- Better-than-expected income growth led by allocation of upfront fees and NIM expansion
- Bad debt formation increased significantly in Q1 21, dragging credit costs
- We revise up our a target price by 2.6% to VND43,500/share. Accumulate
Better-than-expected income growth led by allocation of upfront fees and NIM expansion.
Bad debt formation increased significantly in 1Q2021, dragging credit costs. We forecast that NPL will be controlled towards the year end, and credit costs will be slightly lower.
The negative surprise in provision was offset by CIR improvement as base effect and provision reversal.
We revise up our a target price by 2.6% to VND43,500/share. This implies an upside of 16% from the closing price of May 21 2021, and therefore translates to an Accumulate recommendation.
Falling funding costs and expansion in LDR propelled NIM
ACB posted a gain of +61% yoy in PBT in Q1 21, above our expectations of +38%. Robust income growth (+30%) and the divergence of operating expenses (-17%) were profit engines. The non-concurrent reversal item resulted from a fully provisioned receivable offsetting the surge in credit costs. The surprise to our forecast mainly came from net interest income.
ACB expanded its loan book faster than our projection (+4.1% YTD compared to +3.5% YTD estimated). Combined with the widening NIM, NII growth reached +36%. ACB started buying financial institution bonds as an alternative to low yield government ones. The weight, however, is still insignificant to influence the decreasing yield of the investment portfolio. Average lending rates trended downward among SME and the retail segments due to competition.
Correspondingly, asset yield dropped by 73bps yoy and 42bps qoq (annualised). Both average lending rates and deposit rates dropped sharper than we expected. We estimate that beside the support from the increasing CASA in the second half of 2020, falling average term deposit rates contributed significantly to the decrease in funding costs (-137bps yoy, annualised). The lower quoted deposit rates was likely to change deposit behaviours, driving the average yield on term deposits down 51bps qoq and 152bps yoy (annualised). Interest costs declined 17% yoy in Q1 21 as a result.
Aside from the difference in the magnitude of falling interest rates, the pick-up in LDR also accounted for the expansion in NIM. As deposit growth from customers and financial institution decelerated, LDR approached 84%. NIM benefited from that movement and rose to 4.0%, the highest in recent years. Nevertheless, we expect this trend of LDR to be transitory and will not be a constraint on liquidity. Seasonality was among the factors bringing about the stagnation in customer deposit growth. ACB is not looking to lift deposit rates and is comfortable with the current liquidity status. We anticipate a correction in LDR following a growing deposit base towards the year end. Therefore, the projected NIM for 2021 is maintained at 3.8%, slightly higher than that of last year.
Given the earnings surprise as well as the sooner-than-expected appearance of extraordinary items, we only consider a minor raise in 2021 PBT. The projected 2021 PBT is revised up to VND11,858bn (US$516mn) from previously VND11,601bn. Earnings growth for this year, thus, will be +24% instead of +21%. This, however, is not the major factor leading to a change in the valuation, since earnings CAGR for 2021-2025 is intact.
We update our comparable valuation component. The recent rise of banking stocks leads to the adjustment in the average price-to-book ratio, which we think might be considered plausible until the pullback of interest rate. We maintain a positive view on ACB considering its healthy balance sheet, efficient lending, a sustainably growing customer base, strong liquidity and sufficient capital. As stated before, we are cautious about the bank’s valuation premium to the sector based on its low-risk-appetite in a likely coming expansion cycle. In conclusion, we revise up our a target price by 2.6% to VND43,500/share. This implies an upside of 16% from the closing price of 21 May 2021. We recommend Accumulate.
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