No ease up in sight for banking sector

VNStockNews.com - Positive securities results for the first half of 2009 have met a lukewarm reception from investors, who have questioned the prospects of business performances in the latter half of the year.

Sai Gon Securities Inc’s Market Analysis Department give their views on the banking system and its prospects for the long term. The analysis is part of the latest report on the future for the business sector that the company developed as a reference for investor strategies.

Looking at the second half of 2009 and 2010, the prime rate will be stabilised and is unlikely to rise. One of the reasons is inflation is not a concern. Consumer price index in the first six months of this year was only 2.8%, a modest increase.

Meanwhile, liquidity in the banking sector still stands at the current deposit rate. More importantly, as the economy is still in difficulties, companies still need support to sustain business. The interest subsidy programme will continue until the year end so the interest rate hike will adversely affect the effectiveness of the programme.

With the latest movements of dong-denominated deposit rates, pressure on banks’ profitability due to high deposit rate after late May will continue. When the base rate is kept stable and ceiling rate is 10.5 per cent, commercial banks can find ways to increase fees on loans to improve profit. If banks’ profit margin declines in the second half, the reduction would not be significant.

Another prominent point is credit growth still has room to improve. Currently, total credit of interest subsidy loans has only completed 53 per cent of 2009 target (data on June 18); therefore, room for new loans is still available.

Seasonally, demand for loans will surge towards the year end. Moreover, we can expect the gradual recovery of local as well as global economy, which will spur capital need in the market.

Finally, bad debts in 2009 will still be a problem given the effect of the economic crisis. Although the central bank has been determined to control debt rollover using interest subsidy loans, it is tough for the central bank to check all loan procedures of all local banks.

Companies in focus

There are currently four listed commercial banks, including Vietcombank and Sacombank in HCM City Stock Exchange and Asia Commercial Bank and Sai Gon-Ha Noi Bank in Ha Noi Stock Exchange.

Sai Gon-Ha Noi Bank is a small commercial bank, recently upgraded to urban from rural bank status, so it has a relatively high level of investment risk. The other three banks are among the top banks in the country and are also market movers in stock exchanges.

Of the three banks, Vietcombank has a distinct competitive advantage supporting its sustainable future development including scale, brand name, customer base, information technology platform... However, as it is originally a State-owned commercial bank, Vietcombank does have some internal management issues including corporate governance and risk management.

Non-performing loans ratio in 2008 was 4.6 per cent, higher than the industry average of 3.5 per cent. In 2009, we expect Vietcombank’s net interest income and income from Forex will decline, hence operating revenue will be lower.

However, Vietcombank will be able to lower operating expenses and especially provision for loan loss. On the basis of this, we estimate Vietcombank will be able to earn VND4.3 trillion (US$241.6 million) of pre-tax profit in 2009, a 29.6 per cent growth compared to 2008.

Asia Commercial Bank, despite being smaller than Vietcombank, has the highest return on equity in the banking sector. This is due to its diversified business as well as sound risk management. The bank has a conservative lending policy, which leads to very low non-performing loans ratio (under 1%). Apart from interest income, the bank also earns stable income from fees, gold and securities trading. The bank’s human resources are considered experienced and veteran in the market.

Provision in credit loss will surge in 2009 due to difficult market condition while the bank plans to spur lending to gain market share. Asia Commercial Bank’s pre-tax profit is expected to reach VND3.2 trillion ($179.8 million) this year, a year-on-year increase of 24.2%.

To these two banks, Sacombank is not comparable in terms of scale, profitability and quality of management. (VNS)