BID [U-PF –13.7%] – A Host of Issues Results in us Taking Pause on BIDV

September 17, 2015.

BIDV (BID) – Bank for Investment and Development of Vietnam JSC

As curious as the events were leading up to the inclusion of BID in both major ETFs, for the record and working on the guidance of BIDV of full govt take-up in the rights issue, (delivery of rights issue shares will happen at the latest on 11/10/15) the free-float will be 4.72% (see Figure 1)(possibly lower given the non-govt portion is not underwritten).

ETF issues aside, the more pedestrian issues of stock supply surfaces in the 4Q15 when non-govt MHB shareholders are delivered 30m BID shares as part of M&A consideration and non-govt BID shareholders (post-merger entity) receives circa 13m shares from rights issue settlement (assuming 100% take-up).

BID continues to update analysts on the progress of negotiation with shortlisted strategic investor(s) (all we know is that they are from an OECD country) and it’s our hope that it does come to fruition because over and above the injection of fresh capital, it’s a rubber stamp that BID has passed a rigorous due diligence process (a chance not taken up in the rights issue given BID guidance of full govt take-up).

After the dramas of ETF buy-in and possible conclusion of strategic investor process fades moving into 2016, fundamentals will reassert themselves and by virtue of certain concentrated lending BID becomes more susceptible than VCB and CTG to shifting global macroeconomic conditions. A second point of concern is that BID takes the mantle for largest sale of debt to VAMC in 1H15 (on a relative basis) in our coverage universe. To sum up, while we like the NPL classification philosophy of BID and its trends in accrued interest, we still reiterate our preference for CTG as a second SOE pick because of it has lower negative sentiment headline risk and better NIM dynamics.

The issue of CAR ratio has been and will be for the foreseeable future a buzzing issue. BID is skimming along at the moment above the minimum 9%. The rights issue certainly helps. We model conservatively for the strategic investor to close in 2016. If it happens earlier than CAR becomes less of a buzz but if it slips into 2016 then it will distract management. Being one of the largest banks in Vietnam we assume the system is more likely to bend to accommodate BID than putting any vice on it on the CAR issue. However having more of a CAR headroom will certainly help it take the fight more directly against VCB and CTG.
– We model BID with loan growth flexibility in the next two years (FY15E of 16.4% growth) before dipping down to terminal loan growth of 13.2% (the emphasis being retail loan growth during forecast period), NIMs to range from 2.5% to 2.9% during the forecast period and mid-range long-term credit cost. FY15E provision charge is estimated to be VND7,968b to arrive at PBT of VND7,337b vs BID’s guidance of VND 7,500b. At a closing price of VND24,800, BID is trading at a forward P/E of 14.1x and forward P/B of 1.9x. Our TP has been raised from VND19,100 to VND20,500, implying a total return of -13.7% and an UNDERPERFORM rating.

Financial Statements

P&L Forecast

1H15 results:

The problem with analysing BID’s 2Q15 results is that we’re presented consolidated numbers including MHB and therefore we should be working off quarterly annualised numbers but we are not given 1Q15 numbers for MHB so the fractions for yields are slightly inflated. The following is what we can best interpret from the numbers:

Post-merger loan yields looking particularly soft at 6.7% if one annualises 2Q15: and resulting post-merger NIMs show corresponding softness whether one focuses on quarterly or semi-annual NIMs of 2.37% and 2.54%, respectively, vs FY14 NIMs for pre-merged BID of 2.97%.

1H15 loan growth of 9.0%: is in line with its peers and CAR ratio reported to be “still above 9%” for same period

1H15 PBT achieved 42% of FY15 guidance of VND7,500b, though BID is yet to book the VND 830b gain from withdrawal from VID Bank

1H15 VAMC transactions amounted to circa VND7,000b: which amounts to about 1.26% of this year’s forecasted loans to customer balance, with the next highest in our coverage universe being STB at about 1.07%. BID said that bad debts brought about by the MHB acquisition will most likely be resolved through the VAMC channel.

Improving economy helps lift FY guidance for recovery of written off debt to VND1,800b: on our modelling this is equivalent to a recovery rate of about 30%.

BID raises VND3.5t through a sub-debt issue in Aug: this issue by BID is said to be domestically distributed.

Accentuated exposure to soft commodities and real estate: on the topic of real estate we reiterate our stance taken on CTG that we are comfortable with real estate for the next few years however BID’s exposure is significantly more than the highly exposed CTG, at 24% vs 15% of customer loans on our estimates for YE14, respectively.

M&A at a glance:

Merger motivated on the basis of: taking advantage of the large retail customer base in the Mekong Delta area dominated by MHB.

The M&A share script ratio was set at 1:1 (1 MHB share in exchange for 1 BID share) is arguably on balance preferential to MHB’s shareholders. However, given the dominating ownership of the SBV at both 2 banks (more than 90%), this ratio in our view is quite reasonable.

We summarize our calculation of SBV holdings and associated free-float after merger in the tables below:

During this year’s AGM BID also announced a rights issue on the basis of 100-for-8.6 ratio giving shareholders a right to buy at VND10,000 per share. Full take-up will raise circa 270m shares to result in outstanding shares of 3,419m.

The exercise period for the rights issue closes on 21 Sept 2015.

The financial forecast for the post-merged bank has not shown any deviation vis-a-vis AGM.

Modelling assumptions:

CAR qualifying capital raisings to be the dominant theme at BID during forecast period: given guided participation of the govt in the Sept 15 rights issue then this raising is uncontroversial but we model conservatively for the strategic investor to close in 1Q16 at 15% share enlargement and another 10% raising in 2018. In addition we add another VND3.5t of subdebt in 2016.

NIMs modeled to be soft post-merger: and then drift up as tighter credit conditions improve the profit environment of banks.

Our credit growth assumptions are handicapped because of the periodic need to tap equity markets and the presumed continual pressure to maintain cash dividends.

BID’s Residual Income assumptions

BID’s weighted average fair value

Recommendation History

VCSC Information

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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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