with this report and opinions expressed there in. Neither the information nor any opinion expressed in this report constitutes an offer, nor an invitation to make an offer, to buy or to sell any securities or any option, futures or other derivative instruments in any jurisdiction. Nor should it be construed as an advertisement for any financial instruments. Officers of HSC may have a financial interest in securities mentioned in this report or in related instruments. This research report is prepared for general circulation for general information only. It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this report. Investor should note that the prices of securities fluctuate and may rise and fall. Past performance, if any, is no guide to the future. The financial instruments discussed in this report may not be suitable for all investors. Investors must make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular financial situation and investment objectives. As this report is HSC’s property and not public information, this report and any part of this report may not be copied, reproduced, published or redistributed by any person for any purpose without the express permission of HSC in writing. Please cite sources when quoting. Any Party shall be liable to HSC for any cost, loss or damage incurred by HSC or HSC clients as a result of any other breach under this Disclaimer in accordance with law.

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