VCB reported VND9.3 trillion in pre-tax profit (up 25% year on year), slightly below our estimate of VND10 trillion (up 35% year on year), due to higher-than-expected provisioning.
However, we continue to view VCB’s Q2 2023 results as quite impressive, as the bank prioritised higher provisioning in the first half of the year. As a result, provisioning expenses in the second half of 2023 could be lower. In Q2 2023, VCB also bucked the broader industry trend in both NIM, which increased by 2 basis points quarter on quarter, and asset quality, with the NPL ratio remaining stable at 0.8% and the NPL coverage ratio rising further to 386%.
In our view, the only drawback in Q2 2023 results was that CASA declined by 43 basis points to 30%, while the average CASA ratio of other banks improved by 45 basis points. However, we do not consider this trend a concern, as VCB continues to have the lowest cost of funds in the industry, largely thanks to its strong and stable depositor base. In the second half of 2023, we expect CASA to improve as deposit rates remain low. Since first-half 2023 pre-tax profit was in line with expectations, we maintain our current forecasts. Accordingly, 2023 and 2024 pre-tax profit are projected at VND44.3 trillion, up 19% year on year, and VND49.1 trillion, up 11% year on year, respectively.
Short-Term View: Pre-tax profit growth is expected to remain strong in Q3 2023 before slowing from Q4 2023.
Q2 2023 Review.
VCB’s NIM remained the most stable among the banks under our coverage in Q2 2023. Since December 2022, VCB has implemented three interest-rate support programmes for customers, reducing net interest income by approximately VND1.8 trillion. However, in our view, NIM remained stable thanks to a resilient funding base and more optimised allocation of interest-earning assets. Customer deposits at VCB increased 6.7% year to date, including 3.5% quarter-on-quarter growth, as of June 2023. With its strong brand and reputation, we believe VCB continues to attract depositors who prioritise safety over higher deposit yields. Supported by solid deposit growth, the bank’s liquidity remained stable despite a reduction of VND32 trillion in deposits from the State Treasury. Meanwhile, asset allocation was optimised, with lower allocations to lower-yielding assets such as deposits at the State Bank of Vietnam (SBV) and other credit institutions (see Chart 2).
Accordingly, VCB’s NIM rose slightly by 2 basis points quarter on quarter to 3.2% in Q2 2023, while all other banks recorded an average quarter-on-quarter NIM decline of 32 basis points. As a result, net interest income increased 9.6% year on year, despite funding growth of 6% year to date outpacing credit growth of 2.8% year to date.
Service Fee Income Improved, While Recoveries of Written-Off Loans and Foreign-Exchange Trading Profit Slowed. Non-interest income increased 8.6% year on year in Q2 2023, mainly due to a 134% year-on-year increase in service fee income. However, this growth was partly attributable to differences in the accounting treatment of upfront bancassurance fees last year. Therefore, to assess the trend more appropriately, we compared these figures with the corresponding data from Q1 2023. Service income improved 11% quarter on quarter, driven by credit-card services, while payment-service fees remained stable. In the first six months of 2023, income from credit cards and payment services increased 5% and 25% year on year, respectively. Trade-finance fees, down 5% year on year, and first-year bancassurance premiums, down 21% year on year, both declined. A positive point is that VCB’s market share in both segments increased, as the market contracted more rapidly. In particular, domestic trade finance declined 15% year on year, helping VCB’s market share improve to 20%, from 18% at the end of 2022. Meanwhile, the banks under our coverage reported first-year bancassurance APE declines of more than 40% in Q2 2023 (see Chart 7).
In addition, foreign-exchange trading profit was unchanged year on year and declined 13% quarter on quarter. Recoveries from written-off loans fell 59% year on year and 1.7% quarter on quarter, as the bank did not prioritise asset sales at steep discounts under current conditions.
VCB Continued to Demonstrate the Best Asset Quality in the Industry. VCB bucked the broader trend by keeping both NPLs and Group 2 loans almost unchanged. The bank restructured VND1.2 trillion in outstanding loans, equivalent to 0.1% of total credit, under Circular 02. At the end of Q2 2023, NPLs and Group 2 loans stood at VND9.8 trillion, or 0.83% of total credit, and VND8 trillion, or 0.69% of total credit, respectively. During the first half of 2023, newly formed NPLs mainly came from steel-sector companies, certain small manufacturers and highly leveraged mortgage borrowers. The NPL ratio among individual customers doubled year on year to 0.8%, consistent with the broader market trend. Meanwhile, the bank actively made an additional VND7.2 trillion in provisions, bringing cumulative provisions to VND37.7 trillion and the NPL coverage ratio to 386% (see Charts 3–4).
The bank has approximately 4% and 3.5% of its credit exposure to real-estate developers and renewable-energy companies, respectively. Although the credit quality of these loans needs close monitoring, we believe they will not have a sudden or material negative impact on VCB’s earnings in the near term. With its sizeable credit buffer, we believe VCB will be more flexible in responding to any asset-quality developments. In the first half of 2023, as noted in our previous report, VCB reversed VND9.8 trillion in provisions made in 2022 for interbank loans.
Update on VCB’s Charter Capital Increase Plan, which comprises three components:
1. An 18.1% share dividend from 2020 retained earnings, completed in July 2023.
2. A share dividend using cumulative retained earnings through the end of 2018 and retained earnings from 2021. Accordingly, charter capital will increase by 50%, equivalent to VND27.7 trillion. This plan requires approval from the Government and the National Assembly; therefore, implementation is expected in 2024.
3. A 6.5% new share issuance through a private placement. The bank is in the process of selecting a financial adviser, and completion is expected in 2024.
Profit Forecasts and Investment Thesis
As first-half 2023 pre-tax profit was in line with expectations, we maintain our previous forecasts. Specifically, we estimate 2023 and 2024 pre-tax profit at VND44.3 trillion, up 19% year on year, and VND49.1 trillion, up 11% year on year, respectively.
We roll forward our valuation base to year-end 2024 and raise our target P/B multiple to 2.7x from 2.4x, reflecting a lower interest-rate environment. We set a target price of VND105,900 per share, implying 18.7% upside potential. We also factor in the possibility that the private placement could be completed by the end of 2024. Accordingly, we maintain our OUTPERFORM recommendation on VCB shares.
Source: VCB, SSI Research
