12/12/2019 - 15:26
Vietnam Brokerage Sector: The Competitive Crunch
| What’s new? ► We think 2020E will be another tough year. ► The brokerage commission race-to-the-bottom continues. ► Well-funded foreign (i.e., Korean) competition in margin finance is even more of a concern for ROA. ► Domestic brokers are better positioned for insto brokerage, I/B, and perhaps wealth management.
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Requiem for the commission floor. Net brokerage commission rates recovered slightly in 3Q19 but are still close to zero and are not likely to return to historical levels. Industry fragmentation is only increasing due to well-funded and market share-hungry new foreign (i.e., Korean) entrants who appear to be willing to forego brokerage fees in favor of market share and as a loss leader for margin lending. For obvious reasons, retail investors are well aware of this trend, so the brokerage stocks’ historically high correlation with market levels and ADT may decline going forward.
Margin finance is soaring, but who is winning? Total margin loans reached USD 2.3 bn in 3Q19 (+9% QoQ / +36% YoY). This was 23% higher than margin loans at the market peak in 1Q18. However, competition in this business is even more insidious than the brokerage commission race-to-the-bottom for domestic brokerage profitability, in our view. This is because 1) margin lending is one of the two key drivers of brokers’ overall profitability (along with I/B), and 2) foreign players enjoy funding advantages that have helped to drive their substantial market share gains in margin lending.
Short term view: A possible seasonal market rally in 1Q20 may boost the brokers’ shares prices. But we are not as confident on the remainder of 2020 given that competitive pressure will probably intensify next year and our view that investment banking dealflow, where domestic brokers have a more sustainable edge, is not likely to recover meaningfully until 2021.
Long term view: We consider the brokers as proxies on Vietnam’s developing capital markets. Given the heated competition in retail broking (and especially in margin lending), we believe that the domestic brokers should focus on business segments where their competitive moat is wider and less dependent on funding resources, such as institutional broking, investment banking, and – on a longer term view – wealth management.
Stock ideas: HCM (BUY) remains our top pick given its scale, relatively diversified revenue streams, and management’s focus on profitability rather than market share. We upgrade SSI to HOLD-Outperform largely on valuation following its YTD underperformance. However, we downgrade our ratings on VND and VCI to HOLD-Underperform because we believe the catalysts for a rerating are either too distant (for VCI) or hard to identify (for VND) amid the intense competition and our low expectations for 2020.
