VCB [O-PF +11%] – Look to accumulate VCB on Banking fall-out

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August 21, 2015

Vietcombank (VCB), JSC Bank for Foreign Trade of Vietnam

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– Fine print in 1H15 audited report indicates some blemishes but so much is working in favour for VCB that clients should continue to accumulate on weakness. Pluses includes laser focus on lifting NIMs, favoured candidate to break institutional capital raising drought and benefiting from fall-out in the clean-up of retail/SME focused banks.

– Evidence of fall-out benefit: deposit growth near the top of its peer group yet demand deposits as % of overall deposits remains near historical high (25%).

– Pursuit of NIMs bruising market share chase in corporate loans of yesteryear easing in 1H15, replaced by preference for large-ticket, relatively low credit risk bond exposures (ie Ministry of Finance bond and Masan Consumer). Meanwhile growth in loan book in 1H15 was predominantly retail focused. Growth in loan book and bond holdings grew 10.2% in 1H15, the second fastest rate of listed-peer growth (excluding BIDV).

– 1H15 audited provisioning expenses jumped circa VND350b vs preliminary numbers to reach VND3.3t, though there was a near equivalent drop of VND270b in operating expenses. Given continued improvement in credit trends discussed below we see no risk to VCB’s guidance of FY provision expense of VND5.5t.

– We leave our FY15 forecast unchanged. VCB is trading on a forward P/B of 2.5x based on forward BVPS of 17,000.

Institutional capital raising preparations shows steady momentum. We see VCB as being best place to succeed in these types of institutional focused, overseas focused capital raising but timing is likely to slip to 1Q16. Again we re-iterate the theme of a commanding CAR war chest in 2016.

Credit quality: relatively conservative non-performing loan classification of 1Q15 has given way to more lax classification in 2Q15, indicating more confidence in borrowers. At the more sensitive end of less than 3 months past due VCB’s qualitative assessment has seen a drop of 24% vs 1Q15 and quantitative assessment has dropped 67% vs 1Q15, all comparing relative numbers. The blemish however is that on a quantitative assessment past due more than 3 months has increased 16% vs 1Q15, again comparing relative numbers. We see the overall credit trend at VCB as positive.

Recommendation History

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VCSC Information

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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.

Disclaimer

Analyst Certification of Independence
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