Rating: BUY

Current price: VND11,350

Target Price: VND14,049

Upside: 23.8%

Event catalysts

• Operational turnaround as legacy bad debt problems are resolved and underlying business continues to improve.
• Management’s real estate expertise supports confidence in NPL restructuring.
• LDR is lower than peers and well below the regulatory cap, implying NIM outperformance vs the sector.

Our view: STB has been a sector laggard due to its substantial legacy NPLs. But a restructuring is under way, and we view the bank as a turnaround play given its solid underlying operations, as reflected in strong expected pre-provisioning operating profit (PPoP) growth. Admittedly, the story is not without risks, and capital pressure is a key investor concern. But the bank’s low LDR, broad retail footprint, and solid PPOP growth highlight its strong underlying potential. We think that there is value here, and we initiate coverage on STB with a BUY recommendation.

Valuation is cheap (admittedly, for a reason)… STB’s stock trades at 1.1x 3Q18A P/TBV, far below the sector average of 2.0x. In our view, the reason for the valuation discount vs peers should be obvious: STB’s high level of legacy NPLs, which we peg at VND82.3 trillion or 20.3% of assets. However, we believe the stock could rerate as positive signs of its restructuring emerge. Our 12-month price target of VND14,049 implies 1.2x 2018E P/TBV, which we view as reasonable given the bank’s long-term roadmap to improved returns. In short, we believe the stock offers value here.

… but underlying business operations are improving. We forecast PPoP CAGR of 35.1% in 2017-20E, with PPoP / clean-book assets to almost double from 2017A to reach 1.49% in 2020E. In our view, topline growth and PPOP ROA are better indicators of STB’s underlying business strength than net profit, which we assume will compressed by the NPL overhang during our forecast horizon. That said, STB could surprise on the upside if the NPL restructuring proceeds more rapidly and effectively than we assume in our model – and management’s real estate acumen suggests that it might.

Capital is the key risk. STB’s NPL prudential restructuring plan implies gradual loss recognition based on top line profitability in the next several years. We view this workout as entirely appropriate from a prudential perspective. But investors could face equity dilution if a one-off recapitalization were adopted, which necessitates an assessment of the potential risk. A reasonably prudent set of assumptions – 20-30% legacy NPL write-offs and new shares issued at 1.4-1.5x P/TBV – would imply 36-48% dilution if the bank were recapitalized to achieve an 8% CET1 ratio, based on our estimates.

Please see the link for the full report: STB_Initiation_January 2019 Final

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