Equity Analysis /

BID Vietnam: Positive on medium-term outlook; cut TP on coronavirus headwinds

  • Our positive view is based on stronger capital adequacy, clearance of legacy bad debts, support from strategic partners

  • Revise down BID’s TP to VND45,000, equivalent to a potential upside of 33%; Buy

  • Downside risk includes the impact of the Covid-19 pandemic on credit growth, NIM and asset quality

Rong Viet
17 March 2020
Published byRong Viet

The bank has set a moderate earnings growth target of 16.4% in 2020, with the plan to finish its restructuring within this year as well as investing more resources on core banking and digital projects. We hold our positive view on BID’s outlook in the medium term based on stronger capital adequacy coupled with the clearance of legacy bad debts and the support from strategic partners. We forecast NPAT CAGR to reach 30% in 2020–2022 and ROE to approach 20% in the next three years.

Considering the possible negative impact from the coronavirus pandemic this year, we reduce credit growth forecast by 2ppts and NIM forecast by 5bps, thereby revise down BID’s target price to VND45,000. This is equivalent to a potential upside of 33% from the closing price of 17 March 2020, reiterating our Buy recommendation. Downside risk includes the stronger-than-expected impact of the Covid-19 pandemic on credit growth, NIM and asset quality. Upside risk include one-off earnings from the BIDV MetLife divestment and exclusive bancassurance agreement.

2019 business results

BID’s 2019 PBT was VND10,732bn (+13.3% yoy), fulfilling 104.2% of the full-year target. Operating income expanded modestly by 8.2% yoy due to limited net interest income growth. Both operating and provision expenses increased modestly (by 7.1% yoy and 6.6% yoy, respectively) and BID managed to achieve an earnings growth of 13.3% yoy.

While total credit expanded by 13.0% YTD, net interest income only improved marginally by 2.9% yoy, due to a NIM compression of 25bps to 2.7%. This movement was mainly caused by a higher funding cost of 29bps upon a surge of 57.0% in long-term bonds issuance to improve Tier 2 capital last year.

Credit structure shifted towards retail lending with this segment expanding by 21% and raising the contribution on total credit from 31.5% to 34.5% after being flat in 2018. Within retail lending, mortgage increased its share to 34.4% while the portion of other categories was stable.

With such a transition towards retail lending (particularly mortgage lending), asset yields are likely to expand, while the funding cost should also benefit from less dependency on long-term bonds issuance. As such, we expect NIM to improve slightly by 9bps in 2020. We expect credit growth to reach 12% based on the assumption that the SBV would give 3% additional credit room in H2 dependent on the epidemic being contained. This would lead to a possible growth of 16.5% yoy in interest income.

Service income growth momentum in 2019 was weaker than other banks, at 20% yoy, due to the lack of service income diversification and under exploitation of bancassurance activities. Income from settlement still prevailed at 63.8% while bancassruance income only accounted for 11.1% of total service fee. We expect the trend to improve should an exclusive bancassurance agreement is finalised and a new core banking along with digital projects are launch.

CIR 2019 was as low as 35.9%, among the most efficient banks under our watch list. However, it should be noted that the 2019 operating cost has yet to include the cost of core banking upgrade (and possibly, other digital banking projects) that the bank has postponed until this year. As such, we expect that operating costs would expand considerably in 2020 to reflect these expenses.

For 2019, the bank spent 65.2% of pre-provision profit (PPOP) as credit cost, raising provision coverage from 66.0% to 75.1% and lowering NPL ratio from 1.9% to 1.7%. Meanwhile, the collection of VAMC debts is progressing positively and in the AGM, the bank announced its clearance of the entire special bonds. We think the bank is still on track to improve asset quality, especially legacy bad debts. As such, we estimate that the provision burden should not increase much in 2020 and would ease moderately in 2021, which is likely to facilitate an earnings growth from next year on.

2020 business and capital plan

For 2020, BID aims to achieve consolidated PBT of VND12,500bn (+16.4% yoy), assuming that the coronavirus pandemic is contained soon. The credit growth target is temporarily set at 9% (equal to the initial credit growth target given by the SBV), and NPL ratio target is set at lower than 1.7%.

BID plans to increase charter capital from VND40,220bn to VND46,450bn in 2020 (+15.5%), including making placements of 8.5% of new charter capital to dilute the government’s ownership.