Strategy to invest in bank stocks

The growth in economy does not always transfer to the same growth as the stock market and stock price. Most blue-chip stocks are not expected to increase much this year, given the lack of domestic and foreign cash flow and ensuing escalating risk in global political issues as well as the US-China trade war.
Regarding bank stocks, although economic growth is favorable, this sector is forecast to not grow strongly in 2019. This sector movement is expected to be fragmented, some stocks are likely to increase substantially while some other stocks will probably go down.

Decelerated profit growth
The 2018 banking landscape was quite positive. 
 Banking sector profitability grew remarkably. However, bad debt climbed slightly.
 The deposit and loan growth was stable. The system liquidity was not as abundant as before but it was under control of the State Bank.
 Though the risk from inside and outside exists, bank stocks are worth considering. However, opportunities are not there for all stocks, so if you have to invest in 2019, the names would be VCB, MBB, BID, ACB.
 The foreign reserve recorded high at USD 65bn at end of 2018. 
 The deposit and lending interest rate was stable in the first half, but then rose slightly in the second half of the year.
 The pressure to raise capital in banks increased as deadline for applying for Basel II is nearing.
The banking sector outlook is still positive, but the profit growth is expected to be slow in coming years.
The year-to-date credit growth was 1.9% in Q1/2019. The State Bank targets to control the credit growth at below 14% in 2019. 
The State Bank considers increasing foreign ownership limit at banks that qualify the requirements of Circular 41/2016/TT-NHNN on the CAR ratio.
Some banks like VCB, CTG, MBB, ACB and TCB seem to have high potential to grow this year. But the market consensus of profit growth of these banks is quite low.  
According to the data in Q1/201, the banking sector profit increased 11.8% YoY, driven by strong growth of some leading banks, such as Vietcombank, Vietinbank, BIDV and ACB. Sacombank is an exceptional case with growth of 110% YoY. 
Strategy to invest in bank stocks ảnh 1 At the end of May 2018, the total assets in banking system were VND 10,329,259bn, increase of 3.27% YTD. The equity and charter capital was VND 749,548bn and VND 516,951bn, rose 4.96% and 0.88% YTD, respectively. 
Vietcombank, one of the leading banks in Vietnam, achieved VND,5878bn in profit, surged 34.8% YoY in Q1/2019, in which its parent bank showed profit at VND 5,751bn.
This positive result was already reflected in VCB stock price movement. It has recovered strongly this year, from VND 50,00/share at beginning of 2019 to VND 66,900/share at the end of April. 
The good results of banks in Q1/2019 were mainly driven by the successful restructuring in their lending portfolio, the concentration to higher NIM products, the retail orientation strategy, and the increase in non-interest income.
NIM is an indicator to evaluate the effectiveness of banks’ businesses and the growth of bank stocks. A high NIM ratio presents the success of banks in managing assets and liabilities. Adversely, a low NIM ratio shows that the banks are facing difficulties in creating profit.

Capital raising and network expansion as priorities
According to the State Bank, the government has not focused on pushing up the credit growth this year. The State Bank plans to concentrate more on the progress of banking system reforms, create a sustainable growth in banking sector, reduce bad debt ratio, and control strictly the lending activities related to stock and real estate markets.
As the State Bank tends to tighten the credit growth this year, most banks have set the credit growth targets between 12-14% in 2019, such as MBB, ACB, SCB, while VCB and CTG target to grow 15% and 7%, respectively.
Some banks are running quickly to meet the requirements of Basel II. Some other banks are focused on expanding their network or resolving bad debts. Besides the target to increase profit, banks are trying to stabilize their management system.
The defensive character of bank stocks and their high free float ratio (the ratio between free trading shares to total outstanding shares) are two factors that make them not so attractive in investors’ eyes.
Bank stocks are known as value stocks. They have low P/E ratio, and are much different from the growth stocks like pharmaceuticals, auto, and technology. Usually, bank stock prices only increases strongly when the stock market rises significantly.
According to the data from 2008-2018, most of the strong-growth periods of stock markets was attributed to the strong growth of bank stocks, such as in 2009, 2015, 2017, and beginning of 2018. This year, bank stocks are mostly not the market interest. When the stock market moves in a narrow range or moves sideways, bank stocks usually remain unchanged.
Although the movement of some big banks, like VCB, CTB, ACB, BID, are different, bank stocks remain as value stocks. Usually, when the stock market drops to a certain level, bank stocks become more attractive in terms of cheap valuation.

Le Duc Khanh Petro Vietnam Securities Company

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