As we approach the financial announcement season of 2023, numerous securities firms have released analysis reports focusing on the TPB code of Tiên Phong Commercial Joint Stock Bank. Notably, all these analyses underscore the deterioration in the bank’s asset quality.

Increase in Bad Debt Contributes to Profit Decline

At the time when securities firms released their analysis reports, TPB disclosed its financial statements for the third quarter of 2023, presenting less optimistic figures. Specifically, TPB reported net interest income of VND 2,963 billion (an 8.1% increase), non-interest income reaching VND 1,251 billion (a 22.2% increase), resulting in a total operating income (TOI) of VND 4,214 billion (an 11.9% increase).

However, due to a significant surge in provisioning costs, totaling VND 1,293 billion (2.9 times higher than the same period in 2022), pre-tax profit only amounted to VND 1,576 billion (a 26.2% decrease). For the accumulated 9 months, TPB’s pre-tax profit reached VND 4,959 billion (a 16.3% decrease).

Statistics reveal an increase in the bad debt ratio while TPB’s reserve “buffer” remains relatively modest. Specifically, TPB’s bad debt ratio in the third quarter spiked to 2.97%. Despite TPB’s heightened provisioning efforts, the bad debt coverage ratio (LLCR) experienced a sharp decline to 47%, placing it among the banks with the lowest LLCR in the system. According to TPB’s explanation, the substantial increase in bad debt and group 2 debt in the third quarter predominantly stemmed from the individual customer segment.

Notably, the bad debt ratio in this segment stood at 2.87%, while debt in group 2 within the individual customer segment reached a relatively high level of 5.85% (compared to the overall level of 3.77%). This indicates an elevated risk of bad debt formation in this customer group in the near future.

VNDirect Securities (VNDS) has revised its credit cost forecast for TPB, raising it from 0.8% to 1.9% in 2023 and from 1.5% to 2.5% in 2024. This adjustment accounts for heightened provisioning costs amidst increased bad debt and group 2 debt. VNDS suggests that TPB might face challenges in recovering bad debts due to the sluggish real estate market and legal issues associated with commercial housing projects.

Saigon Securities Company (SSI) also highlights the deterioration in TPB’s asset quality, particularly in its corporate bond portfolio, where overdue debt has surged by 360% compared to the second quarter, reaching VND 2,300 billion.

This increase is primarily attributed to the energy and real estate sectors. Although the reduction in lending interest rates is expected to alleviate some of the overdue debt, SSI anticipates that project housing loans and investors facing project delays or legal issues may encounter difficulties in short-term recovery.

TPB’s Unfavorable Financial Results

As anticipated by securities firms, TienPhongBank’s (TPB) recently disclosed 2023 business results present negative figures, deviating from the industry’s optimistic expectations. The fourth-quarter financial report reveals a 67% decrease in pre-tax profit, totaling nearly VND 630 billion. In 2023, TPB had set a pre-tax profit target of VND 8,700 billion, achieving only 64% of the set goal.

Simultaneously, TPB’s debt quality continues to deteriorate, with total bad debt exceeding VND 4,200 billion as of December 31, 2023, marking a threefold increase from the beginning of the year. Notably, all categories of bad debt surged by the same proportion: the bad debt-to-loan balance ratio rose from 0.84% at the start of the year to 2.05%, substandard debt increased by 331%, doubtful debt increased by 205%, and debt with potential capital loss rose by 121%.

TPB attributes the significant decline in fourth-quarter profits to credit risk provision costs, which were 17 times higher than the same period in 2022. Additionally, the bank’s operating costs increased by 12%, while operating income only grew by slightly over 21%.

The decline in profits for the entire year 2023 is primarily attributed to the sharp increase in provision costs and operating costs, coupled with a marginal increase in operating income. This challenging financial scenario raises concerns about TPB’s performance in the year ahead.

In light of the current circumstances, KBSV expresses the belief that TienPhongBank (TPB) will continue to experience provisioning pressure in the first half of 2024, especially with the expiration of Circular 02, coupled with the bank’s relatively modest reserve buffer.

While the corporate bond market is yet to recover, KBSV notes that a positive macroeconomic outlook could serve as a factor supporting credit demand for banks.

SSI forecasts TPB’s 2024 business results, estimating pre-tax profit to reach VND 7,600 billion, reflecting a 15.2% increase. This growth is attributed to the gradual recovery of credit, anticipated to reach 14.3% compared to the beginning of the year. With the ongoing trend of decreasing interest rates, it is expected that Net Interest Margin (NIM) will continue to recover, gaining 10 basis points to reach 3.87%.

However, concerns about asset quality persist, despite TPB’s proactive efforts to address bad debt. SSI estimates bad debt to amount to VND 1,800 billion, aiming to reduce the bad debt ratio to 2.4% in 2024.

Conversely, VNDS has revised its earnings per share (EPS) forecast for the 2023-2024 period, reducing it by 6.7% and 25.5%, respectively. This adjustment is attributed to lower credit growth expectations during the 2023-2024 period and an increase in credit costs by 1.1 and 1 percentage point. While an earlier-than-expected recovery of the corporate bond market is seen as a potential driver for price increases, VNDS acknowledges the heightened downside risks of higher-than-expected bad debt and the State Bank’s potential decision to increase operating interest rates to mitigate exchange rate risks. Consequently, VNDS has downgraded its recommendation for TPB from “positive” to “neutral.”

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