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STK [O-PF 14.0%] – Riding on the Coattails of the Free Trade Bonanza

September 3, 2015.

VAMC regime significantly eased with significant powers returned to banks

“SBV released Circular 14/2015/TT-NHNN on 28 August supplementing and amending Circular 19/2013/TT-NHNN regarding the purchase, sale and resolution of acquired impaired loans. In addition to special bonds issued in the past, this new circular lays out new regulations regarding VAMC bonds issued to acquire debt below book value (we term these as “VAMC Second Generation Bonds”); revising regulations on risk provisioning of VAMC’s outstanding special bonds; debt rescheduling and selling NPLs by VAMC. This is aimed at speeding up the formation of bad debts trading market while also giving relaxation on provisioning to credit institutions with high NPLs. The effective date is 15th October 2015.

Important changes in the new Circular 14 include:

New mechanism for VAMC Second Generation Bonds used to acquire assets below book value

– Previous regime: VAMC could only purchase debt below book value by using methods other than issuing VAMC special bonds

– New regime -> unlimited trading: In addition to above, VAMC Second Generation Bonds can be traded among credit institutions or with SBV.

– Preferential risk-weight for bonds: 0% risk-weight is applied for CAR calculation with VAMC Second Generation Bonds versus 20% as regulated for “first generation” of VAMC special bonds.

– Provision is nil for VAMC Second Generation Bonds however banks will have to stomach a bigger write-down on day one when selling below book value.

VAMC bonds can be used in Open market operations and for refinancing purpose as with “first generation” special bonds. Term of this bond is 1 year and above, and is allowed to be extended to 3 years from the initial term unless agreed otherwise by bondholders.

Amendments to VAMC “first generation” special bonds

Relaxation on provisioning and term of “first generation” special bonds: these bonds are still limited from free trade on the market. Term of VAMC “first generation” special bonds is 5 years, however, it can be extended to maximum of 10 years if the credit institutions is dealing with financial woes or going under restructuring scheme. For provisions, credit institution is given its own jurisdiction in determining the provision charge for special bonds each year as long as provision is properly made within 5 days before the due date of special bonds. This means provision expense and resulting net profits are under control of each credit institutions.

Under this new mechanism, VAMC can determine market price of debts, retain direct ownership over collaterals and more freedom in selling bad debts to interested investors. However, current regulations in some sectors such as real estate still limit scope of involvement of foreign investors and thus the opportunities to access a bad debts trading market are still not wide-open to all foreign investors. Thus we expect little significant improvement in bad debt recovery unless further supporting regulatory framework is introduced.

VAMC targets VND 500 – 700b purchase of bad debts at market price for remaining months of this year and proposing SBV to supplement VND 1,500b to its charter capital. However, speed of bad debt recovery up-to-date is quite low (only VND 6.5tn compared with 142tn bad debts to be purchased).

VCSC Information

VCSC Rating System & Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance. This structure applies from 27 May 2015.
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Valuation Methodology: To derive the target price, the analyst may use different valuation methods, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, and historical valuation approaches; 2) Discount models (DCF, DVMA, DDM); 3)Break-up value approaches or asset-based evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials, on other assumptions about the economy, as well as risks inherent to the company under review. Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries.

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