With expectations that STB will complete provisioning for VAMC bonds in 2023, we believe profit growth in 2024 and 2025 will be promising, and the bank will have greater opportunities to complete its restructuring plan ahead of schedule.
Although STB maintains a reasonable level of lending exposure to the real-estate sector and does not invest in corporate bonds, we remain relatively cautious about the bank’s recent credit quality, including its exposure to Bamboo Airways. Accordingly, we downgrade our recommendation from BUY to OUTPERFORM, with a 2024 target price of VND37,500 per share, implying 14.7% upside potential.
Profit Forecasts
We maintain our 2023 pre-tax profit (PBT) forecast of VND9.5 trillion, up 50% year on year, although we revise down NIM to 4.13%, 27 basis points below our previous estimate, due to lower lending yields and weaker asset quality, with the non-performing loan (NPL) ratio at 2%. In addition, we expect STB to successfully sell Phong Phu Industrial Park, enabling the bank to fully provide for its VAMC bonds and supporting core-profit growth in 2024. Accordingly, we forecast 2024 PBT of VND15.2 trillion, up 60% year on year, mainly supported by proceeds from Phong Phu Industrial Park, while NIM remains stable at 4.12% and the NPL ratio improves to an estimated 1.8%.
Short-Term View: STB’s growth potential remains positive; however, the share price has risen 37.3% year to date. We therefore recommend accumulating the stock during market pullbacks.
Downside Risks to Our Recommendation:
• Higher-than-expected NPL formation;
• A more prolonged restructuring process than expected; and
• A sharper-than-expected decline in lending rates, affecting NIM.
Upside Catalysts for Our Recommendation:
• A recovery in credit growth; and
• Improved asset quality.
Q2 2023 Summary
STB reported nearly VND2.4 trillion in Q2 2023 PBT, up 80% year on year, bringing first-half 2023 PBT to VND4.8 trillion, in line with our estimates. The result was mainly supported by NIM returning to its normal trajectory, despite a 72% year-on-year decline in non-interest income. Credit grew 5% year to date, while deposits increased 10.4% year to date. Although asset quality improved in Q1 2023, overdue loans rose 41.6% quarter on quarter, with NPLs and Group 2 loans increasing sharply by 54% and 25.9%, respectively, compared with Q1 2023. Net VAMC bond balances stood at VND4.4 trillion, down 24% quarter on quarter, following an additional VND438 billion provision in Q2 2023. In addition, STB did not prioritise debt restructuring under Circular 02, with restructured-loan balances remaining below VND1 trillion as of Q2 2023. However, we believe restructured-loan balances are likely to rise in subsequent quarters to support asset quality.
Strong Credit Growth in the First Half of 2023. STB recorded 5% year-to-date credit growth, reaching VND460.5 trillion, while deposits rose 10.4% year to date in Q2 2023, reducing the net loan-to-deposit ratio (LDR) to 87%, compared with 91% in Q4 2022. Due to weaker retail-credit demand, growth was mainly driven by corporate lending, which increased 8.4% year to date to VND201 trillion. The loan portfolio remained diversified, with the largest share in trade and household-business lending, accounting for 57.6% of total loans at VND265 trillion, up 3.4% year to date; manufacturing loans of VND22 trillion, up 14.7%; and construction and real-estate loans of VND38.3 trillion, up 19.4%. Given weak credit demand, competition among joint-stock commercial banks is expected to intensify in the second half of 2023. We therefore expect lending rates to continue declining to stimulate credit growth.
Credit Quality Weakened While Resolution of Legacy Assets Continued Smoothly.
• Current loan book. Overdue loans increased 41.6% quarter on quarter to VND13.5 trillion, with NPLs and Group 2 loans rising 54% to VND8.2 trillion and 26% to VND5.3 trillion, respectively. Manufacturing, trading and household-business activities were the main drivers of the increase in NPLs. As a result, the NPL formation ratio rose to 0.65%, its highest level in three years, while the NPL coverage ratio declined to 77% in Q2 2023, from 103.8% in Q1 2023. Total restructured loans under Circular 02 remained below VND1 trillion, representing 0.22% of total credit, in Q2 2023. If asset quality continues to deteriorate, we expect restructured-loan balances to increase in the second half of 2023.
At the end of Q2 2023, outstanding loans to Bamboo Airways (BAV) stood at VND3 trillion, accounting for 0.7% of total credit. Although these loans are collateralised and BAV was servicing its debt obligations on time, concerns remain regarding BAV’s ability to continue as a going concern. Specifically, the company recorded a substantial accumulated loss of VND17.6 trillion in 2022, compared with a loss of VND2.3 trillion in 2021. In addition, total assets at the end of 2022 fell sharply by 33% from the beginning of the year to VND18 trillion, while shareholders’ equity was negative VND836 billion despite contributed capital of VND18.5 trillion. In 2022, BAV’s liabilities reached VND18.8 trillion, including total borrowings of VND10.6 trillion. On 19 August 2023, the Prime Minister assigned relevant ministries and agencies to support BAV’s restructuring. Accordingly, the central bank was expected to assist BAV in arranging funding by facilitating the participation of a suitable bank as a shareholder. We consider this a complex situation that could pose credit risk to STB if BAV’s restructuring fails.
• Net VAMC bond balances continued to decline. In Q2 2023, STB provisioned VND438 billion for VAMC bonds, reducing the net balance to VND4.4 trillion. The bank stated that 80% of the amount to be recovered, equivalent to approximately VND2 trillion, was frozen in VAMC accounts held at STB. Therefore, if STB recovers the remaining amount, the bank will record a provision reversal in the second half of 2023 (Table 5). In addition, the bank continued to organise the sixth auction of Phong Phu Industrial Park in August 2023, with a starting price of VND7.9 trillion.
Given the specific payment roadmap, we see management’s determination to resolve this asset during 2023.
Regarding 590 million shares frozen in relation to VAMC bonds, we maintain the view that STB needs specific guidance from the State Bank of Vietnam (SBV) on the resolution plan, as these shares represent more than 30% of STB’s ownership. Therefore, we do not incorporate any potential extraordinary gain from the transfer of these shares into our valuation model. However, we note that resolving these shares may raise corporate-governance issues if ownership is allocated among too many different investor groups.
Overall, we believe STB will prioritise fully provisioning for VAMC bonds in the second half of 2023. In addition, rising NPL formation and Group 2 loan balances are another reason why NPLs may increase in the second half of 2023.
NIM Narrowed After Peaking.
Although NIM remained up 200 basis points year on year at 4.12%, we observe a downward trend, declining by 21 basis points quarter on quarter. With average lending and deposit rates both rising 40 basis points quarter on quarter, we believe deteriorating asset quality and CASA, which fell 39 basis points to 17%, were the main reasons for the NIM decline from Q1 2023. Given ample liquidity and reductions in deposit rates, we expect NIM to stabilise at around 4.1% in the second half of 2023, although lending rates are likely to decline to stimulate credit demand.
Weak Non-Interest Income.
Non-interest income (NII) declined 62.4% year on year in Q2 2023 to VND654 billion, mainly due to the absence of extraordinary income and lower bancassurance fee income. Excluding extraordinary income, NII declined 34% year on year, compared with average growth of 2% among other banks. We believe the challenging period for insurance sales will continue as regulators maintain close scrutiny of this activity. In Q2 2023, STB continued its cross-selling campaigns and fee reductions to expand its customer base to more than 16 million customers, up 6.7% year to date. The bank also actively installed POS machines at many stores to promote cashless payments, particularly among younger customers. However, this campaign is currently generating more costs than revenue. Specifically, payment and transaction fees declined 36.3% year on year to VND263 billion in the first half of 2023. Foreign-exchange and securities trading recorded 8% year-on-year growth to VND266 billion.
Profit Forecasts
We maintain our 2023 PBT forecast of VND9.5 trillion, up 50% year on year. In 2024, we expect STB to achieve PBT of VND15.2 trillion, up 60% year on year, supported by stable NIM of 4.12%, while credit and deposit growth are projected at 13% and 13.4% year to date, respectively. Asset quality is expected to improve, with the NPL ratio declining to 1.8%, compared with 2% in 2023, due to decisive action in resolving VND1.4 trillion of NPLs. Total provisions are estimated at around VND900 billion, down 83% year on year, following the receipt of VND3.2 trillion from the sale of Phong Phu Industrial Park. In addition, we believe SBV approval is a prerequisite for STB to resolve more than 30% of its shares frozen at VAMC. Therefore, we do not include any extraordinary gain in our valuation model.
Valuation
With expectations that STB will complete provisioning for VAMC bonds in 2023, we believe profit growth in 2024 and 2025 will be positive and the bank will have an opportunity to complete its restructuring plan ahead of the required schedule. Although STB maintains a reasonable level of lending exposure to real estate and does not invest in corporate bonds, we remain concerned about STB’s near-term credit quality, including its exposure to Bamboo Airways. We apply the following two assumptions in our valuation:
- We incorporate the full proceeds from the sale of Phong Phu Industrial Park into 2024 book value per share (BVPS).
- We roll forward our valuation base to year-end 2024, apply a target P/B multiple of 1.3x and set a target price of VND37,500 per share, implying 14.7% upside potential. Accordingly, we downgrade our recommendation from BUY to
Conclusion: OUTPERFORM on STB shares.
Source: STB, SSI Research
