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TCB – Awaiting recovery from the second half of 2023

• In Q2/23, TCB's total operating income was VND 9.3 trillion (-16% YoY), continuing to be affected by net interest income, which recorded at VND 6.2 trillion (-19% YoY, -3.6% QoQ). This was primarily due to NIM (annualized) decreasing by 160 bps YoY and 26 bps QoQ, as the bank had fully utilized its credit limit in Q1. Additionally, the increase in non-performing loans added pressure to the bank's risk provisions in the period totaling VND 807 billion (+93% YoY). This resulted in the bank's pre-tax profit continuing to decline, reaching VND 5.6 trillion, down 23% YoY.
• The cost of funds (annualized) in Q2 increased at a slower rate, by 21 bps. However, the asset yield recorded a decrease of 10 bps, causing the bank's NIM to further decline to 3.9%. This was due to the bank's shift in lending towards corporate customers and the implementation of a "flexible interest rate" policy to reduce interest rates for some struggling customers. As a result, the average interest rate for loans with interest rates below 8% and above 10% decreased significantly compared to the end of 2022. However, this interest rate support is expected to be offset as customers' financial health improves.
• The non-performing loan ratio in Q2 reached 1.07%, up 22 bps from Q1 and 50 bps from the same period last year, with non-performing loans from the corporate and SME groups reaching 1.96% and 1.51% respectively. Notably, there were no non-performing loans in the business segment.
• Despite modest growth prospects in 2023 due to challenging conditions, we are optimistic about TCB's long-term outlook for balance sheet growth. This is due to TCB's leadership in retail banking, supported by (1) leading technology infrastructure, (2) strong capital buffers, and (3) a well-connected ecosystem. These factors will enable the bank to grow rapidly during periods of economic prosperity. Therefore, improving ROE as the bank navigates through difficult times will help revalue the stock. TCB is currently trading at a P/B ratio of 0.9, lower than the industry average and its long-term prospects. Therefore, we recommend accumulating TCB with a target price of 39,500 VND, corresponding to a PBR of 1.1, offering a potential return of 17% compared to the closing price on August 24, 2023.