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26 January 2011
INDUSTRY UPDATE
BANKING
Key indicators
No. of listed banks Total market cap (VND bn) Market cap (USD mn) %/ total market cap Average P/E 2010F (x) Average P/B 2010F (x) ROA (%) ROE (%) 8 157,877 7,518 21.1 9.9 1.8 1.5 18.0
Key banks
Outstanding shares (mn) Foreign room (%)
ACB
938 30% 2,520 -20% 9.6 1.9 22% 1.2%
EIB
1,056 30% 1,642 28% 9.2 1.1 13% 1.8%
VCB
1,759 2.9% 2,303 -29% 14.9 3.2 23% 1.3%
EPS (VND) EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%)
Price performance
Absolute % Relative %
3M
13% 3%
6M
3% 3%
12M
-10% -11%
20% 10% 0% -10% -20% -30% Apr-10 Jul-10 Jan-10 Feb-10 Mar-10 Jun-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 May-10 Jan-11
VNINDEX
.VNBANK
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2009
3Q2010
75%
23%
7% 0% -3%
ACB
STB
Average
-32%
During the first 3Q2010, though faced with a number of regulatory changes, the average net income growth of the larger banks remained above 23%.
Low cost-to-income ratios Vietnams average cost-to-income ratio is around 40%, substantially lower than the regional peers, and above only China and Singapore. With low cost-to-income ratios, Vietnamese banks have been able to improve their bottom line and increase their profitability ratios.
Figure 2: Vietnams banks maintain a good cost to income ratio Cost to income 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 3Q2010 Vietnam banks costs are quite low compared to regional peers 100% 80% 60% 40% 20% 0%
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Capability to improve efficiency ratios thanks to potential development of retail banking services and financial services for SMEs In 2010, Vietnams GDP broke through the USD100billion mark with GDP per capita at nearly USD1,200 doubling over the last 5 years. The countrys young population combined with improved personal income will lead to higher demand for retail banking services. Vietnams demographic should underpin growth in payment services, credit cards and personal financing services.
Figure 4: Vietnam posted a high GDP growth over the past 10 years... GDP per capita is double within 5 years USD 1,400 1,200 1,000 800 600 400 200 Vietnam GDP was over USD100bn in 2010 USD bn 120 100 80 60 40 20 0
Nominal GDP (RHS) GDP growth (LHS)
In addition, the private sector played a key role in the Vietnam economic development during the past 10 years with a CAGR of 24%. In 2008, the private sector investment accounted for c. 41% of the total investment, significantly higher than the state contribution of 29%. Though the government stimulus www.vcsc.com.vn | VCSC<GO>
26 January 2011
Private sector posted a CAGR of 24% over the past 10 years VND bn 350,000
26
Private
17 25 16 31 14
Foreign Invested
15 16 16
30
26
300,000 250,000
38
38
38
41 41 39
36
59
60
57
53
48
47
46
43
29
35
38
50,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Attractive valuations As a consequence of new issuances and dilution issues, investors shied away from banking stocks while the sector greatly underperformed the market. In 2010, the banking sector lost 18% while the VNIndex was down 2%. However, the secto r has seen signs of recovery since December 2010 sector gaining 17% during that month.
Figure 6: Banking sector has underperformed in 2010 and only recovered in the last month of 2010 as
20% VNINDEX .VNBANK
10%
0%
-10%
-20%
-30% Jan-10 Jun-10 Aug-10 Sep-10 Nov-10 Dec-10 May-10 Feb-10 Mar-10 Jan-11 Apr-10 Jul-10 Oct-10
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PB 3.0 2.5 2.0 1.5 1.0 0.5 0.0 04-10 05-10 05-10 06-10 07-10 07-10 08-10 09-10 09-10 10-10 11-10 11-10 12-10
PB-STB PB-EIB PB- VNIndex
Compared to regional peers, the Vietnamese banking sector posted higher ROE of 18% and ROA of 1.5% cf. 15.7% ROE and 1.3% ROA.
Figure 8: Vietnams banks are quite small compared to regional peers but have better efficiency ratios Total Assets (USD mn)
Country
P/E (x)
P/B (x)
ROE LF (%)
ROA LF (%)
China (5 securities) Thailand (10 securities) Malaysia (10 securities) Indonesia (18 securities) India (36 securities) Philippines (12 securities) Vietnam (8 securities) Pakistan (14 securities) Sri Lanka (6 securities) Average
Source: Bloomberg, 26 January 2011
7,572 4,765 4,164 4,256 2,062 1,358 1,145 587 453 2,929
83,981 31,726 26,634 12,351 23,012 7,603 7,775 4,546 1,590 22,135
10.62 18.00 12.43 22.06 12.39 12.35 8.89 11.56 23.21 14.61
1.91 1.79 1.81 2.87 1.59 1.60 1.61 1.29 2.88 1.93
19.71 13.44 16.08 17.80 16.17 13.45 18.01 13.12 14.13 15.77
1.05 1.24 1.16 1.78 0.91 1.73 1.56 1.11 1.45 1.33
We believe it is now a good time to accumulate banking stocks, especially the large bank with good market share and strong capital base. We like ACB, STB and EIB as (i) these are the pioneer banks in retail banking services in Vietnam with good brand name (ii) restructuring period will be good opportunities for large banks with strong capital base to obtain distressed assets and gain higher www.vcsc.com.vn | VCSC<GO>
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Figure 10: Comparison between listed banks Unit: VND bn VCB CTG ACB STB EIB SHB
Current Outstanding Shares (mn) Share Price as 26/1/2011 (VND000) Charter Capital 2010 Increase in 2010 charter cap Current Market Capitalization Current Free float (%) Current Foreign ownership (%) EPS 2010F EPS growth ROE 2010F ROA 2010F PB 2010F PE 2010F
Source: VCSC summary, 26 Jan 2011
1,759 34.3 17,588 45% 60,325 9.3% 2.9% 2,303 -29% 23% 1.3% 3.2 14.9
1,517 23.5 15,172 35% 35,655 10.8% 1.0% 2,224 -3% 23% 0.9% 2.2 10.6
938 24.4 9,377 20% 22,879 100% 30% 2,520 -11% 22% 1.2% 2.0 9.7
918 15.8 9,179 37% 14,503 100% 30% 1,990 -20% 16% 1.3% 1.1 7.9
1,056 15.2 10,560 20% 16,051 100% 30% 1,642 28% 13% 1.8% 1.1 9.3
349 11.2 3,493 75% 3,912 100% 1.5% 1,402 -10% 18% 1.2% 1.3 8.0
1 2
Decree No. 141/2006/ND-CP dated 22 November 2006 Circular No. 15/2009/TT-NHNN dated 10 August 2009 Letter No. 369/TB-VPCP dated 30 December 2009 Circular No. 07/2010/TT-NHNN dated 26 February 2010 and
Minimum chartered capital of VND3,000bn (~USD150mn) by end of 2010 Requires commercial banks to use up to 30%, instead of 40%, of the short-term deposit for medium and long-term loans Bans banks from trading gold Allows commercial banks to negotiate lending rates on short-term and long-term 1 Jan 2010
3 4
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Circular 12/2010/TT-NHNN dated 14 April 2010 5 6 Circular No. 13/2010/TT-NHNN dated 20 May 2010 Circular No. 19/2010/TT-NHNN dated 27 September 2010 Circular No. 22/2010/TT-NHNN dated 29 October 2010 Law No. 47/2010/QH12 on credit institutions
loans Stipulates prudential ratios in operations for credit institutions Adjusts some articles in Circular 13, especially the components of total deposits Restricts gold lending to specific goldrelated entities Regulates institutions the operations of credit 1 Oct 2010 1 Oct 2010
7 8
Circular 13 and the 2010 Law on Credit Institutions will bring about fundamental improvements as commercial banks will have to make appropriate changes in their operations and development strategies.
Bank name
1 2 3 4
635 572
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Bank name
5 6 7 8 9 10
Kien Long Gia Dinh SG Cong thuong Bao Viet VN Thuong tin Petrolimex Total
Impact of Circular 13
Circular 13 implements a set of important obligations for the banking sector: The CAR is raised from 8% to 9%. The loans-to-total-deposits ratio is not allowed to exceed 80%. The risk weight ratio for securities and property loans is 250% (previously 100%). Investments in other credit institutions and subsidiaries in the form of capital contribution or purchase of shares are excluded from Tier 1 capital. Total investment in subsidiaries and affiliates must not exceed 25% of the credit institutions charter capital and reserve funds. Total capital contribution and financial investments in all enterprises, investment funds, investment projects or other credit institutions and in affiliated companies must not exceed 40% of credit institutions charter capital and reserve funds. Credit institutions are banned from lending to affiliated securities trading businesses or from providing unsecured loans for securities investment and trading. Total outstanding loans for securities investments and trading must not exceed 20% of the banks charter capital.
With these requirements, many of the commercial banks will have to restructure their assets and operations, which may lead to higher cost of fund and lower net interest margin. Enhancing financial capability Currently, among the 40 commercial banks, only ten have a charter capital of over VND5,000 billion, of which only VCB, CTG and EIB have a charter capital above VND10,000 billion (excluding the two largest state-owned commercial banks BIDV and Agribank). The average chartered capital of the Vietnam banking system is VND3,666 billion (~USD183 million), much lower than those of regional peers. As the average capital base of the banking system is still low, the capital raising story of the banking system not only created a great pressure on the local market in 2010 but may last through 2-3 years afterwards. For 10 small banks with chartered capital below VND3,000 billion, they will need to fulfil their capital raising plan in 2011. Also, such large bank as CTG also has plan to increase its chartered capital from VND15,172 billion to c. VND30,000 billion in 2011.
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In addition, under the new banking law, banks must comply with the following requirements: Total outstanding loans to a subsidiary/associate that the credit institution holds control are not allowed to exceed 10% of the credit institutions equity and 20% of the credit institutions equity is the limit for total outstanding loans to all subsidiaries and associates.
Viet Capital Securities | 9
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Agribank Vietcombank (*) Vietinbank (*) ACB (*) STB (*) Military Bank EIB (*) TCB Maritime bank VIB Average top 10 banks in: Vietnam Philippines Indonesia Thailand Malaysia India China
Source: The Asian Banker
23,384 15,050 13,193 9,085 5,629 3,734 3,542 3,495 3,457 3,065 8,363 9,039 17,878 25,936 35,923 83,289 749,372
196 232 140 119 90 64 61 69 42 25 104 84 312 265 338 726 6,925
751 903 711 502 517 342 735 280 152 147 504 902 1,580 2,389 2,850 5,058 35,122
26.1 25.7 19.7 23.7 17.4 18.7 8.3 24.6 27.6 17.0 20.9 10.8 17.2 9.9 14.1 17.0 20.4
3.2 6.0 5.4 5.5 9.2 9.2 20.7 8.0 4.4 4.8 7.6 10.0 8.6 9.4 7.5 5.9 4.6
(*) listed banks in Vietnam
Even large banks such as VCB or CTG had an equity-to-total-asset ratio of less than 8% in 3Q2010. As such, the minimum CAR of 9% as required by Circular 13 from 1 October 2010, may be difficult to attain for many of the banks in the country.
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16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% VCB CTG EIB ACB STB CAR=9%
High LDR ratios At the end of the third quarter of 2010, four of the five banks in our coverage list had loans-to-deposits ratios of over 80%. Circular 19 expands the total deposit base when calculating LDR ratios, leaving some buffer for the banking system. Sources of capital that banks can use for lending include: Non-term and term deposits from individuals. Term deposits from organizations including those from other credit institutions. 25% of non-term deposits from economic institutions (excluding those from credit institutions). This means the larger banks will benefit from the large balance of non-term deposits of Vietnams State Treasury of c. VND52,000 billion, in which c. VND20,000 billion are at the four largest banks Agribank, BIDV, VCB and CTG. Loans from domestic organizations and other credit institutions with terms of three months or more. Capital mobilized through issuing valuable papers.
Figure 14: High loan to deposit ratio with large reliance on borrowings from other credit institutions LDR Borrowings from other credit institutions/Total deposits
2008
2009
3Q2010
2008
2009
3Q2010
CTG
EIB
ACB
STB
VCB
CTG
EIB
ACB
STB
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Deposit growth
60% 50% 40% 30% 20% 10% 0% 42%
Credit growth
37% 48%
25%
32%
25%
40% 29%
23%
27%
Possibility of higher NPL ratios Although, average NPL remained at c. 2.5% in 2010, actual NPL in the banking system may be higher as some banks may not make full provisions for big state-owned enterprises (SOEs) loans. Vinashin is now in restructuring total outstanding loans of VND86,000 billion, of which c. VND26,000bn is in the banking system. These loans have not been included in the current NPL of the banking system. According to SBVs estimate, NPL could rise to 3.2% if they take into account Vinashins debt.
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* Total deposit includes customer deposit and other credit institutions deposit.
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VCSCs Rating System and Valuation Methodology Absolute performance, long term (fundamental) rating key: The recommendation is based on implied
absolute upside/downside for the stock from the target price, defined as (target price current price)/current price, and is not related to market performance. This structure applies from 1 November 2010. Equity rating key BUY ADD HOLD REDUCE SELL NOT RATED Definition If the target price is 20% higher than the market price If the target price is 10-20% higher than the market price If the target price is 10% below or 10% above the market price If the target price is 10-20% lower than the market price If the target price is 20% lower than the market price The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances, including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company. The investment rating and target price for this stock have been suspended as there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and target price, if any, are no longer in effect for this stock.
RATING SUSPENDED
Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12month horizon. It is possible that 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.
Target price: In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock, provided the necessary catalysts were in place to effect this change in perception within the performance horizon. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. 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. Risks: Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative.
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Research
Head of Research Marc Djandji, M.Sc., CFA, ext 116 marc.djandji@vcsc.com.vn Manager, Hoang Thi Hoa, ext 146 Senior Economist, Doan Thi Thu Hoai, ext 139 Senior Analyst, Truong Vinh An, ext 143 Senior Analyst, Dinh Thi Nhu Hoa, ext 140 Senior Analyst, Pham Cam Tu, ext 120 Research Team +84 8 3914 3588 research@vcsc.com.vn Analyst, Vu Thanh Tu, ext 105 Analyst, Hoang Huong Giang, ext 142 Analyst, Nguyen Thi Ngoc Lan, ext 147
Disclaimer
Copyright 2010 Viet Capital Securities Company. 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 investor and retail clients of VCSC, 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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