CAMEL Analysis_3Q19 Update
11/11/2019 - 11:33
We have updated our rankings of the 18 listed Vietnamese banks based on the CAMEL framework, a fundamental approach to bank analysis that focuses on Capital, Asset quality, Management, Earnings, and Liquidity. For a detailed description of the CAMEL methodology, please see our July 5 report titled “Vietnam Banks CAMEL Analysis – The good, the bad, and the chronically mispriced.”
We remain Overweight the banks and continue to suggest a barbell approach comprising 1) a core long position in VCB (BUY) as a proxy on Vietnam’s economic development 2) and an allocation to STB (BUY) as an undervalued turnaround play (think risk-reward). We also have a BUY recommendation on MBB, HOLD-Outperform on BID, and HOLD-Underperform on HDB.
Themes and catalysts:
- Cost efficiency continues to improve. Adjusted 3Q19 CIR was 44% (+1ppt QoQ / -3ppt YoY)
- 3Q19 PBT increased 13% QoQ / 44% YoY among all listed banks
- Reduced leverage on stronger capital solvency. Asset/equity of 14.7x in 3Q19 was down from 15.8x at FY18
Trends and Risks:
- Rising NPL ratio. The sector’s NPL ratio climbed to 1.76% in 3Q19 (+6bps QoQ / -2bps YoY)
- Rising funding costs, especially for the smaller banks with relatively weak funding franchises
- Bank stocks outperforming in 4Q19 led by VCB (+12% since Sep 30)
VCB remains Vietnam’s No. 1 CAMEL-ranked bank. VCB’s sector-low funding cost remains a core competitive advantage. Fees should be boosted by the bancassurance deal with FWD, including the upfront fee of about US$400 mn and ongoing fees from banca sales. VCB is one of our top picks in the sector.
ACB (Not Rated) and TCB (Not rated) round out the top three. ACB has supplanted TCB as the No.2 CAMEL-ranked bank since our “CAMEL Analysis-2Q19 Update”. ACB’s improvement was largely due to improved capital (i.e., straight equity/assets of 7.1% was up 30bps QoQ and 70bps YTD), and earnings power (i.e., NIM improved 10bps QoQ, and ROAA was up 5bps QoQ.
STB’s CAMEL ranking improved from 8th in 2Q19 to 6th in 3Q19. STB’s 9M19 PBT was up 90% YoY. More importantly, asset quality continues to improve as management works through the legacy NPAs. Organic NPLs (i.e., Cat. 3-5 NPLs) declined to 2.00% of gross loans in 3Q19 (-4bps QoQ / -20bps YTD / -1.2ppt YoY). The bank’s total nonperforming asset (NPA) ratio (which includes legacy bad debt) fell to 17% in 3Q19 (-1.5ppt QoQ / -4.6ppt YTD / -5.0ppt YoY).
We reiterate BUY on STB, which we see as a turnaround story given its strong core business performance amidst the ongoing legacy bad debt restructuring. The stock remains unloved despite the continued operational improvements. Given its low valuation and wide open FOL, we suggest that foreign institutions take a closer look.
For the complete report, please access here: Banks_CAMEL_11.11- 3Q19_Updated
Matthew Smith, CFA, Head of Research, firstname.lastname@example.org
Tanh Tran, email@example.com