Let’s Wait on Vietnam Ex-Im Bank

April 21, 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.

• Eximbank (HSX: EIB) posted audited consolidation report with major adjustment
• from new auditors.
• Retained earnings was reported at loss from profit in FY2014 and FY2015.
• This came from inappropriate profit totaling VND1,116 billion from real estate sale during FY2010-2013.
• This loss was recommended by new auditor to book in FY2010-2013 instead of booking in FY2016.
• This cumulative loss will give EIB a tax rebates in FY2016.
• Lack of a major expense in FY2016, HSC revised forecast of EIB’s EBT from VND290 billion to VND901 billion this year.
• Forward P/B is 0.91xs which is still cheap. However, stock still lacks of
• near term catalysts.
• Reiterate HOLD.

Eximbank (HSX; EIB) posted their audited consolidation report with some opinions and major adjustments from new auditors for profit numbers last several years.

MAIN TAKEAWAY – Audited report has added a new twist to the treatment of the inappropriate profit totaling VND1,116 billion from real estate sale between EIB and Eximland during FY2010-2013. While the previous consensus was that this would be booked as a loss in the current financial year the auditor has taken a different tack altogether. Instead they have deducted the amounts from the profits of each year it was originally booked. Effectively restating historical numbers thus leading a cumulative loss in retained earnings and a restatement of book value and thus BVPS. The cumulative loss came to VND(817) billion as of end FY2015 from VND161 billion in previous. While FY2015’s EBT was adjusted down a little bit from VND62.46 billion to VND60.82 billion (-2.63%).

ACTION – Reiterate HOLD. The proposed accounting treatment removes the risk of a large charge to the FY2016 result. However despite the improved outlook for this year the exposure to HAG loans is a concern. Hence we see few near term catalysts.

EIB posted FY2015 their audited consolidated numbers – Showing a major adjustment in retained earnings carried over from FY2014 from a profit to a loss. Retained earnings after adjustment in FY2014 and FY2015 have been restated to a loss of VND(834) & VND(817) billion respectively from the previous profit of VND114 billion & VND161 billion. This adjustment came from the backing out of inappropriate profits regarding the sale of real estate between EIB and Eximland which was mentioned on our last few reports. Specifically, from FY2010-2013, EIB sold some real estate to Eximland and recorded profit in the “other profit” line in P&L amounting to VND1,116 billion (FY2010: VND180 billion, FY2011: VND363 billion, FY2012: VND477 billion and FY2013: VND96 billion). Subsequently EIB bought back this real estate from Eximland during FY2011-2015. Under VAS this type of transaction is not allowed and hence it has had to be unwound while the SBV has instructed EIB to reverse all associated profits booked in previous years from their P&L.

This follows a SBV report and disapproval expressed by shareholders in the EGM late last year
– In the EGM, EIB’s managers disclosed the cumulative loss of around VND831 billion from this real estate transaction as discovered by an SBV investigation and subsequent report which still need to be cleared from P&L. Their solution which was to ask shareholders to spread the loss over 3 years was rejected. Which left the bank with no option but to book the whole amount in FY2016 with major consequences for near term profitability.

Auditors recommend restating historical P&L – Rather than take a loss in FY2016 auditors have instead suggested that the bank restate historical results by backing out the unapproved profit from the year in which it was originally reported from FY2010-2013. Thus, with this change in EIB’s retained earnings from FY2010-2013, the bank carries a net cumulative loss of VND(817) as of end FY2015. Compared to a positive retained earnings amount of VND161 billion as of end FY2015 previously.

Authorities have yet to approve the tax rebates in audited report but we think it likely they will do so – Restating historical results can be a tricky issue especially if it gives rise to claims for tax repayment. As the tax office is rarely open to such an approach. However in this case because what we are left with is a cumulative loss this will not affect historical tax payments rather reduce future tax payments via calculating the amount of tax overpayment. Which from the authorities point of view is far easier scenario to accept. Hence while noting that nothing in life is sure we thing on balance the audited report is like to be acceptable. So what does this mean?

This cumulative loss will give EIB a tax rebates in FY2016 – FY2015’s EBT was adjusted down a little bit from VND62.46 billion to VND60.82 billion (-2.63%).

EIB reported VND129 billion of CIT overpayment as at FY2015. This amount came from the adjustment of retained earnings from profit to loss during the last several years. It means that EIB will not have to pay CIT until they clear the cumulative loss. And we expect that they won’t have to pay CIT until FY2017. That will improve FY2016’s EPS.

For FY2016, HSC revised up our EBT forecast from VND290 billion to VND901 billion (+1,382% y/y) based mainly on the proposed approach. And driven by these major assumptions as follows;

1. We keep our assumption of 15% y/y growth in customer loans to VND97,473 billion. EIB won’t grow customer loans much because of strict controls from the SBV typically imposed on restructuring banks (ACB had this before).

2. We revise up our forecasts for customer deposit growth from 6% y/y (comes to VND104,336 billion) to 16% y/y growth or (VND114,179 billion). And assume pure LDR improves a little bit from 86% to 85%. In our previous report, we expected only 6% y/y growth in customer deposits given our view that EIB would priorities funding cost control. However, with the draft Amendment of Circular 36 released by SBV showing that the ratio of short-term funding used for medium and long-term loans will be capped at 40% this presents an issue for EIB as we estimate this ratio was around 50% as at FY2015.
Thus, the bank will have to boost customer deposits during FY2016 in preparation.

3. NIMs to grow 44 bps to 3.33% from 3.51% assumed previously on higher funding cost. However
improvement still coming from the absence of accrued interest reversals seen in FY2015 coupled
with higher NIMs from retail loans.

4. We revise downed our estimate for NII growth from 26.8% y/y to 21.7% y/y (VND4,135 billion) on higher funding cost. However, we keep our assumption that total non-interest income streams grow 54.59%
y/y to VND620.96 billion.

5. Our new forecast for total operating expense is 7.00% y/y growth to VND2,465 billion from
VND3,250 billion in the previous model thanks to the disappearance of the VND831 billion real estate
related loss which was expected to be recorded here. We then expect that actual operating expense
will increase 7% y/y compared to 5% y/y previously as we expect EIB will have to raise the average salary for its staff to catch up with other banks. Thus, we now see a CIR of 51.8%.

6. We keep our assumption that provision expense will drop by 3.19% y/y to VND1,388 billion. Of this
we assume (a) VND1,246 billion provision against VAMC bonds (+56.72% y/y). As we estimate that the balance of VAMC bond stands at VND6,230 billion as at end FY2015. Then we also assume (b) a VND142 billion provision against NPLs (+73.84% y/y).

7. CAR will be around 16% and still very high. EIB won’t need to raise more capital until the end of
FY2018.

EIB’s FY2015 BVPS drops from VND11,498 to VND10,707 after adjustment. However, we project the forward BVPS is VND11,397 and forward P/B comes to 0.91xs which is quite cheap.

Investment thesis – Reiterate Hold. The stock looks cheap buts lack near term catalysts. With a forward P/B now standing at only 0.91xs, EIB is now the cheapest bank amongst listed peers. The bank has had a painful 36 months what with a balance sheet restructuring leading to declines in interest earning assets and of course the change in management coupled with a brand new BOD. The new team is having some impact however and we expect the bank to have dealt with most of its legacy issues by the end of FY2018. However, as we expect the recovery in EBT won’t begin until FY2017 and also have some concerns over their HAG loan exposure we expect the stock will continue to move in a narrow range for the time being. Long term players should keep an eye on the stock as there is an earnings recovery story in the making here over the next 12-18 months. Reiterate HOLD.

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