VIETNAM BANKING INDUSTRY

September 16, 2014

INDUSTRY UPDATE
Banking stocks have underperformed VN-Index, with a oneyear return of only 5.9%, compared to that of the VN-Index of
33.7%. Currently, the P/B and P/E of banking sector is 1.13x and
14.1, compared to 2.05x and 15.8x of the VN-Index, respectively.

Banking stock performance

Banking sector

40

VNINDEX

35
30

This underperformance has been driven by several factors:

25

Sluggish credit growth: Despite declining lending interest

rates, credit growth remained sluggish. By the end of August,
credit growth in the banking sector reached 4.5%. We think that
the target growth of 12 to 14% may be difficult to achieve.

20
15
10
5

08/14

Further rate cuts: In 1H2014, market interest rates, including Gbond yields, interbank, bank deposits and lending rates have
fallen drastically resulting from low inflation, ample liquidity in
the banking system. Further rate cuts, especially in bank lending
are expected in the 2H2014.

4.67

Declining profitability: The overall profitability of the banking

system continued to slip downward with lower NIM and higher
provision expenses.

0
-5
09/13

11/13

01/14

03/14

04/14

06/14

NIM (%)
6.00
2013

1H2014

5.00
4.00

4.00
2.92

3.00
2.00

1.84

2.24

3.13

3.24

Increasing pressure on foreign currency liquidity: Loans in

USD increased much faster than loans in VND in 1H2014, while
deposits in USD continuously declined. Banks need to increase
their foreign currency position as LDR of loans foreign currency
increased, raising USD demand in the market and putting
pressure on USD liquidity.

2.45

1.00
-SHB

EIB

VCB

BID

ACB

CTG

MBB

STB

NPL (%)
6.00
2013

5.36

1H2014

5.00
4.00

3.60
2.94

3.00
2.29
2.00

3.09

3.10

2.53

1.00
-BID

www.VPBS.com.vn

CTG

EIB

VCB

MBB

Slow movement of VAMC: In 1H2014, VAMC has bought

VND11,414 billion(USD537.23 million) worth of bad debts, which
is far from this years target. So far, VAMC has sold only VND996
billion (USD46.88 million) worth of bad debts.
Increasing investment in G-bonds: G-bonds remained an
attractive investment channel for most commercial banks. Given
65% of the 2014s issuance plan was implemented in 1H2014, we
believe that, banks investment in government bonds will slow
down considerably in 2H2014.

1.51

STB

Increasing NPLs: The NPL ratios in the banking system have

edged upwards from 3.61% in December, 2013 to 4.17% by an
absolute amount of VND132,500 billion (USD6.24 billion) of NPLs.

ACB

SHB

M&A wave continued to be more vibrant: As banks

continued their restructuring process, many voluntary proposals
of M&A plans have been revealed in 1H2014. However, to date,
none of these deals have been realized.

Page | 1

CONTENTS
PERFORMANCE OF LISTED BANKS IN 1H2014

Stock price performance

Financial performance

INDUSTRY HIGHLIGHTS IN 1H2014

Sluggish credit growth in the first five months and started to pick up from June

Overall interest rates declined

Profitability further declined

Increasing pressure on foreign currency liquidity

NPL ratio trended upward despite banks effort

10

VAMCs rate of NPL purchases lags far behind this years target

12

The M&A waves will continue to be more vibrant

13

Ten pilot banks to apply Basel II

15

Update law enforcement

16

CONTACT INFORMATION

17

www.VPBS.com.vn

Page | 2

PERFORMANCE OF LISTED BANKS IN 1H2014

Stock price performance
Banking stock significantly
underperformed the VNIndex over the past 12
months.

The banking sector has underperformed the VN-Index over the past 12 months. The
one year return of the banking sector was 5.9%, which is less than one fifth of the VNIndex return (33.7%). Given the unresolved non-performing loans problem in the
banking system, coupled with slow recovery of the economy and weak ability to
absorb capital that led to sluggish credit growth, the prospects of banking system as
a whole are still latent many obstacles. As of September 11, 2014, the banking sector
is trading at a P/E of 14.1 times and P/B of 1.15 times, lower than the VN-Index P/E of
15.8 times and P/B of 2.05 times.
Among eight listed banks, SHB and VCB tend to outperform their peer group with a
one-year return of 36.2% for SHB and 27.3% for VCB. The worst performers are BID
and EIB with one-year returns of -25% and -11.3%, respectively.
Price performance of listed banks
SHB

100%

VCB

80%

STB

60%

MBB

40%

ACB
20%

EIB

0%

CTG

-20%

BID

-40%

VN Index

Source: Bloomberg

Currently, VCB and STB are the two tickers trading at premium based on their P/B
indicators. While VCB is considered Vietnams best managed bank with superior
assets quality, STB is currently the most profitable one bank.
Mkt Cap
(VND bn)
VN-Index
Banking Sector
VCB
CTG
BID
STB
MBB
ACB
EIB
SHB

74,087
53,989
39,638
22,393
15,768
14,007
15,368
8,157

Price as of Sep
15, 2014
(VND)

27,800
14,500
14,100
19,600
13,600
15,200
12,500
9,200

P/E (x)

P/B (x)

15.8
14.1
15.6
8.5
8.9
9.9
6.6
18.7
22.0
23.0

2.05
1.15
1.67
1.01
1.19
1.42
0.94
1.16
1.03
0.76

*ACB & SHB recovered from negative and STB from poor earnings in 2012

www.VPBS.com.vn

12M EPS
as of Jun
30, 2014

1,785
1,562
1,593
2,073
2,063
737
481
965

EPS - 1Yr
Growth

14.9
-37.7
N.A.
135.5*
-11.5
745.5*
-54.6
166.6*

ROE (%)
13.4
11.3
10.2
11.2
12.3
14.9
17.7
9.2
7.0
7.8

Source: Bloomberg

Page | 3

Financial performance
Over-performers: VCB, STB,
MBB.
Underperformers: BID, CTG,
ACB, EIB, SHB.

The mixed results of listed banks through 1H2014 are detailed below. The key factors
that drive a commercial banks performance include: capacity for growth, profitability
and balance sheet quality. Taking these important drivers into consideration, we have
divided the eight listed banks into two groups: (1) the three over-performers being
VCB, STB, and MBB; and (2) the five underperformers being BID, CTG, ACB, EIB, and
SHB. The performance of these banks, although tracking along with the banking
industrys downward trend, still outperformed the industry average overall. We will
have a closer look at the financial performance of these banks in the industry
highlights session below.

Indicator
Total assets
Ytd %
Customer loans
Ytd %
Debt securities
Ytd %
Customer deposits
Ytd %
Total Operating Income
Yoy %
Net Interest Income/Total
Operating Income
yoy %
Net Non-interest Income
/Total Operating Income
yoy %
PPOP
Yoy %
PBT
% of 2014s plan
LDR (%)
NPL 2013 (%)
NPL 1H2014 (%)
LLC (%)
NIM 2013 (%)
NIM 1H2014 (%)
ROA (%)
ROE (%)

VCB

STB

MBB

BID

CTG

ACB

SHB

EIB

504,432
7.6
292,545
6.6
90,686
42.3
378,559
13.9
8,314
15.6

178,939
10.9
121,193
9.6
27,866
29.0
148,276
12.6
4,050
6.1

188,570
4.5
94,551
7.8
59,177
30.1
157,675
15.9
4,101
5.5

579,022
5.6
397,428
1.6
86,993
26.6
386,056
5.9
10,020
16.8

597,636
3.7
377,992
0.5
112,768
35.7
377,690
3.6
9,849
(3.5)

177,454
6.5
110,752
3.3
41,522
22.2
147,173
6.6
3,113
2.0

149,611
4.2
91,479
19.6
12,760
(31.5)
109,471
20.6
1,353
3.4

132,064
(22.2)
80,275
(3.7)
14,690
7.0
77,092
(3.0)
1,777
(3.1)

67.0

85.3

81.3

77.5

88.5

77.8

82.0

86.1

8.3

0.3

6.8

16.0

(6.4)

1.2

3.0

(1.6)

33.0

14.7

18.7

23.5

11.5

22.2

18.0

13.9

34.0
5,254
14.8
2,846
51.7
78.5
2.73
3.09
96.9
2.65
2.45
0.9
10.2

59.8
1,929
9.2
1,624
53.4
84.2
1.46
1.51
80.9
5.03
4.67
1.6
14.9

0.4
2,642
1.7
1,702
55.0
62.0
2.45
3.10
62.2
3.80
4.00
1.5
17.7

19.7
5,383
3.3
2,505
41.8
109.3
2.37
2.29
85.2
2.92
2.92
0.7
12.3

27.3
5,590
(6.8)
3,873
53.2
108.6
1.00
2.53
54.7
3.60
3.24
1.0
11.2

5.2
1,309
8.6
731
61.5
75.3
3.03
3.60
48.1
2.95
3.13
0.7
9.2

5.7
648
67.0
505
39.8
88.7
4.06
5.36
17.1
1.87
1.84
0.6
7.8

(11.4)
859
(0.1)
664
36.9
104.1
1.98
2.94
33.8
1.83
2.24
0.6
7.0

Average
2.6
5.7
20.2
9.5
5.4
80.6
3.5
15.4
17.6
12.2
49.2
88.8
2.4
3.1
59.9
3.1
3.1
1.0
11.3

INDUSTRY HIGHLIGHTS IN 1H2014

Sluggish credit growth in the first five months started to pick
up from June
Credit growth remained sluggish, especially during the first five months of the year.
As of May 31, 2014, credit only grew by 1.52% y-t-d. This was far below the growth of
2.98% y-t-d as of 5M2013. Although credit growth was usually slow in the first half of
the year due to the seasonality factor, it has not been as slow as this year for a long
time. The reasons for lower credit growth are the modest earnings growth and the
high failure rate of businesses; couple with high level of existing NPLs of the banking
system.

www.VPBS.com.vn

Page | 4

Monthly credit growth of the banking system

14%
12%
10%
8%
6%
4%
2%
0%
-2%

m-o-m growth

Ytd growth
12.52%

4.72%

3.72%

Source: SBV

Credit
growth
started
picking up from June.
We expect credit growth to
only achieve 10% this year.

What is also worthy of notice was the quick jump in June as the SBV reported credit
growth of the banking system of 3.72%, meaning that in June alone, VND69,465
billion (USD3.27 billion) of loans was approved. By the end of August, credit growth
of the whole banking system reached 4.5%. Although credit growth is expected to
accelerate in the second half of the 2014, we think that the target credit growth of 12
to 14% of the banking system may be difficult to achieve and a 10% credit growth is
more likely.
Among listed banks, SHB, VCB, STB and MBB grew at an impressive rate of 19.6%,
6.6%, 9.6% and 7.8%, respectively. We noticed some common characteristics among
these banks, which were: (1) providing credit for high profile SOEs, (2) strong focus
on developing the retail segment, (3) increasing credit provided for prioritized
sectors; and (4) increasing loans to SMEs. Each of these banks has focused on
different segments of the market where they have competitive advantages.
Credit growth
SHB
STB
MBB
VCB
ACB
BID
CTG
EIB

2013
34.37%
14.77%
17.81%
13.75%
4.26%
15.04%
12.88%
11.25%

1H2013
2.70%
13.45%
7.00%
-1.47%
7.45%
7.31%
0.38%
7.37%

1H2014
19.57%
9.61%
7.76%
6.65%
3.32%
1.63%
0.45%
-3.69%

To briefly examine the credit growth of listed banks:

ACB: In the first six months of the year, ACBs credit growth was only 3.32%, roughly
equal to the industry average. ACB was among those who had NPLs increase the
most. NPLs increased by 34% since the beginning of the year with NPL ratio going
from 3.02% to 3.64%. The bank is currently focusing on resolving bad debts and other
issues related to some of its ex-management board member scandals.
BID: BID achieved marginal credit growth of 1.6%. BID traditionally gave out major
loan packages to government infrastructure projects. However, recently, the
economy was not yet recovered and the government's investment in infrastructure
has not been boosted yet. As a result, credit in the field of construction and building
materials cannot rise as well.

www.VPBS.com.vn

Page | 5

CTG: CTG recorded sluggish credit growth of 0.45% in 1H2014. Hence, CTGs credit
growth target for 2014 of 13% seems a bit overly ambitious. However, in 1H2013,
CTG has also recorded a low credit growth of 0.38% and jumped to 12.88% by end of
year. In 1H2014, loans to SOEs slightly grew by 3.15%, while loans to SMEs stayed
flat and individual loans actually declined by -5.6%. The sluggish credit growth might
also be due to the fact that CTGs NPL ratio has skyrocketed from 1% as of FY2013 to
2.53% in 1H2014, hence, CTGs priority is to focus on resolving existing NPLs.
EIB: Among listed banks, EIB was the only bank that experienced negative credit
growth given an actual decline of loans to individuals, the sector that EIB traditionally
enjoyed a competitive advantage; while loans to SOEs and SMEs barely grew.
MBB: Since the beginning of the year, MBB has launched two credit packages worth
a total of VND5,000 billion (USD235.34 million), targeting individuals, which included
VND2,000 billion (USD94.14 million) launched in February and VND3,000 billion
(USD141.20 million) launched in May. It was likely that the pick-up in MBBs credit
growth was the result of the implementation of the two packages mentioned above.
On top of that, MBBs SOE loans increased by 30.43%, individual loans grew by
26.14%, while SME loans experienced a 1.17% drop, coupled with strategic
partnership with Viettel, MBB can ensure a decent growth of credit.
SHB: SHB, surprisingly, had the highest credit growth of 19.6% in 1H2014. Quite
different from its peers, SHB had a high portion of SME loans and this group actually
brought about most of SHBs credit growth in 1H2014, which grew 47.8%.
STB: STBs traditional strength has been in the retail segment. However, it has also
increased its lending to prioritized sectors such as agriculture. After five years of
implementing the project Rural Finance III, Sacombank has been granted a credit
line of up to VND650 billion (USD30.59 million) from initial VND100 billion (USD4.71
million). Historically the bank has a track record of dispersing 100% of its credit line.
VCB: For VCB in particular, thanks to strategic partnerships with many large SOEs,
VCB was able to extend more loans to this group, including EVN, EVN NPT,
Vinacomin, Vinachem and Viettel. At the same time, VCB also paid special attention
to providing loans to a number of major State projects (such as Lai Chau, Son La,
Vinh Tan hydropower plants) and the prioritized sectors and groups. VCB currently
has about 50% of its loan book in these sectors.

Overall interest rates declined

Government bonds yields and interbank: Inflation in 1H2014 hit the lowest levels
of the last 13 years; CPI fell by 1.12 percentage points from 6.1% in December 2013
down to 4.98% in June 2014. As a result, bond yields continuously fell for all tenors
from the beginning of the year through June with sharper reductions at the short-end
of the curve. Given that commercial banks are the major investors of government
bonds, a decline in yields would likely hurt banks profit. At the same time, the
interbank rates stayed at much lower levels compared to the same period last year
thanks to ample liquidity in the banking system.

www.VPBS.com.vn

Page | 6

Government Bond Yield Curves

Interbank VND interest rates

Sources: Bloomberg, VPBS

In spite of lower yields, we still observed an obvious preference for g-bonds among
commercial banks, especially the big ones. Most listed banks investment in g- bonds
increased much faster than their customer loans in the 1H2014. Given that the ability
to absorb capital of local businesses remained weak and the banking systems
liquidity was abundant, the fact that g-bonds continued to be an attractive investment
channel is reasonable.
Customer credit growth (%)
G-bonds investment growth (%)

STB
9.6
34.4

MBB
7.8
20.9

VCB
6.6
60.4

BID
1.6
25.8

CTG
0.45
56.6

ACB
3.3
73.0

SHB
19.6
(34.5)

EIB
(3.7)
7.0*

*Include bonds and corporate bonds

During the first half of 2014, the government successfully mobilized VND151,748
billion (USD7.11 billion) of bond and bill issuance, which counted for 65.4% of the
recently revised issuance plan. Therefore, we believe that for the 2H2014, banks
investment in government bonds, although still increase, but the pace will slow down
considerably compared to the 1H2014.

Banks lending interest rates

are expected to decline
further in 2H2014.

Banks deposit and lending interest rates: Because domestic sector GDP growth
has been weak, government has tried to help corporate profitability by lowering the
cap on deposit rates so that banks would lower loan rates too. Weak consumer
spending has allowed them to lower interest rates without fear of inflation returning.
Particularly deposit rate cap has been reduced from 7% to 6% for one month to less
than six month tenors, lending rate cap from 9% to 8% for prioritized sectors, and 7%
for agriculture sector in particular. According to the National Financial Supervision
Commission (NFSC), in July 2014, average deposit interest rates stood at 5.53% per
annum, down 0.6 percentage points whereas the average lending interest rates
reached 10.08% per annum, down 0.25 percentage points compared to year end
2013, which was less than that in the deposit rates.
At the end of August, banks announced rate cuts in VND deposits, which ranged from
0.1 to 0.5 percentage points. Currently, SOCBs offer the lowest deposit interest rates,
particularly the interest rate of one-month tenor of BIDV is 4.5%, VCB and Agribank is
4.8%, and CTG is 5%. Other smaller JSCBs are still offering closed to the ceiling rates
of 6%.

www.VPBS.com.vn

Page | 7

Outlook: As deposit rates are already closed to the expected inflation rate of 5.5 to
6.0%, we think that further cuts in deposit rate are unlikely. However, to stimulate
credit growth in the last quarter of 2014, banks will likely have to lower their lending
rates, and a lower NIM is expected as a result.

Profitability further declined

Some banks improved their
NIM, but many others saw it
decline.

The overall profitability of the banking system continued to slip downward given
sluggish credit growth, rate cuts and higher provision expenses.
NIM ratio: Listed banks recorded mixed results. While ACB, EIB, BID and MBB had
their NIM improved slightly due mostly to better assets structure, where portions of
lower earning assets were reduced; in contrast CTG, VCB, STB, and SHB had their
NIM decline. STB and MBB, with competitive advantages in retail lending, emerged
as the most profitable ones with highest NIM, as well as highest ROA and ROE.
NIM (%)
6.00
2013

5.00

4.67
4.00

4.00
3.00
2.00

1H2014

1.84

2.24

2.45

2.92

3.13

3.24

1.00
-SHB

EIB

VCB

BID

ACB

CTG

MBB

STB

Source: Banks FS

Operating Profits: Five out of eight listed banks (CTG, VCB, STB, MBB, and ACB)
have achieved their targets for 1H2014 profit before tax.
1H2013

Overall
profitability
of
banking sector declined due
to lower NIM, slow credit
growth, and high provision
expenses.

ACB
BID
CTG
EIB
MBB
SHB
STB
VCB

946
2,579
4,137
755
1,799
400
1,518
2,603

Profit before tax

2014s target
1H2014
731
2,505
3,873
664
1,702
505
1,624
2,846

1,189
6,000
7,280
1,800
3,100
1,270
3,000
5,500

% of 2014s plan
61.5
41.8
53.2
36.9
55.0
39.8
53.4
51.7

However, most banks have kept their 2014 targets at a similar level to or even lower
than the actual 2013 results. In our view, for the remainder of 2014, the banking
sectors performance can hardly improve given that profitability will be eroded from
rising NPLs and additional provision expenses for the VND39,000 billion (USD1.84
billion) of NPLs sold to VAMC in 2013.
Of the listed banks, only BID and EIB are expected to record any significant growth in
profits before tax for 2014 and EIBs results will still be well below 2012 levels.

www.VPBS.com.vn

Page | 8

Profit before tax (VND bn)

9,000

VCB
MBB

4,000

5,500

5,743

1,189

1,036

1,043

1,270

1,000

1,825

1,800

828

2,851

3,000

2,961

3,100

3,022

1,368

1,000

SHB

3,090

2,000

EIB

ACB
3,390

3,000

STB
5,764

5,290

5,000

6,000

6,000

BID
7,280

7,000

7,751

8,000

8,168

CTG

--

*2012 & 2013 are actual results, 2014s figures are banks target

Source: Banks FS

Increasing pressure on foreign currency liquidity

After several years of decline, the 1H2014 witnessed a reverse trend of foreign
currency loans as they increased substantially higher than VND loans. While the
overall credit growth in the first six months of the year was 3.72%, with very sluggish
growth of VND loans of 2.17% y-t-d, foreign currency lending has increased 12.03% yt-d. This years trend is opposite to the trend from the end of 2011 to end of 2013, in
which foreign currency credit growth rate continuously declined (down 3.5% y-o-y in
2012 and down 16.5% y-o-y in 2013).
During the period from 2012 to 2013, many commercial banks extended loans in
VND, which were priced at foreign currency interest rates plus a margin of insurance
for the fluctuation of the exchange rates. As the scope for enterprises to borrow
foreign currencies is limited under the SBVs regulations (Circular 37/2012 and
29/2013), this activity helped a large number of enterprises to borrow in VND at lower
interest rates and helped to push credit growth, especially when the SBV has
committed to stabilize foreign exchange rates. However, in December 2013 the SBV
released a document, which banned commercial banks from lending at rates
lower than deposit rates to avoid unfair competition and risks. As foreign
currency lending rates are often lower compared to VND deposit rates ,
commercial banks had to stop this activity. Export enterprises raised foreign
currency borrowing instead of VND borrowing as USD lending interest rates
were much lower compared to VND borrowing rates.

www.VPBS.com.vn

Page | 9

Credit growth by currency

60%

Total credit

Contribution to credit growth

Credit in foreign currency

Credit in foreign currency

Credit in VND

50%

120%

40%

100%

30%

80%

20%

60%

48.7%
71.0%

75.2%
103.4%

40%

10%

20%

0%
-10%

Credit in VND

140%

2008

2009

2010

-20%

2011

2012

2013

1H 2014

51.3%
29.0%

24.8%

2010

2011

0%
-20%

119.8%

-3.4%

2012

-40%

2013

1H2014

-19.8%
Source: SBV

Meanwhile, as reported by the National Financial Supervisory Commission,

mobilization of foreign currency has decreased by 5.5% y-t-d by the end of May 2014.
One reason for such decline was that the USD deposit rates are capped at 1% per
annum for individuals and 0.25% per annum for economic entities, while VND
deposit rates are much higher, at 6.0 to 7.5% for six-month to one-year term
deposits. As a result, LDR in foreign currency went up to 95.5% in May 2014, from
its previous 84.3% in 2013.
As loans in foreign currency increased, banks had to increase their foreign
currency position. Since the end of 2013, the gap between VND and USD
lending rates was high enough to drive banks to sell USD to lend in VND at
higher rates given a stable foreign exchange outlook. However, from the
beginning of 2014 up to now, VND lending rates have been falling continuously,
narrowing the gap between VND and USD lending rates to a level that
encouraged banks to buy back USD, raising USD demand in the market and
putting pressure on USD liquidity.

NPL ratio trended upward despite banks effort

NPLs are on the rise, many
banks already had their NPL
ratio exceeded the 3%
threshold.

www.VPBS.com.vn

The NPL ratios in the banking system have edged upwards from 3.61% in December,
2013 to 4.17% by an absolute amount of VND132,500 billion (USD6.24 billion) of
NPLs. The rising NPL ratios indicated that companies were still confronting many
hurdles. On top of that, the effectiveness of Circular 09/2014 since June 1, 2014 has
forced banks to reclassify part of their group 1 and 2 loans to lower groups and
reveal more NPLs in 1H2014, especially in June. In addition, technically speaking, the
low credit growth in 1H2014 did not help to dilute NPL ratios. Rising NPL ratios may
also be due to window dressing by banks. Historically, some banks artificially reduce
their year-end NPL ratios by restructuring their NPLs in order to make up attractive
annual results. It was common to see the bounce back of NPL in the first quarter of
the following year.

Page | 10

NPL ratio of listed banks (%)

NPLs, Provisions and LLC in 1H2014

6.00
2013

5.36

1H2014

120%

10,000

5.00

8,000

3.60

4.00
2.94

3.00
2.29
2.00

12,000

3.09

6,000
4,000

1.51

1.00

2,000

--

-STB

BID

CTG

EIB

VCB

85.2%

3.10

2.53

MBB

ACB

SHB

100%

96.9%

54.7%

80.9%

80%

62.2%

60%

48.1%
33.8%

40%
27.1%
20%
0%

BIDV CTG VCB MBB ACB STB

NPL
Provisions

EIB SHB
LLC
Sources: SBV, VPBS

Further, according to the SBVs inspectors, if banks were not allowed to keep their
restructured loans in the same group (following Decision 780), the real bad debt
figure would have increased by VND185,000 billion (USD8.71 billion), mounted to a
total of VND307,000 billion (USD14.45 billion) or a NPL ratio of 9.71%. As banks are
required to fully comply with Circular 02 and 09 in 2015, NPLs are obviously expected
to increase further in the near future.
Among listed banks, VCB, ACB, MBB and SHB currently have NPL ratio exceeding the
threshold of 3%. Vietinbank, which has been able to keep its NPL ratio below the
threshold of 3.00%, is no longer the bank with the lowest reported NPL ratio.
Vietinbanks 1H2014 NPL ratio skyrocketed to 2.53%, compared to the absurdly low
figure of 1.00% as of FY2013. Total NPL increased substantially, with Group 3 loans
increasing abruptly six-fold and Group 4 loans augmented threefold. In addition, as
BID, VCB and MBB are the only three banks who have been applying Article 7 of
Decision 493 regarding loans classification (using the qualitative approach, which is
considered stricter compared to the quantitative approach) and the remaining banks
applied quantitative approach, it is hard to compare NPL ratios across the board.
In order to reduce the NPL levels, banks have implemented many proactive
approaches. According to SBVs statistics, in 1H2014 a total of VND33,650 billion
(USD1.58 billion) of bad debts has been dealt with by debt collection from debtors,
sale of collaterals and the use of provisions for credit loss. By the end of August 2014,
banks have sold VND19,630 billion (USD923.94 million) of NPLs to VAMC. Also,
banks also put aside additional reserves for credit losses given NPLs increased and
part of the provisions were used to write-off NPLs. By the end of June 2014, the
remaining provisions for credit losses balance in the banking system stood at
VND77,300 billion (USD3.64 billion), increased by 10.9% compared to FY2013. If this
whole amount is used to solve bad debts then the NPL ratio of the industry will slide
down to 2.2%.
For the eight listed banks, in 1H2014, nearly VND3,190 billion (USD150.15 million) of
provisions have been used to write-off NPLs, equal to only 25% of the figure in 2013.
During this period these banks have set aside an additional of VND10,700
billion(USD503.62 million) for provisions, bringing their provisions balance to over
VND29,800 billion (USD1.40 billion), up about 25% from a year earlier. Last year, they
have set aside about VND18,300 billion (USD861.34 million) for provisions and used

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Page | 11

VND17,108 billion (USD805.23 million). Even though additional provisions have been
set aside, the LLC ratio was still at a low level, even on a declining trend vis--vis
1Q2014. VCBs LLC ratio was maintained at a high and stable level, stood at 96.9% as
of June 30, 2014. VCBs LLC has consistently been the highest among listed banks.
BID also maintain its manner with LLC ratio increased to 85.2% from 81.6% in
1Q2014. The rest, even MBB, known as the bank with good credit control, has failed
to maintain its high LLC ratio, with its figure went down to 62.2% from previously
high 84.6% in 1Q2014 and 82.5% as of FY2013.

VAMCs rate of NPL purchases lags far behind this years

target

In 1H2014, VAMC has

bought VND11,414 billion
worth of bad debts, which is
far from this years target.
So far, VAMC has sold only
VND996 billion worth of bad
debts.

Since its establishment in July 2013, VAMC has been playing an active role in solving
bad debt by buying NPLs, helping banks to clean up part of their balance sheets, and
extending the time it takes to set provisions for the amount of loans sold. In addition,
VAMC also adjusted downward the lending interest rates for the overdue borrowers,
pressed down from over 20% to around 10%, reducing their pressure in paying
interest. In April 2014, VAMC announced an adjusted interest rate of bad debts
acquired at 10.7% per year for loans in VND; 5.2% to 5.7% for loans in USD and EUR,
respectively. Plus, those who were previously denied loans due to their existing
overdue debt are now being granted another chance to receive credit for viable
projects.
However, the pace of VAMC buying bad debts has been slowed in 2014. In 1H2014,
VAMC has bought VND11,414 billion (USD537.23 million) worth of bad debts, which
is far from this years target of purchasing between VND70,000 billion (USD3.29
billion) and VND100,000 billion (USD4.71 billion) worth of NPLs, and also much lower
compared to the VND39,307 billion (USD 1.85 billion) of NPLs that VAMC bought in
the last three months of 2013.
In order for VAMC to resolve the bad debts issue, it needs to be able to buy and sell
bad debts at the same time. While the legal framework has been set up to support
VAMC to buy NPLs, it has not provided adequate tools for VAMC to effectively sell
NPLs. So far, VAMC has sold only VND996 billion (USD46.88 million) worth of bad
debts. The company is very positive about its plan of selling and collecting VND2,500
billion (USD117.67 million) worth of bad debts this year. This seems, however, in our
view, to be relatively inconsequential when weighed against the massive amount of
total outstanding NPLs that are still in the system. Such low liquidation rates create a
significant risk that banks will eventually need to write down the bonds they received
for their VAMC loan sales. The obstacles that restrict VAMC from selling NPLs
include:
(1) Lack of legal framework for liquidating collateral: Currently, the law has
not allowed foreign organizations or individuals to hold mortgages in Vietnam. Even
organizations and individuals in the country are not allowed to hold a mortgage if
they are not credit institutions (According to Article 114, Housing law prescribed real
estate collateral credit institutions"). Therefore, foreign investors will not buy back
bad debt from bank, if they cannot claim entitlement of the collaterals.
Recently, an amendment bill of the law on housing has been discussed. Particularly,
in Articles 155, 157 and 158 of the Housing amendment bill, overseas Vietnamese

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Page | 12

once returning to Vietnam are permitted to own houses as national citizens,

irrespective of the type and number of houses owned; for foreign organizations and
individuals, except for those who are active in the field of diplomacy or NGO, once
they are allowed to work in Vietnam, they are entitled to purchase and own houses
and apartments, including those in the tourism and resort areas. As these
amendments facilitate foreigners ownership of housing, the VAMC will have higher
chance to sell real estate collaterals to foreign investors.
In our view it is likely the Housing amendment bill will be approved during the
second annual meeting of the National Assembly. However we are still skeptical
about the effectiveness of these changes in helping VAMC to resell the NPLs.
(2) No market for selling bad debts: To sell bad debts to foreign investors, a
debt market should be established and bad debts price should really appeal to
investors. VAMC bought NPLs at high prices (equal to the remaining book value of
the loans after subtracting provisions), which is usually equivalent to 70 to 75% of the
loans face value. Thus, even when a distressed securities market is formed, bad
debts are not necessarily attractive to foreign investors because of the high price.
In the long run, VAMC probably needs more real capital (debt and equity) and
support from the government in order for it to really solve the NPLs problem of the
banking system.

The M&A waves will continue to be more vibrant

Banking Mergers and Acquisitions (M&A) is becoming increasingly popular in recent
years. Prior to 2012, most of M&A activities occurred between a foreign financial
institution and a local bank when the foreign investors purchased ownership of the
local one.
Local Banks

Foreign Banks

Purchased ownership

Executed Year

ACB

Standard Chartered bank

8.8%

July 2005

TCB

HSBC

10.0%

December 2005

VPBank

OCBC Singapore

10.0%

September 2006

TCB

HSBC

10.0%

January 2007

Ocean Bank

BNP Paribas

15.0%

January 2007

Eximbank

Sumitomo Mitsui Bank

15.0%

July 2007

Habubank

Deutsche bank

10.0%

October 2007

Anbinhbank

Maybank

15.0%

March 2008

ACB

Standard Chartered bank

6.2%

July 2008

Southern Bank

United Overseas Bank

20.0%

July 2008

VPBank

OCBC Singapore

5.0%

August 2008

Seabank

France Societe Generale Bank

15.0%

August 2008

VIB

Common Wealth of Australia

15.0%

September 2010

CTG

International Finance Corporation

10.0%

January 2011

VCB

Mizuho Bank

15.0%

September 2011

CTG

Bank of Tokyo Mitsubishi UFJ

19.7%

December 2012
Source: VPBS collected

In 2012 and 2013, as a part of the Financial System Reform Plan 2011-2015, the SBV
has been actively supporting the merger and acquisitions of banks. M&A activities
happened mainly between local banks, particularly the four following deals were
executed.

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Page | 13

Merger Banks

Post-merged Name

Deal Size

Executed Year

SCB

USD7.07 bn

January 2012

SHB

USD5.66 bn

August 2012

PVcom Bank

USD4.98 bn

May 2013

HD Bank

USD4.01 bn

Nov 2013

Saigon Commercial Bank (SCB)

Ficombank
TinnghiaBank
Saigon Hanoi Bank (SHB)
Habubank
PVFC
Western Bank
Housing Development Bank (HD Bank)
Dai A Bank

As banks continued their

restructuring process, many
voluntary proposals of M&A
plans have been revealed in
1H2014. However, to date,
none of these deals have
been realized.

Since the beginning of this year, the market saw more proposal of voluntary mergers
and acquisitions: Sacombank and Southern Bank, Vietinbank and PG Bank, Mekong
Bank and Maritime Bank as banks were more aware that restructuring was necessary
to improve their competitiveness. In addition to the specific cases mentioned above,
a number of other banks such as VCB, MBB, Viet Capital Bank, SeaBank and Viet A
Bank also touch upon the possibility of merging with another bank this yearTo date,
however, none of these proposals have been realized. Also, despite the uplifting limit
on foreign ownership, we have not seen any major investment of foreign institutions
so far this year. Nonetheless, we notice two prominent M&A trends this year:
The wave of high net worths divestment from banks
According to the Department of Corporate Finance (MOF), SOEs have launched more
than VND22,000 billion (USD1.04 billion) to invest in non-core business segments
(primarily securities, insurance, real estate companies, investment funds and banks).
To comply with Resolution 15/2014/NQ-CP, in 2014, many industries will strive to
finalize plans of divesting 50% of capital in non-core business investments, among
which, divesting 100% capital from banking, insurance and securities sectors.
Particularly, in August 2014, Vinacomin has divested completely from SHB (VND300
billion) and SHS (VND70 billion). It is also expected that by 2015, Vietnam Oil and Gas
Group (PVN) will also divest completely from Ocean Bank (PVN currently holds about
20% of Ocean Banks chartered capital). A number of other corporations are still
struggling with this problem. However, the year of 2014 will likely witness the
simultaneous divestment of big players: Textile Corporation (Vinatex) divestment
from NCB; Bao Viet Group divestment from Bao Viet JSCB, Vietnam Posts and
Telecommunications (VNPT) divestment from Maritime Bank, and Petrolimex
divestment from PG Bank.
The hunt for finance companies
Banks have embarked on a path of hunting to acquire finance companies and this
trend is becoming increasingly notable in 2014:

In April 2014, SHB has asked for shareholders permission to acquire ViettelVinaconex Finance JSC, a finance company.
In May 2014, Maritime Bank has become the largest shareholder of Vietnam
Textile and Garment Finance JSC with 64.1% shareholdings.
In July 2014, VPBank acquired Vinacomin Finance Company.

The key drivers of this wave of M&A include:

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Page | 14

Government decree No. 39/2014/ND-CP dated May 07, 2014 that allows finance
companies to provide banking services including the issuance of credit card,
capital mobilization and financial leasing. As a result, banks can leverage this
channel to provide retail products and payments services.
Thanks to simple credit policy, without collateral requirement, finance companies
have attracted a large base of customers. In addition, their lending rates are often
absurdly high, mostly mortgage lending for consuming, averaging 35% pa, with
interest in special cases up to 60% pa, promising to boost banks net profit.
SOEs are required to divest from non-core businesses within 2014 and 2015,
which is good timing for banks to take over their shareholdings in finance
companies (MBB has taken over 64.1% shareholdings of Vietnam Textile and
Garment Finance JSC from Vinatex)
However, bad debts remained a problem for banks that are taking over finance
companies. Due to the high earning rates, the attendant risks are also high.
According to the HCM City branch of SBV, by the end of 2013, finance companies and
financial leasing firms reported the highest NPL ratios in the financial sector, 21.96 %
and 37.53 %, respectively.

Ten pilot banks to apply Basel II

Banks seem undercapitalized
under Basel II.

Despite the SBVs intention to apply Basel II on all banks by 2015, given the rising
NPLs and declining profitability in recent years, it seems that not all banks are ready
to sallow the bitter medicine of Basel II and the 2015 deadline is likely to be missed.
The SBV recently selected ten commercial banks for piloting the Basel II
implementation roadmap from 2015 to 2018. After this phase, Basel II will be applied
to the remaining commercial banks in the country.
With concern of the rising NPL and the transparency of NPL classification we
compare the current NPL, LLC and CAR ratios of the ten pilot banks and then stress
test their CAR ratio to see how low the CAR may decline. We take the sum of a banks
equity capital and its long-term valuable papers as a proxy for total tier 1 and tier 2
capitals, then we calculated the possible losses of capital from which we generated
an estimation of CAR under each of the three scenarios.
1. Best case scenario: NPLs are already properly classified
2. Base case scenario: 50% of Group 2 loans are actually NPLs
3. Worst case scenario: 100% of Group 2 loans are actually NPLs

Unit: %
NPL/Total loans
Group 2-5/Total loans
LLC
Current CAR
Best case scenario CAR
Base case scenario CAR
Worst case scenario CAR

CTG
2.53
3.31
54.7
13.17
12.16
11.80
11.44

BID
2.29
7.98
85.2
10.23
9.92
7.39
4.87

VCB
3.09
10.71
96.9
13.13
13.05
9.90
6.75

MBB
3.10
6.84
62.2
11.00
10.34
9.28
8.23

STB
1.51
1.88
80.9
10.22
10.02
9.89
9.75

ACB
3.60
6.91
48.1
14.70
12.68
10.94
9.20

TCB
4.12
8.47
36.8
14.03
12.50
11.22
9.94

VP
2.81
7.51
41.0
12.50
11.44
9.93
8.42

VIB
2.82
4.58
93.1
18.00
17.85
15.95
14.06

MSB
2.71
3.98
98.7
10.56
10.55
8.79
7.02

According to our projections, under the worst scenario, half of the ten pilot banks will
need additional capital to bring their CAR to the minimum level of 9%. Among them,
BID, VCB and MBB are the only three banks who have already been applying the
qualitative approach of loan classification.

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Page | 15

Our simple approach described above, however, only takes credit risk into
consideration and, therefore the resulted CAR will still likely be lower than what they
should be when operational risk and market risks are calculated in the equation.

Update law enforcement

Decree No.
01/2014/ND-CP,
(effective from
February 20,
2014)

Content
Share holdings by a foreign credit institution and its related
parties increased from 10% to 15%. Shareholdings by a
foreign strategic credit institution and its related parties
increased from 15% to 20%. There will be no limit of foreign
ownership in Vietnamese commercial banks in special cases.

Impact
The foreign capital is hoped to
improve
banks
financial
position, and it is hoped that
increased
involvement
by
foreign banks will lead to
transfers of technology and
experience that will improve the
operations of Vietnamese banks.
In
the
short-term,
easing
pressures on NPL reporting will
help banks extend more credit,
make fewer provisions, and thus
improve profits. On the other
hand, the revisions in Circular
09 will inevitably prolong the
banking sector reform, which is
very crucial for the long-term
prospects of the banking sector.

Circular
09/2014/TTNHNN (dated
March 18,
2014)

One of the most notable provisions of Circular 09 relating to

Decision 780 is additional regulation regarding the
restructuring of credit repayment terms of CIs and the keeping
of the restructured loan in the same group until the end of
1Q2015 with stricter rules. Furthermore, it allows CIs to delay
the adjustment of loan classification results according to the
classification of CIC for another six months.

Resolution
No.15/2014/NQCP

Promotes the equitization and divestment of SOEs.

Accordingly, there are many new regulations to make the
process go much easier than before. The Decree also
stipulates measures to encourage state corporations to divest
of investments in banks, such as allowing selling prices lower
than book value, public offerings of shares in banks, etc.

More SOEs will divest, which

will
lead
to
changes
of
ownership and M&A in the
banking industry.

Proposal of an
amendment of
Decree
53/2013/ND-CP

Creating a favorable environment, especially the legal basis

for the processing and sale of debt and collaterals to give
more autonomy to banks and VAMC in the seizure and
handling collaterals.

Strengthening of transparency
and publicity in the sale and
solving of bad debts and
collaterals.

Proposal of a
replacement of
Circular
13/2010 /TTNHNN

Focusing on raising prudential ratios in operations of CIs. The

members of BOD, BOM and affiliates are not granted loans to
invest in stocks. Total outstanding loans granted to founding
members and major shareholders (shareholdings of 5% or
more) should not exceed 5% of a banks chartered capital and
their contributed capital (book value). Shareholders and
owners are required to contribute additional capital if the real
value of the charter capital of banks and branches of foreign
banks is lower than the legal capital. The granted credit to
contributed capital/purchase of shares of other banks will be
deducted from Tier 1 capital when calculating CAR.

This new Circular is expected to

reduce
cross-ownership,
improve the quality of credit
institutions capital, and bring
more prudence to the operation
of the banking system.

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Page | 16

GUIDE TO RATINGS DEFINITION

VPBank Securities (VPBS) uses the following ratings system:
Buy: Expected return, including dividends, over the next 12 months is greater than 15%.
Hold: Expected return, including dividends, over the next 12 months is from -10% to +15%.
Sell: Expected return, including dividends, over the next 12 months is below -10%.

CONTACT INFORMATION
For further information regarding this report, please contact the following members of the VPBS
research department:
Barry David Weisblatt
Head of Research
barryw@vpbs.com.vn
Nguyen Thi Thuy Linh
Director Macro and Financials
linhntt@vpbs.com.vn

Pham Lien Ha, CFA

Senior Analyst
hapl@vpbs.com.vn

Chu Le Anh Ngoc

Research Assistant
ngoccla@vpbs.com.vn

For any questions regarding your account, please contact the following:
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Head of Institutional Sales and Brokerage
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dungld@vpbs.com.vn
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Vice President of Retail Sales &
Brokerage
phuongvv@vpbs.com.vn
+848 6296 4210 Ext: 130

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Vice President of Retail Sales &
Brokerage
domalux@vpbs.com.vn
+848 6296 4210 Ext: 128

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Vice President of Retail Sales &
Brokerage
vinhtd@vpbs.com.vn
+848 3835 6688 Ext: 369

Nguyen Danh Vinh

Associate Vice President of Retail
Sales & Brokerage
vinhnd@vpbs.com.vn
+848 3823 8608 Ext: 146

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Page | 17

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