Vietnam Banks: Takeaways from 2019 Vietnam Economic Conference

We attended the 2019 Vietnam Economic Conference, an annual event held by the Vietnam Economic Times, on March 12. Conference speakers included key economic decision makers in the government and financial industry. This note presents the key takeaways for the banking sector.

Takeaways from 2019 Vietnam Economic Conference

Themes and catalysts
 2019 policy confirmed as c.14% credit growth, reduction of banks’ exposure to real estate developers.
 Policymakers recognize the need to develop bond market, and the related hurdles.
 Banks to focus more on non-interest income, less on loan growth.

Policymakers: Financial system remains overly bank centric. with system loans to GDP at 134% at 2018 (+4.6% YoY). This implies the need for a more developed corporate bond market. Currently, outstanding corporate bonds to GDP is only 7%, far below the ASEAN region at 21%. Corporate bond issuance will also help enterprises reduce their dependence on bank loans, while banks (and bank subsidiaries) engaging in corporate bond issuance boost their non-interest income from doing so.

Obstacles to the development of corporate bond market were a key focus of the discussions. Many corporates are reluctant to issue bonds due to investor demands for compliance with international accounting standards (i.e., IFRS), which the corporates may be unable to apply, or unwilling to do so given the increased transparency. Lack of reliable credit ratings is another barrier as the expense of international credit agencies cause corporates to balk, while domestic agencies lack credibility with investors.

Our view: The corporate bond market is only in its nascence and its development will take years. Although this represents bank disintermediation, we still see it as a long-term positive because 1) financial diversification strengthens the overall system, 2) financial diversification also increases investment options, and 3) banks that are able to capture the flows will benefit on the non-interest income line.

We reiterate our Buy ratings on STB and BID. With bank balance sheets highly leveraged and loans / GDP already high, we agree that banks must focus on generating non-interest income as a means of generating profitability. Those with large customer-based, wide range of branches and networks, good customer service, and modern IT system will take the lead. We reiterate our Buy recommendations on Sacombank (STB VN, 11% 12-m TSR) and BIDV (BID VN, 9% 12-m TSR).