We believe MBB’s outlook can be impacted by some potential headwinds: (1) the dependence of NIM expansion on consumer finance, (2) the slowdown in insurance net income growth, while other service fee growth is more limited, and (3) high NPL formation rate and provision charges growth due to higher risk appetite. Meanwhile, some tailwinds still are intact, such as the continuous expansion of consumer finance, high CASA and efficiency improvement. We forecast that these pros would allow the bank to maintain high earnings growth of 25% yoy in 2020.
MBB is currently trading at VND21,150, equivalent to an attractive PBR 2020f of 1.1x. The stock price is 28.0% lower than our target price in 2020 Strategy Report (VND27,000). We reiterate our Buy recommendation on the stock.
NIM expansion led by strong credit growth of consumer finance
Consolidated 2019 loan mix continued to shift into retail lending with this segment growing by 32.8% yoy. As of end-2019, the proportion of retail lending reached 40.5% (+2.7ppts yoy), SME lending 42.8% (-1.7ppts), and corporate lending 11.3% (-0.4ppts). We hold the view that overall loan expansion was driven by mortgage lending and consumer lending. Within retail loans, mortgage loans accounts for c50%; the remaining includes auto loans, household business and consumer lending.
Despite this shift, the parent bank’s NIM remained flat, as the increase in asset yields was offset by the rise in deposit rate as well as bonds’ interest expense. Meanwhile, consolidated NIM saw a significant improvement to 4.9% from 4.6% in 2018. Consumer credit growth from MCredit contributed c57% to the NIM improvement, which raised consolidated customer lending growth to 16.6% yoy versus 14.5% yoy at the parent bank. According to MBB, MCredit is maintaining average lending interest rate at around 40-45% per year, returning net margin of over 20%. We hold the view that consumer lending has expanded to a decent portion to sustain an expansion in consolidated margin.
Cash loan accounts for more than 70% of total lending at MCredit. Upon the official ratification of Circular 18/2019/TT-NHNN, MCredit sets a plan to gradually restructure its loan mix towards non-cash loans. Motorbike and consumer durables loans should be pushed further, along with the launch of credit card expected in March 2020. Accordingly, lending and NIM expansion of MCredit should become more limited in the long term due to the impact of this restructuring efforts.
CASA reduced to 38.4% from 40.5% at end-2018, but still showed a significant recovery after a fall to 33.4% in Q3 19. This is still the highest among all banks and can possibly support a slight improvement in the parent bank’s NIM in 2020.
Service fee growth has been constantly slowing down
Service income growth has been slowing down during 2019, eventually down to 24.3% yoy for the entire year, much lower than the bank’s expectation of 50% at the beginning. After a rocket growth of 368% yoy in 2018, net income from insurance only rose by 33.9% yoy in 2019, reaching VND1,788bn, equivalent to 56.1% of service income. Considering the increasing competition in bancassurance due to the push of this activities in other banks such as VCB and ACB, we expect embracing a higher growth of bancassurance activities would become more difficult. The insurance subordinate would need to acquire growth by expanding into agent channel, which might lead to increase in operating expense.
Meanwhile, other service fee streams are somehow limited, while the portion of settlement and treasury fee is at 24.1%, a yoy growth of 17% only.
Operating and provision burden persisted
With an increase of only 11% yoy in operating expense, MBB improved CIR to 39.4% from 44.7% in 2018, yet this was mainly thanks to the absence of other operating expenses (which amounted to 1.3tn in 2018). In fact, most of the operating expense lines have increased considerably, especially staff cost (+22% yoy) while number of employees only expanded by 3% yoy. As such, we expect consolidated CIR to unlikely improve further in 2020.
Meanwhile, consolidated provision grew strongly by 61.0% yoy versus 20% at the parent bank. We can see that the climb in provision charges was primarily pushed by MCredit, with an NPL ratio of c7% and outstanding loans of 3.9% total lending. There was a surge in written-off debts (+151.2% yoy to VND4.9tn versus VND1.9tn in 2018), which facilitated the normalisation of consolidated NPL ratio to 1.2% at end-2019. This ratio at the parent bank reached all-time low of 1.0% (-23.5bps), which is better than our expectation. Despite this improvement, the ratio of written-off bad debts in 2019 was at nearly 2.0%, much higher than the corresponding ratio of 0.9% in 2018, implying an increasing trend of NPL formation due to higher risk appetite.