What are the prospects for banking stocks in 2H24?

>> Banking stocks' slump drives modest decline in overall market

Credit growth outlook

Although banks actively implemented many support policies and the current interest rate level is at its lowest, the disbursement rate in the early months of the year was relatively slow due to (1) high comparative bases last year, (2) slow recovery of the overall economy, and (3) the influence of seasonal factors (disbursement is frequently slow in the early part of the year).

According to the State Bank of Vietnam (SBV)'s most recent statistics, real estate loans increased by VND20 trillion in just the first two months of the year (1.9% year to date). As a result, these loans drove credit growth for a number of outperformers, including TCB, HDB, and VPB. Meanwhile, ACB, VIB, and STB reported slower credit growth since consumer demand in this area has not significantly rebounded.

That being said, Pham Phuong Linh, an analyst at KB Securities Vietnam, believes that credit growth for the entire year will meet the 15% target if the following assumptions are met: (1) current low lending interest rates are maintained to support the economy; (2) the private customer group should contribute more to 2H24 credit growth; and (3) the real estate market continues to recover following the government's efforts to resolve legal issues.

Slow recovery in NIM

Deposit interest rates at several banks have risen from the lowest for brief periods of one to twelve months. This might be the effect of a temporary shortage of cash in the interbank market, which has influenced client deposit interest rates. Linh believes that the SBV will stabilize exchange rates through OMOs, bill issuance, and FX sales, while keeping lending interest rates low to boost the economy. "We believe that deposit interest rates may climb 30-50 basis points from now to the end of the year in the context of an economic recovery, hence raising deposit demand," Linh stated.

Loan rates in Vietnam are unlikely to fall further in the near future, according to KB Securities. Loan rates may even improve slightly because (1) current lending interest rates are relatively low compared to the peak in 2023; (2) banks require reasonable lending interest rates to balance customer risks; (3) system-wide credit showed better signals in April and May; and (4) retail lending should improve in 2H24.

Meanwhile, an increase in deposit rates may have an influence on the cost of funds (CoF), although the CoF in 2024 will remain low. "We downgraded our projection for NIM recovery in 2024 for banks in our coverage, anticipating NIMs to increase 10-20bps from 2023's comparative lows," Linh explained.

>> Banking stocks continue to lead market's gain

More time to improve asset quality

Vietnam's banks' asset quality decreased somewhat in the first quarter. The NPL ratio improved at the end of the first quarter compared to 3Q23. Credit promotion in late 2023 helped to reduce the bad debt/total outstanding debt ratio. However, with the poor disbursement rate in 1Q24, banks' asset quality has marginally deteriorated. The total industry's NPL ratio increased 24 basis points to 2.2% QoQ. The loan loss reserve (LLR) continues to fall at most banks. Except for TCB, which kept its LLR at 100%, all large commercial banks saw their LLR fall.

To decrease bad debt burdens in the first quarter, banks continued to promote the use of already provided resources to manage bad debts off the balance sheet. At the banks covered by KB Securities Vietnam, the part utilized to address bad debts in the first quarter is lower than in the fourth quarter, but it remains at the same high level as in the third quarter. "We believe that banks are still leveraging substantial provision sources from the previous period to enhance asset quality, but lower provision buffers are also a burden for them, implying that they would need to make more provisions in the future," Linh added.

KB Securities Vietnam maintained a cautious perspective on bank asset quality since the economy still needs time to recover and policies require time to demonstrate their effectiveness. However, the bad debt position should be better in comparison to 2023. (1) Circular 02/2023/TT-NHNN has been extended until the end of 2024; (2) banks have implemented interest rate support policies; and (3) legal concerns have been handled, allowing enterprises to continue to grow their operations and production.

What stocks to pick?

After a robust surge in the first quarter pushed the banking industry P/B to 1.7x, most bank stocks corrected, putting the average P/B back to 1.47x - 1.7x, which is lower than the five-year average. For the long run, KB Securities Vietnam believes that the banking industry deserves a higher valuation. However, in the short term, banking stocks may experience corrections if business performance in the second and third quarters does not improve significantly. KB Securities Vietnam's top selections include VCB, ACB, STB, TCB, and VIB.