Residential property sector – Waiting for more aggressive policies

• Concerns over stagnant property market in FY23F will stress banks’ outlook via rising credit risk and weakening asset quality.
• FY23F earnings growth of banks under our coverage will slow down to 11% yoy (from +34% in FY22) on weaker credit growth, softer NIM and higher credit cost.
• Once we get more clarity on the NPL picture, there is the time for banks start their share prices rally. Top picks: CTG and ACB.

Liquidity constraints ease given cooling interest rate pressure

At end-2022, banks still suffered from tightened liquidity position, when M2 growth was far behind from credit growth, weighing on banks’ liquidity via their tense LDR ratio. However, we think this tension has partially eased until now, given (1) cooling interest rates pressure thanks to FED “less hawkish” viewpoint and SBV’s support via opening market channel or buying foreign exchange reserves; and (2) Circular 26/2022 effects.

Gloomy property market will deteriorate banks’ asset quality

Another debatable issues in the banking sector relate to stagnant property market and sluggish corporate bond (CB) recovery. Amid halting CB market and subdued presales, many property developers find themselves to be cut off from all sources of funds; and their ability to repay debt obligations for creditors and banks are questionable. Therefore, those difficulties will stress banks’ FY23F outlook via rising credit risk and weakening asset quality.

Banks took a prudent step in their FY23F guidance

Amid the sectoral headwinds, banks’ FY23F guidance have turned to a more conservative mode: VCB only aimed for 12% earnings growth in this year. VIB, a bancassurance (banca) play within the sector, just targeted 15% yoy growth for its FY23F earnings. In FY23F, we see that banca is not a “goose that laid the golden eggs” for banks anymore due to (1) weaker economy impacts demand for insurance products and (2) heightened scrutiny from regulators around banca activities.

Asset quality trend matters more to banks’ share prices. Top picks: CTG & ACB

We believe asset quality concern is the main reason why investors stayed away from banking sector, as they think if asset quality trend is improved, banks will deliver more sustainable growth and return in the long run. Once we get more clarity on the NPL picture, there is the time for banks to start their share prices rally. The worst may be over in 2H23 onward, in our view, once pressure from interest rates and FX ease, in pace with Decree 8/2023 effects and liquidity improvement. Currently, we still remain cautious in the near term and prefer banks with diversified loan portfolio, strong provision coverage for loan-at-risk and well-equipped to weather the uncertainties, thus CTG and ACB are our safe choices.

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