Earnings Report /

VPBank: Q1 20 – Covid-19 impact to weigh on earnings in subsequent quarters; Accumulate

  • We adjust the stock’s target price lower to VND28,000/share, equivalent to a 12% upside versus current market price

  • Longer term, we expect the overall growth outlook to remain positive

  • In Q1 20, VPB maintained the highest PBT growth among banks on our watch list

Rong Viet
20 May 2020
Published byRong Viet

In Q1 20, VPB maintained the highest PBT growth among banks on our watch list. For the next few quarters, we expect the Covid-19 pandemic impact to weigh on the bank’s performance on more obvious income slowdown and the escalation of provision booking. However, the timely and appropriate response to the virus situation, coupled with low leverage (asset leverage of 8.9x) and strong capital (CAR Basel II at 11.14%) should allow the bank to withstand the Covid-19 impact. 

Longer term, we expect that the overall growth outlook should remain positive when the pandemic is over, and VPB would still be able to achieve a higher growth than sector average. The bank has sought shareholders’ approval for treasury shares purchase (up to 5%) and the calling of USD300mn international bonds issued previously, which imply abundant liquidity. The plan of locking foreign investment room at 15%, if possible, would create room for a strategic placement. These are subjected to state agencies’ approval and actual market movement. 

Considering the impact of Covid-19 on the economy and VPB in particular, we reduce our 2020e earnings growth forecast to 10.9%, translating to 2020e ROE of 18.9%. We adjust the stock’s target price to VND28,000/share (8% lower than in our February report), equivalent to a 12% upside compared to the current market price. We thereby recommend Accumulate on the stock. 

Timely responses to the coronavirus situation and SBV guidance  

With the coronavirus outbreak, VPB has adopted a more prudent approach to lending with policies such as (1) decreasing lending to new customers (particularly ceasing lending to high risk segments) and (2) focusing more on non-impacted existing customers. Besides, the bank reinforced collection activities. 

The bank also implemented loan forbearances measures as per SBV guidance. These include (1) interest rate reduction package with interest rate cut of up to 2% for distressed corporate customers with good payment history, and up to 3% for distressed individuals with small ticket, high interest rate unsecured loans, and (2) deferral of principle payments and extension of loan tenure to a maximum of 12 months. As of 29 April, 95% of the applications for loan restructuring have been approved. The completed restructuring accounts for 1.8% in terms of customer numbers and 5% in terms of balance. Restructuring requests can be processed online for small ticket loans. 

Tightened disbursement and forbearance measures lead to NII deceleration  

With an adjustment in lending policy, Q1 20 lending growth slowed down to 2.6% YTD (from 4.3% YTD in Q1 19), with 2.8% YTD customer lending growth at the parent bank, while that in FE Credit only stood at 1.7% YTD. However, VPB still achieved a high total credit growth in Q1 (+7.9% YTD), much higher than customer lending due to the double in corporate bonds. Corporate bonds now account for 10% of total credit, from 5.2% by end-2019. 

The parent bank shifted credit portfolio towards secured loans (+11.5% YTD) while unsecured loans shrank by 0.5% YTD. Following that, the unsecured loan portion at a consolidated level declined to 32% (-2ppts versus end-2019). The application of forbearance measures as well as the shift to more secured lending has trimmed average asset yields to 15.1% (40bps yoy and -90bps qoq). The yield contraction was partly moderated by an easing cost of fund owing to the less dependence on customer deposit (only +0.6% YTD, while VPB mobilszed US$208mn from IFC in Q1). 

Overall, NIM compressed to 9.1% (-40% bps yoy and -70bps yoy). This explained the NII slowdown in Q1 (+14.2% yoy, -2.7% qoq). For the deepening of forbearance measures, especially under recent reinforcement of the SBV, we expect that NII would continue to slow down further in Q2 (and maybe in Q3 also). We forecast 2020 credit growth of 15% at parent bank and 9% at FE Credit (current assigned limit is 13% for parent bank and 9% for FE Credit), along with a NIM cut of 53bps, which translates to a NII growth forecast of 8.3% yoy in 2020. However, once the coronavirus impact is over, we believe VPB would still be able to (1) maintain a strong credit expansion owing to strong capital, and (2) have ample room to turn NIM around with a healthy liquidity (LDR at 71.9% and the ratio of short-term fund for medium/long term loans at 28.7%, both quite far below the regulatory threshold). As such, we expect NII to maintain a desirable growth after the outbreak is contained. 

Impact on service income  

Net fees reach VND695bn (US$30.2mn, +33.4% yoy), mainly contributed by strong payment fee momentum at the parent bank (+90.8% yoy). Since March, VPB has exempted fees on interbank real time transfer and discounted 10-25% on e-commerce transactions to promote non-cash payment. These promotions seemed to effectively facilitate the prevalence of online transactions in Q1, yet we expect that payment fee momentum to level off in the remaining quarters of this year under intensification of transfer fee forbearance.

Bancassurance fee expanded significantly in the parent bank (+29.8% yoy), but the consolidated momentum was much lower (+5.0% yoy only) due to a 2% yoy fall in FE Credit, which can be attributed to lower consumer loan disbursement by 13% yoy in Q1.  

Considering these trends, we revise down the 2020e fee income growth forecast to 21.0% yoy, but maintain the view that the bank’s long-term outlook is still strong given its current diverse fee structures among proactive digitalisation exercises. 

Operating cost to improve further 

Q1 operating expenses were controlled, only increasing by 10.3% yoy, mainly attributed to a 21.5% yoy climb in staff cost. While TOI climbed by 24.4% yoy, CIR improved to 33.1% from 34.0% in 2019 (and 37.4% in Q1 19). Higher efficiency was found at both the parent bank (CIR -7.8ppts yoy) and FE Credit (CIR -2.3ppts yoy). VPB has set a vision to become the most consumer-friendly bank through technology by 2022, with leaner processes and cost optimisation via digital transformation. We expect the bank’s operating efficiency to benefit from customer behaviours transitioning towards online channels during the coronavirus outbreak. As such, CIR is likely to improve further. We forecast a 70bps improvement in 2020e CIR versus 2019’s 33.3%. 

Asset quality to be monitored closely  

Asset quality in Q1 20 seems yet to be impacted much by the coronavirus outbreak. After the write-off of 1.38% gross loans in Q1, consolidated NPL ratio (Circular 02) was down to 2.6% (-36 bps YTD and -59bps yoy). This is predominantly owing to the improvement in FE Credit’s NPL ratio (down from 6.0% by end-2019 to 4.4%, in light of the SBV’s loan tolerance guidance, more prudent lending approach and increase in write-offs). Consolidated provision costs increased moderately by 15.8% yoy to reach VND3.7tn (excluding VAMC provision cost, actual growth is 26.0% yoy). LLR (added back write-offs) improved to 67.1% from 63.3%. As such, during Q1 20, VPB accumulated some more room to handle probable asset quality deterioration in the upcoming quarters. 

However, in the current unfavourable economic condition, it should be noted that a significant portion of unsecured lending is still under a higher risk of more severe Covid-19 impacts than the other more conservative banks. Since Q2 when the impact on asset quality is likely to become more distant, we expect the bank to escalate its provision booking to thicken provision buffers. We forecast a 2020e consolidated provision expenses of 15tn (+10.2% yoy or +18.8% yoy if excluding VAMC provision) to maintain the same NPL ratios as at end-2019 for both the parent bank and FE Credit.