VIETNAM BANKING SYSTEM REALITY AND FORECAST

Transcription

1 VIETNAM BANKING SYSTEM REALITY AND FORECAST INDUSTRY SECTOR July CONTENTS: PART I: OVERVIEW OF VIETNAM BANKING SYSTEM EXECUTIVE SUMMARY... 2 VIETNAM ECONOMIC BACKGROUND... 3 VIETNAM BANKING SYSTEM THE REALITY... 4 Achievements... 4 Rapid increase in credit growth rate rather than deposit growth rate... 5 Lost of balance between source and use of funds... 6 Tightening monetary policy and Liquidity risk... 8 BANKING OPERATION FORECAST... 9 Continuously strained liquidity problem... 9 Real Estate Credit Risk of crisis for the banking system Possibility of loosening loan growth The banks operation efficiency decreases Merging and Restructuring the capital of banking systems INVESTMENT VIEWPOINT IN BANKING INDUSTRY COMPARE SOME BANKS FINANCIAL RATIOS PART II: SNAPSHOTS OF SOME TYPICAL COMMERCIAL BANKS ASIA COMMERCIAL BANK (ACB) SAIGON THUONG TIN COMMERCIAL JS BANK (SACOMBANK) TECHNOLOGICAL AND COMMERCIAL JS BANK (TECHCOMBANK).. 21 VIETNAM EXPORT IMPORT COMMERCIAL JS BANK (EXIMBANK) MILLITARY COMMERCIAL JS BANK (MILITARY BANK) VIET CAPITAL JOINT STOCK COMPANY 67 Ham Nghi, District 1, Ho Chi Minh City, Vietnam T: (84 8) F: (84 8)

2 VIET NAM BANKING SYSTEM REALITY AND FORECAST EXECUTIVE SUMMARY Sector Highlights: Banking is an industry which has a close correlation with the movements in the economy. This industry will be the first one to suffer from difficulties when the economy declines but will also be the first one to recover to provide necessary condition for economic recovery and stability. Viet Nam s Banking system is operating in an environment where the global and Vietnamese economies are facing difficulties mainly due to high inflation and rocketing oil prices. The overheated economic growth over the past few years has resulted in an acceleration of the money supply, leading to rapid increase in loans and decrease in savings. The banking system lost its capital structure balance between the source and the use of funds, using short term capital for long term loans, as well as ultilising funds from inter-bank market with lower cost of funds to meet loan demands in stocks and the real estate sector. Hot credit growth and the tightening monetary policy have increased the liquidity risk. Forecast for the last 6 months of 2008 The liquidity situation remains tense the term imbalance between deposits and loans as well as excessively increasing interest rates have caused difficulties to both the banking system and the whole. Credit problems in the real estate sector Risk of higher over-due debts may lead to crisis in the whole banking system. Possible credit growth loosening to over 30% to maintain normal business and production activities of the economy. Decrease in banking operational efficiency due to decrease in loan activities and increase in provisions. Possible merge and restructuring of banking organizations, specially small and medium joint stock commercial banks. The interest rate will be decreased when there is no race in interest rates. Comparison of some financial ratios Sector Information: No. Of Listed Co. 2 Total Market Cap. (VND bn.) 29,657 Avg. P/E 07 (x) 9.39 Avg. Net Margin (%) 2.39 Avg. NIM (%) 2.88 Avg. ROA (%) Credit and Deposit Growth Rate Source: SBV Bank s Income Structure in 2007 Source: VCSC Bank ACB STB TCB EIB MB 2007A 2008E 2007A 2008E 2007A 2008E 2007A 2008E 2007A 2008E Total assets 85, ,881 64,573 76,638 39,542 51,850 33,710 41,957 29,623 37,534 Charter capital 2,630 6,355 4,449 5,381 2,521 3,733 2,800 7,380 2,000 2,900 P/B P/E ROA ROE LDR Banking sector 2

3 VIETNAM ECONOMIC BACKGROUND Vietnam has emerged as a rapidly growing economy in the last few years with the average growth rate of over 7% per year. The country has gradually integrated into the global economic arena after officially becoming a member of the World Trade Organization (WTO) at the end of The year 2007 was a successful one for Vietnam when its GDP growth rate achieved 8.5%, the FDI disbursement was over USD 8 billion, and the FII capital according to unofficial statistics was approximately USD 6 billion. However, in 2008, with internal economic difficulties caused by excessively rapid growth recently and unfavorable changes in the world economy, Vietnam s economy is facing several difficulties. Within the first 6 months of 2008, the inflation rate has significantly increased to 18.44%, deficit in the trade balance exceeded the amount of the whole year 2007, reaching 49.7% of total export revenue. The stock market has declined by 60% in comparison with that in November 2007 and the GDP growth rate is only 6.5% compared to the same period last year. Vietnam Inflation and trade deficit in the last few years Source: GSO Excessive consumption and speculation motive caused inflation and trade deficits The government try to implement tight monetary policy and reduce public spending in order to stabilize the macro economy The possibility of the Government loosening fuel price subsidy due to soaring world oil price will negatively hit macro indicators The bubble in the stock and real estate markets in 2006 and 2007 together with the excessive increase in credit growth to 37.8% in 2007 resulted in a segment of the population becoming extremely wealthy. Consumption demand for luxury goods such as cars suddently increased, contributing to a deficit of trade balance in the first 6 months of 2008, reaching the highest everlevel of USD 14,8 billion which is equivalent to 49.8% of export values. In addition, speculation has led to imports being higher than actual demand, and hence prices of goods and services such as rice, fertilizer, steel and cement have increased dramatically. In order to cope with the current inflation and trade deficit issues, the government has applied a tigtening monetary policy to reduce the money supply circulation and in addition has reduced public spending to enhance efficiency in the public sector. These methods have had some positive effects on inflation restraint and trade decifit reduction. Moreover, the government has also required corporations not to increase prices of essential commodities such as electricity, water, medicines, steel and cement until the end of June 2008 in order to curb inflation. Up to this time, the increasing prices for these commodities has not been announced yet corporations are suffering losses from increasing prices of inputs and unable to increase prices of outputs correspondingly. Banking sector 3

4 Vietnam still totally depends on imported sources for refined oil; it only exports crude oil because its oil refinery factories have not yet operational. Therefore, the increase in the world price of oil has put a lot of pressure on the government budget due to its subsidy policy to curb increasing prices. Budget subsidy for the first six month of 2008 amounted to VND11,000 bn, accounting for 5.3% total public expenditures, even though the Government has let the price of petrol and oil increase last February. The increase in price of petrol and oil on 25th February 2008 had shown its effect on the increasing price of other commodities, leading to an extremely high inflation rate. The inflation rate in the first quarter 2008 increased by 16.38% in comparison with the same period last year and it has kept increasing in the following months. Before 25/2/ /2/2008 Growth % Price of diesel and petroleum 10,200 13,900 3,700 36% Price of mazut oil 8,500 9,500 1,000 12% Price of A92 petrol 13,000 14,500 1,500 12% There is a high possibility that the government will loosen its subsidy for petrol and oil price in the coming periods. The increase in oil price will create more pressure on commodities whose prices have been restrained. If the Government tries to maintain it s petrol subsidy to curb inflation, the budget deficit will worsen because oil prices have continued to increase to more than 130 USD per barrel. This will continue in the last six months of 2008 due to the continuing increase of world oil prices. Hence, increases in petrol price will have a significant impact on macro economic indicators. VIETNAM BANKING SYSTEM THE REALITY Achievements Banking system the heart of the economy During the previous years, the banking system has provided a great capital source for the economy, accounting for approximately 16% to 18% of GDP annually and was almost equivalent to 50% of total investment capital of the whole country. This proves that the banking system has developed strongly and efficiently and played a crucial role as the connection between production, consumption, and savings. The number of commercial banks over years Commercial banks charter capital in 2007 JVCB: Joint venture commercial banks SOCB: State owned commercial banks BOFB: Branches of foreign banks JSCB: Joint stock commercial banks Source: The State Bank of Vietnam Previously, state-owned commercial banks were key players in supporting the state economy thank to their advantages in capital and market share. However, with the strong development of private entities recently, joint stock commercial banks have had a considerable improvement in their source of funds and expansion of their business and service network for small and medium corporations. Joint stock commercial banks Banking sector 4

5 income growth rate is around 60% to 120% annually. Especially in 2007, the growth rate of joint stock commercial bank s charter capital was 94% in comparison with that in Whereas, state-owned commercial banks have only focused on state corporations, having low income growth rates of approximately 20% per year. Bad debts proportion reduced from 20% in the 90s to below 2% in 2007 The banking system has restructured its financial aspect and executed loans existing from the nineties. Until 2007, the proportion of bad debt over total outstanding loans was less than 2%. Bad debt proportion over years Increase in credit growth rate exceeds the deposit growth rate Source: State Bank of Vietnam In 2006 and 2007, the excessive growth of the economy together with the rapid increase in money supply circulation in comparison with the economic absorbability had caused high inflation and bubbles in the stock and real estate markets. The State Bank of Vietnam, with inflation restraint targets, have applied monetary tightening policy to reduce money in circulation. However, the government policy is not strong, timely and consistent enough to ensure the effectiveness of the money constraint policy, leading to an imbalance in the money supply, savings and lendings in the economy. Banking sector 5

6 Comparison of credit growth and deposit growth Comparison of GDP growth, money supply, credit and savings Source: State Bank of Vietnam Loss of balance between source and use of funds Use short-term capital funding long-term loans Commercial banks source of funds mainly come from 3 main streams: deposits, loans from the inter-bank market and loans from the State Bank of Vietnam through pledge of valuable documents. Total long term deposits account for 35.12% of total source of funds whereas banks medium, long term loans and financial investments (mainly investing in bonds) hold 47.09%. Therefore, the difference of 11.97% of medium to long term loans together with 44.4% in short term loans have to be financed by short term deposits. Cash and fixed assets 8.51% Loans from credit agencies 20.66% Financial investment 13.59% Payable account 21.00% Loans 77.90% Short term deposits 23.22% In which: Short term loans 44.40% Long term deposits 15.12% Issue of valuable documents 7.00% Medium to Long term loans 33.50% Owner s Equity 13.00% 35.12% In addition, banks are not really concerned about bonds issue to increase long term source of funds while owner s equity is not high. This is the main reason for the imbalance between banks source and use of funds. Utilize source of funds from the inter-bank market with lower cost In 2007, the deposits growth rate was lower than that of 2006 while the loans growth rate increased strongly 37.8%, which indicates that commercial banks have used the interbank market as a source of funds where interest rate is lower than 7% per year to meet borrowing demand. However loans from the inter-bank market are stipulated to be used only in the case of solving difficulties for short term liquidity. Therefore, the misuse of this capital resource causes serious imbalance in the capital structure and implicates high liquidity risk in the banking system. Banking sector 6

7 Before 2007 until now, it was so easy for joint stock commercial banks to approach the inter-bank borrowing source at a low interest rate for loans Deposits State Commercial Banks Lending 7% Source of funds at Joint stock Commercial Banks 12% Lending Deposits 3% State Treasury State Bank of Vietnam Most banks are too subjective in pursuing their profit targets through the use of capital from the inter-bank market for long term lendings. As a result, the credit growth rate of the banking system increased greatly and reached 37.8% in 2007 compared to 2006; in which, the credit growth rate in Ho Chi Minh City was 56.8%. This has been the highest growth rate within the past decade. Stock and real estate loans - 2 main reasons of hot credit growth in 2007 Financial investments, huge risk in 2008 Within the first 9 months of 2007, the loans growth rate of Ho Chi Minh City often remained at above 3.4% per month, and increased approximately 30% in total. However, the loans growth rate increased amazingly by more than 20.6% in the last quarter The main reason for this was becasue many banks had greatly increased their credit growth through real estate loans due to the over-heating of the real estate market. Meanwhile, increases in loans also helped banks to shift the proportion of outstanding loans for securities investment from the beginning of the year to 3% on total outstanding loans on 31 December 2007 according to the Instruction 03 of the State Bank of Vietnam. Financial investment of banks also accounts for a significant proportion of approximately 13.59%, which resulted from the booming of the stock market in Banks investment porfolio has concentrated on a large number of stocks and bonds, especially bonds with the average maturity of 3 years. Banks financial investment portfolio structure Source: VCSC Banking sector 7

8 Bond investments before 2007 only have a coupon rate of around 8% while the current trading prices of government bonds are only around 70-80% of its face value equivalent to average yield of 18%. The quality of banking assets regarding the value of bond investments will be consequently reduced. Meanwhile, as the current deposit interest rate is above 17.5%/annum, the fixed interest income of 8% from bond investments will lead to a reduction in NIM of banking system in Income structure change Consequence of hot credit growth and financial investments Banks earnings structure in 2007 has changed as a result of excessively high credit growth and too much financial investment. The proportion of loans activities and financial investments rapidly increased and accounted for 81.68% of total revenue in 2007 (was 70.21% in 2006) while service activities was reduced from 22.36% in 2006 to 11.78% in Earnings structure in 2006 and 2007 Year 2006 Year 2007 Source: VCSC The extremely rapid increase of the stock market in 2007 caused many corporations to switch from their traditional business activities to more concentration on financial investments. A proportion of the population had become rich thanks to this investment. Bubble in securities and real estate markets has brought prosperity to the whole economy, leading to a deviation in production, consumption and saving, which is a catalyst for macro economic difficulties in Tightening monetary policy and Liquidity risk Contraction monetary policy leading banking systems to liquidity problems Since the early months of 2008, the inflation and deficit in trade balance have become more serious. The government priority is to restrain inflation by applying the tightening monetary policy in order to reduce money supply circulation - the main reason for high inflation. The banking system, the bridge for economic capital, has been directly influenced by this tightening monetary policy. Increasing compulsory reserve proportion from 10% to 11% from 1st Feb Compulsory reserve ratio over time VND Deposits under 12 months Foreign currencies Deposits Under 12 months VND and Foreign currencies Deposits over 12 months and under 24 months 01 Aug Jul Jun Feb % 5% 10% 11% 4% 8% 10% 11% 1% 2% 4% 5% Banking sector 8

9 Commercial banks were required to buy VND 20,300 billion of Treasury bills with fixed coupon rate of 7.8%, one year maturity, before 17th March 2008 and were not permitted to use in capital replenishment transactions in the inter-bank market (the Treasury bill s coupon rate was increased to 13% from 1st July 2008) We estimate that within the first half of 2008, the State Bank of Vietnam has withdrawn approximately VND 60,000 billion from commerical banks, and the tightening monetary policy as well as the methods of making banking operation healthier have had some effects. However, the tightening monetary policy has caused serious liquidity difficulties to the commercial banking system. Not only small and medium banks but also large and prestigious commercial banks are in the interest rate racing to both solve liquidity problems and keep their customers. Therefore, the State Bank of Vietnam has continuously adjusted prime interest rate, capital replenishment interest rate, and discount rate. Within the first 6 months, the prime interest rate has been adjusted to increase three times from 8.25% at the beginning of the year to 14% in mid-june. Milestones in the interest rate policy amendment Dec Jan Feb May Jun 2008 Prime interest rate 8.25% 8.75% 12% 14% Capital replenishment rate 6.5% 7.5% 13% 15% Discount rate 4.5% 6.0% 11% 13% The banking system encounters many difficulties resulting from loss of balance in the source of funds and use of funds, and the rapid increase in credit growth. Thus, the tightening monetary policy has caused many banks to have their weaknesses exposed in their operations. We believe these compulsory measures are neccessary for banks to reorganise and strengthen their organizations. Since the tightening monetary policy has just been enforced and needs time to have effect, we believe that the coming periods will be very challenging for the banking system. Therefore, any bank which is able to overcome this difficult period will have opportunity for solid development in the long term. BANKING OPERATION FORECAST Continuously strained liquidity problem The capability of mobilizing capital is low while the growth rate of credit still maintains at high level leading to higher liquidity problems Imbalance in term structure make tense liquidity In the first six months of 2008, the loan growth rate of the whole banking system reached 21%, while the growth rate of deposits only increased 7% compared to This issue together with the monetary tightening policy of the SBV provoke the banking system exposing to more weaknesses in solving liquidity problems recently. For the last 6 months of 2008, the State Bank of Vietnam will continue pursuing the tightening monetary policy through withdrawing VND 52,000 billion deposited at state commercial banks. As a result, the liquidity capacity which is already very weak will become worse. The interest rate race has caused many banks to be in the situation of term imbalance between source and use of funds. Approximately 80% of source of funds of some commerical banks are less than a year term while the average length for medium and long term loans are quite high. This is really a problem for banks as they have to search for source of funds in replacement for the shortage of VND 52,000 billion which will be withdrawn by the State Bank of Vietnam as scheduled, as well as to reserve a large enough amount of funds to ensure liquidity in case of money withdrawal by depositors when needed. Banking sector 9

10 High interest rate Some enterprises are unable to pay debts The high interest rate for loans also causes difficulties to corporations having large debt leverage becasue it is not easy for returns on the use of capital of corporation in the current situation to be higher than its cost of capital. The possibility that corporations are unable to repay debt and go into bankruptcy is totally probable. Therefore, economic difficulties and liquidity problem continue to be a challenge to the whole banking system. Real Estate Credit Risk of crisis for the banking system Credit difficulty in real estate sector High risk of non-performance loans in the last 6 months According to the State Bank of Vietnam report, the oustanding loans for real estate activities until end of April 2008 was VND 135,000 billion, accounting for 13% of the total outstanding loans. In our opinion, the actual proportion of outstanding loans for real estate is expected to be higher than the announced one, approximately around 20% of total outstaning loans. The difference between the announced ratio and our expected one is in the outstanding loans for consumption because commercial banks are unable to check the ultimate usage of these loans. Real Estate s outstanding loans on total outstanging loans Source: State Bank of Vietnam Failure to pay real estate loans Non-performing loans cost suddenly climb up Seriously affecting bank operation According to the preliminary statistics of some banks, the majority or real estate/s loan contracts (80%) are for speculative purpose, only the remaining of 20% is for actual demand. Most of these contracts have been signed and executed in the hottest time of the real estate market which in each loan contract was in the 4th quarter of Besides, banks do not offer fixed but floating rate following the fluctuation of market interest rates. Therefore, increasing loans interest rate together with the decrease in real estate market causes a higher risk of repayment inability for the last 6 months of In order to repay debt, either borrowers have to sell their assets or banks have to liquidate pledged assets. The most dangerous thing is that these pledged assets were valued by banks at 70% of their market values in peak and currently the real estate market has lost up to 50% - 60% of its value. Causal effects not only create liquidity crisis in the banking system but also increase provisions for bad debt in the second half of Possibility of loosening loan growth In the first six months of 2008, the loan growth of banking systems was 21%. This rate was especially high in the first three months. In Quarter II/2008, the loan growth slow down; the outstanding loan growth in May increased only 0.1% against that in April (for State owned commercial banks decrease of 0.4%). Such growth rate has significantly influenced enterprises in an economy which depends strongly on money borrowing from banking systems. The above issue arose from the policy which was regulated by the SBV in Feb 08 that banks should ensure loan growth of maximum 30% in comparison with that of This results in many enterprises facing difficulty in operation due to lack of working capital while the banks can not lend to them because of the governments regulations Banking sector 10

11 The limitation of credit growth has led to the liquidity problems with all sectors in the economy; and negatively affects the normal operation of enterprises. The possibility of going into liquidation of small and medium enterprises is highly probable. Besides, the slower growth rate of the economy will heavily affect such sectors as aquiculture, heavy industry, construction materials due to their huge leverage. Possibility of loosening loan growth to above 30% in order to maintain the normal operation of the economy We presume that the government and the State Bank of Vietnam must consider increasing the liquidity for the economy and the loan growth of banking systems will be loosened and maintain at a more suitable level in order to avoid blocking the normal operation of the economy. The loosening loan growth can indirectly push the inflation up in the short term. However, in order to maintain the normal operation of the economy, we must accept a certain inflation level. The estimated credit growth rate in some banks will be higher than 30% in comparison with 2007; however, the loan growth rate of the whole banking system will be lower than 30%.. Banks operational efficiency decreases Indicators (%) 2007 A (*) 2008E (**) Asset quality Total outstanding loan/deposit NPLs provision/ Total outstanding loan Provision for devaluation of financial investment Equity/Total asset Main ratios Cost to income ratio Net interest spread (NIS) Net interest margin (NIM) Growth ratios Asset growth Loan growth Deposit growth Interest income growth Income from services growth Income before provision growth Net income growth (*) Average numbers of 5 Vietnamese biggest commercial banks (ACB, Sacombank, Eximbank, Techcombank and Military Bank). (**) Estimated number for commercial banks only. Provisions for financial investment devaluation is around 7% Bad debt provisions amounted to 1,56% of the total outstanding loan The year of 2007 was a successful year for Vietnamese banks with income growth rate of above 100%, in which income from trading securities activities account for a large contribution in the total income. However, in the current difficult situation, the income from trading securities will no longer exist and banks also have to make provisions for devaluation of securities in In 2007, the average provisions for NPLs of joint-stock commercial banks were around 0.49% of the total outstanding loans. We forecast the NPLs in 2008 will increase highly, around 1.56%. The main reason is the increase of bad debt provision incurred in real estate and securities loans due to the decline in stock and real estate market recently. However, the NPLs provisions in 2008 may decrease in comparison to our forecast. The reason is that some banks can switch their overdue debts to long term financial investments via buying bonds issued by the debtors themselves. Then, the debtors can reduce their debt payment pressure and the banks will also decrease NPLs provision cost which damages their operating results in Banking sector 11

12 Net interest margin (NIM) decreases Profit of banks decrease strongly in 2008 According to the State Bank of Viet Nam, with the current ceiling loan interest rate of 21%, the deposit interest rate should be lower than 17.5% per year to ensure effective operation. However, because some small & medium joint-stock commercial banks push the deposit interest rate to 19%, many larger banks must also increase the deposit interest rate to 18% in order to keep their customers. So, the net interest margin in 2008 will decrease, to around 1.79%. Due to the increase in provisions and the difficulty of loan activities, whilst the increase in services income can not compensate the decrease of interest and financial investment income. We forecast the profits of banking industry will decrease significantly in 2008, at a negative growth rate of 24.35%. Merging and Restructuring the capital of banking systems In the context of the challenging and increasing competitiveness of the market, the possibility of decreasing profit in 2008 together with the credit and liquidity problems will cause much difficulty to the whole economy and the banking systems. The banks, especially small and medium ones may not be able to face the difficulties and possibly fall into special control of the State Bank in the last 6 months of In order to resolve the capital problem, the banks must take advantage of both their internal and external sources. When the banks operate inefficiently and can not overcome bigger and bigger threats by themselves, they must merge together. Meanwhile, the banking systems must restructure their capital via increasing their charter capital and issuing bonds in order to increase their long term capital. Solutions Increase deposit interest rate Possibility of Success Low Increase cost of fund and lower operating results. Borrow money from interbanks Mortgage the government bonds to the State Bank for cash Issue bonds in order to raise long term capital Issue stocks in order to increase chartered capital Merge with other banks in order to survive and develop Low Bear high interest rates and the money source is limited because the state owned commercial banks must continue submitting VND 52 thousand billion to the State Bank of Vietnam in the last six months of Low At small joint-stock commercial banks, the amount of government bonds in total financial investment portfolios is very low. Low The brand and prestige of small banks are not established yet. Low Unrealizable in the current declining stock market situation. High The banks will be able to approach strong capital sources, operating and risk management skills. Many small banks will possibly merge with the bigger banks and become one of their parts in order to receive their capital, human resources and technology support. Besides, the prestigious guarantee of a big financial institution is an important support for small banks against the bigger ones. The last six months of 2008 and the whole year 2009 will be the period for restructuring banking operations, preparing to a long term and sustainable growth. The interest rate will decrease when there is no longer an interest race The recent serious liquidity problem of small and medium joint-stock commercial banks caused the interest race among the banks in order to attract the inhabitant s unused money. The bigger commercial banks also increased their deposit interest rate to keep their customers. Therefore, when small and medium banks face the liquidity crisis and fall in the special control this interest race will no longer exist. The interest rate will drop and be maintained at a suitable level for the economy development. Banking sector 12

13 INVESTMENT VIEWPOINT IN BANKING INDUSTRY Capacity of overcoming the bad situation in 2009 Right development strategy The necessary requirements for banks in order to overcome the current difficulty. The minimum Capital Adequacy Ratio (CAR) in the current period is around 10% (Normally 8%). Loan to deposit ratio (LDR) is at safe level, inferior to 60%. When the economy becomes more stable, this ratio is lower than 80%. The capital mobilized from interbanks is around 5% of total assets. Revenue structure is diversified from different activities; banking services income takes a high density of total income. The proportion of loan pledged by securities and loan with real estate investing purpose are low in the total outstanding loan structure. The value of the collateral assets must be higher than outstanding loan and must be always re-evaluated to reflect the market value. In addition, the provision must be made according to the regulations of the State Bank. The banks must build strategic plans in order to develop and compete against foreign banks: Concentrate on banking services development; provide convenient products besides traditional products. Evaluating enterprises operating results in credit assessment. Be self-motivated in increasing capital in order to enhance the self-control in financial capability and other operating indicators. Develop customer base via SME and individual customers. Develop corporate banking, retail banking and individual banking. Only banks that satisfy the above criteria will survive and develop strongly in the future. COMPARE SOME BANKS FINANCIAL RATIOS Indicators (%) ACB STB EIB TCB MB F F F F F Asset quality Loan to deposit 57,54 57,98 79,98 80,00 80,60 80,00 84, ,29 65,79 NPLs to Loan 0,08 0,30 0,24 0,66 0,88 0,95 1,35 1,20 1,00 NA Provision/Loan 0,37 0,70 0,48 0,75 0,20 0,60 0,40 0,57 0,95 1,06 CAR (*) 16,19 14,50 11,07 10,70 23,66 N/A 14,30 13,72 14,20 14,60 Equity/Asset 7,33 6,65 11,38 11,76 18,70 30,70 9,04 8,05 11,98 11,45 Main Ratios Cost to income ratio 26,64 30,00 30,36 31,00 34,79 34,00 34,98 35,00 34,62 34,00 NIS 1,76 0,90 2,35 1,07 1,77 1,10 2,84 1,13 1,85 1,50 NIM 2,13 1,98 2,77 1,80 2,76 4,34 3,35 1,88 3,07 2,10 ROA 2,71 1,17 3,13 1,07 1,78 2,06 1,79 0,96 2,28 1,57 ROE 44,25 16,83 27,36 9,21 11,25 8,14 19,13 11,32 19,98 13,42 Growth ratios Asset growth 91,25 41,56 160,62 18,68 160,62 24,46 128,22 31,13 117,64 26,70 Loan growth 86,96 33,00 145,78 33,00 80,77 33,00 133,84 33,00 88,33 33,00 Deposit growth 88,07 32,00 152,59 32,97 74,31 33,92 155,87 39,94 72,46 32,00 Income before provision growth 204,5-4,73 197,34-10,17 94,75 96,73 104,20 2,92 75,57 15,58 Net income growth 248,1-31,65 197,34-46,12 79,29 68,50 98,67-14,10 125,10 6,87 Banking sector 13

14 Comparison of Banks total assets, chartered capital and CAR Comparison of Banks NIM Source: VCSC Comparison of Banks outstanding loans and deposits Banking sector 14

15 ASIA COMMERCIAL BANK (ACB) COMPANY INFORMATION OVERVIEW Recommendation: Buy Status Listed Asia Commercial Bank was established on 24 April It was listed Industry Banking Ticker ACB on HASTC on 31 October 2006, and currently has Charter Capital of VND 2,630 billions. Its scope of business includes saving deposits, Charter Capital (VND bil) 2,630 loans, securities investments, payment services, foreign exchange, 52 weeks high (VND) 190,000 gold, guarantees, factoring and other banking services. 52 weeks low (VND) 40, days avg. traded volume 674,170 VALUATION (July 22 nd, 2008) STRENGTHS Market price (VND) Market Capital (VND bn.) P/E (2007) (x) 65,400 17, ACB is the biggest commercial bank in terms of total assets, with average asset growth rate from 2004 to 2007 is 77% per annum. Thanks to its strong brand name coupled with a big number of branches P/B (2007) (x) 2.75 at major cities nationwide, ACB is ranked number one commercial bank in mobilizing deposits. Its deposit from customers is nine times P/E (2008F) (x) bigger than its owner s equity whereas this ratio for Sacombank is only P/B (2008F) (x) 2.59 six times. It is this strength that makes ACB has a low equity/asset EPS (2008F) (VND) 3,783 ratio and a highest ROE among commercial banks, reaching 44.3% in FINANCIAL STATUS 2007 Credit risk of ACB is lower than other commercial banks as its Total asset (VDN bil) 85,392 Capital Adequacy Ratio is 16.2% in 2007, and bad debt to total debt Total loan (VND bil) 31,811 ratio was maintained below 0.5% from 2005 to Total deposit (VND bil) 55,283 LDR (%) 57.5 YOA (%) 7.4 COF (%) 5.6 NIM (%) 2.1 ROE (%) 44.3 ROA (%) 2.7 CAR (%) 16.2 OWNERSHIP STRUCTURE Government (%) 0 Foreigner (%) 30 Other (%) 70 PRICE CHART INCOME STRUCTURE 2007 LDR of ACB is 57.5% in comparison with that of other commercial banks which is, on average, roughly 80%. This ratio secures a high liquidity for ACB. It is expected that gold trading will contribute a large portion to revenue of ACB in 2008, compensating for revenue reduction from credit and securities investment activities. ACB s Gold Trading Floor is the biggest and most active gold trading floors in Vietnam. ACB has the best Corporate Governance model among commercial banks in Vietnam. WEAKNESSES Revenue from securities investment was a big portion of the total revenue of ACB in 2007, reaching 41%. By the end of first quarter of 2008, total value of Trading Securities and Available-For-Sale Securities is approximately VND 1,240 billions. This would reduce profit of the Bank in 2008 due to provisions for securities devaluation. Currently, ACB is holding thousands of bond investments. The bank will suffer from losses at the average of 25% due to strong decrease of bond price. Gold trading is expected to grow very quickly in However, this kind of business has an implicit risk in the situation where yearly import quotas are being granted to gold trading businesses in Vietnam. Banking sector 15

16 ASIA COMMERCIAL BANK (ACB) INCOME STATEMENT (VND mn) F Net interest income 350, , ,572 1,311,106 1,887,710 Net income for banking services 76,862 97, , , ,187 Gain/loss on gold and forex trading 8,782 14,640 70, , ,560 Gain/loss on Securities trading 9,516 2,626 31, ,990 - Gain/loss on Financial investment 65, ,792 - Other operating gain/loss 28,290 25,562 15,597 4,926 - Dividend received 2,065 30,778 38,139 36,653 19,713 Total revenue 475, ,079 1,190,240 3,020,822 3,016,170 Total Operating Costs (181,973) (288,942) (462,424) (804,650) (904,851) Pre-Provision profit / (loss) 293, , ,816 2,216,172 2,111,319 Bad Debt Provisioning (11,689) (4,587) (40,597) (89,357) (507,427) Pre-tax profit 282, , ,219 2,126,815 1,603,891 Tax (68,057) (92,349) (181,643) (366,807) (400,973) Minority shareholders Stated net profit 214, , ,576 1,760,008 1,202,919 BALANCE SHEET (VND mn) F Cash and interbank 5,349,990 9,056,581 20,249,603 39,236,555 54,396,565 Investment in securities 2,898,749 4,862,985 4,869,873 9,644,095 13,296,938 Investment in associates 51, , , ,469 1,208,813 Total loans 6,698,437 9,381,517 17,014,419 31,810,857 42,308,440 Provisions (26,027) (20,825) (56,207) (134,537) (177,589) Net loans 6,672,410 9,360,692 16,958,212 31,676,320 42,130,851 Other assets 447, ,890 2,129,048 4,072,242 9,848,089 Total assets 15,419,534 24,272,864 44,650,194 85,391, ,881,257 Customer deposits 13,040,340 19,984,920 29,394,703 55,283,104 72,973,697 Deposits to FIs 1,244,756 1,389,004 4,191,227 7,648,660 10,879,313 Total borrowings 68, ,312 6,149,911 12,011,308 18,077,376 Other liabilities 355, ,422 3,217,838 4,190,760 10,915,660 Total liabilities 14,709,536 22,989,658 42,953,679 79,133, ,846,046 Share capital 481, ,316 1,100,047 2,630,060 6,355,060 Statutory Reserves 197, , ,255 2,192, ,475 Retained earnings 31, , ,213 1,435,752 1,011,676 Total shareholder's equity 709,998 1,283,206 1,696,515 6,257,849 8,035,211 Interest-earnings assets 14,947,176 23,301,083 42,133,895 80,691, ,001,944 Interest bearing liabilities 14,353,766 22,341,236 39,735,841 74,943, ,930,386 RATIOS E Asset quality Gross loan/deposit (%) 51.4% 46.9% 57.9% 57.5% 58.0% Gross NPLs/Total Loans (%) 0.72% 0.3% 0.2% 0.1% 0.3% Bad debt Provision/Total loans (%) N/A 0.06% 0.31% 0.37% 0.7% CAR (%) 9.7% 12.1% 10.9% 16.2% 14.5% Equity/Assets (%) 4.6% 5.3% 3.8% 7.3% 6.6% Key Ratios Cost to income ratio 38.2% 42.2% 38.9% 26.6% 30.0% Net interest spread N/A 2.5% 2.2% 1.8% 0.9% Net interest margin N/A 2.7% 2.5% 2.1% 2.0% ROA N/A 1.5% 1.5% 2.7% 1.2% ROE N/A 30.0% 33.9% 44.3% 16.8% Growth Assets growth N/A 57.4% 84.0% 91.2% 41.6% Gross loan growth N/A 40.1% 81.4% 87.0% 33.0% Deposit growth N/A 53.3% 47.1% 88.1% 32.0% Net interest income growth N/A 46.8% 59.6% 59.8% 44.0% Net fee income growth N/A 26.5% 52.6% 82.8% 80.0% Pre-provision earning growth N/A 34.8% 83.7% 204.5% -4.7% Net profit growth N/A 39.8% 69.0% 248.1% -31.7% Banking sector 16

17 ASIA COMMERCIAL BANK (ACB) Profitability ratios Loans and Deposits Loans and deposits growth Credit quality Capital adequacy ratio Profit growth Source: VCSC, ACB Banking sector 17

18 SAIGON THUONG TIN COMMERCIAL JOINT-STOCK BANK (SACOMBANK) COMPANY INFORMATION Industry Banking Status Listed Ticker STB Charter Capital (VND bil) 4, weeks high (VND) 74, weeks low (VND) 19, days average traded volume 1,812,803 VALUATION (July 22 nd, 2008) OVERVIEW Recommendation: Hold Sacombank was established in 1991 and has become one of the 5 largest commercial banks. Soon after, Sacombank founded its subsidiaries and joint ventures operating in the area of asset management, money transfer, financial leasing, stock leasing, investment and fund management. Sacombank was listed on Hochiminh Stock Exchange Centre in July STRENGTHS Market price (VND) 28,000 Sacombank is the 2 nd largest commercial bank in terms of owner s Market Capital (VND bil) 12,457 equity, just after Eximbank. Currently, Sacombank s owner s equity is P/E (2007) (x) 8.91 VND 6,856 bil. P/B (2007) (x) 1.69 P/E (2008F) (x) P/B (2008F) (x) 1.67 EPS (2008F) (VNĐ) 1,400 FINANCIAL STATUS 2007 Total asset (VDN bil) 64,573 Total loan (VND bil) 35,378 Total deposit (VND bil) 44,232 LDR (%) 80 YOA (%) 8.1 COF (%) 5.8 NIM (%) 2.3 ROE (%) 27.4 ROA (%) 3.1 CAR (%) 11.1 FINANCIAL STATUS 2007 Government (%) 0 Foreigner (%) 30 Other (%) 70 PRICE CHART INCOME STRUCTURE 2007 Being the leader among joint stock commercial banks in terms of number of branches: Sacombank has 213 branches nationwide. This intensive network is Sacombank s competitive advantage which ensures its advantage to enhance its market share. Moreover, Sacombank has a strategy to penetrate into regional markets; specifically, Sacombank has established a representative office in China and is going to establish its branches in Cambodia and Laos. Sacombank has a variety of financial business activities among which financial leasing and asset management are the two most prominent ones. As well as traditional loan service, Sacombank also provides other supporting services for corporations. Capital Adequacy Ratio (CAR) is maintained at a level which is higher than the required level (8%), the CAR at the end of 2007 is 11.07% and at the end of quarter 1/ 2008 is 9.83%. Non-performing loan (NPL) is under control which is lower than 1%, NPL at the end of 2007 is 0.24% and quarter 1/2008 is 0.2% Sacombank is the most liquidity stock on HOSE. WEAKNESSES LDR is at 80%, this ratio is quite high which limits the credit growth. Securities investment is quite high, which is more than VND 1,000 bil. This investment will make the bank s profit in 2008 decrease by a remarkable amount because the bank has to make provisions for securities devaluation. Income from services only accounts for a small part of the total income (8% of total income), while the income from securities investment is quite high (33% of total income). Sacombank s staffs do not really have a professional working attitude, especially in the sales department. Banking sector 18

19 SAIGON THUONG TIN COMMERCIAL JOINT-STOCK BANK (SACOMBANK) INCOME STATEMENT (VND mn) F Net interest income 285, , ,366 1,151,872 1,199,562 Net income for banking services 51,301 71, , , ,116 Gain/loss on gold and forex trading 23,260 25,417 4, , ,445 Gain/loss on Securities trading 11,850 19,532 7, ,873 - Gain/loss on Financial investment 135, ,599 - Other operating gain/loss 13, ,590 3,536 - Dividend received 7,157 24, , , ,039 Total revenue 392, ,189 1,062,495 2,441,583 2,007,162 Total Operating Costs (182,667) (251,483) (408,264) (741,225) (479,780) Pre-Provision profit / (loss) 210, , ,231 1,700,358 1,527,382 Bad Debt Provisioning (12,177) (18,652) (42,902) (118,387) (523,117) Pre-tax profit 197, , ,329 1,581,971 1,004,265 Tax (46,791) (71,664) (141,200) (184,074) (251,066) Minority shareholders Stated net profit 151, , ,129 1,397, ,199 BALANCE SHEET (VND mn) F Cash and interbank 2,205,758 3,226,004 5,840,571 11,870,304 12,560,458 Investment in securities 1,496,980 1,611,521 2,329,715 13,320,781 13,102,053 Investment in associates 160, , ,577 1,495,608 1,645,169 Total loans 5,986,412 8,425,238 14,394,313 35,378,147 47,052,936 Provisions (27,968) (45,903) (81,418) (177,573) (486,690) Net loans 5,958,444 8,379,335 14,312,895 35,200,574 46,566,246 Other assets 573, ,111 1,512,424 2,685,608 2,763,647 Total assets 10,394,881 14,456,182 24,776,182 64,572,875 76,637,573 Customer deposits 8,553,254 11,435,505 17,511,580 44,231,944 58,816,169 Deposits to FIs 623, , ,473 5,259,154 5,364,630 Total borrowings 170,370 2,903,967 6,200,673 6,897,382 Other liabilities 253, , ,816 1,531,445 (3,454,511) Total liabilities 9,429,941 12,574,541 21,905,836 57,223,216 67,623,670 Share capital 740,948 1,250,948 2,248,726 5,662,485 7,061,414 Statutory Reserves 118, , , , ,084 Retained earnings 105, , ,146 1,234,529 1,320,406 Total shareholder's equity 964,940 1,881,641 2,870,346 7,349,659 9,013,904 Interest-earnings assets 9,689,150 13,262,763 22,564,599 60,569,232 72,715,447 Interest bearing liabilities 9,176,327 12,271,905 21,338,020 55,691,771 71,078,181 RATIOS E Asset quality Gross loan/deposit (%) 70.0% 73.7% 82.2% 80.0% 80.0% Gross NPLs/Total Loans (%) 1.1% 0.6% 0.7% 0.2% 0.7% Bad debt Provision/Total loans (%) 0.26% 0.38% 0.48% 0.8% CAR(%) 10.5% 15.4% 11.8% 11.1% 10.7% Equity/Assets (%) 9.3% 13.0% 11.6% 11.4% 11.8% Key Ratios Cost to income ratio 47.8% 43.4% 38.4% 30.4% 31.0% Net interest spread 3.1% 3.4% 2.8% 2.3% 1.1% Net interest margin 3.4% 3.8% 3.0% 2.8% 1.8% ROA 1.7% 1.9% 1.9% 3.1% 1.1% ROE 18.8% 16.5% 16.4% 27.4% 9.2% Growth Assets growth N/A 39.1% 71.4% 160.6% 18.7% Gross loan growth N/A 40.7% 70.8% 145.8% 33.0% Deposit growth N/A 33.7% 53.1% 152.6% 33.0% Net interest income growth N/A 52.1% 56.5% 69.3% 4.1% Net fee income growth N/A 38.8% 68.1% 61.6% 80.0% Pre-provision earning growth N/A 54.5% 101.5% 159.9% -10.2% Net profit growth N/A 55.1% 100.6% 197.3% -46.1% Banking sector 19

20 SAIGON THUONG TIN COMMERCIAL JOINT-STOCK BANK (SACOMBANK) Profitability ratios Loans and Deposits Loans and deposits growth Credit quality Capital adequacy ratio Profit growth Source: VCSC, Sacombank Banking sector 20

21 TECHNOLOGICAL AND COMMERCIAL JOINT-STOCK BANK (TECHCOMBANK) COMPANY INFORMATION Industry Banking Status OTC Ticker N/A Charter Capital (VND bil) 3, weeks high (VND) N/A 52 weeks low (VND) N/A 10 days average traded N/A volume VALUATION (July 22 nd, 2008) Market price (VND) 25,000 Market Capital (VND bil) 6,303 P/E (2007) (x) 9.8x P/B (2007) (x) 1.24x P/E (2008F) (x) 18x P/B (2008F) (x) 1.87x EPS (2008F) (VNĐ) 1,402 FINANCIAL STATUS 2007 Total asset (VDN bil) 39,542 Total loan (VND bil) 20,603 Total deposit (VND bil) 24,476 LDR (%) 80 YOA (%) 8.41 COF (%) 5.57 NIM (%) 3.35 ROE (%) ROA (%) 1.79 CAR (%) OWNERSHIP STRUCTURE Government (%) Foreigner (%) Other (%) INCOME STRUCTURE 2007 OVERVIEW Recommendation: Hold Being established in 1993, Techcombank is the 3 rd largest joint stock commercial bank in Vietnam which provides banking products and financial services for personal, corporate and government organization clients. After 15 years of operation, the bank has the 3 rd largest transaction network among commercial banks with nearly 130 branches and transaction offices in 23 provinces and cities nationwide. Techcombank is the first commercial bank which was appraised by Moody s to be the best bank in terms of BFSR in STRENGTHS High growth rate. Profit in 2007 was double in comparison with that in In the first 5 months of 2008, total deposits reached VND 42,187 bil, increased 21% in comparison with that at the end of Credit activity is still at a high growth rate; the total loan after the first 5 months of 2008 was VND 27,959 bil, increased 38% compared to that at the beginning of the year. Being the leader in applying technological advances in business operations. In 2007, Techcombank successfully upgraded its Core Banking T24-R6 system to improve its LAN in order to ensure the security of it s banking system by its internal personnel force; applied advanced electronic commercial products such as F@st i-bank Internet Banking, F@st Vietpay Electronic payment gate, etc. Techcombank is the first and the only bank which is recognized by Financial Insights to be the leader in applying technological advances in market development. With the support from HSBC, Techcombank builds its risk management technology to manage retail loan risk, enhance its quality services system to meet the international quality standard, and connect its ATM system in order to maximize its customers convenience. WEAKNESSES Yield on Assets is high due to the high risk in loan activities. Non performing loan (NPL) ratio of Techcombank is the highest among joint stock commercial banks. In 2007, the NPL/total loan ratio was Although this ratio was 5% lower than the average ratio of state owned commercial banks, it is still higher than that of other joint stock commercial banks (ACB 0.08%; STB 0.24%; EIB 0.8%; MB 1%) Cost of fund is low due to the loan ratio from interbank market is high, approximately 24% of the total loan. This fact has created a negative effect to business activities as well as the bank s profit with the increasing interbank interest rate in the first half of Besides which, when Vietnam s banking system is facing a liquidity problem, the mobilization through the interbank market is not that easy like it was before and the bank will have to face the threat of losing their liquidity ability. The loan/ total deposit ratio is high, above 80%. This will affect the credit growth ability in the future because the bank will have to face higher risks. Securities investment accounts for a high proportion (17.4%) in the total asset. In these difficult circumstances when the stock market has already lost 60% of its market value in comparison with that at the beginning of 2007 and with a high interest rate, Techcombank will have to bear a huge loss and its expected profit of 2008 will be significantly decreased. Banking sector 21

22 TECHNOLOGICAL AND COMMERCIAL JOINT-STOCK BANK (TECHCOMBANK) INCOME STATEMENT (VND mn) F Net interest income 177, , , , ,641 Net income for banking services 34,759 66, , , ,000 Gain/loss on gold and forex trading 2,062 1,872 7,491 24,583 41,791 Gain/loss on Securities trading 549 5,065 81,761 - Gain/loss on Financial investment Other operating gain/loss 5,528 14,552 39,156 4,462 5,801 Dividend received 724 2,992 2,693 Total revenue 220, , ,359 1,216,008 1,251,925 Total Operating Costs (89,865) (154,835) (224,180) (425,381) (438,174) Pre-Provision profit / (loss) 130, , , , ,751 Bad Debt Provisioning (23,306) 5,817 (30,657) (80,887) (229,179) Pre-tax profit 107, , , , ,572 Tax (30,881) (79,911) (99,616) (199,356) (146,143) Minority shareholders Stated net profit 76, , , , ,429 BALANCE SHEET (VND mn) F Cash and interbank 3,420,634 3,121,001 5,071,529 11,098,540 13,256,901 Investment in securities 724,289 1,942,620 2,876,804 6,842,172 6,769,940 Investment in associates 7,965 11,838 30,783 36,930 23,259 Total loans 3,465,540 5,380,036 8,810,848 20,603,094 27,402,115 Provisions (95,449) (86,974) (114,747) (116,963) (253,974) Net loans 3,370,091 5,293,062 8,696,101 20,486,131 27,148,141 Other assets 144, , ,136 1,078,723 4,652,051 Total assets 7,667,461 10,666,106 17,326,353 39,542,496 51,850,292 Customer deposits 4,600,097 6,195,072 9,566,043 24,476,576 34,252,644 Deposits to FIs 2,369,768 3,014,831 5,070,852 8,458,903 10,150,684 Total borrowings 17, , ,432 2,213,878 2,290,394 Other liabilities 165, , , , ,668 Total liabilities 7,152,354 9,656,701 15,564,666 35,969,080 47,677,389 Share capital 448, ,266 1,504,313 2,998,458 3,733,371 Statutory Reserves 27,151 50,343 86, ,322 37,305 Retained earnings 39, , , , ,228 Total shareholder's equity 515,107 1,009,405 1,761,687 3,573,416 4,172,904 Interest-earnings assets 7,610,463 10,443,657 16,759,181 38,543,806 47,428,956 Interest bearing liabilities 6,986,923 9,360,005 15,164,327 35,149,357 46,693,721 RATIOS E Asset quality Gross loan/deposit (%) 75% 87% 92% 84% 80% Gross NPLs/Total Loans (%) 3.35% 2.92% 3.11% 1.35% 1.20% Bad debt Provision/Total loans (%) 0.67% -0.13% 0.39% 0.40% 0.57% CAR(%) 10.19% 15.72% 17.28% 14.30% 13.72% Equity/Assets (%) 6.72% 9.46% 10.17% 9.04% 8.05% Key Ratios Cost to income ratio 40.81% 35.59% 36.67% 34.98% 35.00% Net interest spread 2.02% 3.38% 2.76% 2.84% 1.13% Net interest margin 2.33% 3.89% 3.36% 3.35% 1.88% ROA 0.99% 2.25% 1.84% 1.79% 0.96% ROE 14.78% 27.05% 18.54% 19.13% 11.32% Growth Assets growth NA 39.11% 62.44% % 31.13% Gross loan growth NA 55.24% 63.77% % 33.00% Deposit growth NA 34.67% 54.41% % 39.94% Net interest income growth NA 98.08% 30.23% % % Net fee income growth NA 92.31% 51.81% 74.36% % Pre-provision earning growth NA % 38.15% % 2.92% Net profit growth NA % 24.62% 98.67% % Banking sector 22

23 TECHNOLOGICAL AND COMMERCIAL JOINT-STOCK BANK (TECHCOMBANK) Profitability ratios Loans and Deposits Loans and deposits growth Credit quality Capital adequacy ratio Profit growth Source: VCSC, Techcombank Banking sector 23

24 VIETNAM EXPORT IMPORT COMMERCIAL JOINT-STOCK BANK (EXIMBANK) COMPANY INFORMATION Industry Banking Status OTC Ticker N/A Charter Capital (VND bil) weeks high (VND) N/A 52 weeks low (VND) N/A 10 days average traded volume N/A VALUATION (July 22 nd, 2008) OVERVIEW Recommendation: Hold Eximbank, formerly known as Bank for Import and Export of Vietnam, established in 1989, is one of the first commercial banks in Vietnam. Eximbank was granted business license with 50 years of operation and initial charter capital of VND 50 bil. The bank s charter capital increased up to VND 2,800 bil in December 2007, and in May 2008, 4 foreign investors completed buying 25% charter capital of Eximbank. It is planned that at the end of 2008, Eximbank charter capital will increase up to VND 7,380 bil. STRENGTHS Market price (VND) Eximbank is the fourth largest commercial bank in terms of Market Capital (VND bil) P/E (2007) (x) assets with the strength of international payment. From 2005 to 2007, there was a high increase of 72% of the bank s assets. P/B (2007) (x) 1,1 The sum of VND 6,319 bil from selling shares to foreign strategic P/E (2008F) (x) 23 partners is an advantage of Eximbank in their lending business, investing in bonds and other banking services. This sum of money P/B (2008F) (x) 1,4 also helped Eximbank solving all liquidity difficulties that most of the EPS (2008F) (VNĐ) 1,058 local banks are facing against. FINANCIAL STATUS 2007 After the credit mess before 2000, Eximbank has a more careful Total asset (VDN bil) 33,710 lending policy. From 2005, the ratio of bad debt to total outstanding Total loan (VND bil) 18,452 debt is always below 1%. Furthermore, Eximbank is one of the commercial banks who has low percentage of lending for securities Total deposit (VND bil) 22,906 investments, only 1% of the total outstanding loans. LDR (%) 80.6 Thanks to its strength of import and export services, income YOA (%) 7.1 from foreign currency and gold accounts for a quite high COF (%) 5.3 percentage which is 14% of the total income, while ACB is 5% and NIM (%) 2.8 Sacombank is only 4%. ROE (%) 11.2 Mr. Truong Van Phuoc, General Director of Eximbank, is a ROA (%) 1.8 competent and prestigious person in the Vietnamese financial market. CAR (%) OWNERSHIP STRUCTURE Government (%) 0 Foreigner (%) 25 Other (%) 75 INCOME STRUCTURE 2007 In the OTC market, Eximbank is a stock that has high liquidity and this bank also has plans to list on HOSE in WEAKNESSES Quite low percentage of income from services, only accounts for 7% of the income structure. Eximbank has increased its charter capital from VND 2,800 bil in 2007 to VND 7,380 bil in 2008; and that s why its shares has been diluted a lot. Because of that, although the 2008 NPAT is predicted to be 60% higher than that of 2007, EPS decreases from VND 1,655 to VND 1,058. Eximbank s Board of Directors includes 10 people who are the representatives of big economic corporations. Most of them do not belong to the financial industry. Therefore, their strategic decisions are not flexible and less effective. Eximbank does not have a lot of branches, only 65 branches, while Sacombank has 213 and ACB has 137. This limits the ability of Eximbank to increase its market share. Banking sector 24

25 VIETNAM EXPORT IMPORT COMMERCIAL JOINT-STOCK BANK (EXIMBANK) INCOME STATEMENT (VND mn) F Net interest income 128, , , ,629 1,553,915 Net income for banking services 24,592 25,374 44,100 72, ,904 Gain/loss on gold and forex trading 30,960 54,544 75, , ,514 Gain/loss on Securities trading Gain/loss on Financial investment 41,222 57,190 - Other operating gain/loss 7,722 5,924 76,661 41,536 - Dividend received 3,562 1,922 1,014 21,736 13,811 Total revenue 195, , ,000 1,016,602 1,976,144 Total Operating Costs (88,043) (117,085) (184,677) (353,629) (671,889) Pre-Provision profit / (loss) 107, , , ,973 1,304,255 Bad Debt Provisioning (107,459) (157,994) (46,736) (34,126) (263,093) Pre-tax profit - 28, , ,847 1,041,162 Tax (7,456) (100,118) (165,430) (260,291) Minority shareholders Stated net profit - 21, , , ,872 BALANCE SHEET (VND mn) F Cash and interbank 2,112,161 2,732,487 5,807,524 7,422,271 8,435,031 Investment in securities 536,242 1,102,984 1,601,716 6,084,424 6,650,577 Investment in associates 14,247 39,866 92, , ,538 Total loans 5,293,510 6,919,831 10,207,392 18,452,151 24,541,361 Provisions - (5,466) (42,417) (73,541) (202,522) Net loans 5,293,510 6,914,365 10,164,975 18,378,610 24,338,839 Other assets 311, , ,771 1,134,581 1,842,037 Total assets 8,267,377 11,369,233 18,327,479 33,710,424 41,957,022 Customer deposits 6,297,038 8,352,111 13,141,175 22,906,123 30,676,701 Deposits to FIs 1,270,967 1,956,966 2,562,099 1,242, ,140 Total borrowings 366,509 33, ,785 Other liabilities 167, , ,029 3,230,182 (2,648,391) Total liabilities 7,735,784 10,533,694 16,380,812 27,412,088 29,077,236 Share capital 515, ,396 1,688,273 5,789,858 12,616,565 Statutory Reserves 16, ,790 56, , ,047 Retained earnings 14, , , ,174 Total shareholder's equity 531, ,539 1,946,667 6,294,943 12,879,786 Interest-earnings assets 7,941,913 10,755,302 17,616,632 31,958,846 39,626,968 Interest bearing liabilities 7,568,005 10,309,077 16,069,783 24,181,906 31,725,627 RATIOS E Asset quality Gross loan/deposit (%) 84.1% 82.9% 77.7% 80.6% 80.0% Gross NPLs/Total Loans (%) N/A 1.04% 0.85% 0.88% 0.95% Bad debt Provision/Total loans (%) 2.59% 0.55% 0.24% 0.6% CAR (%) 6.4% 7.3% 10.6% 18.7% 30.7% Equity/Assets (%) Key Ratios 45.0% 38.6% 31.3% 34.8% 34.0% Cost to income ratio N/A 2.1% 1.7% 1.8% 1.1% Net interest spread N/A 2.3% 2.0% 2.8% 4.3% Net interest margin N/A 0.2% 1.7% 1.8% 2.1% ROA N/A 3.1% 18.6% 11.2% 8.1% ROE Growth N/A 37.5% 61.2% 160.6% 24.5% Assets growth N/A 30.7% 47.5% 80.8% 33.0% Gross loan growth N/A 32.6% 57.3% 74.3% 33.9% Deposit growth N/A 67.8% 62.9% 94.7% 127.0% Net interest income growth N/A 3.2% 73.8% 63.6% 80.0% Net fee income growth N/A N/A 117.3% 63.6% 96.7% Pre-provision earning growth N/A N/A % 79.3% 68.5% Banking sector 25

26 VIETNAM EXPORT IMPORT COMMERCIAL JOINT-STOCK BANK (EXIMBANK) Profitability ratios Loans and Deposits Loans and deposits growth Credit quality Capital adequacy ratio Profit growth Source: VCSC, Eximbank Banking sector 26

27 MILLITARY COMMERCIAL JOINT-STOCK BANK (MILITARY BANK) COMPANY INFORMATION Industry Banking Status OTC Ticker MB Charter Capital (VND bil) 2, weeks high (VND) N/A 52 weeks low (VND) N/A 10 days average traded volume N/A VALUATION (July 22 nd, 2008) OVERVIEW Recommendation: Buy Military Bank was established in 1994 with the initial charter capital of VND 20 bn. which increased up to VND 2,000 bil at the present. Its business scope is savings deposits, medium and long-term loan, securities investment, payment service, trading foreign currency and gold, underwriting, financial leasing and other banking services. STRENGTHS Market price (VND) 18,000 The bank s income is from different sources. Income from services Market Capital (VND bil) 3,600 accounts for 18% of the total income; this is considered quite high in comparison with other banks. This percentage is predicted to increase in P/E (2007) (x) 5.6 the coming years. P/B (2007) (x) 0.79 MB has a good Capital Adequate Ratio (CAR = 14.2%) and Net Interest P/E (2008F) (x) 8.6 Margin (NIM = 3.07%), which is considered high in comparison to the P/B (2008F) (x) 1.03 industry average. Similar to ACB, MB has a low LDR at 65%, less than EPS (2008F) (VNĐ) 2,101 the industry average which is at 80%. FINANCIAL STATUS 2007 The proportion of real estate and securities lending is 10.8% and 1.7%, respectively, which accounts for a small part of the total loan in Total asset (VDN bil) 29,623 comparison with other banks. Total loan (VND bil) 11,612 The percentage of financial investments is not as high as other Total deposit (VND bil) 17,784 banks. 9.3% of the total asset mainly invested in government bonds and LDR (%) 65 bonds of financial institutions that have stable incomes. The Bank has YOA (%) 7.65 VND 271 bil in stock investments, which accounts for 10% of its portfolio. These investments are well managed by professional financial institutions COF (%) 5.13 like TLS, Hanoi Fund Management Company. NIM (%) 3.07 Rapid growth over a long period. Profit growth is at least 1.3 to 1.4 ROE (%) times per annum, in the latter years higher than previously. Dividend paid ROA (%) 2.28 for shareholders is from 15% to 21% from the year 1995 till now. CAR (%) High liquidity, abundant cash in hand. In the first 4 months of 2008, OWNERSHIP STRUCTURE overnight interest reached 30-40% sometimes, when liquidity of other banks is in red alert, MB entered the inter-bank market in the role of a Government (%) lender by using the its deposit surplus. The bank s turnover has increased Foreigner (%) a lot thanks to this. Other (%) INCOME STRUCTURE 2007 WEAKNESSES The bank s operation is still not transparent. Its financial statements and annual reports have not been made public completely or in a timely manner. Network of branches and transaction offices is not very strong,as a result it is not adequately set up to become one of the leading retail banks in Vietnam. Military businesses are MB s traditional customers. In general, the business success of these companies is not high which can effect the quality of debt management and increase the bank s non-performing loans Banking sector 27

28 MILLITARY COMMERCIAL JOINT-STOCK BANK (MILITARY BANK) INCOME STATEMENT (VND mn) F Net interest income 142, , , , ,643 Net income for banking services 16,443 22,107 75, , ,821 Gain/loss on gold and forex trading 5,648 3,154 6,591 21,124 46,473 Gain/loss on Securities trading ,110 89,552 - Gain/loss on Financial investment 820 4, Other operating gain/loss 8,843 30,155 54,817 93, ,310 Dividend received - - 5,602 34,367 30,417 Total revenue 173, , ,689 1,060,917 1,214,663 Total Operating Costs (49,041) (74,908) (177,627) (367,313) (412,985) Pre-Provision profit / (loss) 124, , , , ,678 Bad Debt Provisioning (20,746) (76,469) (125,463) (84,618) (143,634) Pre-tax profit 104, , , , ,043 Tax (28,656) (39,570) (50,609) (116,378) (131,609) Minority shareholders - - (148) - - Stated net profit 75, , , , ,435 BALANCE SHEET (VND mn) F Cash and interbank 2,732,512 3,159,132 6,022,736 13,757,703 15,133,473 Investment in securities 63, , ,818 2,766,273 2,489,646 Investment in associates 95, , , ,115 1,216,673 Total loans 3,455,160 4,218,138 6,166,146 11,612,439 15,444,544 Provisions - - (163,016) (143,833) (201,366) Net loans 3,455,160 4,218,138 6,003,130 11,468,606 15,243,178 Other assets 163, , , ,749 3,450,659 Total assets 6,509,140 8,214,933 13,611,400 29,623,446 37,533,628 Customer deposits 5,520,607 6,069,812 10,312,619 17,784,837 23,475,985 Deposits to FIs 367,136 1,049,186 1,201,311 5,061,345 6,073,614 Total borrowings 73, , ,568 2,310,126 2,541,139 Other liabilities 66, , , ,272 1,146,590 Total liabilities 6,027,401 7,578,335 12,230,488 26,073,580 33,237,327 Share capital 358, ,975 1,102,796 2,000,000 2,900,000 Statutory Reserves 45,793 57,273 82,262 1,012, ,099 Retained earnings 76, , , , ,201 Total shareholder's equity 481, ,598 1,380,912 3,549,866 4,296,301 Interest-earnings assets 6,250,689 7,855,203 13,188,700 28,136,415 33,067,663 Interest bearing liabilities 5,960,894 7,444,941 11,822,498 25,156,308 32,090,737 RATIOS E Asset quality Gross loan/deposit (%) 63% 69% 60% 65% 66% Gross NPLs/Total Loans (%) NA NA NA 1.00% NA Bad debt Provision/Total loans (%) 0.60% 1.99% 2.42% 0.95% 1.06% CAR(%) 9.68% 11.28% 15.58% 14.20% 14.60% Equity/Assets (%) 7.40% 7.75% 10.15% 11.98% 11.45% Key Ratios Cost to income ratio 28.21% 24.97% 31.02% 34.62% 34.00% Net interest spread 2.15% 2.89% 2.57% 1.85% 1.50% Net interest margin 2.27% 3.40% 3.76% 3.07% 2.10% ROA 1.16% 1.48% 2.01% 2.28% 1.57% ROE 15.65% 19.50% 21.69% 19.98% 13.42% Growth Assets growth NA 26.21% 65.69% % 26.70% Gross loan growth NA 22.08% 46.18% 88.33% 33.00% Deposit growth NA 9.95% 69.90% 72.46% 32.00% Net interest income growth NA 68.87% 65.10% 59.88% 1.47% Net fee income growth NA 34.45% % % 95.00% Pre-provision earning growth NA 80.38% 75.52% 75.57% 15.58% Net profit growth NA 44.65% % % 6.87% Banking sector 28

29 MILLITARY COMMERCIAL JOINT-STOCK BANK (MILITARY BANK) Profitability ratios Loans and Deposits Loans and deposits growth Credit quality Capital adequacy ratio Profit growth Source: VCSC, MB Banking sector 29