Credit demand has increased
According to statistics, banking system credit grew 8% year-to-date to May 31, while it climbed 5% in the first five months of 2021, showing a sharp rise in the demand for credit to serve the resumption of activity. business activities after the pandemic. Three public listed commercial banks, BID (BIDV), VCB (Vietcombank) and CTG (VietinBank), accounting for 33.5% of the domestic lending market share, recorded a 6.7% increase in credit since the beginning of the year. In general, the total outstanding loans of 15 listed banks accounted for 62% of the system’s credit.
Banking sector credit growth is projected to continue accelerating to at least 14% in 2022, driven by three factors, including a strong recovery in production and business activity, low interest rates on lending to stimulate demand for loans from homebuyers, and higher disbursement rate of public investments.
Since Vietnam reopened its economy in October 2021, alongside current government support programs and low lending rates, it has urged businesses to recover and boost credit growth. Banks’ business activities have seen positive changes since the first quarter of 2022. The total net interest income (NII) of 15 listed banks increased by 18% compared to the same period in 2021, thanks to a growth in loans of 18.9% and net interest. margin (NIM) remained at 4.17 percent.
Notably, total non-interest income increased 50.3% as VPB (VPBank) recorded a one-time profit on a proprietary insurance transaction. In terms of expenses, the average cost/income ratio (CIR) rose from 36% to 33.8%, while provision expenses only increased by 14.7%. Thanks to this result, the banks’ net profit jumped by 29%.
Buffers ready to deal with rising bad debts
One of the factors investors are most interested in investing in this group of stocks is the quality of the assets. According to an analysis by VNDirect Securities (VND), the asset quality of banks has been somewhat affected by the impacts of the Covid-19 pandemic, in which the non-performing loan (NPL) ratio has increased while the loan loss reserve (LLR) decreased slightly compared to the end of the fourth quarter of 2021.
Specifically, the average NPL fell from 1.39% at the end of Q4 2021 to 1.5%. the total outstanding loans of 15 listed banks increased by 6.7% compared to the beginning of the year, while bad debts climbed by 11.4%.
Analysts say bad debts are expected to increase in the coming months when Circular No. 14 expired at the end of June. According to the State Bank of Vietnam, the NPL ratio on the balance sheet could reach 7.3% if restructuring loans and bad debts sold to VAMC are included, which is equivalent to the level of bad debts in the period 2016-2017.
However, the quality of banks’ assets has currently improved significantly compared to the 2016-2017 period. Banks have taken steps to avoid the possibility of bad loans rising sharply, and at the same time, the LLR had reached the highest level in history at most banks by the end of 2021. Else On the other hand, banks have also made a relatively sufficient increase in provision for debt restructuring instead of the prescribed 30% level.
With strong asset quality and a strong provisioning cushion, banks will be able to minimize the risk of bad debts increasing in the near future. In addition, banks have made efforts to increase the capital adequacy ratio (CAR), which is reflected in the improvement in CAR in the first months of 2022. In fact, capital raising is still a top priority for banks in 2022, especially commercial banks. to the capital of the State, to increase the CAR, towards the Basel III application roadmap.
Turning point to come
The banking sector struggled due to inflation concerns, with the NIM contracting and the NPL rising rapidly after the end of Circular No. 14 at the end of June. In addition, the sentiment of caution towards bank stocks has worsened due to investors’ overreaction when the government has taken measures to manage and supervise the capital market, although this will help improve transparency. and long-term market sustainability.
However, according to VND, these events will not lead to serious consequences, so banks can overcome all risks related to asset quality, thanks to their large reserves and strict control of disbursements in the high-value real estate segment. risk.
Above all, the recent sell-off sent the valuation of banks to an extremely attractive level. According to statistics, the banking sector is trading at an average forward P/BV of 1.46x in 2022. This figure is twice well below the three-year average P/BV, although the sector’s overall profit is estimated at still have strong growth and high ROE profitability, indicating an extremely attractive valuation for the industry.
The banking sector is also receiving higher expectations when the economy picks up speed in 2022, thanks to robust export growth, demand recovery and supportive fiscal policies. At that time, bank stocks will become a typical investment choice in the context of an economy recovering from the pandemic. Even though the NIM is unlikely to continue to improve due to rising deposit interest rates, banks can still maintain good earnings growth.
It is estimated that the NIM of the banking sector will increase by approximately 29.4% over the same period, or 25.6% if the extraordinary income from the insurance segment of VPB is excluded. This forecast is based on strong profitability at 22%, driven by steady credit growth, rapidly growing commission income and well-controlled credit costs.