Given the stable growth in VCB’s lending activities and lower deposits growth rate, we believe that interest income will be the key driver of the bank’s TOI in 2019. VCB has also been controlling its costs well, both in operations and provisions. Therefore, despite the absence of a one-off income in 2019, we estimate VCB’s PBT will grow by 19.6% yoy, 9% higher than its 2019 projection. VCB’s NPAT will be VND17.5tn (+c20% yoy), corresponding to EPS of VND4,277. We revise up our target price to VND72,700, equivalent to 2019 forward PBR of 3.2x, and recommend Neutral on the stock.
Interest income drives growth in Q1
VCB’s TOI reached VND11.8tn, up by 18.5% yoy in Q1 19, while operating and provision expenses grew at a much slower pace at 7.8% and 0.5% yoy, respectively. As a result, VCB reported PBT of VND5.9tn, up by 35% yoy, which fulfilled more than 29% of its 2019 guidance.
In Q1, VCB’s customer loan and deposit grew by 6.5% and 4.5% yoy, respectively. Compared with the same period last year, the growth of deposit was higher than that of lending, resulting in its pure LDR improving to 80.3% (82.4% in Q1 18). The positive point was that NIM (TTM) expanded 43bps to 3.1% in Q1 19, which helped increase net interest income (NII) by 37% yoy to VND8.5tn.
Services and FX trading income also saw impressive growth at 21% and 51% yoy, respectively, while investment income was down by 89% yoy due to the absence of divestment deals.
VCB controlled its non-performing loan (NPL) ratio very well, versus a rising trend among peers. Its NPL ratio decreased 33bps to c1% in Q1 19 and new formation rate was merely 0.1%. as a result, VCB’s provision expenses were almost unchanged from Q1 18. Its loan loss reserve ratio (LLR) approached 170% by end-Q1 19, the highest ratio in the banking system.
VCB is one of the first banks in Vietnam to meet the Basel II requirements in terms of capital adequacy. Accordingly, its CAR under Basel II is c9.5%, and coupled with its abundant liquidity, we expect the bank’s credit growth will be higher than the approved quota. VCB will still target its retail segment, which is expected to grow much higher that the bank’s average lending growth rate. Hence, NIM will improve to c3.26%. We forecast NII will grow by 24.7% yoy and account for more than 77% of TOI.
Services income will be stable and grow by 30% in 2019 due to: (1) increased transaction fee since 2018, and (2) increasing cross-sales income, following lending activities. We expect services income to contribute c9.6% to VCB’s FY 19 TOI. The contribution will be much higher in coming years if VCB can divest from Cardiff and enter an exclusive partnership agreement regarding bancassurance.
In terms of cost, we assume that VCB can successfully keep its CIR under control at c37% in 2019. On the other hand, provision expense will slightly decrease while off-balance sheet income will slightly increase, resulting in a low loan loss charge in 2019. Therefore, we expect VCB’s 2019 PBT will increase by 19.6% yoy to VND 21.85tn. NPAT and EPS will be VND17.5tn (+c20% yoy) and VND4,227, respectively.
Capital raising plan in 2019-20
Early this year, VCB successfully issued c3.1% of its charter capital to GIC and Mizuho. In 2019-20, VCB plans to increase c50% of its current charter capital via (1) 40% bonus share (from premium capital and retained earnings), and (2) 6.5% of new capital (after bonus share, or 9.1% of current capital). However, since VCB is a state-owned bank, it would take more time than other commercial banks to get the State Bank of Vietnam’s approval.