This prompts the question: have banking stocks lost their allure among investors?
Profits Tapering Off?
Statistics from ACB Securities Company (ACBS) reveal that in the second quarter, pre-tax profits for banks listed on HoSE (Ho Chi Minh Stock Exchange) declined by 4.8% compared to the first quarter and dipped by 1% compared to the same period in 2022. Notably, net interest income (NII) witnessed a 3.9% decrease in comparison to the first quarter, only showing a modest 2.1% uptick compared to the same period in the previous year.
This decrease in profits can be attributed to the net profit margin (NIM), which narrowed by 22 basis points (bps) compared to the first quarter and contracted by 34 bps relative to the same period in 2022. This is despite the ongoing positive credit growth in banks, which saw an increase of 11.1%. Operating costs in the second quarter surged by 7.8% when compared to the first quarter and escalated by 6.9% in comparison to the same period the previous year. This increase in costs can be attributed to banks' continued investment in assets and digital technology infrastructure.
One of the significant challenges banks face is the decline of deposit interest rates on new deposits by 2-3% due to excess liquidity. However, the consequences of high-interest rate mobilization in the previous period, spanning from the fourth quarter of 2022 to the first quarter of 2023, continue to negatively impact the NIM of banks. During this period, banks raised money for extended periods (6-12 months) at high-interest rates (8-11%), thereby causing a continued increase in capital costs. Meanwhile, the yield on interest-earning assets for banks only saw a marginal increase, as lending interest rates have already surpassed customers' acceptance thresholds, leaving no room for further hikes. Additionally, the State Bank's proactive stance in reducing interest rates has also posed challenges for banks.
Despite the less-than-optimistic profit picture in the early months of the year, ACBS predicts that bank profits will improve starting from the third quarter. This anticipated improvement is attributed to reduced deposit interest rates and an upswing in demand deposits (CASA—current accounts, savings accounts), which will positively impact banks' capital costs, subsequently leading to NIM recovery. Furthermore, new lending interest rates are currently at more reasonable levels in line with customer expectations and will decrease at a slower pace compared to deposit interest rates.
Stock Prices Present an Opportunity
Net interest income (NII) consistently ranks as the most significant revenue source for banks, comprising approximately 80% of total income. Therefore, the recovery of NIM plays a pivotal role in the narrative of profit growth for banks. ACBS expects the profit growth for banks in the entire year of 2023 to reach 10%, a figure lower than the 34.5% growth observed in 2022. However, this profit growth will differ among banks. Banks with ample liquidity, particularly those with sound credit risk management capabilities, will enjoy favorable conditions for high-profit growth.
Currently, the stock prices within the banking sector are trading at a P/E (price-to-earnings) ratio of 9.3x and a P/B (price-to-book) ratio of 1.8x. These figures represent a 22.2% and 11.5% reduction, respectively, when compared to the historical 10-year averages. Nevertheless, the industry's current price levels have experienced a significant recovery, rising by 48% from the lows witnessed in November 2022. This is a likely reason why banking stocks haven't seen more positive price movements, despite their attractive valuation levels.
Tackling the Bad Debt Challenge
Undoubtedly, bad debt is considered the most substantial risk to the banking system, acting as a "bottleneck" obstructing significant capital inflows into this group of stocks. Presently, the industry's bad debt ratio has surged to 1.93%, with restructured debt under Circular 02 accounting for 0.5% of the total outstanding debt in the entire system. Notably, the escalation in bad debt, coupled with only slight increases in provision costs, has caused banks' provision "buffers" to continually erode. At present, the bad debt coverage ratio has fallen below 109%, down from 160% in the third quarter of 2022.
A case in point is Sacombank (STB), which mirrors the developments observed in the economy and other banks. Despite NIM and external interest income declining and no income from debt settlement, STB's bad debt ratio stands at 1.8%, a 60 bps increase from the first quarter due to transferred loans from group 2. Nevertheless, STB's six-month profit increased by 63.5% compared to the same period, thanks to not having to make provisions for revenue or VAMC (Vietnam Asset Management Company) bonds. In addition, STB faces challenges due to the sluggish progress of liquidating collateral, such as the Phong Phu Industrial Park project, due to its high value and poor liquidity in the economy. Consequently, STB will need to allocate profits from business activities to make provisions for VND 4,400 billion in VAMC bonds from now until the end of the year to complete the bad debt restructuring project.
MBBank (MBB) faces a similar scenario. This bank's provision costs will come under pressure due to the economic challenges, the "frozen" corporate bond market, and most significantly, the need to assume transfers from Oceanbank. Furthermore, MBB faces the risk of a high bad debt burden amid difficulties in the real estate and corporate bond markets. According to ACBS, MBB's provision costs may need to remain high, equivalent to 2% of credit provisions per year.
Techcombank (TCB) witnessed a 20.1% decrease in pre-tax profit in the first six months of the year, largely attributable to a sharp NIM decline. This decline resulted from TCB's capital costs continuously rising, stemming from high-interest rate deposits mobilized from the fourth quarter of the previous year to the first quarter of the current year. Conversely, banks had to reduce lending interest rates in the second quarter, causing NIM to decline. Presently, TCB's bad debt ratio is 1.07%, representing a 22 bps increase from the first quarter. The increase in the bad debt ratio arises from loans to small and medium-sized enterprises, while TCB's group 2 debt ratio remains high, hovering around the 2% mark.
While the appeal of banking stocks may have waned recently due to several challenges, it is essential to recognize that opportunities exist, particularly considering their attractive valuation levels. The banking industry remains a vital pillar of the economy, and as it navigates these hurdles, investors should carefully consider the unique circumstances and growth prospects of individual banks when assessing the attractiveness of banking stocks in the current market environment.
