VCB_Leading funding franchise justifies the premium valuation

BUY

Current price (06-05-2019): VND 66,700

Target price: VND 75,270

Upside:  12.8%

Event catalysts

• Rising NIMs from the shift to retail lending with funding costs capped by high CASA.
• B-2 compliance gives VCB a strong case for a higher loan quota than the sector.
• Bancassurance could represent a large one-off gain in 2019E or 2020E and a new source of steady fees thereafter.

Take the lead: VCB’s strong CASA deposit franchise is a key competitive advantage, as demonstrated by its sector-low cost of funding. We expect higher credit growth than the industry average due to its early Basel II compliance. VCB is thus well-placed to improve NIM despite the increasing competition in retail banking. VCB is clearly not a deep value play. But we see the stock as an appropriate core holding in the Vietnam banks, perhaps as the conservative half of a barbell strategy with STB VN. We Initiate with a BUY recommendation.

Liability structure is the key advantage, in our view. Banks with sustainably low funding costs typically generate relatively high ROA without taking on undue credit risks. Such banks tend to trade at a sustained premium valuation across the region. VCB’s CASA ratio is around 30% vs the industry median of 15%. As a result, its funding cost is the sector’s lowest at 2.8% vs the industry average of 5.1%.

Sustainable growth in retail banking. We see substantial room for NIM improvement from the ongoing shifting of the business mix toward retail loans, which posted 39.8% CAGR in 2015-18A. We expect the trend to continue and forecast 18.9% retail loan CAGR in 2019-21E. Coupled with the funding advantage, we expect NIM to increase from 2.90% in 2018A to 3.05%/3.10% in 2019-20E.

Possible increased loan quota. We think VCB is well-placed for an increased loan quota from the SBV this year given its 1) early Basel II adoption and 2) compliance with policy goals of increased loans to manufacturing and agricultural SMEs.

Initiate with BUY – the premium valuation is justified. VCB trades at 3.1x 2019E P/BV with expected ROE of 21%. Our target price implies 3.5x 2019E P/BV. This is not optically cheap, but given the CASA franchise, we think a premium is deserved. We suggest that clients consider adopting a barbell strategy with VCB (as a conservative core holding) and STB (as a high-risk, high-reward rerating story).

For the complete report, please download here: VCB_Initiation_Jun 2019

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