CTG [M-PF -0.2%] – A clearer second pick than ever

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August 28, 2015

Vietinbank (CTG) – Vietnam JSC Bank for Industry and Trade

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– “Whichever way the Vietnam economy goes CTG is to follow” is a view that has been upgraded following confidence boosting 2Q15 results. Given CTG’s scale, the most important task is to identify problems of scale that will push it off-kilter and at present there is none while its other problems such as low provisioning buffer and relatively high exposure to real estate is only absent in another banking name that some investor find unappealing in terms of valuation.

– While being unenthused on the pricing of imminent merger with PG Bank (to be completed by 3Q15), the transaction is not material as PGB’s total asset accounts for only circa 5% of that of CTG.

– We applaud both the use of subordinated debt to boost CAR (VND4,500b in 2Q15) and additionally our inference that it was issued into overseas markets as domestic issuance has hitherto been expensive. Kudos goes to CTG as such international issuance of sub-debt paper is a first for Vietnam.

– CTG reported a 2Q15 NPL number of 1.45%, a number that normally triggers scepticism but all our other favoured asset quality metrics are moving in the right direction so we look upon this figure in a benign light. However, the “new normal” of asset classification under Circular 02/2013 will likely see this rise in the coming quarters in spite of generally improving credit conditions.

– In the context of surging credit growth (9.25% vs 0.45% for 1H15 vs 1H14), topped-up credit growth quota to 16%, we are fairly sanguine on PBT forecast of circa VND8,600b (unconsolidated with PGB) vs start of year guidance of circa VND7,300b (unconsolidated growth of about 18%). At a closing price of VND 19,900, CTG is trading at FY15 forward P/E of 15.6x and FY15 forward P/B of 1.4x. Our upgraded TP is set at VND19,250, implying a total return of -0.2% and a MARKET PERFORM rating.

Financial Statements

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P&L Forecast

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1H15 results:

1H15 results shows hallmarks of confidence in utilising headroom created by recent CAR lifting sub-debt issuance by pushing aggressively growth in customer loan book while at the same time exhibiting decent improvement in our core credit metrics: we are assured by movements in yields on loans between 1Q15 and 2Q15 as suggesting fairly healthy repayment patterns, medium/long-term loan percentage looks contained and accrued interest relative to loans and corporate bonds continues to track down (given certain assumptions). Given our optimistic house view on the real-estate sector then CTG should do well in the context of an economy likely to top start-of-year growth estimates.

CTG doing a decent job holding NIMs steady in 1H15 at 3.05% (annualized from 6M15): we see different emphasis between our favourite two SOE banks in that CTG is showing a preference to grow via its corporate loan book and in doing so favouring certain sectors. This should provide firm support for NIMs for 2H15 given these favoured sectors carry higher loan yields.

M&A at a glance:

We are not particularly excited about the merger with PGB though it is said to take advantage of large retail customer base of Petrolimex and Petrolimex’s agents.

Though there is no common standard for determining the M&A share script ratio, the 1: 0.9 ratio (1 PGB share in exchange for 0.9 CTG share) is arguably preferential to PGB’s shareholders, taking into account its asset quality and PGB’s share price on the OTC stock market.

Share issuance mechanics consists of 270,000,000 CTG shares to be allocated to PGB’s shareholders and 30,000,000 CTG shares will be allocated to CTG’s existing pre-merger shareholders on a pro-rata basis.

M&A to solve ownership cap breaches as calculated on the merged entity, the current stakes of Petrolimex (PGB’s largest pre-merger stakeholders) will be driven down below the regulated 15% (Law on Credit Institutions).

PGB’s prelim financial statements as of 30 June 2015 displayed disappointing results:
– Total asset slid down 5.22% while NPLs ratio surge 83 bps to reach 3.51% versus YE14, of which loans at group 3 and 4 doubled 1Q15’s numbers.

The financial forecast for the post-merged bank has not been published but given the fraction of PGB’s assets as % of CTG’s, we expect only slight negative deviation from CTG’s plan at its AGM.

Modelling assumptions:

NIMs modeled to be sustainable at 3.1% – 3.2% within the context of falling interest income reversals and more favourable corporate loan mix. We have not modeled for any break-through of scale in retail lending.

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Our credit growth assumptions are healthy at 17%-18% for FY15-FY16 period due to strong capital sources from long-term sub-debt issuance. It gradually shrinks to roughly 12% under constraint of regulated loan-to-deposit ratio and heightened competition for deposits.

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We assume a 10% of outstanding shares equity raising in FY16 and FY19, to reflect CTG’s effort to pull CAR to the healthy level of 13% and to lower its RWA/total assets after implementing Basel II. For simplification, we assume they’re done at par value.

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Recommendation History

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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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Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly.
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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.
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.

Disclaimer

Analyst Certification of Independence
I, Thanh Duong, hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.Copyright 2013 Viet Capital Securities Company “VCSC”. All rights reserved. This report has been prepared on the basis of information believed to be reliable at the time of publication. VCSC makes no representation or warranty regarding the completeness and accuracy of such information. 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 VCSC and are subject to change without notice. This report is provided, for information purposes only, to institutional investors and retail clients of VCSC in Vietnam and overseas in accordance to relevant laws and regulations explicit to the country where this report is distributed, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Investors must make their investment decisions based upon independent advice subject to their particular financial situation and investment objectives. This report may not be copied, reproduced, published or redistributed by any person for any purpose without the written permission of an authorized representative of VCSC. Please cite sources when quoting.
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