Banks stay afloat in spite of bad debts

Even as the biggest real estate businesses struggle with debts and bankruptcy, banks continue to stay afloat and tackle the bad debt situation over a period of time. This ability of banks helps bank stocks not fall too low, despite overdue payments.

Banks always win

Most of the listed companies have already announced their financial statements for the first quarter of 2023. Although the overall profit of the whole market is not very positive, with many businesses even showing heavy losses, the whole scenario is still quite optimistic.

Statistics show that out of 26 enterprises listed on the stock market with profits of VND1,000 bln or more include 14 banks. In this, the leading bank is Vietcombank (VCB) with a profit after tax in the first quarter of VND11,221 bln. Closely following VCB is the Bank for Investment and Development of Vietnam (BIDV) with VND6,920 bln, MB Bank (MB) with VND6,512 bln, Vietinbank with VND5,980 bln, Techcombank (TCB ) with VND5,623 bln, Asia Commercial Bank (ACB) with VND5,156 bln, Saigon-Hanoi Commercial Joint Stock Bank (SHB) with VND3,629 bln, Housing Development Commercial Joint Stock Bank (HDBank) with VND2,743 bln, Vietnam International Commercial Joint Stock Bank (VIB) with VND2,694 bln, Vietnam Prosperity Joint Stock Commercial Bank (VPBank) with VND2,550 bln, Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) with VND2,383 bln, Tien Phong Commercial Joint Stock Bank (TPBank) with VND1,765 bln, LienVietPostBank reached VND1,566 bln, Maritime Bank (MSB) with VND1,526 bln, and Southeast Asia Commercial Joint Stock Bank (SeABank) with VND1,070 bln.

With the general economy facing difficulties, many businesses are still struggling to survive, but the fact that banks can maintain trillions of billions in profits surprises many investors. If we see the realistic picture, we will see that banks are hardly even affected by the slowdown of the general economy. The latest report on the banking industry just published by Maybank Investment Bank (MSVN), has pointed out some factors that help the banking industry maintain a robust business despite difficulties within the national economy. In the medium term, MSVN sees banks facing difficulties such as slow credit demand and lower fee income, as well as pressure on Net Interest Margin (NIM) and provisioning.

Banks record growth

Concerning the credit factor, MSVN believes this is only a one-year slowdown phase in the current unfavorable business environment. In three to four years, there will be more room for banks to record strong growth, such as credit growth of about 14 percent in the following years. Accordingly, the NIM ratio will be around 4 percent and fee income growth will be over 20 percent.

For asset provisioning risk, MSVN has implemented a test model to assess the impact of the real estate crisis on banks. Even in a bad scenario, banks will not fall into a crisis like in 2011 and 2012. With the current legal framework and buffer to reduce lending risks, banks can avoid a credit shock. Now banks will only need less than one and a half years to process through provisioning, not five to six years as before.

MSVN believes that the profit growth of most banks will slow down significantly in the face of difficulties in 2023. However, the Return on Equity (ROE) of most banks is still attractive at an average of 18.5 percent. Therefore, the strong growth rate and profit cycle of banks in the next three to four years will not be disrupted. The current valuation is 1.3x at P/B in 2022 and 1.1x at P/B in 2023, reflecting the potential risks in a bad-case scenario caused by the slowdown of the real estate industry.

Based on the analysis of the banking industry 2023 plan and the management's ability to fulfill the plan to achieve the target ROE, MSVN estimates that the total profit of the 17 listed banks could increase by about 13 percent to 15 percent this year, compared with 32 percent to 35 percent in 2021 and 2022. Therefore, the average ROE of listed banks could drop to about 18.7 percent, compared to 20 percent in 2022. Specifically, VCB, STB, HDB, EIB, and BID could be outstanding gainers. Despite the decline in overall profit growth, many banks are still able to maintain ROE above 20 percent based on MSVN estimates and Bloomberg consensus, including VCB, MBB, ACB, HDB, STB, and VIB.

Bank stocks in the long term

Even in an unrealistic scenario that banks will not profit in 2023, or banks will use all their profits to deal with bad debts and only take the book value at the end of 2022 as the basis for calculating P/B, MSVN believes that most banks are trading near ten-year lows. Therefore, MSVN recommends investors who can have a long-term vision beyond 2023 and look to Vietnam’s long-term story of upgrading the country's credit rating and upgrading the stock market, can accumulate bank shares from now on.

According to an assessment by Vietcombank Securities (VCBS), the banking industry is facing risks as bad debts are increasing due to a freeze in the real estate market, as well as the financial health of businesses and borrowers who tend to borrow at high-interest rates. This phenomenon will lead to divergence, as some banks may record a sharp decline in profits this year due to increased provisioning. Therefore, investors should only consider a long-term investment in banking stocks with good asset quality and outstanding growth rates compared to the industry, such as VPB, ACB, BID, LPB, MBB, MSB, TCB, and VCB.

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