VCB_Lower earnings but attractive valuation

BUY

TP upside (downside) +23%
Close 26 Mar 2020
Price                        VND 63,200
12M Target            VND 77,600
Previous Target    VND 92,035
Change                   -16%

What’s new?

• We slash our earnings forecasts by 24% for 2020E and 19% for 2021E.
• Loan growth, NIM, fees & credit costs are all under pressure.
• Expect more revisions. Our reduced 2020-21E forecasts are c. 20% below consensus

Our view

• We upgrade our rating to BUY despite these clear headwinds.
• Investors should focus on quality names in a dismal operating outlook.
• Attractive valuation for our top CAMEL-ranked bank. VCB is now trading at 2.3x 2020E P/BV after falling 34% since the Jan peak.

Lower earnings but attractive valuation

Cutting our loan growth assumptions. We now expect sector loan growth to decline YoY in 2020E. Thus, we lower our 2020E loan growth forecast for VCB by -2ppt vs. our previous forecast to 13% YoY.

NIM forecasts reduced by 18bps to 3.01% for 2020E. VCB’s has cut lending rates in line with SBV policy to support firms during the crisis. But reduced policy rates and VCB’s strong CASA deposit franchise should limit the downside for NIM. We also slash our fee income forecasts given the weak near-term outlook for transaction banking.

Credit costs to increase. Banks are rescheduling payments and retaining pre-outbreak asset quality categorization of related loans, which is likely to continue through 3Q20 at least. We expect VCB to prudently provision for such loans, some of which will not recover.

We slash our PATMI forecasts by -24% for 2020E and -19% for 2021E. Our reduced PATMI forecasts are about 20% below Consensus, but still represent growth of +11% YoY in 2020E and +19% YoY in 20201E.

Solid balance sheet. Basel 2 CAR of 9.9% at 3Q19 is relatively strong, at least for a Vietnamese bank. NPLs of 0.78% and loan loss coverage of 182% indicate a strong buffer for VCB to weather the probable asset quality deterioration in upcoming quarters.

Upgrade to BUY—Investors should focus on business quality during this period, and VCB is Vietnam’s top ranked bank based on our proprietary CAMEL analytical framework. The stock’s 2.3x 2020E P/BV is highly attractive vs its recent history (see Figure 1) and given our (reduced) expected 20% ROE in 2020E. Our Jan 10 downgrade to HOLD-O/P was based entirely on the stock’s then-stretched valuation. We now see 25% TSR to our reduced target price, and we upgrade our rating to BUY.

For the complete report, please access here: VCB_Company Update_03.27.2020

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