EUR 1140.00 For Business Accounts Only

Banking Industry Report - New Cycle: Opportunities and Challenges

​“After the 1st restructuring period from 2012 to 2015, SBV was successful in reducing the NPLs to below 3%. However, the actual figures, which includes NPLs transferred to VAMC, have not actually dropped. In the beginning of 2017, we have noticed that the government has been showing great efforts to speed up the “cleaning” progress to narrow the gap between the real NPLs and reported NPLs from commercial banks; omissions and legal obstacles to create bad debt markets, as well as handling of collateral, are recognized. Although we are not optimistic about the debt recovery making progress in 2017, we expect that there will be special mechanisms to remove the barriers in order to provide a more optimistic scenario for the banking sector in 2018.

There are still concerns regarding capital raising pressures aligning with Basel II requirements. CARs of banks which participate in pilot projects are higher than the minimum as regulated in Circular 36, but still do not fulfill the minimum of 8% under Basel II terms. Meanwhile, banks are facing trade-offs between capital raising and profit growth, and profitability or interest of shareholders, as shareholders will not receive cash dividends for a few years. Searching for strategic partners is another difficult task, since the real level of NPLs is high. It is even harder for state-owned banks as they must be approved by SBV in some conditions (such as issued price) when looking for strategic partners. Therefore, it might take longer to bring Vietnam’s risk management quality closer to international standards. The domino effect is that Vietnam’s commercial banks are constrained from approaching low cost capital, causing challenges for the objective of lowering the lending rate of the government to 5%.

Listed banks holding 47% of the credit market share benefited greatly from strong credit growth in 2015 and 2016. Net interest income and total operating profits saw double digit growth for 2 years in a row, which these banks can use to offset operating expenses and loan loss provisions. There is also an increasing need for investment in IT infrastructure, expansion and human resources, besides the escalating provisions for special bonds which will peak in 2016 – 2019.

Growth and recovery will be strongly diversified between different banks. Those which have nearly surpassed the restructuring period will have stable growth in bottom lines while banks which begin to restructure will need more time to complete this process before thinking of growth phases. Regulations on capital adequacy and liquidity from Circular 36, adjusted Circular 06 and Basel II will consolidate diversification between banks. However, most of the banks that we observed have been optimizing their wide liquidity room to increase its capital co-efficient (ex. MBB) or promptly accelerating deposits from customers to offset the shortfall of liquidity ratios (such as BID) during 2016. We forecast that the NIM of these banks could recover in 2017. On the other hand, as banks have different conditions to satisfy the minimum requirements of capital adequacy, ROE and ROA will also be strongly diverse.

In the end of 2016, the valuation of banking stocks decreased to the lowest value since initially being listed. Stock picks will heavily depend on internal changes and long term prospects. While MBB is likely the most attractive option in terms of valuation, VCB and ACB are currently our top two picks. Investors will have more choices when more joint stock commercial banks are listed in the future, such as VIB, Techcombank and VPBank in 2017.”