Interest, fees receivable (or accrued interest) is a very typical item of the banking industry. The accrual of accrued interest allows banks to record income into their operating results even though they have not yet actually collected the money.
For example, from the time of disbursement to customers, the bank will immediately recognize the corresponding accrued interest for each period (day, month, quarter ...) even though it may be the next 2 years, the customer starts first to pay interest as specified in the contract.
This is a normal and reasonable accounting operation, but there are also holes for banks to record virtual profits. In many ways, a bank can intentionally extend the time between the time of disbursement and the time when the customer has to actually pay interest and fees; Besides, the loan to reverse debt is also a way to mask the real situation of the accrued interest, causing the accrued interest to swell.
Once a virtual profit is recorded, the bank's equity is also distorted (due to the return transferred to equity). However, it is difficult to know the amount of virtual return on accrued interest unless the bank evaluates, synthesizes, and gives data. But even if the bank does, of course, this will be a secret to the vast majority of the public.
However, there are also indicators that can help the public in general and investors, in particular, to visualize the different effects of accrued interest on banks' equity, thereby assessing the sustainability aspect of equity is the ratio of accrued interest/equity.
Statistics of VietnamFinance for listed banks show that this proportion has a very strong differentiation.
The highest was the case of NCB when this proportion reached 81% as of the end of June 2020. Following NCB are banks Sacombank (68%), SHB (50%), VietBank (42%), LienVietPostBank (40%), BacABank (34%), Kienlongbank (34%), Viet Capital Bank (29%). .
The group with a proportion from 10% to 20% includes BIDV, HDBank, TPBank, VPBank, and VIB.
Meanwhile, the group with the proportion of less than 10% includes VietinBank, ACB, Techcombank, MB, Vietcombank, and Eximbank.
When equity is distorted due to unreasonable and reckless recognition of accrued interest, the P / B valuations of banks on the stock market are also misleading. Therefore, the use of P / B to value bank shares also needs to pay attention to the impact of accrued interest.
In a relatively extreme way, if excluding all accrued interest from banks' balance sheets, it means eliminating the effect of accrued interest on equity, P / B of many banks will have a big change.
The most obvious is NCB, the P / B valuation (based on the closing price of August 17th) is 0.81 times, but if excluding the effect of accrued interest, it jumps to 3.49 times. Sacombank also changed many times, increasing from 0.73 times to 2.27 times. Meanwhile, SHB increased from 0.95 times to 1.9 times.
Overall, the top 10 banks with the highest P / B after excluding the effects of accrued interest are NCB, Vietcombank, BIDV, Sacombank, BacABank, SHB, VietBank, ACB, HDBank, TPBank.
The top 10 "primitive" are currently Vietcombank, BIDV, BacABank, ACB, TPBank, Eximbank, HDBank, VIB, VPBank and VietinBank.
However, it should be noted that a high P / B valuation does not mean a poor upside outlook, and vice versa.
In addition to the unreasonable and reckless recognition of accrued interest, the lack of sufficient provision for risk is also an important factor that causes the bank equity to be distorted. Therefore, investors should pay attention to these factors to more accurately determine equity when valuing bank shares.
Translated by Vietnam Credit