CAMEL Analysis_3Q20_Safety first – Increased provisioning

What’s new?

• 3Q20 PATMI of the 19 listed banks: VND24 tn (-1% QoQ/+8% YoY).
• Total 3Q20 credit costs: VND23 tn (+31% QoQ/+19% YoY).
• LLR ratio: 87% (flat QoQ/-2ppt YTD)
• NPL ratio: 1.81% (+11bps QoQ/+37bps YTD)

Our view

• Loan growth should increase in 4Q20 driven by SBV policy and strong seasonal demand.
• Reported NPL ratios fail to fully reflect underlying asset quality deterioration, in our view.
• Continue to focus on banks with strong asset quality and high LLR.

Safety first – Increased provisioning

VCB (HOLD-UPF) remains Vietnam’s No. 1 CAMEL-ranked bank. VCB’s asset quality ranks No.1 due to its sector-high loan loss reserve (LLR) ratio of 215% (-39ppt QoQ/+33ppt YoY). This continues to reflect VCB’s prudent approach to retaining a strong buffer against underlying asset quality deterioration amid the macro shock created by COVID-19. TCB (Not Rated), ACB (BUY), and MBB (BUY) round out our top four yet again.

3Q20 earnings dragged by higher provisioning. After reducing provisioning in 2Q20, banks more prudently increased provisioning in 3Q20 ahead of NPL recognition once Circular 01 expires. We believe this trend will continue in 4Q20 and early 2021E.  

Sector LLR ratio was 87% at 3Q20 (flat QoQ/-2ppt YTD). Although loan loss reserves (LLR) increased by +29% in 9M20, NPLs also jumped by 32% YTD, resulting in a relatively unchanged LLR ratio.

We continue to suggest that investors focus on quality banks with high LLR ratios such as MBB, ACB, and VCB. Our top picks are MBB and ACB. MBB’s is the value play, with a matched-order valuation of 1.0x 2020E P/B vs ACB’s 1.4x and the sector median 1.1x. VCB remains the top- quality bank. However, this is reflected in its valuation of 3.2x 2020E P/B, which we believe has fully priced in the bank’s relative quality.

ACB is a high quality bank with multiple catalysts ahead as outlined in our August initiation titled Safe haven in the storm. Short term share price catalysts include listing on the HOSE and a potential bancassurance exclusivity deal. HDB could be another interesting stock given management’s statement in the quarterly results meeting that the PGBank acquisition may be off the card.

For the complete report, please access here: Banks_CAMEL_3Q20_Updated

Analyst: Tanh Tran, tanh.tran@yuanta.com.vn