Earnings Report /

Ho Chi Minh City Development Bank: Time to boost service income; upgrade to Buy, cut TP

  • Better-than-expected interest income expansion thanks to impressive NIM improvement in 2019

  • 2020 outlook: service income will emerge as growth driver

  • Lower TP to VND29,000, equivalent to a potential upside of 36%; upgrade to Buy

Lam Nguyen
Lam Nguyen

Banking, Market Strat

Rong Viet
18 March 2020
Published byRong Viet

HDB achieved better-than-expected interest income expansion thanks to an impressive NIM improvement in 2019, but we think the contribution from service and other income to operating income should be more visible. For 2020-2021, we expect interest income momentum to be decent while service income would escalate due to a boost from bancassurance activities. Moreover, both operating expenses and provision charges should be well under control, supporting a stable earnings growth in the long term.

HDB is currently trading at VND21,300, equivalent to an attractive 2020f PBR of 0.9x, considering the potential earnings growth and ROE of c20% in the next five years. With a lower forecast for 2020 credit growth and NIM, and a higher forecast for provision cost (versus our 2020 strategy report) due to the potential impact of the coronavirus pandemic, we lower HDB’s target price to VND29,000 (previously VND33,000), equivalent to a potential upside of 36% (closing price of 18 March 2020), and thereby upgrade the stock to Buy from Accumulate.

2019: Better-than-expected earnings growth thanks to interest income expansion 

  • Credit growth was equal at the parent bank and HD Saison (18% YTD). The parent bank’s NIM expanded significantly to 3.3% from 2.7% (our estimates), while that of HD Saison shrank to 26.6% from 28.5%. As such, the parent bank drove consolidated NII growth (respectively at 37.5% and 27.5% yoy).  
  • Service income increased by 36.0% yoy, still driven by HD Saison’s insurance commissions, while the growth at the parent bank was low at 5.8% yoy. Income from other activities dropped by 22.9% yoy due to a decrease in all activities.
  • Driven by strong interest income, consolidated TOI grew 20.6% yoy to VND 11,388bn. Provision expenses climbed by 29.7% yoy, but operating expenses only grew moderately (14.4% yoy), which allowed HDB to secure an earnings growth of 25.3% yoy. With these results, HDB mostly fulfilled its full-year target. 
  • Asset quality is still well managed with the NPL ratio down to 1.4% and net VAMC bonds down to VND131bn, equivalent to 0.1% of customer lending.

2020 outlook: Service income will emerge as growth driver 

  • We forecast that consolidated credit growth will reach 14.4% (14% for the parent bank and 15% for HD Saison), while customer deposit will increase by 5.9%. We also expect consolidated NIM to rise slightly to 5.0%. 
  • Services income is forecast to grow stronger by 33.5% yoy, accounting for 6.0% of TOI, due to the bancassurance boost.
  • We forecast consolidated CIR to drop slightly to 43.9%. Provision expenses are forecast to rise moderately by 16.8%, reaching VND1.5tn (US$65mn). 
  • Consolidated NPAT is expected to increase by 18.2% yoy.