The banking industry may have a hard time reaching its 2022 profit growth targets, but share valuations have dropped significantly to attractive prices.

In the past three months, banking shares witnessed sharp declines and were among the most negatively impacted on the stock market. Most banking stocks decreased by over 30 per cent and there was no single bank seeing positive growth.

The decline was attributed to stricter control of credit flows, increasing bad debts mainly caused by real estate businesses, corporate bond inspection at banks and inflationary pressure which have affected investor sentiment.

However, after a series of deep declines, many banking stocks are rebounding strongly in recent sessions. This brings hope to many investors in this industry group.

In a newly released report, FiinGroup said that the total operating income of 27 listed banks in the first quarter of 2022 increased by 8.2 per cent compared to the previous quarter. Compared to the same period last year, total operating income increased by 22.2 per cent and only three banks recorded a decline, the others grew positively.

Net income from services decreased by 12.1 per cent compared to the previous quarter after increasing sharply in Q4 of 2021, but still up by 14 per cent compared to Q1 of 2021. The high quarter-on-quarter growth of the remaining activities came from other activities (+83.3 per cent), foreign exchange (+21.7 per cent), while income from securities dropped sharply (-52.7 per cent).

Profit after tax of 27 listed banks increased by 51 per cent compared to the previous quarter and up by 31 per cent compared to the same period in 2021.

Non-performing loans are gradually increasing and may continue to rise in the coming quarters as banks gradually shift restructured debts to the right debt groups. FiinGroup believes that this will put pressure on some banks, especially those with low NPL coverage ratios and not enough provisioning. Meanwhile, banks that have actively made provisions with a high NPL coverage ratio will not be of concern.

In Q1 of 2022, the cost-to-income ratio fell to a low level of 30.1 per cent. However, the analyst team argued that two-thirds of the major expense items decreased quarter-on-quarter, including employee costs (-3.5 per cent) and asset spending (-34 per cent).

Regarding the business targets this year, up to 26 out of 27 listed banks set a target of 33 per cent year-on-year growth in post-tax profit. According to FiinGroup, banks will face many challenges to achieve this goal.

Net interest income is unlikely to increase strongly when interest rates are cut to support businesses and deposit rates raised to meet credit demand. The credit growth in the following quarters is difficult to maintain at the level of Q1 of 2022 due to the possibility of limited credit room. On the other hand, fee income is unlikely to grow high enough to compensate for net interest income growth.

Besides, on-balance sheet bad debt will continue to increase when the debt structure deadline expires on June 30, 2022. In addition to the banks that have made early arrangements, pressure will increase on the other banks.

Another factor to watch out for is the health of real estate businesses. According to an analysis by FiinGroup, the real estate industry is facing many obstacles, which will create additional challenges with profit growth and debt quality of banks.

However, after a strong correction period, the valuation of banking stocks became more attractive. A share's price/earnings (P/E) forecast for 2022 for the banking sector is 7.1x, 25 per cent lower than the current P/E of 9.5x. With a proportion of 30 per cent of total capitalisation and 43 per cent of total market profits, banks have a great impact on the overall P/E valuation.

Looking to 2023, tightened lending to risky areas will unevenly impact and create a divergence in profit growth in the banking industry, FiinGroup said.

Previously, Agriseco Research’s report also maintained a positive outlook for banking stocks thanks to credit growth after the pandemic is controlled, new policies issued by the Government, an interest rate subsidy package to help banks increase net interest income, plan for 2022 positive growth, strong capital raising plan and the price level of bank shares returning to an attractive state.

In the medium and long term, the analysts maintain the view that the banking industry will transform and be an attractive investment opportunity thanks to strong digital transformation. The scale and financial capacity of the banks are being boosted thanks to accumulated profits and the capital raising process, and issuance to strategic partners. — VNS