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Vietcombank: Strongest Bank in Vietnam

16 Apr

Joint Stock Commercial Bank for Foreign Trade of Vietnam (VCB : HOSE)

After our discussion about Vietinbank previously, we will discuss Vietcombank next. Like Vietinbank, Vietcombank is another State Owned Commercial Bank (SOCB).

In terms of brand recognition by local Vietnamese, Vietcombank is far and away the most visible and respected bank in Vietnam. This reputation is well deserved. Especially with the recent share sale to Mizuho, it is the most well capitalized bank in Vietnam currently.

9 Apr 2012 — Vietcombank has lifted the curtain on a VND14.7 trillion ($705.6 million) capital surplus. Vietcombank chairman Nguyen Hoa Binh said the selling of 347 million shares to Mizuho at VND34,000 ($1.6) per share had grown the bank’s bottom line. That, together with the VND995 billion ($47.7 million) capital surplus gained from its equitisation and the VND5.521 trillion ($265 million) in undistributed profits, means Vietcombank had a war chest to go to battle.

Mizuho transferred the capital for its stock purchase to Vietcombank in March, 2012 and assigned Yutaka Abe to serve as its representative on Vietcombank’s board of directors. With such a capital ground, the bank hopes to raise its capital adequacy ratio (CAR) from 9.63 to more than 12 per cent this year.

Vietcombank also benefited immensely from previously being called upon to invest and rescue weaker banks and companies during banking crisis in the past.

In 2011, Vietcombank divested non-core businesses and recouped VND589.4 billion ($28.3 million) that was invested in Shinhanvina Bank, VND5.5 billion ($264,000) in VPF1, VND116.3 billion ($5.6 million) in Vietcapital Bank, VND138 billion ($6.6 million) in SPT and VND120 billion ($5.76 million) in PVTran Pacific. This was over and above the profits made in 2010 when Vietcombank divested shares of Eximbank.

Shareholders who bought the bank at IPO will not be pleased however … Vietcombank’s shares were priced at VND107,000 per share at its 2007 IPO. As of March 6, 2012 the bank’s share price stood at VND29,300, still well below the IPO price. Even for employees who bought the bank at IPO on a supposedly preferential price also did not do that well, having bought in at a price of 64,543 VND per share.

Competitive Advantages of Vietcombank

Although Vietcombank is a SOCB, it does not have a reputation of being badly managed and trades at a premium valuation over book and earnings. In fact, valuations for Vietcombank are currently even higher than that of Asia Commercial Bank which is widely recognized as the best managed bank in Vietnam. Whether this large premium in valuation is justified or not is questionable but the bank does have many competitive advantages over other banks.

Credit cards: It is a first mover in the issue of credit cards, having issued Vietnam’s first credit card, the Vietcombank Mastercard, in 1996. Since then, it is the leader in the market share of cards in circulation and over half of the credit card settlements in the country go through Vietcombank. This segment of the business of Vietcombank is currently the fastest growing and will be so for quite some time.

Trade financing: Vietcombank use to be the export and trade department of the State Bank of Vietnam. This headstart allowed the bank to develop strong agency relationships with international banks and gives it a strong foothold and track record in foreign exchange and trade financing. Currently, Vietcombank accounts for about a fifth of trade payments in Vietnam.

In the past, due to its dominance in the banking industry, Vietcombank did not need to spend much in the way of costs to acquire deposits and expand its total assets/loans (e.g. opening new branches, marketing etc.). Cost to income was only about 20% in 2006. However, with competition heating up, this has not been true for recent years. From a cost to income ratio of about 20%, it has increased to well over 30% currently.

Even with this increased spending, Vietcombank had not kept pace with the growth in the banking industry generally, and had been loosing market share persistently.

Financial Information (Years 2002 to 2011)

Year ROA ROE NIM
2002 0.27% 3.78% 1.05%
2003 0.61% 10.07% 1.16%
2004 0.76% 18.44% 1.63%
2005 0.95% 15.36% 2.43%
2006 1.72% 25.84% 2.33%
2007 1.21% 17.69% 2.08%
2008 1.14% 18.28% 2.98%
2009 1.53% 23.47% 2.54%
2010 1.37% 20.39% 2.66%
2011 1.14% 14.65% 3.39%
Average 1.07% 16.80% 2.23%

Looking at the financial results, the thing that surprises me is the fact that NIM is so low. Of course, a NIM of between 2-3% is quite respectable for any bank but we know for a fact that Vietcombank’s cost of deposits is likely to be the lowest of all the banks in Vietnam. My only explanation is that Vietcombank’s customers are extremely large and well capitalized state owned entities which borrow money at well below market rates.

Hence I believe that as Vietcombank’s loans gradually enters the retail and SME market and its loan book gets filled up by retail and SME loans, its NIM will gradually improve.

For a bank this size, Vietcombank’s ROE is very respectable. Not only that, it was able to maintain good ROE even during bad economic times. This of course is also related to the fact that their large/major customers are large state owned enterprises which were relatively sheltered from the economic crisis.

In time to come, I believe Vietcombank will continue to improve on its already good ROE, as it leverages its low cost deposits and low loan to deposit ratio to lend more to SMEs and retail (which will command a higher interest rate) perhaps to profitability levels reaching that of Asia Commercial Bank. That is likely the reason why Vietcombank commands such a premium valuation in the market.

Growth Rate

CAGR (Years 2002 to 2011)
Total Assets 16.21%
Shareholders’ Equity 17.07%
Net Income 34.07%
Net Interest 30.60%

Already the biggest listed bank in Vietnam, Vietcombank’s strategy is not like that of other smaller commercial banks like Saigon Hanoi Bank or Asia Commercial Bank where increasing total assets is the key to growth. Instead, it is trying to consolidate and make better use of its current assets. In this respect, Vietcombank is more like Vietinbank.

This accounts for comparatively low growth of its total assets and shareholders’ equity. Instead, increasing profitability is the key for Vietcombank. Thus we see a far high CAGR of net income and interest with a lower growth rate of assets.

Generally, one sees a huge spurt of growth when the bank starts raising capital, selling shares etc. I believe that for Vietcombank, one would instead see a gradual increase in profitability as the bank expands more into retail, SME loans and further grow in the credit card sector. Although growth may not be that fast like the smaller banks, Vietcombank has been and is still the safest and strongest bank in Vietnam by a large margin.

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Posted by on April 16, 2012 in Vietnam

 

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