08/05/2020 - 08:17
CAMEL Analysis_1Q20_Update
Themes and catalysts
- The sector’s 1Q20 results were weak – no major surprise there.
- Sector NIM fell 8bps vs. 2019.
- CASA deposits fell 11% vs. 2019.
- 1Q provisioning +24% QoQ/+34% YoY.
- 1Q PATMI –11.4% QoQ/+3.3% YoY.
- 2Q20 is likely to be worse given falling yields & fees and rising credit costs.
Trends and Risks
- Earnings forecasts for 2020E appear stretched (including our own).
- Credit costs & loan loss reserve ratios are key to monitoring asset quality in 2020…
- … whereas NPL ratios are less meaningful. Even in normal times, NPL recognition guidelines mean that a bank’s NPL ratio is a lagging indicator of its asset quality. But current policy actually requires banks to engage in extend-and-pretend behavior.
VCB (BUY) remains Vietnam’s No. 1 CAMEL-ranked bank. Its loan loss reserve (LLR) ratio of 235% (+53ppt QoQ/+66ppt YoY) reflects VCB’s prudent approach to building a strong buffer against probable asset quality deterioration due to Covid-19. The macro outlook in 2020 is not great, but VCB remains the highest-quality bank and we see it as the best available play on a still-positive longer term macro story for Vietnam.
TCB (Not rated), ACB (Not Rated), and MBB (BUY) round out the top three. TCB has supplanted MBB as the No.2 CAMEL-ranked bank in our 4Q19 CAMEL update. TCB’s asset quality has improved slightly (i.e. 1Q20 NPL ratio of 1.09% was down 24bps YTD; LLR ratio was up 23ppt YTD to reach 118% in 1Q20). However, TCB’s higher ranking was largely due to the decrease of other banks’ CAMEL scores.
STB (BUY) CAMEL score of 2.9 decreased slightly QoQ, but its ranking jumped from 9th to 7th place. Crucially, STB’s asset quality continues to improve, as its NPA ratio (largely legacy bad assets) declined to 15.8% in 1Q20 (-90bps QoQ/-4.1ppt YoY). The crisis may slow STB’s turnaround momentum, but its 14% loan growth CAGR in 2016-19 (vs the sector’s 16%) suggests relatively low new NPL formation risk.
In the current dismal operational outlook, investors should focus on quality. This informs our top pick call. VCB ’s 2.5x 2020E P/BV multiple is highly attractive vs its five-year trailing average of 3.0x (see Figure 1 inside) and longer term 20%-plus ROE outlook. For those seeking greater risk/reward, we would add STB
For the complete report, please access here: Banks_CAMEL_1Q20_Updated
Analyst: Tanh Tran, tanh.tran@yuanta.com.vn
