HSC Securities: JS Commercial Bank to Outperform

September 14, 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.

• VCB hold the FY2015 AGM on 15th April 2016.
• In the AGM, VCB announced a strong Q1’s results with pre-tax profit up 58% y/y.
• For FY2016 VCB targets 10% pretax profit growth.
• The AGM approved 10% cash dividend for FY2015.
• And passed the 35% stock bonus and 10% private placement proposals also.
• HSC calls for a 29% profit growth for FY2016 of VCB.
• VCB is now trading at a forward P/B of 2.05x, reasonable valuation.
• Maintain Outperform.

VCB shows strong Q1. Good prospects for this year

MAIN TAKEAWAY – A robust performance in Q1 FY2016 with a 58% y/y increase In pre-tax profit on the back of a 6.5% YTD credit growth. This is the strongest Q1 performance over the last 6 years. For FY2016 VCB targets 10% pretax profit growth while HSC forecasts 29% y/y growth. They also confirmed a 10% cash dividend will be paid for FY2015. The AGM also passed the 35% stock bonus and 10% private placement proposals. VCB will likely return to normative growth this year with decent prospects of a y/y fall in provisioning and low NPLs.

ACTION – Maintain Outperform. VCB is now trading at a forward P/B of 2.05x. More reasonable valuation than we have seen for some time given its best of breed status and emerging role as the leading retail bank also. Sector is out of favour right now but the stock clearly has several very strong positive catalysts.

VCB (HSX – Outperform) held an AGM and here are our main takeaways;

A robust performance in Q1 with a 58% y/y jump in pre-tax profit. In the first quarter of 2016, credit growth has reached 6.5% YTD while deposit growth was reported at 2.7% YTD, translating into a higher LDR at 79.8% vs. 77% of 2015. And we think a higher NIM is also highly likely here though no detailed numbers were announced. The NPL ratio dropped to 1.76% vs. 1.84% at the end of 2015. Provision expense, hence, has come to around VND1,300 billion (-14.3% y/y), equivalent to 23.6% of the full year plan of VND5,500 billion. Then pre-tax profit came at VND2,300 billion (+58% y/y), equivalent to 30.6% of the plan. This is the strongest growth for Q1 observed over the last 6 years.

FY2015 audited numbers came with better prudential ratios, lower NPL and higher CAR. We have discussed the FY2015 results previously and here simply note that from the audited FS, NPL ratio arrived at 1.84%, or lower than the 2.01% estimate of unaudited ones accounts. While CAR increased to 11.04% vs. 10.9% reported earlier. No changes to the P&L numbers from the previous numbers.

Ratio of short-term funding used for long-term lending was announced at 24.9%, higher than the previous 18% estimate. However, this is still much lower than the current cap of 60% and also well below the proposed amended cap of 40% in the draft amendment of Circular 36. This means VCB still has plenty of room to expand medium & long term lending of it so wishes. Yet VCB has said that it has its own internal standards to control liquidity risk; and just plan to rise this ratio to 25.3% for FY2016.

VCB again stated any amendments of Circular 36, won’t affect then – This given its low exposure to real estate lending. Total lending to the real estate sector accounted for just 8% of its loans book, equivalent to around VND30,900 billion. And as said before in the analyst meeting, if risk-weight factors for this sector are increased from 150% to 250% as we expect once Circular 36 is amended, VCB estimated its CAR would drop by 50 bps only.

VCB announced a plan to divest bank holdings. The bank previously stated that it has been allowed to keep its holdings at MBB and EIB. With the holding in EIB deemed to be important for that bank’s restructuring purposes as it gives the SBV a voice in the bank through VCB’s holding. However, we may expect a divestment of the OCB (a 5.07% holdings) and SGB (a 4.3% holdings) this year. Even so these stakes are very small. So, no significant P&L effect is expected from any divestment.

Dividend policy for FY2015 – VCB will pay a 10% cash dividend for FY2015. The AGM also approved the plan to increase chartered capital by 48.5%, from VND26,650 billion to VND39,575 billion. The planned increase in capital to be implemented in two phases, via a stock bonus and then a subsequent private placement as follows:
Phase 1 – VCB will announce a 35% stock bonus – The stock bonus worth VND9,327 billion would be funded by the share premium and retained earnings. Following this, chartered capital will increase by 35% to VND35,977 billion. There is no specific timeline for this issuance; yet we expect it will be done at the end of Q2 or early Q3.

Phase 2 – VCB will execute a 10% private placement. The issuance targets mainly foreign strategic buyers. Maximum number buyers for the placement has been set at 10. The stock will also be locked for 1 year which would exclude most financial investors. Timeline of the offering to be subject by approval of competent agencies and negotiation between VCB and related parties. However, the BOD of VCB is confident that it will complete the private placement within FY2016. No guidance on pricing but some form of premium can be expected.

The purpose of the issuance is to help VCB to meet the CAR requirements under the Basel II standard. Prior to the private offering, VCB might consider subordinated bond issue to increase Tier II to foster its CAR.

VCB targets a pre-tax profit increase of 10% in FY2016 – to VND7,500 billion and based on the following assumptions;
1. Total asset increase of 13.5%.
2. Credit growth of 17%. Of which, retail lending is set to increase by 50% y/y to total 25.8% of the loan book.
3. Deposit growth of 15%.
4. NPL below 2.5%. No plans for further VAMC swaps in 2016 unless compulsory, in which case the magnitude would be no more than VND1,000 billion.
5. Salary expense to equals 37% of profit before tax exclusive of the salary expense.
6. Opening of 6 new branches.
7. Provision expense of VND5,500 billion or downabout 9.4% y/y.

For FY2016, HSC revises up our projections, with assumption of higher credit growth given their decent Q1. We now call for a 29% y/y growth in pre-tax profit vs. the previous projection of 25% y/y growth. Our new rationale is based on the following assumptions;
1. Credit growth at 21% y/y. almost the same as SBV sector targets. Given a low LDR, plus an improved CAR post private placement which should enable VCB to grow credit faster.
2. Deposit growth of 18% as VCB is happy to allow a modest increase in its LDR.
3. NIM to expand by 6 bps. VCB concerns on the recent increase in deposit rates are noted.

Yet, we think even assuming a higher CASA weight, the cost of funds won’t be affected much. We think NIM will still trend higher given; (a) higher LDR; (b) full-year effect of high yielding US$ bond holdings; (c) benefit from a shift in the lending structure as preferential interest rate charged for some new loans in the first year drops out and subsequently higher interest rates apply; (d) retail lending increases by another 40-50% y/y. We estimate a 1% increase in the weight of personal loans would lift NIM by 2 bps.

The retail business is a key part of the puzzle here although we have to say that VCB retail lending product is not significantly better than peers. For example they no longer provide overdraft service, a popular retail product and still appear to be excessively conservative in controlling the loan to value ratio for consumer lending. Even so they are becoming the top player in retail segment thanks to (1) low lending rate offers given low funding costs and (2) superior customer base driven by their best of breed credit card business (3) their peerless reputation. Hence growth of 40-50% y/y in this segment is very likely

4. Based on this we project NII will increase by 20% to VND18,539 billion.

5. We then assume non-interest income rises by 6.5% with fee income and other income as the main drivers.

6. Therefore, we forecast total operating income reaches VND24,679.8 billion (+16.4% y/y).

7. We then estimate that operating expense rises by 22.1% to VND10,139 billion on higher staff compensation costs (+25% y/y) as profits recovers. We also assume VCB will open 6 new branches and 20 new transaction offices in FY2016.

8. We expect provision expense will decrease by 5.5% y/y only to VND5,734 billion.

Consisting of VND4,967 billion in customer loans provi- sions (-10.6% y/y) and VND713 billion (+46.6% y/y) in VAMC bond provisions. For example we assume one-off items such as provisions related to fraudulent lending at the Tay Do branch will drop out. In FY2016, we assume the ratio of new NPL formation declines to 1.34% from 1.62% in FY2015. We then assume that the post writeoff NPL ratio will be kept at 2.0% after the bank writes off VND3,980 billion, equivalent to 0.85% of its loan book.

With this we forecast that pretax profit will rise 29% to VND8,805 billion generating an EPS of VND1,631 taking dilution into account.

Investment thesis – Reiterate OUTPERFORM on best of breed status – VCB remains our top pick in the banking industry given its strong core business enjoying the lowest funding cost, superior asset quality and dynamic income structure. And with provisioning likely to slow down going forward which is rare amongst listed banks here we forecast pretax profits growth rates could even accelerate from now on. The proposed 10% Tier 1 capital increase will lead to some dilution but in the scheme of things this is not a major concern. And unlike other banks VCB will easily manage the transition to Basle 2. And won’t see much appreciable effect from C36 amendments either. Then at the current price, VCB is trading at P/B forward of 2.05x. This compares favorably to a peak P/B valuation of 3.2xs during the rally last year. Reiterate Outperform.

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