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Vietnam's Military Bank gets on with the business of banking

Daniel Tabbush has covered banks in Asia for more than 20 years, most recently as head of Asian bank research at CLSA. The following does not constitute investment advice, and the views and opinions expressed are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

Vietnam's Military Commercial Joint Stock Bank appears to have turned a new leaf, moving beyond cleaning up the nonperforming loans and fire-fighting needed through the country's financial system and getting on with the business of banking.

MB, which is one of the country's largest banks with 239.817 trillion Vietnamese dong in assets as of end-September 2016, is no longer sitting on idle cash or securities so that it can pursue higher-yield loan assets. By the end of Sept. 30, 2016, its loan-to-asset ratio rose to 60% from 42% in 2012. As for its loan-to-deposit ratio, the figure moved from a low of 59% in 2014 to 77% as of the end of the third quarter last year. Peer banks, meanwhile, have been reporting a decline in this metric over the same period.

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This may explain why MB, whose largest shareholders are Vietnam Military Telecoms Co. at 14.75% and State Capital Investment Corp. at 9.83%, is among the banks with the best net interest margins in Vietnam, at 3.60% in 2016's third quarter. Peer banks' average was 2.25% during the same period. (It's worth noting that when banks expand their loans relative to deposits and improve their asset mix in favor of loans, the type of improvement at MB is what tends to happen.)

But there is something else that may be driving MB's higher margins: an improving loan mix. Its consumer loans to total loans rose to 29.1% in the third quarter of 2016 from 12.4% in 2012. Although most peer banks' financial reporting does not disclose such granular metrics, Saigon-Hanoi Commercial Joint Stock Bank does. And the profile could not be more different: its consumer loans-to-total loans fell from 27.99% to 17.69% over this same period.

As for its credit metrics, MB's NPL ratio is better than local peers, at 1.34% as at Sept. 30, 2016, compared with 2.73% in 2014. The average at peer banks was 1.97% as at end-September, remaining relatively flat over the period.

Even where Asia Commercial Joint Stock Bank and Vietnam Joint Stock Commercial Bank for Industry and Trade (also known as VietinBank), have lower NPL ratios than MB and where their NPL ratios have declined dramatically like MB's, their overall returns are subpar. Asia Commercial reported a 0.59% ROAA in 2016's third quarter, while VietinBank's was 0.81%. MB's was 1.23%, thereby showing that low NPLs alone are not enough to support returns and there is much more to the MB story than a cleaned balance sheet.

Consider capital. MB is nearly off the charts compared with almost all peer banks, with an equity-to-asset ratio of 10.73% as at the third quarter of 2016. Only Vietnam Export Import Commercial Joint Stock Bank has a comparable equity-to-asset ratio at 10.75% as at the third. The average equity-to-asset ratio for other Vietnam banks is 6.03%. This allows for continued strong growth for MB with no immediate need for new capital.

Perhaps these are some of the reasons that MB, along with Saigon Hanoi Commercial, were the only Vietnam banks that Moody’s upgraded in October 2016 after reviewing eight banks in the country, citing lower solvency and liquidity risks for the lenders amid more benign operating and economic conditions.

And perhaps it is not only MB that is turning a new leaf with a new era of deal-making that could soon start to sweep across the whole sector. The State Bank of Vietnam recently announced that the national 30% cap on foreign holdings in banks may now be removed on a case-by-case basis.

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As of Jan. 27, US$1 was equivalent to 22,592.50 Vietnamese dong.