BID has set a credit growth target of 12% this year, slightly lower than the 14% last year. We believe BID will find it hard to maintain current NIM due to continuing pressure on both asset yields and funding costs. Therefore, net interest income growth is forecast to be modest while we see few non-interest income growth drivers.
BID's prospects depend largely on the private issuance to KEB Hana Bank. If successful, capital pressure will be relieved and the competitiveness of BID in retail, SME and FDI segments is expected to improve.
BID is currently trading at VND 32,500, equivalent to a trailing PBR of 2.1x, unattractive compared to the industry average (1.5x). We think that the current market price already reflects BID's fair value and we keep our NEUTRAL rating on the stock.
1Q 2019 results
1Q 2019 PBT reached VND 2,521bn (+1.4% YoY), fulfilling 24.4% of the full year target. Operating income decreased 5.1% YoY due to a reduction in both interest and other income. Provision expenses fell 13.7% YoY and BID managed to improve PBT marginally, 1.4% YoY.
Interest and operating income declined due to NIM compression
Lending to customers reached VND 1,024Tn, +3.6% YTD while total mobilization reached VND 1,057Tn, +2.7% YTD. We estimate BID's NIM (trailing 12 months) went down to 2.8% in 1Q 2019 from 2.9% in 2018, due to a modest decrease in asset yields coupled with a slight increase in funding costs. A such, BID's net interest income decreased 6.8% YoY to VND 8,545bn. BID is the only listed bank that has recorded negative interest income growth in Q1. NIM compression was caused by the stronger expansion of short-term lending and the pressure on mobilization. Short-term loans increased 4.9% YTD, accounting for 62.6% of the portfolio (61.8% at the end of 2018). Certificates of deposit increased 19.4% YTD, mainly the 1-5 years tenure. CASA fell to 14.4% from 17.0% in 1Q 2018 and 16.4% at the end of 2018.
BID achieved encouraging growth in service income (+17.6% YoY, reaching VND 876 bn), income from other activities (+111.4% YoY, reaching VND 1,264 bn) and income from foreign exchange and gold trading (+ 50.2% YoY, reaching VND 322 bn). However, income from securities trading fell by 92.7% to VND 39 bn while losses from investment securities surged to VND389 bn from VND 17 bn. Overall, income from other sources (non-interest and non-service fees) fell 6.1% YoY; operating income -5.1% YoY to VND 10,750 bn.
Profit growth becomes difficult
BID's operating expenses in 1Q 2019 reached VND 2,998 bn, +7.8% YoY due to a 10.9% increase in staff costs, although headcount rose just slightly. Note this does not include the expenses associated with the core banking upgrade. CIR is quite low, at 28.0%, but rose from 24.6% in 1Q 2018 and is likely to reach 38% by year-end as BID will push projects in core banking, digital banking and Basel 2 to enhance its capabilities in transaction processing, risk management and competitiveness. It’s playing catch up with other banks, many of which already completed the transition process.
Asset quality remains a concern with NPL ratio increasing to 1.7% (from 1.6% in 1Q 2018) and the LLR ratio decreasing to 70.2% (from 80.7% in 1Q 2018). According to BID, some loans have been transferred from group 2 to group 3 and 4, causing group 2 debts to decrease and the bad debt ratio to increase. In Q1, the bank wrote off VND 4.9 Tn, less than the amount in Q1 last year (VND 7.8 Tn). Provision expenses decreased by 13.7% YoY, accounting for 48.5% of TOI and 67.3% of pre-provision net profit. However, while provision expenses in 1Q 2018 accounted for one-third of the full year’s amount, provision expenses in 1Q 2019 accounted for only a quarter of the bank’s full-year target (VND 20,200 bn, +8.1% YoY, to clear all remaining VAMC bonds in 2019). Therefore, for the last three quarters of this year, provision expenses are expected to accelerate.
In short, we expect BID's profit growth to be modest in 2019.