TCB's business performance in Q1 was good as the impact of Covid-19 is yet to be reflected fully. Results in the next quarters are expected to be hit harder. Setting aside the concentration risk of lending to real estate-related sectors, we appreciate the bank’s solid balance sheet, with a focus on lower risk segments, such as high-income group, working capital and collateralisation. A significant portion of Q1 earnings was spent to make more room for NPL and LLR, as a precaution for probable bad debt formation due to the coronavirus outbreak. Considering the current stable condition of the real estate market, we think TCB would show a strong resilience to this crisis and would be able to recover strongly when the pandemic is over. We forecast TCB’s earnings growth to reach 14.4% yoy in 2020e, before recovering to c25% yoy in 2021e. We keep our target price at VND24,000, equivalent to a potential upside of 14% versus the current market price. We thereby recommend Accumulate on the stock.
Net interest income likely to thrive despite Covid-19 impact
Total credit growth reached 3.7% YTD due to a 25% YTD increase in corporate bonds balance, while customer lending only expanded by 0.5% YTD. Under customer lending, corporate loans expanded by 6.6% YTD while SME and retail loans went down by 1.5% YTD and 3.1% YTD, respectively. We think lending would stagnate at least in Q2 due to the temporary delay in the launching schedule of Vingroup’s projects, but expect strong growth to resume in H2. The breakdown of the loan book shows some resilience to unfavourable economic conditions. Regarding retail lending, 80% is constituted by mortgage loans, of which the affluent segment accounts for 67%. Meanwhile, the SME loan book continues to focus on financing working capital (83% portion), secured loan (92% portion) and Upper SME (73% portion).
Strong NII growth of 25.4% yoy in Q1 owing to NIM’s expansion (as per TCB, from 4.2% in 2019 to 4.7% Q1 20). Lending rate expanded to 9.3% (vs 9.1% in 2019), while deposit rate reduced to 3.8% (from 4.1% in 2019). We believe that lending rate improvement was facilitated by (1) the full reflection of the 44.3% growth in late 2019 customers’ lending (mainly mortgage loans) in interest income, and (2) the end of lending rate subsidiary period at a portion of mortgage loans. We expect the pressure on lending rate to deepen in Q2 with forbearance measures intensifying, though the effect should be moderated upon an economic recovery and the resumption of Vingroup’s project launches. Meanwhile, CASA ratio increased by 40bps since 1Q2019, which contributed to deposit rate savings. The retail segment still led CASA expansion in Q1 with 52% growth yoy, while that of corporate only went up by 7% yoy. We believe that TCB would still be able to trim funding cost further owing to (1) the 3-year syndicated loans of US$500mn to be added in Q2, which is likely to save long-term funding cost and (2) the lower short-term deposit rate ceiling, especially when more than 70% of TCB’s customer deposit is of less than 3 months. Current liquidity is still abundant with LDR at 76.8% and short-term fund for medium/long term loans ratios at 30.7%, much lower than the required threshold.
As such, we maintain our view that the current NIM trajectory should be sufficient to override the downside impact of Covid-19. We forecast that TCB will likely be among the few banks that would be able to expand NIM further in 2020, especially thanks to its capability to cut down funding costs. Coupled with the ability to maintain strong credit growth on the ground of an exceptional CAR (16.6%, +0.9ppts since end-2019), this should still transfer to a desirable 2020e NII expansion of more than 20% yoy.
Service income momentum to remain constructive
TCB emerged as one of few banks to escalate its service income growth in Q1 20 (to 51.5% yoy versus 17.5% yoy in Q1 19). This strong growth was driven by bond services fees income (+453.0% yoy) as well as payment service fees (+38.7% yoy). Income from other services such as card fees and FX sales was also strong. The only underperformer was bancassurance fees (-18% yoy), which is likely to continue being under pressure due to the temporary unfavourable economic conditions. Fee income was primarily contributed by affluent individual customers and upper SMEs which account for 60% of fees from these respective segments. Both segments are on the rise.
The growth trajectory of 38.7% yoy in net income from payment and cash services was much better than in Q1 19 (-14% yoy) and FY 19 (-10% yoy). We hold the view that TCB would be a beneficiary of significant reduction on interbank payment fee by NAPAS, along with the escalation in non-cash payment trend from the pandemic. The bank has maintained its temporary fee promotion since 2016 to attract high-value customers and CASA, which led to payment services fee movement during recent periods. This in turn undermined 2019 service income growth towards the lower end of our coverage universe. However, we expect that the policy for temporary interbank payment cost reductions would improve TCB’s net payment income momentum in 2020. As such, we expect TCB to maintain a fairly good service income growth despite the weak near-term outlook of the sector in terms of service fees.
Near-term pressure on CIR
With a strong momentum in both NII (+25.4% yoy) and non-NII, TOI maintained a 37.2% yoy growth in Q1 20. Meanwhile, operating expenses increased almost at the same pace as TOI, which allowed the bank to secure a low CIR of 35.4% (1.2ppts vs Q1 19). During the coronavirus outbreak, digital payments prevailed with 70% of transactions conducted via digital channels. Retail e-banking transactions volume and value increased 2.5x and 2.2x yoy, while corporate/SME banking transaction volume and value increased 1.9x and 1.7x yoy. In Q2, with the anticipated slowdown of TOI due to the full reflection of the Covid-19 impacts as well as additional IT capex for digitalisation, the CIR ratio is expected to increase slightly. Longer term, we believe the bank’s strategic focus on digital transformation would enable further efficiency improvements.
Provisions to escalate under asset quality pressure due to Covid-19 impact
TCB has pushed provision expenses by 4.6x yoy from a low base in Q1 19, which raised LLR to 118%. Despite that, Q1 credit costs was 0.3% of gross loans only, still much lower than peers. Meanwhile, after a 0.3% write-off in gross loans, NPL ratio went down from 1.3% by the end-2019 to 1.1%, which means that the formation of NPL has been contained so far. The bank disclosed that as of 31 March, TCB has restructured 0.2% of its loan book, while as of 15 May, 7% of the loan book has been identified for potential restructuring.
This implies that the NPL ratio might increase due to potential bad debts, though it can be moderated by loan restructuring and write-offs in the year. We expect that TCB would more than double its provision expenses in 2020 to deal with potential bad debts. Eventually, actual credit cost (and earnings growth) would depend on the outlook of the real estate sector (which seems to be stable so far) as well as how long it takes to normalise the coronavirus impact.