Sector Report

2Q24 earnings of the banks under coverage beat our expectations 16.4% YoY (vs. our estimate of between 12-14% YoY). The beat came from a recovery in the NIM (+11bps QoQ), NFI (+14% QoQ) and write-back income (+133% QoQ). The surge in write-back income was a surprise to us given the current still low liquidity in the property market. The NPL ratio at Jun was broadly in line with our expectation, hovering at 1.94% (flat QoQ). However, the NPL formation rate and credit costs were higher than expected, mostly due to the surge at BID, CTG, VPB and OCB. All in all, we did see positive signs from credit demand, which is expected to continue during 2H24. However, uncertainties exist as the inherent credit risk related to renewable energy, real estate (developers and mortgage) have not yet unfolded and the NIM is highly dependent on the pace of credit demand recovery. Cumulative through 6M24, pretax profit of banks under coverage were generally in line with our expectations, achieving 48% of FY24 estimates. Details of the change in estimates (if any) will be discussed in our reports on the individual banks.

On 3 Jul 2024, the Vietnamese government enacted Decree No. 80/2024/NĐ-CP, governing the direct electricity trading mechanism between renewable power generators and large electricity users (Direct Power Purchase Agreement-DPPA mechanism). Considering the importance of the mechanism for outlook of Vietnam electricity sector, we list out key points and potential impacts on key beneficiaries.

Overall, the DPPA mechanism could encourage more investments into renewable power projects in Vietnam, which should promote environmental sustainability and enhance the efficiency of the electricity market in Vietnam.

The WCI is recently up by 181% YoY and 232% higher than average 2019 rates while the 1700-TEU time charter rate is up by 90% YTD. This rally derives from both supply and demand side. From the supply side, the consequences of ship diversion from the Red Sea has emerged gradually at all points of the supply chain that we start to see port congestion in key ports hub like Singapore, Dubai or Rotterdam. Container imbalance also leads to signs of container shortages in some key ports in China, further pushing up freight rates. From the demand side, we think that it inventories restocking activities from 1Q 2024 and surging shipping demand from China to the rest of the world, especially the US have led to the strong increase in container shipping freight.

On the 8^th of May, the US Department of Commerce (D.O.C) heard the testimony between Vietnamese government representatives and U.S industry and labor representatives regarding the pending upgrade decision to elevate Vietnam to market economy status. For the background information, Vietnam is currently on the US D.O.C list of 12 non-market economy countries for purposes of its application of US antidumping (AD) and countervailing dumping (CVD) laws. The upgrade was in discussion between Vietnam’s Ministry of Industry and Trade and D.O.C since 2019, but only tangible on the agenda since the Biden administration. This has been in the works a long time now – the U.S D.O.C initiate from Oct 2023 and by schedule, is expected to announce the final results on 26 July 2024. Details from surrounding discussions are quite neutral on the reclassification. Some supportive voices are the National Retail Federation or Samsung Electronics America, but many are against such as Alliance for American Manufacturing or the United Steelworkers (USW) union. It also needs to pass potential legal challenges in the U.S. as well. Please keep in mind that in 2016, for similar reasons, the DOC rejected China’s application for the reclassification.

The results for banks in our coverage universe were generally in line with what we had anticipated. Earnings recovery was slow (+8.3% YoY and +4.6% QoQ), as NIM continued to be under pressure (-8 bps QoQ) in a weak credit demand environment (+2% YTD or 15% YoY). Meanwhile, asset quality deteriorated after a brisk seasonal improvement in 4Q23. The deterioration, however, was at a greater magnitude than we expected. At 1Q24, special mention loans (SMLs) and NPLs to total loans were 2.23% (+24 bps QoQ) and 1.94% (+23 bps QoQ, close to the 3Q23 high of 1.98%) respectively. The good news is forex trading gains partly offset stagnant bancassurance sales and weak write-backs. In addition, banks in general successfully curbed OPEX, with a CIR of 30.7% (vs. 31% in 1Q23 and 36% in 4Q23).

During 1Q24, Vietnam textile and garment exporter proceeds reached USD 7.8 bn (+9% YoY), in line with the VITAS export forecast growth of 9% YoY for 2024. The growth in 1Q24 (+9% YoY) was driven mostly by volume due to the low base effect in 1Q23 (-17% YoY), indicating that the recovery has started slowly. We note that ASP was flat QoQ and decreased YoY for 1Q24, and weak ASP should remain through 3Q24. We maintain our view that export recovery will come during 2H24.

The value of apparel inventory in the US market remains high. Brands’ inventory by value was still higher than during the 2019-2020 period, and fashion brands sales growth (such as Nike, Adidas) is mostly mid-single digit growth for 2024.

Impact of USD/VND depreciation: During 2023, USD/VND decreased by 3% YoY, we saw that most export companies, such as TNG and MSH, recorded net exchange gains, accounting for between 14-16% of PBT. We expect that these companies will continue to benefit from USD/VND depreciation. During April 2024, The USD/VND declined almost 4% YTD.

We have begun to witness some initial signs of a better-than-expected recovery in the secondary property market, along with an improving macro backdrop during the first quarter of 2024. There were more transactions in the secondary property market given the extremely low introductory mortgage teaser rates (4.8% to 8%) offered during the first 1-2Y of the loan contract (avg. duration of 20 years). Condo prices in Hanoi and Ho Chi Minh City increased between 10-20% YoY during 1Q23. Although we have not seen this dynamic spreading yet to the primary market, this is still a positive sign as: (i) the value of loan collateral might not decrease as we had previously expected; and (ii) the improved state of market liquidity likely will support bank sale of collateral if necessary. In addition, manufacturing data is exhibiting some encouraging signs in the form of industrial production data. We expect similar results in consumption data later in the year. We believe that even in the case where recovery maintains its steady pace, it will still take some time to be reflected in bank fundamentals. The earnings trend for the banking industry during 1Q24 is expected to be in line with our expectations. We foresee a modest earnings growth range of 5 – 8% for banks under our coverage, given that credit growth only accelerated toward the end of March, while fee-based services remain sluggish. We expect that fundamentals might improve during 2H24 of lower-than-expected NPL formation, NIM improvement, and stronger-than-expected writebacks. We broadly maintain sector-wide earnings forecasts for FY 2024.

Last week, PetroVietnam Group (PVN) along with other investors and partners of Block B – O Mon gas-fired electricity megaproject has held a ceremony to sign several contracts, which is a significant move to reach the final investment decision (FID) for the project. Contracts signed include GSPA (gas selling and purchasing agreement, between upstream and midstream), GTA (gas transporting agreement), and GSA (gas selling agreement) for O Mon 1 power plant. After the signing ceremony, MOECO (investor of upstream and midstream parts) has immediately announced reaching FID for the upstream and midstream investment of the project, which we think is another major development, as it shows MOECO confidence in the profitability and feasibility of the project.

The supply of industrial parks in southern Vietnam during 2021-2030 likely will continue to come from converted rubber land. According to the industrial park (IP) master plan for Dong Nai province, industrial park area approved by the Prime Minister for rubber land conversion aggregates to 6,760 ha (accounting for 91% of the total area of IP) by 2025, and 2,000 ha between 2025- 2030 (accounting for 48% of the total area of IP). In addition, the total area of rubber land converted into industrial parks in 2025 in Binh Duong, Binh Phuoc, and Ba Ria Vung Tau is estimated at 3,084, 2,994, and 3,933 ha, respectively. We believe that conversion of rubber land into industrial park land has the following advantages: (i) large land tracts allow for a rapid land compensation process for land clearance; (ii) legal procedures for land valuation have clear guidance according to Decree 12/2024/NĐ-CP; and (iii) construction costs are low due to the firmness of the soil for land used by rubber tree plantations.

As the Law on Credit Institutions was passed by the National Assembly in Jan 2024, there will be some guiding documents proposed, including 2 Decrees and 4 Circulars, in April. Recently, the SBV drafted some amendments to current circulars on operational safety ratios (Circular 22/2019 and Circular 23/2020) and on lending activities (Circular 39) to be consistent with the new law. Our key takeaway from the key revision: The amendments for Circular 39/2016 showed SBV’s determination in keeping a strict management perspective on the lending activities to borrowers whose purpose is to make deposits under land/project transferring contract. Accordingly, the clause on putting such disbursement into an escrow account was kept unchanged in this new draft, opposing to what has been protested by developers. There were also stricter requirements on disclosing related parties in the loan contract to address the issue of related lending activities. These are in line with our expectation that one of the key focus of the SBV in the coming time would be mitigating related lending activities to ensure the system’s safety with lesson learnt from the SCB – Van Thinh Phat case. Although the purpose of this clause is clear, effective enforcement essentially hinges on both the truthful statements of the borrowers, as well as the time & efforts from banks in verification processes.

2023 was the year that the global aviation industry returned to pre-pandemic activity. According to IATA, industry-wide passenger traffic measured in revenue passenger-kilometer (RPK, a measure of demand for air travel) grew +40% YoY during 9M 2023 and has reached 93% of pre-Covid levels.

Vietnam aviation has also witnessed a very impressive recovery during 2023, despite China international passenger slow recovery. According to ACV, total passenger throughput of Vietnam airports reached 114 mn passengers during 2023 (in line with our assumption of 117 mn passengers).

2024 key theme for the seaport industry would be volume recovery due to improving external demand (especially from inventory restocking in the US/EU), while supply should be stable through 2025. 

Average 2024 forward P/E for stocks under coverage is 13.4x, which is on par with historical levels, corresponding with the average core earnings growth of 10% YoY for the industry. We think that the industry is correctly priced relative to our base case assumptions. This means that we can expect upside/downside if the actual economic activities and external demand perform better/worse than our expectations. We remain overweight the sector on the improving outlook, focusing on names with good core earnings growth (PVT) while watching names with potential to benefit from geopolitical tensions (HAH, VOS), waiting for correction (GMD) and the new listing of VTP for ecommerce logistics story.

The revised Law on Credit Institutions (LCI) officially takes effect on July 1, 2024. The law addresses the thorny issue of cross-ownership and provides a more streamlined mechanism related to weak banks under governmental administration. While having been at the center of discussion, Resolution 42 was not codified into law with this final version therefore there is still a lack of mechanism to deal with bad debt in this cycle.         

On 18 January 2024, the National Assembly completed the ratification of the revised Land Law. The ratification ushers in a more market-based & transparent legal environment and maintaining a good balance between being conducive to business while protecting landowners.