JPMorgan is bullish on Vietnamese banks, says sector offers high growth and profitability


A customer uses a Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, automatic teller machine (ATM) in Hanoi, Vietnam.

Justin Mott | Bloomberg | Getty Images

Vietnam’s banking sector is an attractive investment opportunity because it is generating a lot of capital and growing fast, according to a senior banker at J.P. Morgan.

It is a rare combination where Vietnamese banks are growing fast and are quite profitable, Harsh Modi, co-head of Asia ex-Japan for financials research at the investment bank, told CNBC.

As such, they are able to sustain high growth without needing too much capital for long periods of time

“The return on equity that they’re generating is quite high. The return is higher than balance sheet growth,” Modi said during an interview in November. What that implies is Vietnamese banks theoretically do not need to raise capital to fund current growth, but they do so, anyway, for purposes like having higher capital ratios and satisfying regulatory requirements, he explained.

As a result, without putting in a lot of money, investors are potentially able to see balance sheet growth for those banks sustaining for a period of time, with their stocks staying at reasonably high multiples. “That is the attraction of the sector,” Modi said.

In a November note that Modi co-authored, J.P. Morgan analysts said they expect Vietnamese banks under the firm’s coverage to deliver 15% to 21% return on equity over the next two years as they have “started making money on both sides of the balance sheet.” The investment bank is overweight on Vietcombank, Techcombank and Asia Commercial Bank.

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Better macroeconomic factors are driving much of the optimism surrounding Vietnamese banks, according to Modi. Improving productivity in export-oriented sectors is drawing foreign direct investments, which improves the visibility of exports and the current account surplus for the next few years, and ensures reasonably adequate domestic liquidity in the country, he explained. Vietnam is said to be benefiting from the ongoing U.S.-China trade war that has resulted in a shift in the global supply chain.

“Since we have that kind of visibility on exports and current account surplus and liquidity, that’s why we’re comfortable forecasting significant amount of visibility on banking system growth and banking system profitability,” Modi said.

Rest of Southeast Asia and India

There are multiple opportunities across the rest of Southeast Asia, but the contours of risks and returns are different for each market, Modi said.

J.P. Morgan “broadly” likes Indonesian banks and is overweight on Bank Mandiri, Bank Rakyat Indonesia, and Bank Central Asia. In Thailand and the Philippines, the firm is overweight on selected names such as Kasikornbank, Bangkok Bank, Metropolitan Bank and Trust Company and East West Banking Corp.

“The investment horizon for a lot of the rest of the region is probably shorter,” Modi said, explaining the main difference between them and Vietnam. The latter’s relative limitations to market access push investors to take a longer-term view while in other markets, with better-developed infrastructure, it becomes easier to take shorter-term calls, he added.

Modi said J.P. Morgan prefers Indian banks with “good underwriting track record and very good deposit franchise.” The bank is overweight on HDFC Bank as well as Mahindra and Mahindra Financial Services.

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India’s financial sector has struggled with an ongoing crisis where banks and non-bank lenders have accumulated large amounts of bad debt that are weighing on their profitability and have hamstrung lending as a result. Making the situation more challenging is the sharp slowdown in the economy, where growth fell below 5% in the three months to September for the first time since 2013.

A pickup in the number of bad assets that Indian banks hold poses a major risk to the sector, according to Modi. The economic slowdown, combined with an uptick in inflation, could increase the probability of more non-performing loans being formed. In addition, Modi said banks start taking lower credit risks as growth slows down, which then show up in their net interest margins — a measure of lending profitability.

In Southeast Asian markets that are closely aligned to the global supply chain, such as Singapore, Malaysia, Thailand and Vietnam, trade remains the “single-largest risk.” Modi explained the risk lies in how well those countries are able to use a combination of fiscal, monetary and industrial policy to support economic activity and improve productivity well enough to start attracting investments.

For Indonesia and the Philippines, domestic policies matter more because growth is determined more by changes in internal factors such as liquidity, according to Modi.



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