HDB VN_Wait for clarity on the PG Bank deal
26/09/2019 - 11:44
HOLD – Underperform
- Investors may get a better entry opportunity once the deal is done, possibly in 4QWe initiate coverage with a Hold–Underperform rating.
- HDB’s acquisition of PGBank is a short term share overhang.
- HD Saison is well-positioned in consumer finance.
- Merger effects are likely to include moderate share dilution, increased NPLs, and reduced cost efficiencies.
- PG Bank shareholders may be sellers after the deal is done – wait for this.
- However, the bank’s CAR, CASA, and credit growth quota should all increase after the deal, and the tie-up with PLX offers an attractive sales channel.
The PG Bank merger is a short-term overhang and we assume that it will take place at end-2019. As with most M&A deals, EPS dilution and higher NPLs are likely to be an initial result; we also expect HDB’s cost efficiency to fall post-deal. However, we also expect longer term merger benefits for NIM, including higher credit growth quotas and a marginally higher – but still weak — CASA ratio (of 10.9%).
We expect higher-than-average credit growth driven by early Basel II compliance and the merger with PGBank. HDB will implement Basel II from 4Q19, which should result in a higher SBV quota than the sector average of 14% in 2019E. Additionally, the PGBank acquisition should result in a higher credit growth quota from the SBV in 2020E. We thus forecast 2020E loan growth of 17% for HDB vs 13% for the sector.
Yuanta vs consensus. Our net income forecasts are 10%-29% higher than the consensus mean for 2020E-21E. This may be because we have factored in the deal’s completion at end-2019. We thus expect higher credit growth room, lower funding costs, and stronger capital solvency than the Street. Our fee income forecasts may also be on the high side given to our bullish view on bancassurance sales assuming that HDB and Dai-ichi Life successfully renegotiate their deal terms.
We initiate with HOLD-Underperform. Our VND 28,016 target price implies 1.7x FY2020E PBR which is arguably conservative given expected ROE of c.20% going forward. However, a conservative approach is reasonable given the short-term acquisition risks.
A better entry opportunity may emerge following the deal’s consummation. From a practical perspective, HDB’s shares may be pressured after the merger as minority shareholders in PG Bank seek to monetize this asset once they have access to the liquidity of HDB’s shares. As our above-consensus earnings forecast indicate, we are not particularly bearish on HDB. But we would await clarity on the acquisition before revisiting our cautious short-term view on the stock.
For the complete report, please access here: HDB_Initiation_Sep 2019_v2
Analyst: Tanh Tran, email@example.com