HDB – As steady as she goes – Update

• HDB is one of a few banks which will be able to grant a high credit quota from the SBV in FY23F.
• Sectoral headwinds will hinder HDB’s NP growth to 16-20% yoy over FY23-24F. However, it is still better than peers.
• Reiterate ADD with a lower TP of VND25,000.

A solid bank to grant a higher-than-peer credit quota
HDB’s 3Q22 net profit (NP) rose strongly 40.9% yoy to VND2.0tr, mostly driven by a strong loan growth and fast-growing fee incomes (+111% yoy, underpinned by bancassurance). HDB’s 9M22 NP reached VND6.0tr (+32.3% yoy), fulfilling 77% of our forecasts. Notably, HDB is one of a few banks receiving a high credit quota from the SBV in 2022, thanks to a robust CAR (15.3% vs. peers’ average of c.12%), well-managed LDR (71.4% vs. maximum threshold of 85%), benign loan mix (good exposure to retail lending and less exposure to corporate bond – CB), and participation in handling weak financial institutions. This is also its strong advantage to accelerate credit growth in the next year (20% per our estimate).
Banking sector outlook to see a bumpy road ahead…
Firstly, SBV has increased policy rates by 200bps and this rate hike will inevitably put pressure on banks’ NIM next year as cost of funds (COF) rises and a full pass-through into lending rates is unlikely. Secondly, stagnant property market and sluggish corporate bond (CB) recovery will stress banks’ asset quality and liquidity. Besides, “liquidity constraint” issue among Vietnam corporates could also threaten banks’ NPL. Overall, due to the tightening monetary policy and macro uncertainties, banks’ FY23-24F outlook will see elevated risks via weaker credit growth, NIM compression and face concerns over asset quality.
… but HDB can partially mitigate those risks
Due to the sectoral headwinds, given (i) a 15bps NIM compression and (ii) higher provisions, HDB’s earnings growth may softer to 16-20% yoy over FY23-24F (CAGR FY19-21 of 30%). However, it is still better than peer (ie. 10.4%) thanks to its ability to accelerate credit growth as we mentioned above. In the long run, we still like HDB thanks to (i) its unique banking model (approaching rural areas, which has huge loans demand); (ii) potential banca segment elevate fee incomes; (iii) good asset quality compared with its high risk-appetite peers; (iv) robust profitability with ROE of c.23% over FY20-22F (peers’ average of c.20%).
Reiterate ADD with a lower TP of VND25,000
We downgrade the P/B target to 1.3x from 2.0x to fully reflect the sectoral headwinds, with 50% contribution from residual income approach (COE: 16%, LTG: 3%), we derive a new TP of 25,000. However, the negativities were factored in as HDB’s valuation has been compressed to 1.0x FY23F P/B – below minus 2SD of 3Y average, thus the stock is now undervalued. Downside risks include higher-than-expected rate hike and bad debt spike. However, the potential banca partnership with FWD is a strong upside catalyst for HDB in the upcoming time

Please follow this link for the full report