VCB released H1 2021 results with TOI of VND28.6tn (USD1.2bn; +24.2% YoY) and NPAT-MI of VND10.9tn (USD472mn; +23.6% YoY), achieving 49.4% and 46.5% of our FY2021 forecasts, respectively. The increase in NPAT was mainly due to (1) a 23.7% YoY increase in NII, (2) 69.3% YoY increase in pure NFI (including upfront fee), (3) 5.2% YoY increase in gains from FX trading, and (4) 3.5% YoY increase in net other income, which were partly offset by (1) a 18.5% YoY increase in OPEX and (2) 37.2% YoY increase in provision expenses. On a quarterly basis, VCB reported Q2 2021 NPAT-MI decreasing by 14.2% YoY due to (1) a 62.9% YoY decrease in pure NFI, (2) 51.7% YoY increase in OPEX (from a low base in Q2 2020), and (3) a 73.7% YoY increase in provision expenses. Given the impact of the fourth wave of COVID-19 in Vietnam together with a new lending rate cut program in H2 2021 at VCB to support customers affected by COVID-19, we see potential downside risk to our current forecasts for VCB, pending a more extensive review.

NII delivered strong growth of 23.7% YoY in H1 2021 on the back a 37-bp YoY increase in NIM. VCB reported H1 2021 NIM at 3.28% (+37.0 bps YoY) as a result of (1) a 93-bp YoY decrease in COF that outweighed a 51-bp YoY decrease in the IEA yield as well as (2) a faster pace of loan growth relative to deposit growth in 6M 2021 (9.8% and 1.9%, respectively). We attribute the decrease in COF to a series of deposit rate cuts by the State Bank of Vietnam (SBV) as well as a 4.4-ppt YoY increase in CASA ratio. The Q2 2021 CASA ratio of 33.2% was actually the highest CASA ratio for quarters that we have records for. Meanwhile, the decrease in IEA yield was mainly due to VCB’s lending rate support package for customers, in our view. According to the bank, VND2tn of interest income was sacrificed in H1 2021 to support customers affected by COVID-19. On a QoQ basis, VCB reported a 34-bp QoQ increase in NIM thanks to a 24-bp QoQ increase in IEA yield and a 9-bp QoQ decrease in COF. According to our estimation, regulated LDR increased from 75.1% in Q2 2020 to 82.2% in Q2 2021 vs our 2021F assumption of 76.7%.

NOII was relatively weak in Q2 2021 due to pure NFI. VCB reported H1 2021 NOII of VND7.4tn (+25.5% YoY) thanks to (1) a 69.3% YoY increase in pure NFI, (2) 5.2% YoY increase in FX trading, (3) a VND90bn gain in income from trading securities vs a VND21bn loss in H1 2020, and (4) a 3.5% YoY increase in net other income. However, if we exclude the annual upfront banca fee that was booked in the first quarter (we assume the same amount VCB booked in Q4 2020 of VND1.8tn), H1 2021 NOII would drop 5.0% YoY as a result of weak pure NFI in Q2 2021. Indeed, VCB reported Q2 2021 pure NFI that plunged 62.9% YoY to VND428bn; however, the lack of a specific breakdown restrains us from giving further comments at this point.

An 18.5% YoY increase in OPEX amid a 24.2% YoY increase in TOI helped to lower CIR from 34.9% in H1 2020 to 33.3% in H1 2021.

Provision expenses increased by 37.2% YoY in H1 2021 with Q2 2021 LLR climbing up to 352% from 279% in Q1 2021. Although VCB’s NPL ratio dropped 9 bps YoY in Q2 2021, H1 2021 provision expenses soared 37.2% YoY to VND5.5tn, which we attribute to VCB’s conservativeness amid the severe fourth wave of COVID-19 in Vietnam and/or additional provision expenses for restructured loans under Circular 03.

Asset quality remained intact in Q2 2021. The Q2 2021 NPL ratio remained low at 0.74% (-14 bps QoQ and -9 bps YoY) on the back of a H1 2021 write-off rate over gross loans of 0.07%. Group 2 loans relative to gross loans decreased by 39 bps YoY to 0.61% in Q2 2021. Q2 2021 accrued interest over IEAs decreased to 0.48% (-19 bps QoQ and -11 bps YoY).