This is the first part of a series that I am going to write on the Vietnamese banking sector. Much has been written about this sector and I will direct you to the analysis that had been done so far. What I am going to write will be well known and published information but I will try to present the information in a way that a potential long term investor who is approaching the sector now will find it helpful.
A Compelling Investment
I believe that among all the sectors in Vietnam, banks are one of the most consistently profitable sectors through good times and bad. Even in the height of the financial crisis in 2008, banks had remained solidly profitable throughout.
They are also the sector with the greatest potential growth in the future. In Vietnam, the percentage of people that have a bank account compared with the overall population is one of the lowest among the South East Asian countries. As the country grows and progresses, more and more people will start using the banking system and so banks will continue to grow in size and reach.
Vietnamese banks are hence, very compelling long term investments.
My Favourite Sector
The banking sector in Vietnam is also my favourite sector of the Vietnamese market, not least because the first company in Vietnam that I ever bought stocks in was Sacombank, a joint stock bank, when I started investing in 2004.
At that time I bought this stock, it was still listed in the over-the-counter (OTC) market, a market that has existed before the stock market in Vietnam started in the year 2000. Indeed, the OTC market in Vietnam still exists and I believe that unlike OTC markets in other countries, the best and largest companies in Vietnam do not trade in the HOSE/HASTC but trade in this little discussed, shadowy area of the Vietnamese stock market… the likes of Sabeco, Habeco, Saigon Co-op to name a few. Indeed, some of the largest banks in Vietnam still trade on the OTC market, e.g. Dong A Bank, BIDV bank, Techcombank to name a few.
However, this time, I am going to concentrate only on the banks that are currently listed in either HOSE or HASTC. Being listed, their prices and financial information are more readily available so a good comparison can be made among the various banks.
How to Judge?
At the risk of oversimplification, I am going to use only 3 parameters on which to judge these banks and they are: Return on Assets (ROA), Return on Equity (ROE) and Net interest margin (NYSE:NIM).
Seasoned analysts of banks will find my analysis simplistic but I believe that over longer time frames, these parameters tell us the most useful information about the bank's performance because most short-term issues will have evened themselves out over longer time frames.
For some of the banks, I will include data from year 2001/2002 to that of 2011, about 10 years of data. I believe this will enable us to take a really long term look at the financial performance of the bank.
A note to readers
Return on Assets (ROA) is calculated by dividing the net profit over the total assets of the bank. This tells us how well the bank is employing its assets to generate profits. This varies with the economy of course. When the economy is good, average american banks' ROA averages more than 1.1% while in times of economic disaster, it can go well below 1%, e.g. 0.08% in 2008; But on average, United States banks generate an ROA of about 1% according to the data from the USA Federal Deposit Insurance Corporation (FDIC). With the banks in Vietnam, they are rather similar in this respect.
Return of Equity (ROE) is the figure that shareholders of banks should pay most attention to, for this is the measure of the bank's profitability on the shareholder's capital. This shows investors what the bank is earning on their investment in the bank. In this respect, Vietnamese banks vary greatly, with some with ROE less than 10% while some others have ROEs close to 30% in good times, ranking them among the most profitable banks in the world. As an average, US banks have an ROE of about 11%.
It is due to this fact that the ROEs vary greatly between Vietnamese banks that I believe that a long term analysis of the bank's ROE has the most value-add. This tells us which banks in Vietnam are the best run and hence most likely go give shareholders excess returns in the future. The day to day fluctuation of the shares may be unpredictable, but in the long run, the best run banks would likely give the best returns to shareholders.
Net Interest Margin (NIM) is the net interest income of the bank, calculated by subtracting the interest expenses from the total interest income of the bank. This figure is expressed as a percentage of the total assets of the bank. The basic function of the bank is to collect deposits ("liabilities of the bank") and lend out these proceeds in the form of loans ("assets of the bank") at the highest interest possible and/or to buy income producing assets (e.g. government bonds etc.). Obviously, the bank should pay the least interest on their deposits and lend it out at as high interest as possible. How good a job the bank managers are doing is reflected in the NIM. When the bank managers are able to secure deposits at a low interest rate and lend it out at a high interest rate, the bank is very profitable and the converse is true.
In the USA, this NIM is stable at a rate of about 3.5% or so, both in good times and when the economy is bad, fluctuating little. In this respect, Vietnamese banks do not look good, earning a NIM on average 2%.
Again, this figure varies quite a bit between the various vietnamese banks and from year to year.
Elephant in the Room
What I will not cover in this analysis is the asset quality of the banks in question. Obviously, this is very important as well … and Vietnamese banks typically do very very badly in this respect. First of all, there is little readily available data on the asset quality of banks in Vietnam and the banks have a lot of leeway on how to classify their loans. As a result it is not easy to determine how much bad loans really are on the balance sheet and how much money the banks can possibly recover from these bad loans.
Notwithstanding this, I believe this type of issues are common to any emerging market, especially one just starting to come out of crisis as Vietnam has. Indeed, larger countries like China and India also have state banks that also have this issue of asset quality. This however, have not prevented investors from making outsized returns on their bank stocks if they had bought them early enough. When an economy starts to grow, and banks become better in their risk management, more loans with (hopefully) better quality become a larger part of the banks' balance sheet so that these legacy loans of lesser quality become a smaller proportion of the bank's assets.
Certainly, investing in Vietnamese banks, like Vietnamese stocks in general, requires a leap of faith. Afterall, Vietnam is not called a frontier market for nothing.
However, I would like to point out that there are few places in the world you can get banks with such a high growth rate trading at such low multiples to earnings and book value.