Asset quality is crucial for bank stocks

Investors may pick certain bank stocks. Photo: Quoc Tuan

>> Market extends losses on bank stocks

What was the primary driver of bank share price performance? It wasn't earnings growth, but rather a strengthening of balance sheets, especially asset quality. This is due to investors' belief that if banks demonstrate a higher asset quality trend, they would provide more sustainable growth and return in the long run.

Due to post-Covid effects, investors have been skeptical about banks' asset quality since 2H21. That is why bank share prices fell 3% at the end of FY21 compared to the end of 2Q21, despite the fact that bank earnings increased by 30% year on year. Going forward to FY22, the scrutiny in the property and corporate bond markets had prompted significant concerns about banks' asset quality, resulting in a -22% decrease in bank share values, despite the sector achieving a robust 33.7% year-on-year profits increase. To summarize, if the asset quality trend improves, there is still time until banks' share prices begin to rise.

VNDirect believes that a stronger economy would help banks by resulting in higher asset quality. Nonetheless, the problems in the property and corporate bond markets remain unresolved. It explains how the property and corporate bond markets are linked to the asset quality of banks...

First and foremost, banks were cautioned to reduce their loan exposure to real estate in order to calm the "hot fever" of this market. According to Circular 08/2020, the short-term funding ceiling for medium- and long-term lending will be reduced from 37% to 34% from October 1st, 2022, and 30% effective October 1st, 2023. Banks will not allow their lending exposure to this sector to grow uncontrolled since property loans are medium- and long-term loans.

Because borrowing from banks has become more onerous, the market has seen a surge in corporate bond issuance from property developers since 2021 as a new replacement funding source for this industry. Property developers' outstanding corporate bond value accounted for 35% of the corporate bond balance at the end of 2022. (collected by HNX).

However, from 2Q22, the government has strictly regulated corporate bond issuance by Decree 65. Numerous instances of poor primary mobilization methods were identified in the market, and several Vietnamese executives were imprisoned. This has harmed investors' trust in the integrity of issuers, leading to a corporate bond boycott. As a result, developers are having difficulty raising funding from the corporate bond market. The overall value of corporate bond issue declined 63% year on year in FY22, while property corporate bond issuance fell 78%.

Mortgage rates have reached an all-time high due to the ongoing financial crisis. When combined with the present high house prices, housing demand has dropped dramatically, and this trend is likely to continue in the coming months. According to CBRE, new condo supply declined 81% year on year (38% year on year), resulting in a dramatic drop in sales volume of 80% year on year (63% year on year) in both HCMC and Hanoi.

>> Undervalued banks winning bet for investors

Several developers are shut off from all sources of funding due to a stalled corporate bond market and low presales. As a result, investors are concerned about their capacity to satisfy debt commitments to creditors and banks. Notwithstanding the fact that bank credit has been curtailed, it remains an important source of property market liquidity (21% of total system credit at the end of FY22). The market is concerned about the asset quality of banks as a result of the stagnating real estate market.

Furthermore, according to VNDirect, there is an issue with "liquidity drying up" among Vietnamese firms, particularly SMEs. Vietnamese enterprises must deal with rising interest charges, which reduce profitability and put further strain on debt commitments. Meanwhile, tighter financial circumstances are discovered with limit ed bank lending and crimped corporate bond issuance, limit ing corporate refinancing opportunities. Corporates' inability to acquire finance and satisfy debt commitments would further jeopardize banks' asset quality in 2023F.

Decree 8/2023 is supposed to provide a remedy to these issues. This order will assist to alleviate the economy's liquidity crisis, particularly in the real estate sector. Decree 08, in particular, will provide companies and property developers with additional time to recover and pay their financial commitments.