VCB_Valuation premium is justified

BUY

TP upside (downside) +11%
Close 15 Jan 2021
Price                         VND 103,200
12M Target              VND 114,650
Previous Target      VND 75,140
Change                     +53%

What’s new?

• Target price raised after moderate earnings increases and reduced cost of equity assumption (from 13.7% to 12.7%).
• Earnings forecasts by +4% for 2021E and +2% for 2022E.
• Risk free rate reduced by 1ppt to 5.6% to reflect bank deposit rates

Our view

• We upgrade our rating to BUY.
• We continue to view VCB as the highest quality bank, and investors should focus on quality in 2021.
• Net interest income and fee income should recover in 2021. We expect VCB to recognize the upfront banca exclusivity fee starting from 2021.

Valuation premium is justified

Credit growth recovered in 4Q20 to reach +14% YoY, which is the highest credit growth among SOCBs in 2020. We expect VCB’s credit growth to improve further in 2021E given its strong balance sheet and the likely continuation of loose monetary policy in the medium term.

2021E NIM forecasts increased by 19bps to 3.17% for 2021E. Assuming no resurgence of the pandemic, we expect VCB to refrain from reducing interest rates to support clients in 2021. VCB’s strong CASA deposit franchise continues to maintain its sector-low funding cost advantage.

Fee income should rise given upfront bancassurance fee recognition in 2021. We expect VCB to recognize the upfront fee starting from 2021, which will help boost its pre-provisioning operating profit.

Credit costs to decrease. High credit costs were the main negative factor for 2020 earnings, but VCB’s exceptionally high LLR of 377% allows for greater flexibility than most banks to lower provisioning and thus boost 2021E earnings without sacrificing asset quality.

We raise our PATMI forecasts by +4% for 2021E to VND21.7 tn and by +2% for 2022E to VND28.1 tn. Our PATMI forecasts are 2% above consensus for 2021E and 6% higher for 2022E.

Upgrade to BUY— Investors should focus on quality in 2021. Our view has consistently been that VCB is Vietnam’s highest quality bank, and our previous HOLD-Underperform rating was purely based on concerns about overvaluation. However, given the lack of visibility on bank sector earnings amid forbearance on COVID-impacted borrowers, we now believe the premium to be merited. We revise down our risk free rate assumption to 5.6% (previous: 6.6%) to reflect bank deposit rates. Our new target price implies +11% upside to the current price.

For the complete report, please access here: VCB_Company Update_Jan_2021

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