Three securities companies including MB Securities (MBS), Viet Dragon Securities Corporation (VDSC) and Maybank Kim Eng (MBKE) all believed that the banking industry in 2020 will still grow positively despite the stricter legal regulations. In particular, the macro situation is currently very stable, helping Vietnamese banks grow interest and fee income, and maintain asset quality, thanks to which banks do not have to increase provisioning.
MBKE has raised its assessment for the banking industry in 2020 from neutral to positive, based on 3 factors: The regulations of the State Bank; Profitability on assets and Valuation.
Regarding the State Bank's regulations: MBKE assessed that the State Bank's regulations on the banking sector continue to support the growth and maintain profitability. Currently, regulations of the banking industry, such as capital adequacy regulations or provisions on provisioning, are being implemented in a very reasonable manner.
Thanks to moderate and not tightening regulations, banks continue to maintain asset leverage on capital at 10 -12 times instead of falling to below 10 times as regional banks. Therefore, Vietnamese banks are experiencing good profitability.
Regarding profitability on assets: MBKE assessed that the macro situation is currently very stable, helping Vietnamese banks grow interest and fee income, and maintain asset quality, thanks to which banks do not have to increase provisioning.
Specifically, thanks to the stable macroeconomic situation and low credit / GDP ratio (under the new calculation method, the scale of GDP in 2020 will increase, making the credit / GDP ratio fall below 130%), the banking industry will continue to maintain a credit growth of 13% - 14%, while this growth of top banks will be 15% - 16%.
Banks' profitability will be improved thanks to non-interest expenses, especially the increase in insurance sales, which helps the bank improve its ROA to 1.8% - 2%. Due to a reasonable leverage of 10 to 12 times, the profitability of ROE will very good, at 18% - 20%.
>> Vietnam’s banking industry to recover in 2021
In terms of valuation, despite the good profitability, the current valuation of Vietnamese banks is still only at 0.9 to 1 P / B (for many top banks). One factor that makes the valuation of Vietnamese banks unimproved is foreign ownership limit. MBKE expects the Financial index fund or Diamond index funds, which track the full room stocks and have attractive pricing, will be a factor to help valuate stocks, especially bank stocks, which will be improved in 2020.
VDSC's analysis team estimates that the new policies of the State Bank will have different effects on the business results of each banking group. In particular, state-owned banks are more likely to face difficulties in expanding their net profit margin while the impact on private banks is multidimensional and has a lesser effect.
However, VDSC also saw an opportunity for all banks when credit growth is maintained positively, because lending is still the main source of income for banks and credit expansion will allow banks to conduct cross-selling their products (cards, payments, insurance, bond services ...), thereby boosting service income.
"In 2020, credit growth will be similar to 2019, net profit margin will continue to expand selectively and provision expenses will be further reduced in some banks. Accordingly, banks are likely to achieve core profit growth of at least 15% in 2020. Low valuations (estimated PB of 2020 at 0.9-1.2 times) and high profitability (expected ROE in 2020 from 20-24%) are the advantages of many bank stocks" said VDSC.
>> The potentials of the banking industry 2020
Capital demand in 2020 is expected to be very large. Specifically, according to Fitch's assessment, Basel II standard will increase risky assets by 60% compared to 2017, totaling VND 463 trillion for the whole system. The banking system, especially unlisted banks, will be in shortage of Tier 1 capital.
However, banking market liquidity will be positive thanks to:
(1) FDI inflows into Vietnam will continue to grow strongly and
(2) there will be no sudden capital there will be no sudden capital withdrawal thanks to factors such as capital flows from China. MBS forecasted that the system liquidity will continue to be abundant and not put pressure on interest rates.
However, like VDSC, MBS stated that NIM growth of banks is gradually slowing down due to the increasing interest rate level (requirements of the State Bank replacing Circular 36, especially for the tightening of the ratio of short-term mobilization of medium and long-term loans will push mobilization costs higher in 2019-2020); competition will become more intense in consumer loans; government bond interest rates will decline and banks will be oriented towards safer lending (lower interest rates) to meet Basel II standards.
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