Vietnam Maritime Commercial Joint Stock Bank (HOSE: MSB) just signed an exclusive bancassurance deal with Prudential Vietnam, according to the co-statement released last week.
The new agreement has a 15-year duration, and an upfront fee estimated between USD 80-90 mn (VND 1.9-2.1 tn), according to a report by Research Center of SSI Securities Corporation (SSI).
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Asset quality expected to improve with strong earnings outlook.
Investment thesis: Despite MSB’s spectacular 4Q20 earnings results, we lower our rating on the shares from Outperform to MARKET PERFORM as most of MSB’s positive are already reflected in its valuation. We lower our rating in spite of significantly increasing our PBT forecast to VND 3.5 tn (+39.2% YoY) and increasing targeted P/B ratio from 1.1x to 1.4x, which pushed our 1Y target price to VND 23,500 per share.
MSB’s 4Q20 earnings results included a glowing TOI of VND 2.4 tn (+95.5% YoY), while PBT smashed through expectations with VND 857 bn (+283% YoY). No doubt MSB had a fantastic 2020, achieving VND 2.5 tn of PBT (+95.9% YoY). This was driven by robust credit growth of +25.1% YoY, strong improvement in NIM (+90 bps YoY), and a significant drop in CIR (-126 bps YoY). The bank also improved its asset quality by completely clearing all of their VAMC bonds by 3Q 2020, while slightly reducing its NPL ratio and raising provision coverage. It started listing on the HOSE in December 2020.
Forecast for 2021: SSI Research raises its PBT forecast to VND 3.5 tn (+39.2% YoY), driven by credit growth of 22.9% YoY, NIM improvement of +10 bps YoY to 3.47%, and 15.3% YoY growth in non-interest income. The bank has sold all of its 56 mn MBB shares, recording VND 400 bn of relevant gain in 1Q2021. SSI Research assumed that the bank will book ~VND 600 bn of upfront fees in 2021, CIR to decrease further to 49.5%, and provisions to increase +5.5% at the bank while the NPL ratio declines to 1.7% and LLC increases to 93%.
Valuation: At VND 21,900 per share, MSB is trading at a 2021F P/E and P/B of 9.2x and 1.3x, respectively. Given that profitability and asset quality are both improving, SSI Research increased the targeted P/B ratio from 1.1x to 1.4x, which brings our 1Y target price to VND 23,500 per share (from VND 19,714 per share after dilution). With implied upside of just 7.3%, SSI Research lowered its recommendation on the shares of MSB from Outperform to MARKET PERFORM.
2020 performance in focus
Credit growth was among the highest in the sector (+25.1% YoY), largely driven by corporate loans (+28.3% YoY) and corporate bonds (+29.3% YoY). Retail lending growth was also somewhat impressive, (+16.4% YoY).
By term, medium and long-term loans increased +45.1% YoY and +30% YoY, respectively. This raised the ratio of short-term funds used for medium and long-term lending +6 bps YoY to 26.2%, far lower than the current cap of 40%.
Lending to the real estate and construction sectors, the ones that bore higher credit risks, has reduced their parts in total loans from 28.9% in 2019 to 20.5%.
Lower funding cost boosted NIM: The NIM increased +90 bps YoY to 3.37% p.a., fueled by a YoY -76 bps decline in funding costs. These conditions were made possible via both CASA improvement and cuts of deposit rates.
- The CASA balance was +53.3% higher YoY, due to both retail and corporate customers, raising the CASA ratio significantly from 20.7% in 2019 to 29.3% in 2020. The CASA ratio for MSB ranked 4th within the sector.
- Deposit rates were reduced between 100-200 bps YoY across all tenures.
- Credit expanded as a percentage of interest-earning assets, increasing +4.3% to 55.4%). This raised total asset yield +7 bps YoY.
- In sum, NII soared up +57.5% YoY to VND 4.82 tn.
Non-interest income was strong, attaining VND 2.4 tn at +42.8% YoY. Non-interest income to the TOI ratio aggregated 32.6%, the second highest in our coverage universe. This was fueled by net fee income (+57% YoY), FX gains (+74% YoY), and income from securities trading and investment (+181% YoY).
Fee income was driven by bancassurance which continued to outpace other fee-based services, achieving +118% YoY growth to post VND 333.5 bn.
MSB is known for its government bond investment and trading, which has been funded primarily by the interbank market. The balance of government bonds amounted to 20% of total assets, high relative to peer. The transaction value of government bond trading in 2020 reached VND 560 tn, increasing +39% YoY.
FX gains was propelled by net income from currency derivative products, which has been a strength of the bank.
CIR delivered nearly 50% in 2020 and is on a downward trend since 2017, due to a surge in TOI and digitalization which led to reduced staff cost over PPOP compared to previous years.
Provisions increased +16% YoY, primarily due to VAMC bonds: Provisions declined -7.9% YoY due to improved loan book quality, and a greater proportion of total loans extended to the education and healthcare sectors. Meanwhile, MSB increased provisions for VAMC bonds (+30.4% YoY) and receivables from debt sales (+7.2%).
Asset quality improved, albeit at a lower range compared to peers: During 2020, MSB resolved all VAMC bonds which had an aggregate net value of VND 1.2 tn, or 1.8% of total credit at 2019. MSB has also managed to reduce its NPL ratio 8 bp to 1.96% YoY. The combined provision coverage ratio (including net VAMC bonds) markedly improved from 35.4% to 54.1%. Still, despite the rapid improvement, these metrics were still underperforming sector average (excluding STB) NPL at 1.39% and LLC at 105%, respectively, in 2020.
Total restructured loans posted VND 1.56 tn, declining -70.5% QoQ. This accounted for 2% of total lending, at the average level of the banking sector.
Profitability metrics improved significantly, with ROAA and ROAE coming in at 1.21% and 12.7%, respectively, in 2021.
However, while ROAA was near the sector average of 1.3%, ROAE was the third lowest, and well below the sector average of 18%.
2021 Forecast and Valuation
Management guidance: The bank has recently released its 2021 AGM documents which set the following target growth for key performance metrics:
- Total assets: 7.53% YoY
- Customer deposits: 15% YoY
- Credit growth: 25% YoY
- Profit before tax: 30% YoY
Capital raise: In March 2021, MSB sold 82.5 mn of treasury shares of a total 100.5 mn shares, with a one year lock-up. The average sales price was VND 11,550 per share, with estimated total proceeds of VND 953 bn. The remaining 18 mn of treasury shares will be distributed to the bank’s staff under ESOP in 2021.
The bank set a stock dividend of 30% in 2021, raising its chartered capital in the process to VND 15.275 tn (+30% YoY).
Exclusive bancassurance deal: On March 3, 2021, MSB signed an exclusive bancassurance deal with Prudential, the same partner which has had an exclusive partnership with the bank over the past three years in Southern Vietnam (similar to Dai-ichi Life deal in Northern Vietnam). The new agreement has a 15-year duration, and an upfront fee estimated between USD 80-90 mn (VND 1.9-2.1 tn).
MSB also has a plan to sell stake in its consumer finance subsidiary FCCOM in 2021, which is not yet included in our model as of yet. By 2020-end, FCCOM had total assets of VND 622 bn, equity of VND 606.9 bn, and customer credit of VND 322 bn. If the bank sells more than 50% of FCCOM, as per accounting regulations of Vietnam, the gains from the selling deal, if any, will be booked directly into shareholder’s equity.
Forecast for 2021: SSI Research raised its PBT forecast to VND 3.5 tn (+39.2% YoY), driven by credit growth of 22.9% YoY, NIM improvement of +10 bps YoY to 3.47%, and 15.3% YoY growth in non-interest income. The bank has sold all of its 56 mn MBB shares, recording VND 400 bn of relevant gain in 1Q2021. SSI Research assumed that the bank will book ~VND 600 bn of upfront fees in 2021, CIR to decrease further to 49.5%, and provisions to increase +5.5% at the bank while the NPL ratio declines to 1.7% and LLC increases to 93%.
Valuation: At VND 21,500 per share, MSB is trading at a 2021F P/E and P/B of 9.2x and 1.3x, respectively. Given that profitability and asset quality are both improving, SSI Research increased its targeted P/B ratio from 1.1x to 1.4x, which brings our 1Y target price to VND 23,500 per share (from VND 19,714 per share after dilution). With implied upside of just 7.3%, SSI Research lowered its recommendation on the shares of MSB from Outperform to MARKET PERFORM.