Strategy Note /

Vietnam Banks: VAS inflates EPS and BPS versus IFRS

    Rahul Shah
    Rahul Shah

    Head of Financials Equity Research

    Lam Nguyen
    Anh Nguyen
    Rohit Kumar
    Tellimer Research
    11 August 2019
    Published by

    Most Vietnam banks report results under local accounting standards (VAS), which may present net profit and shareholders’ equity at a materially higher level than under IFRS accounting standards. For VP Bank, which reports under both, the difference in both these metrics has averaged 10% over the past five years. Investors may wish to consider adjusting PE and PB multiples when comparing Vietnam banks to international peers.

    Headline IFRS data are 10% lower than under VAS. VP Bank reports its results under both International Financial Reporting Standards (IFRS) and Vietnam Accounting Standards (VAS). Most other listed banks reported solely under VAS. Over the past five years, VP Bank’s reported net profit under IFRS has been around 11% below that reported under VAS. The differential in shareholders’ equity has been around 9%.

    Key drivers of the difference in reported net profit relate to:

    • Gross interest income: IFRS does not include income from off-balance sheet category 2 loans (ie special mention/past due <90 day balances), whereas VAS does
    • Gross interest expense: IFRS includes some third-party commissions and agent contractor payments, whereas VAS presents these in fee expenses and in operating expenses, respectively.
    • Other operating income: IFRS does not include income from off-balance sheet VAMC assets, whereas VAS does.
    • Loan impairment charge: Under IFRS this is based on management’s assessment of the provisioning needs of the business. In VAS, provisions are based on the requirements of Circular 02 and Circular 09 (Table 6). The future introduction of IFRS9 could lead to further divergence between IFRS and VAS reporting.

    Vietnam banks offer a mixed picture for investors. Although they benefit from a supportive macro environment (6.5% 2019f real GDP growth) and falling credit risk costs, the pace of loan growth and margins are both coming under pressure. Adjusting for differences between IFRS and VAS accounting would further inflate PE multiples, which are already high in a global context (median 2019f 8.5x as reported, versus 6.4x global median). Capital bases appear stretched in some cases, while foreign ownership limits are an ongoing source of frustration for international investors.

    MBB is our top pick among Vietnam banks. Military Commercial Bank is the fifth-largest bank in Vietnam with c3% market share. Relative to local peers it benefits from superior ROE (2019f 21.4%) and asset quality (1.3% 2019f NPLs ratio). It has a diversified revenue stream (35% is non-interest income) including a growing insurance component. The bank trades at 6.5x 2019f PE and 1.2x PB.

    Spotlight on Turkey banks – IFRS not always more stringent. We think it is incorrect for investors to assume that IFRS is always more conservative than local accounting regimes. In Appendix 2, we compare IFRS and BRSA reporting for Turkish banks. Traditionally, BRSA reporting has been more conservative (largely due to more stringent provisioning requirements) although the differences have narrowed sharply in recent years.