The worst case scenario related to the Covid-19 pandemic did not occur, so the low price zone of banks stocks in the past five years is opening up investment opportunities.
In fact, the market is showing purchasing moves of “king stocks” by major shareholders, internal shareholders and institutional investors, etc.
Attractive stock valuation
Bank stocks were said to be negatively affected because the Covid-19 would lead to the rise in bad debts and risk provisions, the decline in profit when banks carry out the interest rate support policy for borrowers.
Specifically, the State Bank of Vietnam (SBV) issued Circular 01/2020/TT-NHNN with effectiveness from March 13th 2020 regulating credit institutions and foreign bank branches to reschedule debts, exempt and reduce interest, fees, and keep the debt group in order to support customers hit by the Covid-19 pandemic.
The business results in the second quarter (Q2) of 2020 of the banking sector are said to reflect more clearly the impact of Covid-19 pandemic, with the main negative trend. Therefore, the general recommendation for bank stocks is “neutral”, “less positive” and caution needed as the disease is still complicated. On the stock market, the prices of bank stocks have recorded sharp adjustment, many of which decreased by 25-30 percent compared to the beginning of 2020.
According to experts, the market reflects the intrinsic difficulties of bank stocks based on the worst scenarios of the disease. However, the reality so far shows tha the situation is not so bad as originally predicted.
According to Quan Trong Thanh, Head of Analysis Department Institutional Customer of Maybank King Eng (MBKE), after Vietnam announced information about the good control of the disease, investors’ sentiment has become less stressful.
In addition, the Q1 business results of the banking sector were not too bad. Meanwhile, in the worst case scenario, banks’ profits would only fall by 10 percent this year and banks have prepared for better scenarios.
Thanh said that in Q1 2020, the average Price to Book ratio (P/B) of many banks was 1.2 times.
Assuming that banks would not make any profit in the remaining nine months of 2020, the P/B of 1.2 times is still a low valuation. Certainly, this scenario is unlikely to happen.
From the beginning of April, the stock market has recorded recovery signs and many stocks have risen again, including bank stocks. According to calculation of Le Quang Minh, Head of Analysis Department of Mirae Asset Vietnam, bank stocks are currently traded at P/B and Price to Earnings ratio (P/E) of respectively 1.3 times and 15.3 times, the lowest zones in the last five years.
Based on the profit growth prospect in 2020 and 2021, Minh said that bank stocks are at an attractive level for medium-term investment.
According to Mirae Asset’s statistics, based on the business results in Q1 2020, the after-tax profit growth of listed banks slowed down significantly, reaching 3.4%, the lowest in about three years. The reason is the modest credit growth of 1.3 percent in Q1 due to the economic disruption under the social distancing order to prevent Covid-19 pandemic. This credit growth level is much lower than the 3.1 percent recorded in the same period of 2019 and the lowest growth rate in six years.
Accordingly, the income from credit fell, while bad debts increased, forcing banks to raise provisioning expenses. At the same time, the Net Interest Margin (NIM) of the banking system is under the pressure of shrinking due to the slowdown of net interest income growth, due to the interest reduction/ exemption for the existing loans.
The Covid-19 pandemic is now well controlled in Vietnam, but the developments in the world remain complicated. Thus, it is forecasted to further cause a certain delay in production and business activities 2020 in general. This makes it difficult for the profit picture of the banking sector to prosper in Q2, even in Q3.
However, Minh assessed that the most difficult period of the banking sector is gradually passing away when the pandemic is under control, the economic disruption is greatly eased, businesses operate again, leading to an increase in credit demand. Particularly, the government is promoting the implementation of stimulus packages, including monetary policy easing and increasing public investment thereby stimulating consumption, investment and reducing the pressure of bad debts.
In addition, the SBV has continuously reduced operating interest rates (along with the commitment to ensure liquidity for credit institutions to provide capital for the economy), helping to reduce the capital costs of banks, paving the way for reducing lending rates and boosting credit growth.
The SBV has cut operating rates for the third time since September 2019. Accordingly, from May 13th 2019, the refinancing rate decreased from five percent to 4.5 percent per annum, rediscount rate fell from 3.5 percent to three percent per annum, and the offering rate of valuable papers through the open market operations (OMO) declined from 3.5 percent to three percent per annum. On market 1 (mobilising capital from people and organisations), the ceiling interest rates for dong deposits were cut to 0.2 percent per annum on one-month term and 4.25 percent per annum on terms from one to less than six months. The ceiling lending rates for priority areas also declined.
Compared to the two previous operating rate cuts in March 2020 and September 2019, the SBV this time made larger adjustment of the ceiling deposit rate for terms of less than six months, to help banks lower the capital costs thereby helping the NIM to narrow the downtrend due to the lending rate cut to support firms affected by the Covid-19 pandemic.
The SBV’s statistics showed that by the end of April 2020, banks applied lower lending rates (down by 50 300 basis points) for nearly 19 percent of the total loans (including existing and new loans).
In the basic case (when the Covid-19 is well controlled at the end of June 2020), Maybank Kim Eng’s representative expected that the interest rates of 25 percent of banks’ total loans will be 150 basis points less than the average rate. Thus, the average lending rate will fall by 40 basis points.
The decisions to cut interest rates between the SBV and commercial banks will basically not have much impact on banks, because the loans from the SBV only account for a small proportion. “In fact, after the operating rate cut in March 2020, we found that only 20.8 trillion dong were borrowed by commercial banks from the SBV via OMO, equivalent to 0.2 percent of banks’ total outstanding loans,” said Thanh.
Banks are still focusing on mobilising capital from customers, but the credit growth this year is predicted to slow down due to the impact of the disease. Thus, the banking system is having good liquidity and may not need to borrow more from the SBV.
However, reducing the ceiling deposit rate for terms of less than six months will have a positive impact on the average mobilisation cost of banks.
The decrease of the last two cuts was only 25 percentage points, insignificantly different from the rates that banks are applying. However, in this decision to cut interest rates, the management authority cut 50 percentage points from 4.75 percent to 4.25 percent per annum.
According to MBKE, before applying the new ceiling interest rate, deposits with terms of less than six months accounted for about 25-30 percent of banks’ total deposits, with interest rates ranging from about 4.5 4.75 percent per annum.
As of May 12th, only Vietnam Technological and Commercial Joint Stock Bank (Techcombank, TCB) profited an interest rate of 4.25 percent per annum for deposits of less than six months. Some large banks such as Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Prosperity Commercial Joint Stock Bank (VPB) offered rates of 4.45 4.5 percent per annum. Most other banks applied rates of maximum 4.75 percent per annum.
Thus, MBKE estimated that the lower ceiling deposit rate may help reduce the average cost of funds (CoF) of banks by up to 15%. This will slightly reduce the impact of the decline in average lending costs (40 basis points) on NIM of banks. In basic case, MBKE forecasted banks’ NIM to fall by 20 30 points in 2020.
Since the stock market reflects future expectations, when good news come, bank stocks had breakthrough sessions, although there were still concerns about the risk of Q2 business result reduction.
In the session on May 8th, bank stocks boomed along with soaring liquidity and continued attracting cash flows after that. Previously, many banks announced that they would buy treasury bills and internal shareholders registered to buy. For example, Chair’s son of Saigon Hanoi Commercial Joint Stock Bank (SHB) registered to buy 35.9 million shares, while, VPB and Tien Phong Commercial Joint Stock Bank plans to buy 122 million shares and 10 million treasury shares. This information contributed to the quick recovery of TPB shares (up from 17,000 dong to 21,800 dong per share), VPB shares (up from 17,000 dong to 23,600 dong per share, SHB shares (up from 10,000 dong to 17,200 dong per share), etc.
Notably, VCB shares presented in the largest portfolio of Vietnam Holdings instead of GEG. At the same time, foreign investors recently have returned to net buy shares, after strongly selling of a lot of bank stocks such as VCB, VPB, HDB (HCM City Development Commercial Joint Stock Bank), BID (Commercial Joint Stock Bank for Investment and Development of Vietnam), etc.
Statistics of Mirae Asset showed that from May 4th to 13th, VPB and VCB were the two stocks that recorded the largest net buying of foreign investors with respectively 248 billion dong and 226 billion dong. VCB was bought a lot because its stock price plummeted. Meanwhile, for VPB shares, investors expected that the bank’s initial public offering (IPO) of its subsidiary FE Credit in the near future will bring a large capital surplus.
With support information, the demand for bank stocks is gradually rising, when the valuation is at the lowest in five years.
