Short-term challenges and structural issues drive us to cut our 2017-2018 base case by 5.5% and 8.3%, respectively. A supply glut is expected to continue, driven by continually rising US production. However, a geopolitical risk premium is always there. Uncertainties regarding when OPEC members will end their output cuts or whether they will slash production more severely still materially impact supply side.
Vietnam is seeing a sustained boom in domestic tourism driven by rising discretionary income. With steady growth in GDP per capita, Vietnam has breached the threshold level of around USD2,000 (see Figure 6) beyond which countries typically see a boom in discretionary spending across branded food products, white goods and consumer durables as well recreational experiences and vacations. We believe this is just the tip of the iceberg and that growing wealth
Vietnam’s FMCG posted strongest growth in years in Q1 2017. Per Nielsen, FMCG consumption across Vietnam rose 9.6% YoY, including 8.5% volume growth, in Q1 2017 vs 5.3% in Q1 2016 and 6.9% in Q4 2016. This was driven by robust consumption during this year’s Tet holiday and a rebound in rural areas. This is particularly encouraging since Tet came early this year in January and demand typically peaks one to two months before Tet.Broad-based momentum. Strong performance was seen across categories,
NIMs – There is sector-wide pressure on NIMs with some banks chasing retail deposits and consequently faced with rising cost of funds. The average NIM decreased by 10 bps to 2.8% QoQ in Q1 2017. MBB’s and VCB’s current high CASA ratios of 33% and 27% help these banks enjoy low funding cost at 3.7% and 3.3%, respectively, offering opportunities to improve NIMs. MBB has the highest NIM among listed banks at 4% in Q1 2017 (+10 bps QoQ and +70 bps YoY).
Credit cycle is likely to turn a corner in 2018 - We are counter consensus and believe that State Bank of Vietnam (SBV) is likely to start raising rates towards Q4 2017- Q1 2018. The sovereign macroeconomic situation allows SBV the policy room to delay raising rates until H2 2018 (with three rate rises factored in for the Fed Funds Rate (FFR) in 2017 alone). We believe the credit expansion cycle shall near its end starting H2 2018 with clear visibility of adverse inflationary
Recovery needs time – Vietnam’s banking sector has been seen asset quality and capital issues since 2013 while the relatively better managed bank stocks have gained 25%-120% over the 2013 to current period. This came against a backdrop of GDP growth above 6%, rising leverage (over 14x equity multiplier), strong FDI inflows and a benign USD rate environment. Even now the best in class banks (less than 30% of system-wide assets) need one to three years to build provision buffers
Vietnamese banks appear unattractive relative to their Asian and frontier market peers on account of low asset and equity returns (leverage adjusted). We evaluated the structural performance parameters to isolate the factors responsible. The key drivers of low ROAs are: A low contribution from non-interest income – Non-interest income as a portion of total interest income is at 13% for Vietnamese banks against a peer average of 38%. This is in spite of the NIMs being at a cycl
We observe a non-sustainable interest rate regime on risk pricing. As the Fed rate cycle inches upward and Vietnamese rates stay on hold in 2017, we expect to see a repricing of sovereign risk and interbank spreads. We are counter consensus and believe that State Bank of Vietnam (SBV) is likely to start raising rates towards Q4 2017-Q1 2018. The sovereign macroeconomic situation allows SBV the policy room to delay raising rates until H2 2018 (with three rate rises factored in for the Fed Funds R
The good - We believe the credit expansion cycle shall near its end starting H2 2018 with clear visibility of adverse inflationary and currency pressures. In the good scenario, the SBV gets ahead of the problem by raising credit reserve ratios, reducing the loan to deposit ceiling, asking banks to raise capital and placing a cap on loan growth at 8%. This is also accompanied by a revamp of the institutional framework for distressed asset sales, NPL management and FOLs being raised substantially.
Oil prices have dropped 10% over the past three weeks and are currently at the lowest level of the past four months following rising rig counts and record inventories in the US, which have offset optimism over OPEC's efforts to restrict crude output. According to Baker Hughes, the number of drilling rigs jumped to 617 in the week of March 10 vs 386 rigs a year ago. In addition, US shale oil producers said this week they are eyeing ambitious production growth.