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Banking sector – Credit demand is expected to gradually recover from the last months of 2023 onwards

• In 1Q23, a widespread downturn in bottom-line growth was witnessed amongst most industry players, as sector earnings growth recorded a negative level of -3% YoY (or +5% YoY, if excluding VPB’s one-off upfront fee in 1Q22). Among tiers, State-owned group observed the most optimistic results, with an average 18.9% YoY growth boosted by BID’s impressive figure of 53%, whereas the remaining three tiers all experienced marginal or even adverse improvement.
• Deteriorating asset quality with escalating bad debt formation. Non-performing loans of the banking sector have been accelerating for the third consecutive quarter. However, there was also a divergence between bank groups as state-owned banks have seen diminishing signals in NPL formation whereas the deteriorations of private commercial banks’ asset quality have not ceased.
• The banking sector’s credit growth in 1Q23 reached 2.06% YTD, comparatively lower than the same period last year (5.97%) due to weak credit demand amid challenging business conditions and a gloomy real estate market. We anticipate credit demand to gradually recover from the last months of 2023 onwards, backed by the expected turnaround of the export-import sector and brighter signals on the real estate market from 4Q23.
• Banking stock prices have rebounded during the last six months, yet valuation is still below the 5-year average. We foresee this is an attractive valuation for long-term investors to accumulate banking stocks.