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Vietnam Eximbank: Luckiest Bank In Vietnam

Vietnam Export Import Commercial Joint Stock Bank (EIB : HOSE)

Vietnam Export Import Commercial Joint Stock Bank or Eximbank, was a former basket case bank with a checkered history.

In 2000, it was in a similar (probably worse) situation as VietinBank, saddled with bad debts. As late as 2004-2005, the bank was still under special watch by the State Bank of Vietnam because of persistent losses over the years.

However, because it was not a state owned bank, the government did not recapitalize it directly. Instead, Vietcombank had to recapitalize by contributing 50 billion VND (at that time 25% of Eximbank's chartered capital). That was how Vietcombank came to own a big chunk of Eximbank. Vietcombank also sent one of its best managers, Mr Truong Van Phuoc to restructure the bank.

In addition, Eximbank was had to sell its bad debts to Debt and Asset Trading Corporation (DATC). However, like VietinBank, it was restructured and now is one of the most successful banks in Vietnam.

Better Lucky than Smart

Eximbank, like Habubank, was one of the first commercial joint stock banks that was established in Vietnam in the years just after Doi Moi in 1986. The Vietnam banking industry was in its infancy then and perhaps the social and legal framework at that time was still not sufficiently robust. This led Eximbank to accumulate a morass of bad loans and investments that nearly brought the bank down.

The bank took many years to restructure their bad loans and it was not until 2005 before the worst of the bad loans was restructured and the bank returned to a normal level of profitability. This was just in time to capitalize on the economic boom that Vietnam experienced at that time.

At the peak of the market on 20 June 2007, Eximbank sold about a quarter of their chartered capital (500 billion VND) for (USD $250 million) to 17 domestic economic groups like Generalexim, Asia Commercial Bank, Saigon Trading Corporation, Kindo Group etc, at an unprecedented price of over 8 times of par value. This not only allowed Eximbank to secure strong local strategic shareholders to contribute future business to the bank (strategic shareholders usually use the bank they partially own for their banking needs), it set a high benchmark price for the bank to sell a further 10% of the bank's shares to 2 investment funds (Vietnam Opportunity fund and Mirae Asset Management) at similarly high prices.

And Eximbank was not done yet. In May 2008, a 15% stake was sold to Sumitomo Mitsui Banking Group at over 6 times of par value, bringing in USD $225 million to the banks coffers. This series of share sales allowed the bank to accumulate a huge war chest for further expansion and dividends to shareholders.

And not a moment too soon. Vietnam sank into a deep economic recession subsequently after 2008. Compared to other banks in Vietnam going into the recession, Eximbank was the bank which is the least leveraged. Its leverage in 2008 was only 3.8x vs a sector average of over 10x. While others were cutting back and deleveraging their balance sheet, Eximbank was in expansion mode. From 2009 to 2011, the bank expanded at a furious rate, nearly tripling their total assets and net income in 2 years.

No surprise then, that in August last year, Eximbank was the only bank in Vietnam and South East Asia to enter The Banker's list of the top 25 banks with the highest growth rates in the world.

While much can be attributed to the good work by managers of Eximbank on their exquisite timing of the market, I believe that good luck played a huge part as well.

Features of Eximbank

Eximbank's niche in the market is in international settlement and trade finance, supporting the import-export related activities of small and medium enterprises (SMEs) in Vietnam.

The deposit base is overwhelmingly made up of individuals. As a result, most of its deposits are in gold and foreign currency (the Vietnamese population generally shun VND as a store of value and savings are usually kept in gold or USD). This gives the bank a leg up in its NIM as gold and foreign currency loans have a larger spread compared to VND loans.

The bank also runs fairly lean, with a cost to income ratio of just over 30% (as compared with Vietinbank with double the cost to income ratio).

The bad thing about Eximbank however, is its loan loss provision. I believe that due to the legacy of bad debts, Eximbank's criteria for bad loans may be more lenient, leading to one of the lowest loan loss provisions in the industry. While this may lead to nasty surprises in the future, I am not too concerned about this as Vietnam's banking industry is still in its infancy and we can count on growth. Besides, Eximbank's capital is more than adequate.

The main problem with this bank however, is that like Asia Commercial Bank, its foreign room is full and a foreign investor is unable to buy any more shares.

Financial Information

As discussed previously, Eximbank has an above average NIM because their deposits are largely in gold or foreign currency which have larger loan spreads. However, it is still lower than that of the State Owned Commercial Banks (SOCBs) or even Military Bank. Like other retail/SME focused commercial banks, Eximbank has to compete with everyone else for depositors while SOCBs always have the state owned companies to rely on for cheap deposits. A fairer comparison would be with Asia Commercial Bank in the area of NIM and in this respect, Eximbank does very well.

Financially, Eximbank only returned to normal profitability for the full year of 2006 as reflected by the ROE. Subsequently, its ROE remained low but due to different reasons. The huge capital surplus that they had from selling shares at the peak of the market (and hence the low leverage) was certainly a drag on their ROE. However, that is definitely more of a blessing for Eximbank during the dark days of economic crisis in 2008-2009!

Shareholders of the bank definitely slept better and got better returns in the past few years than other comparable banks. Indeed, you see ROEs rebounding strongly in the past couple years and likely for more years to come.

Eximbank is currently the bank with the biggest ability among all the banks for increasing their profitability once market conditions pick up.

Growth of Eximbank

Like I mentioned previously, Eximbank was the only bank (from South east Asia) selected by The Banker to be in the top 25 fastest growing banks in the world. Its growth, especially recent growth has reflected this.

The growth of Eximbank especially since 2009 to 2001 has been off the charts. Credit is still tight in Vietnam and with its strong capital base, I believe that Eximbank still has much growth ahead. This is especially true once the economy of Vietnam improves and individuals and SMEs start to do better.

Indeed, Eximbank is the bank that is most leveraged to the growth and improvement of the economy of Vietnam.

Takeover of Sacombank

Eximbank had also bought a small equity interest in Sacombank which led to rumors that it will cooperate with Asia Commercial Bank (ACB) to take over Sacombank. However, unlike the takeover of Habubank by Saigon Hanoi Bank, this is less confirmed, not least because of the resistance of the management of Sacombank towards a hostile takeover and also Sacombank is much larger in size than Habubank.

Notwithstanding this, I believe that should the transaction go through, this will be very beneficial to Eximbank because it will help Eximbank grow significantly in size. However, they would need to be careful of what price they will be paying for Sacombank.

Unlike Habubank which is significantly undervalued and trading for significantly below book value, Sacombank shares are much more expensive at nearly 2 times of book value. I will be keeping a close eye on this potential transaction.