Consumer finance companies supporting bank stocks

With the State Bank tightening the credit flow into the real estate market, which has been a key lending channel of banks, most banks are now facing inhibitions in building their plans for 2019.

FE Credit's contribution to VPB's consolidated profits is very high.

FE Credit's contribution to VPB's consolidated profits is very high.

However, the second quarter result of banks was better than expected, with the majority contribution coming from consumer finance companies, which also happen to be subsidiaries of banks.

Credit flow into real estate market tightened

Currently, the various loans that support people for buying houses, consumer electronic products and transport vehicles, constitute a huge proportion of loan amount from banks. However, these lending activities have slowed and are facing setbacks after credit tightening by the State Bank.

According to Nguyen Thi Thuy Anh, Rong Viet Securities (VDSC), the risk weighted ratio of these loans, which have collaterals in real estate, were 50% previously. However, according to Circular 41, the risk weighted ratio has been adjusted to 25-200%, depending on the ratio between outstanding loan amount and the value of collateral assets; and the ratio between yearly payable amount and the income of the client in that particular year.

The State Bank also plans to issue Circular 36 to require banks revise the risk weighted ratio of loans, which have notional amount of above VND 1.5bn and are collateral assets in real estate, to 100-150%. At the same time, the State Bank plans to reduce the ratio of long term loans to short term deposits to 30% in the next three years.

These plans of the State Bank are expected to impact home loans as well as consumption loans quite strongly.

Currently, the loans which support clients to buy cars or consumer electronic products contribute a big proportion of total loans of banks, thanks to the direct cooperation between banks and modern retail chains, as well as the penetration of banks in lending to online shoppers. These channels have been considered highly effective given their cheaper cost. However, the markets for these products seems to be maturing soon.

According to Euromonitor, the sales growth of consumer electronic products was 11% YoY in 2018 vs 13.9% on an average of the previous five years. Furthermore, according to VAMM, the motorbike sales has been slow over the last two years. The motorbike sales even posted a negative growth in the first quarter of 2019.

The other loans constitute small amounts to total bank loans, given the difficulties to approach suppliers, clients and in processing complicated lending procedures.

Surprise earnings due to growth of consumer finance companies

The results of banks in second quarter has surprised the market, thanks to the contribution of consumer finance companies which are also subsidiaries of banks.

For example, MB Bank earnings growth was mainly driven by the growth of MB Shinsei (MCredit), a subsidiary of MB Bank, which posted higher NIM in second quarter of 2019. MCredit is currently in the high-growth phase, hence, it is expected to make a good contribution to the bank in total consolidated results.

Furthermore, MCredit has advantages in approaching big state owned corporations, given the fact that it is a subsidiary of MB Bank. According to Fiinpro, market share of MCredit reached 5.2% in 2018, just one year after starting operations. Currently, MCredit contributes 3% to total consolidated loans of MB Bank.

Similarly, FE Credit of VPBank also contributed 50% to the consolidated profit of VPBank, supporting the recovery of this bank in the first half of 2019. The good result of FE Credit in 6M/2019 also helped release market worry about the growth of this company.

Many Vietnamese have been moving from cash to settlement online and are willing to borrow for further consumption. This is both an opportunity as well as a challenge for consumer finance companies,  given the fierce competition within the industry.
FE Credit posted 16.5% of credit growth in 6M/2019. The growth was calculated based on the outstanding amount of USD 2bn at the end of 2018. FE Credit was very successful in reaching this growth, given the nature of consumer loans, which have very short term maturity.

The other bank which has made strong contribution of consumer finance company (HD Saison) to its profit in first 6 months was HD Bank. This bank’s profit grew 7.2% YoY in 6M/2019. HDBank’s ROA and ROE reached 1.7% and 20% while NIM climbed to 4.4%, the highest among VPBank, MBBank and HDBank. Note that, these three banks all have strong contribution from consumer finance subsidiaries.

Target price revised

Based on positive results in 6M/2019, VietCap Securities (VCSC) decided to adjust the growth assumption of FE Credit to upgrade its rating on VPBank from ‘Outperformed” to “Buy”, with total upside of 28.3%.

VPB’s P/B is expected to be 1.0 in 2019 vs 1.3 of industry median. VPB share price is currently trading above VND20,000/share after falling below this threshold since April.

The other research houses also upgraded target price of MBBank from VND 23,000/share to VND 35,300/share. MCredit is expected to continue being the driver of consolidated lending interest rate although its contribution to total loans is still below 5%.

HDBank share price posted strong growth recently as well, breaking through VND27,000/share, thanks to its positive result in 6M/2019.

Kim Giang

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