Banking – Back into buy territory – Update

• 2Q21 aggregate earnings of 17 listed banks rose 36.2% yoy on strong credit growth, NIM expansion and subdued CIR.
• We believe banking is best proxy to Vietnam economic resurgence post pandemic.
• Banks’ share prices have discounted 15% from peak, turning risk/reward profile more attractive. Our stock picks are VCB, TCB, and ACB.

Encouraging 1H21 results, but 2H21 NP growth to slowdown

Aggregate earnings of 17 listed banks grew 36.2% yoy in 2Q21 and 55.5% yoy in 1H21, assisting by a low base 1H20. We believe this strong earnings growth in 1H21 might be offset by a weaker 2H21 as a result of softer net interest margin (NIM). Additionally, banks need to accelerate provisioning to enhance their asset quality upon the possibility of bad debts surge. Almost listed banks enjoyed NIM expansion in 1H21 on subdued funding cost. We believe NIM improvement will slow down in 2H21 as commercial banks are strictly required to lower their lending rates to support for pandemic-hit clients.

System credit grew healthily in 1H21 but slowed down during Aug-Sep

According to SBV, system credit grew 6.44% ytd by end-1H21 from 2.95% ytd by end-1Q21, and nearly double that of 3.65% ytd by end-Jun last year. However, credit growth slowed down during Jul – Aug with only 0.9% pts increase to 7.4% ytd at end-Aug due to stricter nationwide lockdown protocols have been adopted. In base case, we expect the daily cases curve will flatten and movement control will be gradually relaxed since end-Sep. Thus, we lower our forecast for FY21F system credit growth to 10-12% from previous 13% due to weak demand post-pandemic.

Back into BUY territory

We believe investors acknowledged that 2H21 earnings would be hurt by current Covid-19 wave and now they focus on FY22F earnings outlook. Some lost growth momentums may also be made up in subsequent quarters as output and social activity normalize. And banking is best proxy to Vietnam economic resurgence. Banks’ share prices have discounted 15% from their peak. We believe the correction has partially factored the downside risks of the current wave. Thus the risk/reward profile of banking sector is attractive now. Our top picks for the sector are VCB, TCB and ACB.

Upside catalyst includes better-than-expected credit growth. Downside risks are longer-than-expected social distancing due to Covid-19; or any new variant arising which hinder credit growth and trigger new surge in bad debt.

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