Draft Circular to amend Circular 03

The SBV has proposed amendments to Circular 03/2021/TT-NHNN. The draft Circular includes two key revisions to support COVID-impacted clients: 1) the debt restructuring period will be extended to Jun 30, 2022 instead of the original Dec 31, 2021; and 2) rescheduling of debt repayment for borrowers located in blockade areas.

Asset quality is a key concern. Reported NPLs have remained low under the SBV’s forbearance policies. However, this does not fully reflect the underlying asset quality deterioration, in our opinion.

The SBV will maintain the timeline for banks to provision for restructured loans at 3 years, as in the original Circular 03, instead of extending the provisioning period to 5 years as suggested by the Vietnam Banks Association (VNBA).

Banks with low loan loss coverage are under pressure, in our view. Banks with low LLR ratios will have to increase provisioning for potential losses from their restructured loans, which could herald a decline in earnings growth from what may have been peak levels in 1Q-2Q21.

We believe that real NPLs have increased due to the pandemic, and provisioning should increase as a result. Therefore, we continue to recommend that investors focus on quality banks with high LLR ratios.

VCB (BUY) and MBB (BUY), both have high LLR ratios of above 200%. VCB’s reported LLR ratio was a sector-high 352% as at 2Q21. VCB also remains Vietnam’s highest-quality bank based on our sector-wide CAMEL rankings, and its valuation premium is justified in our view. Our target price for VCB is VND114,650/share, implying TSR of 16%. We highlighted MBB as one of our top picks in March, given its high quality and previous valuation discount. The bank remains a solid fundamental pick. However, MBB’s share price is now 15% above our target price, and we are reluctant to aggressively chase the ticker here.

For the complete report, please access here: Draft Circular to amend Circular 03

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