BID_Time to Make a BID
05/03/2019 - 08:30
Current price (03-04-2019): VND 33,600
Target price: VND 38,713
- Issuance of new shares to KEB Hana to provide additional capital for growth.
- Funding costs should fall due to reduced balance sheet leverage.
- Clearing 100% of VAMC exposure in 2019E will result in reduced provisioning in subsequent years.
- Leading SME & retail bank franchise.
Our view: The pending share issuance to KEB Hana Bank should allow BID to meet Basel 2 requirements and grow its business at a time when many competitors face capital constraints. We also expect the stronger balance sheet to result in lower funding costs and improved NIM. BID’s leadership in retail and SME banking is attractive and in our view puts it in a strong position to weather increasing competition in this segment. Also, BID’s ongoing provisioning for its VAMC exposure should be 100% complete in 2019E, providing another earnings boost for 2020E. We initiate coverage with a Buy rating.
CAR is the driver. Many Vietnamese banks require additional capital, in our view. BID’s 26.9% FOL room simplifies this process relative to peers that are close to or already at full FOL. We assume that the pending 15% strategic stake sale to KEB-Hana Bank will occur in mid-2019, resulting in a c. 2.5ppt increase in its Tier 1 capital to 8.4% (total CAR: 12.5%). This supports our assumptions of strong future credit growth, and lower balance sheet leverage should also lead to reduced funding costs.
Growth engine torqueing up. Based on the stronger capital base, we forecast loan growth of 15.4% in 2019E and 16.6% for 2020E. Also, funding costs should decline due to the reduced leverage, while asset yields should be stable given the retail and SME customer base. Overall profitability is likely to remain constrained this year given ongoing VAMC asset provisioning. But this exposure should be fully provisioned by 2019E, and we thus expect ROE to improve to 18.3% in 2020E.
Reasonable valuations. BID is trading at 1.73x 2019E P/BV with expected normalized ROEs of 18-20%. We think BID is a solid business trading at a reasonable price and see 15% upside to our target of VND38,713, implying a reasonable 2.0x 2019E P/BV.
The stake sale is also the key risk to our view, as the KEB Hana deal has not yet been approved. We think the risk of cancellation is low, as the bank needs the capital and KEB Hana, according to our Korea banks team, is very keen to invest. But a delayed approval would put our asset and earnings growth forecasts at risk.
For the complete report, please download here: BID_Initiation_Mar 2019
Analyst: Tanh Tran, email@example.com