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Equity Bottom-Up

Asia Commercial Bank/Vietnam / Equity Bottom-Up

HCM Development J.S. Commercial Bank (HSX: HDB) has achieved impressive results with 110% Y-o-Y growth in PBT 2017 and 170% Y-o-Y growth in PBT 1Q2018. We hold the view that HDB will be able to maintain this robust growth following its retail banking strategy with advantages from huge customer ecosystem, extensive transaction network and efficiency improvements. The contribution of HD Saison – the third biggest player in the booming consumer finance sector - is another significant competitive advantage of HDB. HD Saison will be driving HDB’s growth in the future based on the largest POS network as well as the focus on high growing products like motorbike and consumer durables loans. Additionally, the merger with PGBank will be a milestone in the comprehensive strategic partnership between HDB and Petrolimex. This is a wise move to support HDB’s retail banking strategy based on a strengthen customer base and transaction network. These advantages are crucial to the bank’s sustainable growth considering (1) higher competition in retail and SME banking, and (2) SBV’s gradually monitoring closely credit expansion. Using the residual income method (RIM) and comparable method (P/B forward) with equal weight, we estimate HDB’s fair value at VND 42,000, equivalent to a P/B forward of 2.6x. Considering an expected VND1,000 cash dividend for 2018, the total return is 23% based on the closing price at 19 July 2018. We recommend to BUY the stock.

HCM Development J.S. Commercial Bank (HSX: HDB) has achieved impressive results with 110% Y-o-Y growth in PBT 2017 and 170% Y-o-Y growth in PBT 1Q2018. We hold the view that HDB will be able to maintain this robust growth following its retail banking strategy with advantages from huge customer ecosystem, extensive transaction network and efficiency improvements.  The contribution of HD Saison – the third biggest player in the booming consumer finance sector - is another significant competitive advantage of HDB. HD Saison will be driving HDB’s growth in the future based on the largest POS network as well as the focus on high growing products like motorbike and consumer durables loans.  Additionally, the merger with PGBank will be a milestone in the comprehensive strategic partnership between HDB and Petrolimex. This is a wise move to support HDB’s retail banking strategy based on a strengthen customer base and transaction network. These advantages are crucial to the bank’s sustainable growth considering (1) higher competition in retail and SME banking, and (2) SBV’s gradually monitoring closely credit expansion.  Using the residual income method (RIM) and comparable method (P/B forward) with equal weight, we estimate HDB’s fair value at VND 42,000, equivalent to a P/B forward of 2.6x. Considering an expected VND1,000 cash dividend for 2018, the total return is 23% based on the closing price at 19 July 2018. We recommend to BUY the stock.

HDB - Growth Drivers from Customer Ecosystem and Consumer Finance

Thematic (Sector/Industry)

New prospects for bad debt recovery prospects. The legal framework has continued to improve with the adoption of Resolution 42, which is considered to have resolved almost all issues that credit institutes (CIs) encounter in bad debt settlement as well as collateral foreclosure. However, to attract buyers, we think there are some other bottlenecks that need to be improved such as (1) the coordination and support of many related authorized agencies when applying the resolution and (2) the transaction market for bad debt and collateral to improve the asset’s liquidity. Therefore, in the short term, we think that the resolution will have a strong impact on the borrowers' sentiment. Adding to the change on borrowers’ sentiment, we believe that the recovery of the economy and consumer confidence as well as growing production will boost the recovery rate on bad debts.The combination of these three factors will be key drivers to the success of Resolution 42.Banking industry’s earnings experienced strong growth in 9M 2017, thanks to the loosened monetary policy. Total operating income of the 13 listed banks was VND83.4 trillion (+29% YoY) and NPAT was VND17.6 trillion (+25% YoY). We think the earnings growth was mostly supported by the easing monetary policy. Indeed, the business outlook of the the banking sector has been brightened after the ratio of short-term mobilized funds financing medium- and long-term loans increased to 60% under Circular 36 (it was previously a mere 30%). The ratio decreased to 50% in 2017 under Circular 06, yet it has had a negligible impact on the performance of banks since the ratio of listed banks is still significantly lower than SBV’s requirement of 50%. In addition, interest rates remained stable at low levels due to (1) low inflation and (2) larger deposits with lower cost from the State Treasury. Thanks to that, the banks’ net interest income grew significantly. We expect this trend to continue in the second half of 2017 and early 2018.Banks’ relative valuation has been upgraded. The Vietnam banking sector's picture shows many positive factors in 2017: (1) Credit rating agencies including Fitch, S&amp;P, and Moody's upgraded their rating for some of Vietnam banks; (2) Enjoying favorable macro environment, the banking industry has achieved high profit growth, with 6M 2017 NPAT growing 39% YoY and ROE increasing to 7.5% (2016: 5.7%) of which, state-owned banks and joint-stock commercial banks had the most improving ROE; and (3) Expected recovery rate of bad debt is higher, following the initiation of Resolution 42. As a result, the banking sector's relative valuation has been reversed, with an average PBR of listed banks increasing to 2.1x from 1.7x at the beginning of the year. Excluding the impact of VCB, the listed banks’ average PBR is around 1.7x, which is 20% higher than the average figure of region banks.State-owned banks, with the support of capital raising story and positive business results, are likely to perform well in 2018. CTG is currently having the most attractive valuation. The bank has been aggressive in reorganizing its operation model since 2014 and has accelarated its provision made for special bonds in 2017. Therefore, we expect that CTG’s earnings will grow more positively in 2018–2019 . VCB is quite good in its leading role. We forecast VCB’s NPAT CAGR will be over 20% in 2017–2019 with high loan loss reserve(LLR). Along with its capital raising plan, the story of divesting from other credit institutions will not only help to increase VCB’s Tier 1 capital but also bring extraordinary profit in 2018. Therefore, the market is likely to continue being bullish with VCB. In the most positive scenario, VCB’s PBR would be up to 3.5x while its average PBR in the recent three years has been around 2.7x.We are not optimistic about BID given our expectation that BID growth in 2017-2018 will be slower than its peers due to its large non-performing loans as well as high special bonds, low liquidity ratios, and operating expenses that are likely to rise sharply in the upcoming years,. Meanwhile, BID’s prospect will be more improved if it could successfully make private placement and if Resolution 42 could work well with its bad debts. Therefore, BID investors need to be conservative in considering the trade-off between capital gains and risks taken when investing in BID. BID’s PBR used to reach 2.7x in the past, and its average PBR in recent three years is 1.3x.The other commercial banks who will pilot Basel II are less pressure on capital raising than the state-owned banks. Most of them has paid stock dividends as a way to enhance Tier 1 capital. In this group, we are positive about ACB and MBB, which are expected to continue to grow strongly in 2018. However, we prefer ACB as the bank has constantly strengthened its asset quality and is consistent with its core business strategy in which the bank has experience. In contrast, MBB solved its growth story by expanding into new riskier businesses which would require more time to evaluate the effects.

New prospects for bad debt recovery prospects. The legal framework has continued to improve with the adoption of Resolution 42, which is considered to have resolved almost all issues that credit institutes (CIs) encounter in bad debt settlement as well as collateral foreclosure. However, to attract buyers, we think there are some other bottlenecks that need to be improved such as (1) the coordination and support of many related authorized agencies when applying the resolution and (2) the transaction market for bad debt and collateral to improve the asset’s liquidity. Therefore, in the short term, we think that the resolution will have a strong impact on the borrowers' sentiment. Adding to the change on borrowers’ sentiment, we believe that the recovery of the economy and consumer confidence as well as growing production will boost the recovery rate on bad debts.The combination of these three factors will be key drivers to the success of Resolution 42.Banking industry’s earnings experienced strong growth in 9M 2017, thanks to the loosened monetary policy. Total operating income of the 13 listed banks was VND83.4 trillion (+29% YoY) and NPAT was VND17.6 trillion (+25% YoY). We think the earnings growth was mostly supported by the easing monetary policy. Indeed, the business outlook of the the banking sector has been brightened after the ratio of short-term mobilized funds financing medium- and long-term loans increased to 60% under Circular 36 (it was previously a mere 30%). The ratio decreased to 50% in 2017 under Circular 06, yet it has had a negligible impact on the performance of banks since the ratio of listed banks is still significantly lower than SBV’s requirement of 50%. In addition, interest rates remained stable at low levels due to (1) low inflation and (2) larger deposits with lower cost from the State Treasury. Thanks to that, the banks’ net interest income grew significantly. We expect this trend to continue in the second half of 2017 and early 2018.Banks’ relative valuation has been upgraded. The Vietnam banking sector's picture shows many positive factors in 2017: (1) Credit rating agencies including Fitch, S&amp;P, and Moody's upgraded their rating for some of Vietnam banks; (2) Enjoying favorable macro environment, the banking industry has achieved high profit growth, with 6M 2017 NPAT growing 39% YoY and ROE increasing to 7.5% (2016: 5.7%) of which, state-owned banks and joint-stock commercial banks had the most improving ROE; and (3) Expected recovery rate of bad debt is higher, following the initiation of Resolution 42. As a result, the banking sector's relative valuation has been reversed, with an average PBR of listed banks increasing to 2.1x from 1.7x at the beginning of the year. Excluding the impact of VCB, the listed banks’ average PBR is around 1.7x, which is 20% higher than the average figure of region banks.State-owned banks, with the support of capital raising story and positive business results, are likely to perform well in 2018. CTG is currently having the most attractive valuation. The bank has been aggressive in reorganizing its operation model since 2014 and has accelarated its provision made for special bonds in 2017. Therefore, we expect that CTG’s earnings will grow more positively in 2018–2019 . VCB is quite good in its leading role. We forecast VCB’s NPAT CAGR will be over 20% in 2017–2019 with high loan loss reserve(LLR). Along with its capital raising plan, the story of divesting from other credit institutions will not only help to increase VCB’s Tier 1 capital but also bring extraordinary profit in 2018. Therefore, the market is likely to continue being bullish with VCB. In the most positive scenario, VCB’s PBR would be up to 3.5x while its average PBR in the recent three years has been around 2.7x.We are not optimistic about BID given our expectation that BID growth in 2017-2018 will be slower than its peers due to its large non-performing loans as well as high special bonds, low liquidity ratios, and operating expenses that are likely to rise sharply in the upcoming years,. Meanwhile, BID’s prospect will be more improved if it could successfully make private placement and if Resolution 42 could work well with its bad debts. Therefore, BID investors need to be conservative in considering the trade-off between capital gains and risks taken when investing in BID. BID’s PBR used to reach 2.7x in the past, and its average PBR in recent three years is 1.3x.The other commercial banks who will pilot Basel II are less pressure on capital raising than the state-owned banks. Most of them has paid stock dividends as a way to enhance Tier 1 capital. In this group, we are positive about ACB and MBB, which are expected to continue to grow strongly in 2018. However, we prefer ACB as the bank has constantly strengthened its asset quality and is consistent with its core business strategy in which the bank has experience. In contrast, MBB solved its growth story by expanding into new riskier businesses which would require more time to evaluate the effects.

Banking Industry Update Report - Macro Advantage to Drive Profit Growth of Banking Industry

Vietnam

Asia Commercial Bank attracts deposits and offers commercial banking services.

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Asia Commercial Bank/Vietnam (ACB VN)

HDB - Growth Drivers from Customer Ecosystem and Consumer Finance

HCM Development J.S. Commercial Bank (HSX: HDB) has achieved impressive results with 110% Y-o-Y growth in PBT 2017 and 170% Y-o-Y growth in PBT...

Rong Viet Securities

Banking Industry Update Report - Macro Advantage to Drive Profit Growth of Banking Industry

New prospects for bad debt recovery prospects. The legal framework has continued to improve with the adoption of Resolution 42, which is considered...

Rong Viet Securities

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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