Banking sector – Bad debt in 2021

In the context that the economy reached the lowest growth rate in a decade and the number of closed businesses skyrocketed, the banking sector still recorded good earnings. On the bright side, some banks still managed well with robust net interest income, driven by less impacted segments, others’ income was supported by upfront fees from exclusive bancassurance deals, opportunities from the volatile gold market, widened exchange rate spread, and low interest rates. This is quite better than expected compared to the concern of surging provision expenses and weak lending demand affecting profits. This was also due to the restructuring, maintenance of debt group which helped lower the pressure from provision of restructured loans. In 2021, these worries will be back as Circular 01 expires. High provision expenses and lag in bad debt formation are widely anticipated to hamper profit growth.

Despite also agreeing on the high base of provision expenses, we have reasons to believe that the bad debt concern might be not as terrible as predicted. The slowdown in restructured debt formation following the recovery and the period of normal economic activities is a sigh of that. The draft of the amended Circular 01 is potentially creating concern of a high credit cost cycle. However, it is expected to be one of the best scenarios, and we think that the banking system is preparing for it, at least at several large banks on our watchlist. They will also have time to handle restructured debt before making fully provision, according to the draft.

Gem Sky World – Key benificiary from Long Thanh Airport

Benefiting from the strong growth trend of the real estate market in the suburbs of Ho Chi Minh City which comes from infrastructure, notably the Long Thanh Airport (launched in January 2021), we believe that Gem Sky World will be the key catalyst of Dat Xanh Group in the following years, thanks to the advantages of scale, solid legal status and good location in the area. Recently, the company organized a sale event for land at Topaz and shophouse in Garnet and Pearl areas following the success of previous launches with an absorption rate of 95% over 1,357 land products. We expect that the next launch of Gem Sky World will continue to attract homebuyers thanks to its current good sale progress. In 2021, Gem Sky World is expected to generate VND 500 to VND 700 Bn NPAT for DXG based on management estimation (40-50% of DXG total NPAT target).

Gold price: Déjà Vu?

The spot gold price has gone nowhere since August 2020 (Figure 1), even though the world is in a pandemic, a mild recession and a geopolitical quagmire. If gold is a relative safety bet, why has the price been flat to slightly lower?

The answer: higher bond yields and stronger risk appetite. The 10-year Treasury has moved rather swiftly once it broke out of the range it has been in since late March 2020 (Figure 2), with the catalyst being the Democrats assuming control of the Senate. This raises the interesting issue whether the Federal Reserve is going to do anything about it in terms of adopting a Japanese-style yield curve control.  

Construction and Materials: Market consolidation is changing the industry

The construction industry growth has been on the decline and under the influence of COVID-19, it is even more difficult to find growth drivers. Civil construction is no longer moving at a pace as high as during 2013-2018, while disbursement of public investment and FDI still has yet not been sufficient to stimulate the industry’s growth. We note that most civil construction contractors are struggling to maintain revenue and that it is increasingly difficult to find new turnover for the longer term. The highlight for the construction industry belongs to the electricity construction segment because of a series of power source and power transmission projects under construction in order to solve the electricity shortage problem in the country.

As for the building materials industry, the biggest disadvantage is probably that the domestic construction market is becoming weak. However, there are leading companies in their respective sectors that pursue clear strategies and have sizeable opportunities for earning growth in order to secure  shareholder interests. We believe these few companies still deserve a positive recommendation for 2021. Investors can select names that can overcome the storm and even grow by gaining market share from less efficient competitors.

The change in FX intervention policy and its implications

At the end of 2020, the SBV announced new regulations on buying foreign currencies from commercial banks. To be specific, from 31 Dec 2020, the SBV stopped listing spot bid-rates on USD/VND and stopped buying USD in the spot market. From 04 Jan 2021, the SBV extended the USD forward contract term to 6-month instead of 3-month at the USD/VND rate of VND 23,125. Besides, commercial banks are only allowed to cancel one-time the entire transaction value of the forward contract.

Asian bond markets

Asian bonds are among the fastest-growing segments in the global bond market. Alongside the increase in size, Asian bonds have also evolved as a choice among investors who are seeking yield while being mindful of risk.

Banking sector – Credit growth expectation for 2021

The banking industry strongly polarized during the pandemic. Covid-19 had a strong impact on the economy by negatively affecting loan demand, financial capability of customers and the quality of assets. The State Bank of Vietnam has directed credit institutions to support the economy by measures such as lowering interest rates, restructuring debt, rescheduling payment period, exemptions and maintaining debt group. These timely actions at the beginning of the year - when the pandemic just broke out – helped maintain a positive economic growth. This promises a recovery in credit growth in 2021, followed by operating income of banks. This growth is expected to be further supported by capital enhancement at several banks and abundant liquidity in the system. However, it came at a cost. Regarding the medium-term target of SBV in order to create a safer banking system, it had to abandon some targets and postpone some restrictions. We believe that the pandemic could have strongly affected the economy, if the government had not prolonged the impact period to give banks time to handle bad debt. In 2021, we expect the government to issue additional regulations to ease the pressure on commercial banks, giving those room to achieve a 11.4-14.7% credit growth.

SMC update – Large investments in processing coil segment

SMC’s performance in 4Q2020 will be positive as hot-rolled coil (HRC) prices increased strongly by 18% QoQ in 4Q and its stable selling volume. We expect gross margin to reach 4.8%, and NPAT was roughly 75 billion in 4Q 2020. Due to the increasing demand for processed coils from machinery producers, SMC has a bright prospect in the next years. New factories in 2021 will help SMC increase its capacity in coil processing and allows the company to grow in the 2022-2023 period. However, SMC can grow at a low pace in 2021 as its factories are running at a high utilization rate. We think the good performance in 2020 has been priced in the stock price, which surged by roughly 100% in 2020. We are NEUTRAL on this stock as steel price can be corrected in the next year after surging in 2020, which will affect negatively SMC’s gross margin.

The Oil and Gas industry: Very few picks for 2021

As a relatively simple and fledgling value chain compared to other large petroleum corporations, Vietnam's oil and gas industry depends heavily on the fluctuations in world markets. Disadvantageous production costs of upstream projects reduce the motivation to invest in new oil and gas fields. Instead, decisions to spend on upstream projects are no longer based on economic benefits but depend entirely on political motivation. Therefore, the big picture looks rather cloudy, particularly considering the long-term impact of the pandemic. Many firms have made their business plans for 2021 assuming oil prices below $50/barrel, hence targeting conservative bottom lines. Based on companies’ expectation, we believe that 2021 will not be the year for oil and gas stocks. One of the rare positive points comes from the global liquefied natural gas (LNG) market. LNG prices dropping and staying low throughout 2020 have helped gas-fired power plants and numerous manufacturers benefit from lower input prices. We believe that the LNG industry outlook will be an important contributor in providing turnover for the domestic oil and gas value chain in the next ten years. Investors, contractors at gas fields and related infrastructure sites, importers and logistic service providers will be direct beneficiaries from the trend of using natural gas in electricity production and industrial activities.

Decree 148/2020/ND-CP: Positive impact on real estate market sentiment

Issued in December 2020, Decree 148/2020/ND-CP (effective from February 8, 2021) will be one of the main legal highlights to help real estate developers solve existing issue in project development, especially in land clearance when dealing with overlaps between public and private land. Therefore, the issuance of this Decree, along with the changes of several related laws such as the Investment Law and Construction Law, will open opportunities to solve legal bottlenecks in hundreds of projects and enhance supply in 2021. According to HoREA estimates, there are about 5,000 projects in the country that have been delayed due to the public land issues. 

US and the financial reaction to the pandemic

No time for politics. People need money and jobs.

The US Senate Majority Leader Mitch McConnell (Republican from Kentucky) on Tuesday blocked consideration of a House bill that would deliver a USD 2,000 stimulus payments to most Americans — spurning a request by President Trump as more Senate Republicans voiced support for the dramatically larger checks.