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Vietnam Banks Sector Summary

Core Content

Vietnam's banking sector has shown strong performance over the past several years, characterized by robust credit growth and high returns on equity (ROE). The sector is positioned to continue its growth trajectory, with expectations of maintaining healthy credit expansion at 10-14% annually over the next five to ten years. This growth is attributed to a growing middle-class population, strong foreign direct investment (FDI), and favorable demographic trends. Despite a slowdown from the 18% peak in 2018, the credit growth remains strong and is projected to outperform regional peers.

The report highlights the potential for continued growth in retail lending, which is expected to be the key driver in the next three to five years. Private banks are anticipated to outperform state-owned commercial banks (SOCBs) in terms of market share and profitability. The analysis covers 19 Vietnamese banks, representing over 80% of the system loans, and evaluates their performance based on various metrics such as ROE, net interest margin (NIM), fee income, and non-performing loans (NPLs).

Vietnamese banks are currently undervalued compared to regional peers, with a PBV/ROE ratio of ~8.5x, offering a discount of ~22%. The report also suggests that the government's stimulus programs and the banks' ability to manage NPLs and maintain a healthy capital adequacy ratio (CAR) will support continued performance.

Main Points

• Credit Growth: Vietnam's credit growth is expected to remain at 10-14% annually over the next five to ten years, driven by a strong middle-class and FDI.
• ROE Outlook: Vietnamese banks in the report's coverage are projected to maintain ROE above 20% for the next three years, due to structural growth in CASA funding, fee income, and improved credit cost.
• Valuation: Despite strong performance, the valuations of Vietnamese banks, especially private banks, are considered undemanding, with a PBV/ROE ratio of ~8.5x.
• Market Share: Private banks like TCB, MBB, VIB, and ACB are expected to gain market share from SOCBs, with VCB and VPB rated as neutral due to potential risks.
• Government Stimulus: A major stimulus package of D350tn (~US$15.2bn) is expected to support economic recovery, focusing on healthcare, infrastructure, and business development.
• VAT Reduction: A historic VAT cut from 10% to 8% is anticipated to boost consumption and retail loan demand.

Key Information

• Credit Growth Trajectory: Slowed from 18% in 2018 to ~14% in 2021, but still expected to remain robust.
• ROE: The report covers 19 banks, representing ~80-90% of the system loans. These banks are expected to sustain ROE above 20% in the next three years.
• Valuation Metrics: PBV/ROE ratio of ~8.5x, with a 22% discount to regional peers.
• Coverage Initiation: Five private banks (TCB, MBB, VIB, ACB, VPB) and one SOCB (VCB) are initiated for coverage. TCB, MBB, VIB, and ACB are rated OUTPERFORM, while VPB and VCB are rated NEUTRAL.
• Stimulus Impact: The 2022-23 stimulus package includes interest rate subsidies, tax cuts, and infrastructure spending, expected to support economic recovery.
• NPLs: Although NPL risk could linger in 2022, the banks are well-positioned to manage it due to conservative provisioning and underwriting practices.
• Digital Disruption: A potential risk to fee income and margins, but not expected to significantly impact the sector in the short term.
• Fiscal Deficit: The stimulus package and tax cuts may increase the fiscal deficit to ~4-5% of GDP in 2022-23, but it is still under control compared to historical levels.

Key Risks and Upside Potential

• Downside Risks:

  • Macroeconomic uncertainty due to prolonged pandemic impact, inflation, and external risks.
  • Regulatory changes or government intervention affecting interest rates and credit support.
  • Digital disruption and rising competition affecting fee income and margins.

• Upside Risks:

  • Higher-than-expected credit quotas from the State Bank of Vietnam (SBV).
  • Faster-than-expected digital transformation leading to quicker CASA growth.
  • Greater-than-expected recovery of written-off loans.

Conclusion

Vietnam's banking sector is poised for continued growth and strong returns, supported by structural factors, government policies, and a favorable economic environment. The report recommends initiating coverage on selected private banks and highlights the potential for outperformance, while cautioning about risks such as NPL management and regulatory changes. The sector's valuation is attractive, and the upcoming stimulus package is expected to further boost performance and support a recovery in the retail lending segment.