Banks Earnings Preview_3Q21

Credit growth has slowed due to the pandemic. Sector credit growth has been tepid, but unsurprisingly so given the pandemic impact. In 8M21, credit growth was 7.4% YTD (up from 4.8% YTD in 8M20). We believe 3Q21 credit growth is mainly being driven by new loans to Covid-impacted clients and corporate bonds. Overall, we expect that banks’ 3Q21 gross interest income to decline by -2% QoQ. However, we expect credit growth to recover in 4Q21 as the economy reopens.

We expect NIMs to decline in 3Q21 as banks cut loan yields to support Covid-impacted clients. However, bank system liquidity has been loose since the beginning of June as demonstrated by the overnight rate’s -86bps decline since then (see the 2^nd chart at left). We expect the SBV to retain loose policy at least until yearend; thus, NIM should improve slightly in 4Q21 as loan expansion recovers.

We expect 3Q21 fee income to increase and this will be the key earnings driver for this quarter.

However, we expect provisioning to increase by +20% QoQ in 3Q21, especially for banks with low loan loss reserve (LLR) ratios (see 3^rd chart). We believe that asset quality deterioration is inevitable amid the pandemic and lockdowns. Circular 14/2021/TT-NHNN extends the debt restructuring period to June 30, 2022 instead of the original Dec 31, 2021. Thus, reported NPLs might remain low, but it would be prudent for banks to increase provisioning now (ahead of asset quality classification downgrades later), in our view.

Net-net, we expect 3Q21 earnings to decline by -19% QoQ vs. 2Q21 due to tepid loan growth and our expected QoQ increased provisioning. Increased provisioning will dent earnings more at low-LLR banks.

Our focus remains on the quality banks with high LLR ratios. VCB remains the highest-quality bank in our CAMEL rankings with a sector-high LLR ratio of 352%, and its valuation premium is justified.

For the complete report, please access here: Banks Earnings Preview_3Q21

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