MEBF 5th Thesis - Valuation of Vietcombank - G3

VALUATION OF VIETCOMBANK – THE LEADING COMMERCIAL JOINT STOCK

BANK IN VIETNAM

By Trinh Hai Linh,

Nguyen Thanh Son, Luong Duy Nam,

Quach Thanh Long

Intake: 5th

A Thesis Submitted to CFVG

University Paris Dauphine ESCP Europe

In partial fulfillment of the requirements for the degree of MASTER IN ECONOMICS OF BANKING AND FINANCE

Hanoi, June 2009

Consultancy Project - Vietcombank Valuation

MEBF 5th , Group 3 1

ACKNOWLEDGEMENTS

We would like to express our sincere gratitude to Dr. Patrick Gougeon, consulting

project advisors, for his valuable guidance and advices for our research. We also

would like to thank professors of ESCP-Europe and CFVG members for their

valuable arrangement and kind support during our studying period.

We greatly thank Vietcombank, investment analysis teams for their consultations and

providing valuable documents for our project.

Thanks are also due to Mekong Securities Head Office, Privatization team for

their valuable time, constructive discussions and documents.

Finally, we are heartily indebted to our families for their help, encouragement and

support for us during our hard study of 18 months with MEBF – CFVG course.

Hanoi, June 2009

MEBF, Intake 5th – Group 3



TABLE OF CONTENTS

List of Abbreviation 3

I. Introduction 4

a. Context 4

b. Objectives 5

c. Methodology 5

d. Limitations of the valuation 5

e. Organization of the Paper 6

II. Methodologies 7

II.1. Discounted Cash Flow Approach 7

II.1.1. Dividend Discounted Model 8

II.1.2. Discounted Free Cash Flow to Equity Model 13

II.1.3. Discounted Free Cash Flow to Firm Model 14

II.1.4. Adjusted Present Value 16

II.2. Relative / Multiple Valuation Models 17

II.2.1. Price / Earning Multiples 18

II.2.2. Market to Book Value Multiples 19

II.2.3. Price to Revenue Multiples 20

II.2.4. Enterprise value to EBIT Multiples 20

II.3. Asset Based Valuation 21

II.4. Application in Valuation Model for Banks/FI in VN & VCB 22

III. Vietcombank Valuation 24

III.1. Macro updates 24

III.2. Bank Sector 27

III.2.1. Landscape of Vietnamese bank sector 27

III.2.2. In the future 34

III.3. Vietcombank Profile 34

III.3.1. Overview of Vietcombank 34

III.3.2. Ownership and Organization structure 36

III.3.3. Operations 37

III.3.4. Market Position 39

III.4. Financial highlights & Forecasts 41

III.5. Valuation 43

III.5.1 Valuing VCB using DDM 44

III.5.2 Valuing VCB using Multiples Methods 46

IV. CONCLUSION 49

Reference 51

Appendix 52



LIST OF ABBREVIATIONS

VCB Vietcombank (Joint Stock Commercial Bank for Foreign Trade of

Vietnam)

SSC State Securities Commission

IPO Initials Public Offering

OTC Over The Counters

HOSE Hochiminh City Stock Exchange

DDM Dividend Discounted Model

DCF Discounted Cash Flow Model

VCBS Vietcombank Security

FCFF Free Cash Flow to Firm Model

FCFE Free Cash Flow to Equity Model

APV Adjusted Present Value

CAPM Capital Asset Pricing Model

WACC Weighted Average Cost of Capital

EBITDA Earning Before Interest Tax, Depreciation & Amortizations

SBV State Bank of Vietnam

SOCBs State Owned Commercial Banks

JSCBs Jointed Stocks Commercial Banks

FBBs Foreign Branch Banks

JVBs Jointed Venture Banks

NPLs Non Performing Loans

ROaE Returns on average Equity

ROAA Returns on average Assets

CPI Consumer Pricing Index

BIDV Bank for Investment & Development of Vietnam

ACB Asia Commercial Bank

STB Sai Gon Thuong Tin Commercial Joint Stock Bank (Sacombank)

ICB Vietnam Bank for Industrial & Trade (Viettinbank)

GDP Gross Domestic Product

SCIC State Capital Investment Corporation

SMEs Small & Medium Enterprises

ATMs Automated Teller Machines

GSO General Statistic Office of Vietnam

EIU Economic Intelligence Unit

FDI Foreign Direct Investment

CAGR Compound Annual Growth Rate

MBV Market to Book Value



Part I

INTRODUCTION

Context

There is a saying that “When you talk about a (commercial) bank in the US, you are

talking about Bank of America. When you talk about a bank in France, you are

talking about BNP Paribas. And when you talk about a bank in Vietnam, you are

talking about Vietcombank”. VCB is known as a leader and has an important

influence on Vietnam bank sector.

The bank has received approval from State Securities Commission (SSC) to list its

112,285,426 ordinary shares, accounting for 9.28% of its chartered capital and

planned to go listing on HOSE, the main stock exchange in the South this summer

(end of June or early July). However, which price will be chosen as a reference price1

of VCB for its first trading day2 has not decided yet.

Safe to say it’s the single most important listing event in Vietnam in a long while.

However, VCB share price is really a big story for all individual investors and

institutions, both foreign and local ones. The bank has successfully sold its stake in

via IPO in 26 Dec 2007 with average winning price of around VND 107,000 per

share, a little bit higher than its offering price of VND 100,000 per share. Many

investment funds did not participate in the auction said that with its initial offering

price of VND 100,000 per share the stock was too expensive but VCB auction also

had its record on number of participants at that time. Did all these winners think that

1 The price which is decided by consultant firm (VCBS)

2 The stock must be traded within the range of +/-20% of the reference price for the first trading day,

and +/-5% on next days



the stock was cheap at that level? How much does the stock worth? After IPO3, the

low of around VND 25,000 per share was hit in Mar last year. And now, when the

bank trading on HOSE, how much we should pay for it? The valuation of the bank

really challenges us. So we started our consulting project as a full coverage on the

bank to find out the answer for our question.

Objectives

This consulting project’s specific objectives are:

Having a whole picture of Vietnam bank sector and drivers of commercial

banks

Applying Discount Dividend Method and Multiples Valuation Methods for a

commercial bank in an emerging countries like Vietnam.

Finding out and dealing with obstacles in these applications.

Giving the investors a valued reference for making decision on VCB

Methodology

In this project, we approach this bank by top-down analysis. We started with the

overview of macro-economy, then bank sector, VCB and valuation of VCB.

In the valuation, we have introduced various approaches but focused on Dividend

Discount Model and Multiple Method to value VCB.

Limitations of the valuation

With this valuation, we realize some limits on valuing a commercial bank in Vietnam

these days:

- Limit on sector information: We have no rating system in Vietnam so most of

the ratings were based on foreign organizations that surely have some limits in

reaching Vietnamese culture and business or they just scanned Vietnam in

3 After IPO, the sold volume was not listed immediately on an exchange floor but transferred on

unofficial OTC market.



general view, grouping Vietnam in emerging countries group or Asia countries

group.

- As a young stock market, Vietnam market lacks systematic information to

estimate. Even with the simplest model like DDM with three main inputs only,

we hard to find them out directly because they never been built up

systematically. Data like beta, market return, and market price of commercial

joint stock banks in Vietnam have not consolidated yet and even when we

wished to do it, the data for each bank were not available and updated

separately.

- Our valuation was made in a volatile and tough time of the financial world and

Vietnam. Using the most updated forecasts to make assumption somehow did

not exactly reflex the capacity of the economy as well as the bank.

Organization of the Paper

The consulting project divided into four parts:

Part I. INTRODUCTION

Part II. METHODOLOGIES

Part III. VIETCOMBANK VALUATION

Part IV. CONCLUSION

{Reference:}



Part II.

METHODOLOGIES

As we can aware, a lot of approaches to valuate company performance & for pricing

purpose, as far as the improvement of technique & scientist, we still can see some

traditional models still in good applicable for the market.

What we aiming to talk about are 3 main valuation approaches which were most

favorable for valuating the financial service firms & financial institution, which are

below:

- Discounted cash flow models (expected future data)

- Relative / multiple valuation model

- Asset based valuation model

II.1. Discounted Cash Flow Approaches

When a financial analyst is required to conduct a financial valuation on the business

or company being forecasted by the financial model, a commonly used valuation

technique in a financial modeling exercise is the Discounted Cash Flow (DCF)

method.

We can say that, DCF is basis principle to determine intrinsic value of any shares or

assets of the firm. To valuate any shares or assets of the firm is to valuate all of cash

flow which we will receive from that shares or assets in the future. Two think we

need to do for this model: first, to forecast future cash flow, then convert these cash

flow to present by discounting them by given discount rate.

Discounted Cash Flow valuation is the process of relates an asset to its present value



of future cash flows generated by the assets. This approach contents the following

main models

- Dividend discounted model (DDM)

- Free cash flow to equity model (FCFE)

- Free cash flow to firm model (FCFF)

- Adjusted present value (APV)

a) Advantage:

- Clear definition

- Take into account time value of money

- The model can be adjusted to adapt with specific characteristics of the firm

- The model relied on serial time of information

b) Limitation:

- The model depend much on assumptions

- Instability formula & Future estimate contents error

II.1.1. Dividend Discount Model

The dividend discount model is a more conservative variation of discounted cash

flows, that says a share of stock is worth the present value of its future dividends,

rather than its earnings.

When an investor buys shares, they expect 2 types of cash inflows: cash flow

dividend during the time share holding & cash flow equal to the price when they

decide to sell it out. The price of the shares is also the prediction based on the

dividend that the stock returns in the future. Therefore, the value of the shares at the

current value of all dividends that the stock brought in indefinite time period, in

another word, we can assume that we hold a share & earn unlimited cash flow in the

futures, and present value of all these cash flow would be call intrinsic value of the

shares.

Gordon Growth Model - DDM -Phase One

This model applies to shares in the period with a stable growth dividend no change



and sustainable development. Instead of the current value of the dividend stream and

the community, Professor Gordon Myrin has developed the formula in the value of

very simple as follows:

A model for determining the intrinsic value of a stock, based on a future series of

dividends that grow at a constant rate. Given a dividend per share that is payable in

one year, and the assumption that the dividend grows at a constant rate in perpetuity,

the model solves for the present value of the infinite series of future dividends.

Where:

D = Expected dividend per share one year from now

k = required rate of return for equity investor

G = Growth rate in dividends (in perpetuity)

When predict growth rate, we must note that, not only dividend growth rate, but also

other financial indicators important too, the most important benefit is also to grow

with in the same room. When the rate of growth of the dividend will be profitable and

the other supports, and therefore it maintained stably. In addition, the rate of

sustainable growth will only be less than or equal the highest rate of growth of the

economy. No business can grow forever with speed higher growth rate of the

economy.

Special cases: When the rate of growth in 0, ie the payout regularly unchanged,

intrinsic value of the dividend will be exactly equal to Gordon Model.

Assessing the Inputs

In the simplest form of the dividend discount model, there are only three required

inputs: the expected dividend, the dividend growth rate and the equity discount rate.

To determine the expected dividends, we make certain assumptions about future



earnings and payout ratios. In order to keep this uncomplicated, let's assume that

dividends infinitely grow at a constant rate.

So what rate do we use to determine the discounted present value of these cash flows?

This equity discount rate is also sometimes called the required return, or the cost of

equity. To simplify things for this column, one common method, called the capital

asset pricing model approach (CAPM).

The equity discount rate is the difference between the expected rate of return on the

overall market (usually the S&P 500 is used for the market return) and the risk-free

rate, multiplied by the stock's beta. This figure is added to the risk-free rate to arrive

at the equity discount rate.

We have made some oversimplifying assumptions, which are probably unrealistic in

the real world. For many companies, the assumption of constant dividend growth just

is not appropriate because some companies have an increasing level of growth in their

dividend rate for a number of years, after which the growth becomes constant. Other

companies have one constant growth rate in the near term, followed by a different

constant growth rate later. Still other companies have nothing constant at all with

their growth rates, as their dividends are highly variable.

In these cases, consider two types of cash flows: the dividends received each year,

and the price at which you sell the stock after some finite time horizon. The dividends

each year must be estimated or the growth rates must be projected. Alternatively, the

earnings and payout ratios can be estimated. The expected price of the stock at the

end of the holding period - the price you sell the stock for - is itself determined by the

discounted stream of dividend payments. These cash flows are then discounted back

using the equity discount rate.



Explaining the Dividend Discount Model

This is called the two-stage (or finite horizon) dividend discount model and looks like

this:

Now that we have gotten this far, there are two important limitations to point out.

First, this valuation technique, as well as any of the other discounted cash flow

measures, is very sensitive to the inputs: the growth rate of the dividends (and the

duration of the growth) and the discount rate used. A small change in any of these

inputs has a great influence on the estimated value. Second, the dividend discount

model is difficult to apply to growth businesses that do not pay dividends during

periods of high growth because they can earn rates of return on investments that are

above their required return.

Base on two models above, we can apply to the stock dividend have developed in

many different stages of time, such as models of 3 phases: dividend growth strong

reduction, and return to sustainable growth, or model 2 phase stable growth then

growth hot...

Multi-Stage Models

To get around the problem posed by un-steady dividends, multi-stage models take the

DDM a step closer to reality by assuming that the company will experience differing

growth phases. Stock analysts build complex forecast models with many phases of

differing growth to better reflect real prospects. For example, a multi-stage DDM may

predict that a company will have a dividend that grows at 5% for seven years, 3% for

the following three years and then at 2% in perpetuity.



However, such an approach brings even more assumptions into the model - although

it doesn't assume that a dividend will grow at a constant rate, it must guess when and

by how much a dividend will change over time.

Summary of multi stages of DDM

No. Name Formula

1 Constant Growth DDM VE = DIVt/(ke - g)

2 Two Stages DDM n VE = Z DIVt/(1+ke)t+ Pn/(1+ke)n

t=1

3 Three Stages DDM n1 n2 VE = Z DIVt/(1+ke)t + Z DIVt/(1+ke)t + Pn/(1+ke)

t=1 t= n1+1

DIVt : Expected dividend paying out

g : Constant growth rate of dividend DIVt

ke : Required rate of return to firm’s owners (Cost of equity of the firm)

Pn : Expected residual (terminal) value of equity at the end of period n

Pn = DIVn * (1+g)/(r-g) or DIVn+1/(r-g)

Advantage / Limitation of DDM

The strengths and weaknesses of the Dividend Discount Methods start with the lists

as those for the Discount Cash Flow Methods in the previous article. Also with detail

specific below:

A) Advantage:

- Clear definition with specific input variables

- Rational definition: Standard bond calculation as the discounted value of the

dividends plus the discounted value of the face value.

- Dividend data is readily available obtained from the financial statements of a

company & there is no dispute about them.

- Benefit form dividends are secure:

- Residual income: A tool of modify price.

A) Limitation

- Theoretical formulas: sometime, stock price has a high intrinsic value

compared to its price, does not mean that it will be a profitable investment in

terms of return. Benjamin Graham talked about the "hazard of tardy

adjustment of price to value”



- Multiple formulas There are many variations of the Dividend Discount

Method using a variety of structures for the growth rates. The outcome is a

range of different values. A stock could be undervalued according to one

formula, but overvalued according to another.

- Instability All the formulas are unstable. This means that small changes in the

input numbers lead to extremely large variation in the output. A change of a

few percent in the input can lead to changes of 100% or more in the output

- Untestable inputs It is impossible to test the accuracy of the key inputs in the

formulas such as the terminal growth rate and the discount rate because they

require forecasts out to infinity. More specifically, if I say that the long-term

or final growth rate is 4% and you say that it is 6%, we can never determine

who is correct since to do that we would have to wait for ever.

- Infinite sums As stated above, the DDM formula is an infinite sum. As such it

requires an infinite number of inputs for the values which cannot be done one

at time and requires them to be specified through a rule. This is a limitation on

the values that are possible for the inputs. A second limitation is to calculate

the value of an infinite sum we need to apply a mathematical formula.

However, there are only formulas for a restricted number of infinite sums.

II.1.2. Discounted Free Cash Flow to Equity Model - FCFE

The FCFE is an variant of DDM model, instead of discount the predicted future actual

dividends, the model discounted potential dividends (Damodaran, 2002)

n

Value of the equity = ∑ FCFEt/ (1+ ke)t + Pn/(1 + ke)n

t=1

Where:

FCFEt: Free cash flow to equity year t and

Free Cash Flow to Equity (FCFE)=Net income

- (Capital Expenditures – Depreciation)

- (Change in Non-cash Working Capital)

+ (New Debt Issued – Debt Repayments)



ke: Required rate of return to firm’s owners: Expected residual value at

the end of period n; ke can be calculated base on CAPM model as previous

introduction.

Summary of multi stages of FCFE

No Name Formula

1 Constant Growth FCFE VE = FCFEt/(ke - g)

2 Two Stages FCFE n VE = Z FCFEt/(1+ke)t+ Pn/(1+ke)n

t=1

3 Three Stages FCFE n1 n2 VE = Z FCFEt/(1+ke)t + Z FCFEt/(1+ke)t + Pn/(1+ke

t=1 t= n1+1

FCFEt : Free cash flow to equity year t

g : Constant growth rate of FCFEt

ke : Required rate of return to firm’s owners (Cost of equity of the firm)

Pn : Expected residual value of equity at the end of period n

Pn = FCFEn * (1+g)/(r-g) or FCFEn+1/(r-g)

II.1.3 Free Cash Flow to Firm Model - FCFF

Free cash flow to the firm model values firm rather than equity. Hence, in this case

we talk about the cash flow available not only to the stockholders, but also to

bondholders and creditors. The free cash flow to the firm is the sum of the cash flows

to all claim holders in the firm, including stockholders, bondholders and preferred

stockholders (Damodaran, 2002)

n

Value of the firm = ∑ FCFEt/ (1+ WACC)t + Pn/(1 + WACC)n

t=1

Where:

FCFEt: Free cash flow to firm year t and

Free Cash Flow to Equity (FCFF)=EBIT (1-T)

- (Capital Expenditures – Depreciation)

- (Change in Non-cash Working Capital)

WACC: Weight Average Cost of Capital

Pn: Expected residual value at the end of period n



Summary of multi stages of FCFF

No Name Formula

1 Constant Growth FCFF VE = FCFFt/(WACC - g)

2 Two Stages FCFF N VE = Z FCFFt/(1+WACC)t+ Pn/(1+WACC)n

t=1

3 Three Stages FCFF n1 n2 VE = Z FCFFt/(1+WACC)t + Z FCFFt/(1+WACC)t

t=1 t= n1+1 + Pn/(1+WACC)

FCFFt : Free cash flow to firm year t

g : Constant growth rate of FCFFt

WACC : Weighted average cost of capital

Pn : Expected residual value of firm at the end of period n

Pn = FCFEn * (1+g)/(r-g) or FCFEn+1/(r-g)

In any model of three difference stages of growth, high growth, forward & constant

growth, the most importance thing is assumption of variable should consistence with

assumption of these variables, the relationship with investment expense &

depreciation will be changed

It’ll be reasonable when we assume that the firm will start from first stage of high

growth, then move to forward growth stage and the last stage is constant growth

which is applicable when the difference of capital expenditure – depreciation have

small gap, it’s show the lower expected growth but stable .

WACC is the after tax weighted average cost of capital. Usually, not changing mix is

considered, but in reality several WACCs might be applied for different period

WACC = ke* (E/E+D+PS) + kd*(D/E+D+PS)(1-T) + kps*(PS/E+D+PS)

Where:

Ke = cost of equity kd = cost of debt

Kps = cost of preferred stock

E/E+D+PS = market value proportion of Equity

D/E+D+PS = market value proportion of Debt PS/E+D+PS = market value

proportion of Preferred Stock T = corporate tax rate (25% in Vietnam from

2009)



Suitability & limitation of FCFE & FCFF

A) Advantage

- FCFF is pre-debt cash flow & WACC is used. In cases where firm leverage is

expected to change significantly over time, the model would bring notable savings

- The model can avoid the problem associated with stable dividend payout ratio as

in DDM

B) Limitation:

- It may be seen that the assumptions made in the model is a crucial factor in

determining the ultimate result in estimating share price

- The model is also sensitive to projected synergy effect on cash flows, also it

would be most accurate if un updated interest rates were updated that reflect the

risk of the debt

- Estimating cash flow from net capital expenditures & non cash working capital

cannot be easily identified. It is possible, but if we define reinvestment differently.

We need to identify the amortizable life for the asset, collect information on

employee expense in prior year, compute the current years’ amortize expense,

adjust net income for the firm, and calculate human capital, regulatory capital…

II.1.4 Adjusted Present Value - APV

APV valuation model looks pretty much the same as FCFF model in way that the

cash flow is discounted to come to the value of operations and consequently to the

value of enterprise. However, instead of WACC, cash flows would be discounted at

the unlevered cost of equity, and tax shields at the cost of debt. APV and the standard

DCF approaches should give the identical result if the capital structure remains stable.

APV = Base-case NPV + PV of financing effect.

The APV method is especially effective when LBO case is considered since the

company is loaded with an extreme amount of debt, so the tax shield is substantial.



II.2. Relative / Multiple Valuation Models

Relative Valuation:

In relative valuation, the value of an asset is compared to the values assessed by the

market for similar or comparable assets. To do relative valuation, we need to identify

comparable assets and obtain market values for these assets. Then, we convert these

market values into standardized values, since the absolute prices cannot be compared.

This process of standardizing creates price multiples. The standardized value or

multiple for the asset being analyzed is compared to the standardized values for

comparable asset, controlling for any differences between the firms that might affect

the multiple, to judge whether the asset is under or over valued 4 .

A) Advantage

The use of relative valuation is widespread. There are several reasons:

- Using multiples of comparable firms allows completing with far fewer

explicit assumptions and far more quickly than a discounted cash flow valuation.

- Simpler to understand and easier to present to clients than discounted cash flow

models

- Is more likely reflecting the current mood of the market since it is an

attempt to measure relative and not intrinsic value 4.

B) Limitation

- The easy with which a relative valuation can be put together, pulling together a

multiple and a group of comparable firm, can also result in inconsistent

estimates of value where key valuation such as risk, growth, cash flow

potential are ignored.

- Multiples reflect market mood also implies that using relative valuation to

estimate the value of an asset can result in values that are too high when the

market is overvalued of the comparable firm or too low when it is undervalued

of these firms.

- The lack of transparency regarding the underlining assumptions in relative

valuations makes them particularly vulnerably to manipulation 4



Multiple valuation approach is one of second major equity approach which contents

the following main models

- P/E multiple

- Market to Book multiple

- Price to Revenue multiple

- Enterprise value to EBIT multiple

II.2.1 Price / Earning Multiples

Earning multiples are the most commonly multiples that buyers of stock look

at when making a decision. It is simply the ratio of the price paid for a stock over

the earnings per share generated by that company. This price-earnings ratio can be

estimated using current earnings per share, which is called a current PE, the

earnings per share of the latest four quarter, which is called a trailing PE, or

an expected earnings per share in the next year, called a forward PE.

When buying a business other than a bank, as opposed to just valuing the equity in

the business, it is common to examine the value of the firm as a multiple of the

operating income or the earnings before interest, taxes, depreciation and amortization

(EBITDA).

Price Earnings Ratios

The price earnings ratio for a bank or insurance companies is measured much the

same as it is for any other firm.

In valuing a bank, the price per share is calculated based on the Price Earnings Ratio

(PE ratio) of comparable firms multiplies by the earnings per shares of the

bank. If the average PE ratio of the comparables is trailing, the earnings per share

used should also be trailing earnings per share, and so is the case of the forward PE

ratio. In applying the PE ratio, we shall evaluate the comparable firms in term of

risk, growth and return characteristics to the possible extent justified by

comparing the risk multiples used of comparables firms. This task is not an

easy one because with a bank in multiple businesses (retail banking, securities



services, real estate, etc…), it is extremely difficult to find truly comparable banks

with the same characteristics.

II.2.2 Market to Book Value Multiples

Book value is the estimation of the business made by the accountant and

reflected in the financial statements. The accounting estimate of book value is

determined by accounting rules and standards that are heavily regulated and

influenced by the original price paid for assets and any accounting adjustment

(such as provision and depreciation) made since. Meanwhile, the market has a

different view on the estimation of value of the business which is more related to the

current value of the assets possessed by the company.

Investors often look at the relationship between the price they pay for a stock and the

book value of equity (or net worth) as a measure of how over- or under-valued a stock

is. The price-book value (PBV) can vary widely across industries, depending again

upon the growth potential and the quality of the investments in each. When valuing

businesses, analysts estimate this ratio using the value of the firm and the book value

of all assets (rather than just the equity). For those who believe that book value is not

a good measure of the true value of the assets, an alternative is to use the replacement

cost of the assets; the ratio of the value of the firm to replacement cost is called

Tobin’s Q.

Price to Book Value Ratios

The price to book value ratio for a financial service firm is the ratio of the price per

share to the book value of equity per share.

As with the PE ratio, valuing a bank using the Price to Book value ratio (PB ratio)

requires the use of the PB ratio of comparables firms. The price per share of the

bank to be valued then is calculated simply by multiplying the comparable PB

ratio with the book value of equity per share of the bank. The most current financial

information to calculate the book value of equity per share shall be applied and called



trailing book value of equity per share. It is also necessary to use the trailing PB ratio

of the comparable firms. Again, the difficulty arisen is in finding the truly comparable

firms where the PB ratio applied can be justified.

II.2.3. Price to Revenue Multiples

Both earnings and book value are accounting measures and are determined by

accounting rules and principles. An alternative approach, which is far less affected by

accounting choices, is to use the ratio of the value of an asset to the revenues it

generates. For equity investors, this ratio is the price/sales ratio (PS), where the

market value per share is divided by the revenues generated per share. For firm value,

this ratio can be modified as the value/sales ratio (VS), where the numerator becomes

the total value of the firm. This ratio, again, varies widely across sectors, largely

as a function of the profit margins in each. The advantage of using revenue

multiples, however, is that it becomes far easier to compare firm in different markets,

with different accounting systems at work, than it is to compare earnings or book

value multiples.

II.2.4 Enterprise value to EBIT multiple

Firm value multiples such as Value to EBITDA or Value to EBIT cannot be easily

adapted to value financial service firms, because neither value nor operating income

can be easily estimated for banks or insurance companies. In keeping with focus on

equity valuation for financial service firms, the multiples that we will work with to

analyze financial service firms are equity multiples. The three most widely used

equity multiples are price earnings ratios, price to book value ratios and price

to sales ratios. Since sales or revenues are not really measurable for financial

service firms, price to sales ratios cannot be estimated or used for these firms. We

will look at the use of price earnings and price to book value ratios for valuing

financial service firms.

A) Advantage

- Providing a relatively stable, intuitive measure of value that can be compared

to the market price



- Much simpler benchmark comparison than discount cash flows method

- Given reasonably consistency accounting standard across firms, price to

book ratio can be compared similar firms

- This method can be used to value firm who have negative earning that can

not used earning multiplier method

B) Limitations of this model

- Book value like earning are affected by accounting decision on

depreciation and other variables like provision policy

- Book value may not carry much meaning for services firm that do not have

much tangible assets

- The book value of equity could be negative if a firm has a sustained string of

negative earning report, leading to a negative price book value ratio.

II.3. Asset Based Valuation

In asset-based valuation, the existing assets of a financial institution shall be valued,

and then net out debt and other outstanding claims and report the difference as the

value of equity i.e. with a bank; this would require valuing the loan portfolio of the

bank (which would comprise its assets) and subtracting outstanding debt to estimate

the value of equity. How would you value the loan portfolio of the bank? One

approach would be to estimate the price at which loan portfolio can be sold to another

financial institution, but the better approach is to value it based upon the expected

cash flow 4

A) Advantage

This approach has merit if we are valuing a mature bank with little or no growth

potential.

B) Limitations of this model:

- It does not assign any value to expect further growth and the excess returns that

flow from that growth. A bank, for instance, that consistently is able to lend at

rates higher than justified by default risk should be able to harvest value from

future loans as well.

4 A.Damodaran, Investment Valuation, Second Edition, page 595



- It is difficult to apply when a financial institution enters multiple

businesses. A firm that operates in multiple businesses would prove to be

difficult to value because the assets in each business - insurance, commercial

banking, investment banking, portfolio management etc would need to be

valued separately, with different income streams and different discount rates.

II. 4. Applicable in Valuation Model for Banks/Financial Institution in Vietnam

& VCB

With recent development of stock market in Vietnam, in order to increase the

competitiveness, the Vietnam banks have followed the trend to be listed in the stock

exchange.

By analyzing bank industrial data availabilities, with nature of information risk, the

financial development trend over the past & the business plan to 2014, our purpose

for bank valuation is to measure suitable of selected valuation approach to the Bank,

which we aim at providing precisely & rational price so that to verify whether it’s

price is overvalued or undervalue versus market price.

Regarding to specific condition of emerging market like Vietnam, where capital

market is on developing process, lack of market information & secondary market still

in first stage of development, also recently urges of stock market & VNIndex is in

new generation. Process of bank & financial institution equitization in local market

are being boosted with strong supports from the Government & State Bank of

Vietnam.

However, fledging of stock market, lack information on capital market lead to some

limitation in applying the valuation methods above in specific variables input.

Therefore, when selecting valuation method, we need to make also a lot of

assumption which may not realistic & any change in assumptions, it’s lead to big

different to output of price. DCF have some clear definition & reputation when

applying in Vietnam Local Market while multiple valuations are good for reference /

correlation since local market not yet has enough competitive listed companies for



specific industries. We need also to benchmark with off-shore market or S&P to make

sure multiple models are applicable. For asset based methodologies, even it’s show up

real price of the firm at present but not take into account time value & expected value

of the firm while evaluating the firm for IPO & before listing, it’s also not take

goodwill of the firm when pricing. Therefore, we also recommend not to used for

Financial Institutions

For VCB valuation process, we would propose to apply DCF which may have some

reliabilities & applicable. In such case, DCF with DDM & FCFF will be applied.

Rational for this selection that is we focus on VCB projected future cash flow which

is more relevant & applicable with DCF, more ever, based on competitive advantage

of VCB in some variables inputs i.e large of scale, high excess return & high potential

growth rate. By using this approach, with availabilities of data in the past and the

business plan of VCB to 2014, also with researchable data of market for benchmark,

we aim at providing the valuation price which enable for us to compare with market

price of VCB, so that we would bring to the share-holders or investors an objective

view whether the price is overvalued or undervalued as of now.

Beside, with limitation of data provided, some variables input might need to make

assumption depending current situation.



Part III

VIETCOMBANK VALUATION

III.1. Marco Update

GDP growth forecast will entail continuing overall credit growth

At the end of QI/2009, Vietnam’s

GDP growth achieved only at 3.1%

given the shortfall of investment and

exports in the early months of 2009.

This was the lowest growth rate over

the past ten years. However, this

achievement still outperformed other

countries in the region as many posted

negative growth due to impacts of the

world economic crisis. The target of

GDP 2009 has been revised down to 5% (previously 6.5%) and this would be more

feasible. As noted from many forecasts (World Bank 5.5%); (IMF 4.75%, ADB

4.5%) or even more pessimistic (EIU 0.3%), we expect GDP could be around 5-5.5%

this year or at least 5% for upcoming years. Estimates from the Economic Intelligence

Unit (EIU) forecast overall bank loan growth in the coming five-year period still stays

level of GDP.

GDP (%)

Source: GSO, IMF



FDI continued to rise.

An important factor for foreign

banks’ lending growth is FDI,

particularly the setting up of

industrial zones in Vietnam.

Currently there are 130 industrial

zones attracting 4,516 projects

valued at US$18 billion in foreign

capital and 15 new zones are

under construction. These zones

provide the source of credit growth for foreign banks. In QI/2009, FDI has increased

strongly to 40%y-o-y with 93 newly-licensed projects, the industrial production is

also rose slightly at 2.1%. As of 31 May 2009, attracted US$ 6.68 billion and equaled

to only about 23.7% of total amount in the same period in 2008. Total disbursed

capital in the first 5 months of this year was estimated at about USD2.8 billion.

However, it is still at a good level.

Vietnam has just reported trade surplus in the QI/2009. Although the country

experienced deficit again in April

with USD1.12 billion and about

USD1.5 billion in May, total deficit

value in the first 5 months of 2009

was USD1.13 billion. With this

trend, we expect the trade deficit of

2009 to be at lower level of around

USD10 billion than previous year.

CPI tends to decrease to

reasonable level

CPI in May 2009 continued to increase slightly to 0.44% m-o-m or 2.12% y-o-y due

to the impact of adjusted petrol price recent months. There was concern of inflation

coming back, however, with CPI is still in expected trend and we expect the CPI in

2009 would be less than 15%.

TRADE BALANCE (VND BN)

Source: GSO, IMF

Vietnam CPI

Source: GSO



Monetary policy and FX were reasonably stable.

In addition to the first economic stimulus packages to deal with economic downturn,

the second lot of similar package has been launched by the Government to continue

subsidizing borrowing costs of businesses with 4% for medium and long term loans.

We see this move is quite positive in order to push investment and demands strongly.

As a result, this would help support directly businesses and stop economic slowdown

as well as maintain growth in the current challenging situation.

According to SBV, some other key interest rates will also be applicable from June 1st,

2009. Recapitalization interest rates and rediscount interest rates for credit institutions

are 7% and 5% per annum, respectively. Moreover, the overnight interest rate for

inter-banking online payment and loans to compensate losses in SBV’s payment to

banks are both 7% per annum.

End of May-2009, commercial banks reported that outstanding loan entitled to interest

rates support of 4% per annum is more than VND 301 trillion.

The State Bank of Vietnam has recently adjusted the trading band of USD/VND from

2% up to 5%. The rate increased to 17,750 and topped at 17.839 at the announcement

on 24 March. The rate increased to 18,000 at the unofficial market. However, it

became stable and just fluctuated around 17,700-17,800 at the end of March due to

weak demand and strong supply from gold export source.

Basic Interest Rate (%)

Source: GSO, SBV

USD/VND

Source: GSO, SBV



6%

21%

46%49%

60%65%

70%

0%

20%

40%

60%

80%

Vietnam Indonesia Chile Thailand Malaysia Korea China

III.2. Bank Sector

III.2.1. Landscape of Vietnamese bank sector

Vietnam’s banking industry

landscape is marked by a

large and increasing number

of players that include state-

owned commercial banks,

private joint-stock

commercial banks, foreign

JV banks and foreign bank

branches. Market share

concentration remains quite

high for the time being, with the big four state-owned and pre-state owned

commercial banks (SOCBs) continuing to dominate in both loans and deposits.

However, joint stock banks become stronger with market share increased in both

lending and fund mobilization.

Banking penetration, relative to nominal GDP, is on the move but still low,

compared to other countries in the region, represents substantial rooms for

growth.

Total bank loans reached VND 1,223 billion or US$69.9 billion at the end of 2008,

equaling to 82% GDP, steadily up from just 35% GDP in 2000.

Vietnam’s bank penetration in term of savings is even lower. The country currently

has only around six million bank accounts, five million of them for retails out of to a

total population of 86 million, which translates into a 6% market penetration. The

government’s focus on banking reform has helped to improve public confidence in

banks over the last few years and total bank deposits has experienced a steady rise

from 23% of GDP in 2000 to 50% in 2006.

Consumer loan still a small part of total loan

Consumer loan of the country is still at low level of 6.54% of gross loans or around

5.3% of GDP (as of Sep-2008) while this ratio in other developed counties is much

Bank Account as Percentage of Population (%)

Source: Deutsche Bank, S&P, CEIC, World Bank



higher over than 30%. This will be changing on the back of a growing middle class

and a young population acquiring consumption culture. It is anticipated that consumer

loan as a main part of retail sector will be the key driver of banking growth in Asia

Pacific.

Growth, the banking industry is advancing rapidly with both deposits and loans

rising at high, double-digit growth rates per annum.

The robust economic backdrop and development of products/services has resulted in

Vietnam’s credit growth of more than doubling the pace of GDP growth, a 25%

CAGR for 2000-2006. Credit growth peaked above 35% during 1999-2000 due to

substantial infrastructure investments. But the government then tightened the

regulations which led to a more moderate 20-28% growth in 2001-2003. Credit

growth again rose sharply to 42% in 2004 as a result of the global economic recovery,

property and further investment boom. In response to a sharp increase in inflation and

credit growth, the State Bank of Vietnam (SBV) raised its basic interest rates and

reserve requirements in 2005 which resulted in a normalization of credit growth to

30% in 2005 18% in 2006 and 58% in 2007. Interest rates were overly high and the

inflation rate reached up o 21% in 2007.

In 2008, as the result of government’s effort to reduce the country’s credit growth and

control its inflation, the tightening monetary policy was apply, the base rate skied

rock up to 14% while lending rate was capped at 21%. Market became illiquid due to

high capital cost and the crisis in the global market which narrow the market for

output products.

The key segments of growth story are the private corporate, SME and consumer

lending areas, as their development is still in a nascent stage. On the other hand, the

banking sector’s historical reliance on SOE borrowing (especially SOCBs) should

continue to drop.



Lending 2008

Lending 2007

Source: SBV Annual report 2008

Fund Mobilization 2008

Fund Mobilization 2007


57.05%

9.01%

33.94%

23.73%

9.30%

66.97%

SOCBs

JSCBs, non bank

institutions &

credit funds

FBBs & JVBs

33.14%

8.79%

58.07%

68.98%

8.11%

23%

SOCBs

JSCBs, non bank

institutions &

credit funds

FBBs & JVBs



Credit Growth (trillion VND)


Fund Mobilization (trillion VND)


Asset Quality - Vietnamese

banks’ overall asset quality

has been improving since 1999

largely due to banks’ write-off

efforts and strong new loan

growth. According to non-

performing loan (NPL) data

reported by SBV, NPL ratio

peaked at a high of 14.5% in

1999, though the true underlying

level of problem loans is believed to have been even higher. Asset quality began to

improve thereafter as the economy recovered, the government’s SOE and banking

reform efforts started to take positive effects. In 2001-2003 the government injected a

large amount of money into the SOCBs to enable them to write down their NPLs.

Subsequently, NPLs dropped significantly to 4.7% in 2003 from 8% in 2002. There

was a sharp increase in the reported NPLs in 2005, standing at 7.7%, but due to a

change to more stringent NPL classification standard rather than due to a true

Bank Asset Quality

Source: Deutsche Bank AG

28

*

39

*

-22

*

-8

*

10

*21

*

12.7%

8.5%8.0%

4.6%

7.7%

4.7%

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005

US

$ m

illi

on

0%

2%

4%

6%

8%

10%

12%

14%

Bad Dept Exp (US$mm) Net NPL/Equity (x) NPL Ratio (%)

x

*



deterioration of credit quality.

By the end of 2008, total equity of banks increased by 30% from US$7.2 billion to

US$ 9.3 million due to significantly increasing in earnings in 2007 and banks’

chartered increasing plan as a requirement of SBV of VND 1.000 billion ( aprox US$

57 million)

Total Assets 2008 – Top 15 Vietnam banks (US$ million)

Source: MKS, 2008 annual reports of banks

Market share concentration remains quite high for the time being, with the big

four state-owned and pre-state owned commercial banks (SOCBs) continuing to

dominate in both loans

and deposits.

As of May 2009, there were

03 state-owned commercial

banks (SOCBs), 39 joint-

stock commercial banks

(JSCBs) of which 2 banks

are pre- state-owned banks

(Vietcombank and

Vietinbank), 5 joint-venture

Banks, 40 foreign bank branches, a number of credit cooperatives, microfinance

institutions and financing companies operating in Vietnam’s banking sector and

specially 5 new wholly foreign banks. The big four state and pre-state owned

commercial banks (Vietcombank, Incombank, Agribank and BIDV) still dominate the

US$ million

22,107

13,93512,683

11,232

6,525

3,917 3,401 2,757 2,534 2,205 1,984 1,977 1,888 1,349 1,284

Agribank BIDV VCB Vietinbank ACB STB Techcom EIB MB SCB VIB EAB MSB HBB SEAbank

Vietnam – Number of Banks 1991- May 2009

Source: MKS, SBV

4

41

48

3937 37 37

39

1544 35554

8

40

333129

26

18

4 555443 5

1991 1993 1995 2001 2005 2006 2007 May-09

SOCBs JSCBs FBBs JVCBs Wholly foreign banks



sector with around 70% of the nation’s loans outstanding as of 2007 (or 2008),

focusing mainly on SOE segment. JSCBs account for around 16% market share,

focusing mainly on SMEs and individuals. Foreign bank branches and JV banks hold

around 10% market share, while the small credit and leasing institutions together

comprise less than 5% of the market.

Bank Performance - in 2008 in Vietnam, no bank reported losses, no bank

became insolvent despite of financial crisis over the world.

In fact, 2008 was a very tough time for banks in Vietnam. The stormy year 2008

struck deadly blows to local banks. Furthermore, Vietnam’s macroeconomic

turbulence created extremely difficult conditions for banks to operate. Vietnamese

banks have limited capital base to ensure liquidity and lack of professional skills to

keep the balance sheet clean. However, in 2008, Vietnamese banks achieved much

better results than banks in other countries (not mentioning the collapsed international

banks). In 2008, Asian banks earned only 0.27% return on assets while the worldwide

average was 0.47%. The ROAE of 258 banks in 14countries was 0.15% and that of

1465 banks in 79 countries was 3.47%.

ACB continued to outperform the whole market. In the meanwhile, Vietcombank

moved further away from the SOCBs group with third highest RoaE but its asset

usage still lagged behind other members. The most critical issue that VCB needs to

solve in a bid to become the market leader is the asset quality. The NPL of the bank

was second worst (4.6%).



Vietnam – Bank Grouping 2008

Source: Jaccar

In general, the capital profitability level (ROaE) of the Vietnamese banking sector

ranges from 10% to 23%, with few exceptions. This ratio surpassed the average

ROaE of 8.17% for the American banks1, 9.33% for the Asian2, and 11.8% for the

worldwide average3. In terms of asset usage (ROaA), Vietnamese banks separate into

two groups: SOCBs have a range of 0.5% to 1.1% and JSCBs of 1.3% to 3%. The

average of Asian banks is 0.89% and the worldwide average is 1.19%. The ROAA of

JSCBs is about 1.15% higher than that of SOCBs and the ROAE is 8.5% lower. It

signifies that the JSCBs utilize financial assets much better than SOCBS and those

SOCBs are highly leveraged due to the fact that the Owners’ equity (i.e. state’s equity

indeed) is intentionally kept low.

Source: Jaccar, Bloomberg

III.2.2 In the future



It would be tough time for banking sector upcoming years as signs of economic

recovery are still dim. Banks’ profitability highly depends on the Government’s

measures to stimulate production and consumption while controlling inflation. Thus,

contrary to previous years, most banks set conservative profitability targets. Most

importantly, as can be seen from 2008, banks’ topmost concern now is how to tame

the non-performing loans and to clean up the balance sheet. This is an extremely

tough task as the whole sector’s NPL ratio grew to 5% in May 2009, up from 3.5% at

2008-end. Drawing lessons from 2008 that size really matters; all Vietnamese banks

have decided to increase their capital base in 2009 despite the unattractiveness of the

capital markets and the low level of investor confidence on economic growth (and

hence financial sector recovery).

However, Vietnamese banks were expected to have a strong growth, outperforming

many other banks in the region. The growth was based on following drivers:

Robust economic growth,

Growing population,

Rising income level,

High savings rates,

Low penetration and

Underdeveloped retail banking base,

III.3. Vietcombank profile

III.3.1. Overview of VCB

Headquartered in Hanoi, the Bank for Foreign Trade of Vietnam (“Vietcombank” or

the “Group”) is the third largest banking group in Vietnam by assets with

approximately VND221,950 billion ($12.75 billion) in total assets as at

31December 2008, representing a market-share of 15% by assets among domestic

banks. The Group is also the most profitable universal banking and financial services

group in Vietnam generating approximately VND3.765 billion ($216 million) of pre-



provision operating profit as at 31 December 2008. Established in December 1963,

as a fully state-owned commercial bank (SOCB), the core businesses of the Group

include commercial banking, foreign exchange transactions, and international trade

finance services. The Bank’s vision is to build a universal financial group that

operated by best international practices, maintain its key role in Vietnam and

becomes 1 of top 70 Asian (non-Japan) financial institutions by 2015-2020.

Successful IPO and Listing Plan

On 26 December 2007, VCB preceded its IPO, earmarking the very first step of the

Vietnamese Government’s efforts to transform its five SOCBs into JSCBs. The

average price of VND 107,860 (USD 6.5) for a par value of VND 10,000 (USD 0.6)

was a big success for the Government in terms of profits realized.

As the first state-owned bank to be equitized, VCB had been received much attention

of and close instruction from the relevant governmental authorities as well as

investors both in domestic and abroad. For the first time in Vietnam, the equitization

of a state-owned enterprise was implemented according to international practices.

This is considered one of the most important events of the banking event in 2007 as

well as one of the most significant IPOs in the stock market of Vietnam. In 2008,

VCB was officially transitioned to a joint-stock commercial bank with the largest

chartered capital in Vietnam totaling to VND 13,790 billion ($ 792,5 million), under

the full registered name as “ Joint Stock Commercial Bank for Foreign Trade of

Vietnam” , its short name remains unchanged as “Vietcombank” .

The bank is making great efforts to list on the Stock Exchange in 1H09. On

December 31, 2008, the authorities from the Ho Chi Minh Stock Exchange (HOSE)

announced receiving initial listing application from the Bank for Foreign Trade of

Vietnam (VCB) whereby the bank will list 112,285,426 ordinary shares at 10,000

dong par on the Southern Stock Exchange, accounting for 9.28% of its chartered

capital (The State still controls 90.72% of the bank’s equity) under the consultancy of

VCB's Securities. On having the approval The State Securities Commission (SSC),

the bank is entitled to list its shares within 90 days. This means that VCB shares will



be freely traded before the second half on the HOSE. We note that this is a pure

listing, no dilution will occur.

III.3.2. Ownership and Organizational structure

Ownership structure

Investors Shares owned Percentage SCIC (State) Overseas Corporations Local Corporations Vietnamese individual investors Foreign individual investors

Total

1

177 37

15,493 178

15,886

1,097,800,600

36,477,243 28,106,100 47,167,749

534,334

1,210,086,026

90.72% 3.01% 2.32% 3.90% 0.04%

100.00%

Source: VCB website

Currently, the Bank has one Head Office, one Operations Center, 63 main branches,

208 Transaction sites located throughout Vietnam, one training center, 4 subsidiary

companies in Vietnam, one overseas subsidiary company in Hong Kong, five joint

ventures, and an overseas representative office in Singapore.

Main subsidiaries of VCB include Vietcombank Securities Company (VCBS), a

leading securities house in Vietnam, VCB Fund management (VCBF), a joint venture

with Franklin Templeton, and VCB Leasing (VCBL), a very active leaser in the

financial sector. Others include: life insurer VCB-Cardiff, VCB Tower and VCB-

Bonday, which operates in real estate industry and Shinhan-Vina bank, a joint-venture

with Shinhan bank (Korea).

In the meantime, from now to 2015, VCB tries to improve its capacity and

competitiveness by raising the CAR to 10%-12%, and keeping NPL ratio of less than

3%. It aims at having average asset growth of approximately 15-20% p.a., minimum

ROAE of 15% p.a. and ROAA of 1.2% p.a. In our opinion, those targets will be

achievable.

The current organizational structure of VCB is as follows:



III.3.3. Operations

Lending activities: VCB’s core business is in corporate banking. About two thirds

of its lending activities are carried out with big businesses, a large part of which

are state-owned enterprises, and nearly 10% are with individuals (1H08). The years

2007 and 2008 saw a clear commitment of the Board at fulfilling their expansion plan

to the private sector as part of the plan to move into a universal bank.

Lending activities for SMEs account for around 22% (1H08) and will continue to eat

up the share from the big SOEs in the years to come. In 2009, the proportion of credit

to SMEs, we anticipate, will approach 30% thanks to the Government’s stimulus

package for enterprises. Under the package, firms will borrow loans from banks

with 4% interest rate subsidy by the government for 12 months (with some specific

conditions applied).

Fund mobilization: VCB mobilizes huge amounts of capital from the depositors.

The customer deposits often account for approximately 70% of the total assets (equal



to 10.4% of GDP). More importantly, perceived as a safe bank and having an

extensive outlet network nation-wide, VCB has the cheapest cost of funding among

commercial banks.

This massive fund enabled the bank to be active in the inter-bank market during the

down time of enterprises’ business activities (inter-bank lending often ranges from

30% to 50% of customer loans). Roughly 40% of the current accounts are in

foreign currencies, VCB turns out to be an oligopoly player while the financial

market was hungry for dollars during the period of devaluation threat in the second

quarter.

Trade finance is a core product of VCB. It holds approximately 30% of market-

share in this area. The bank receives a fee for providing trade finance facilities,

and receives interest income on amounts that are drawn under the facilities.

However, fee income is the most important revenue component. income on amounts

that are drawn under the facilities. However, fee income is the most important

revenue component.

International settlement is another core segment of the VCB’s business, in

which it retains a leadership position in Vietnam with about 27% market-share.

International settlement services are driven both by trade-related transactions as

well as fund transfers and other remittances. The bank’s services include

payment guarantees, outward and inward remittances, payments and money

transfers, as well as overdraft protection facilities. Leading customers for

international settlement include many of the country’s top importers and exporters

as well as smaller banks which do not possess international banking licenses. The

volume of money transfer in the first half of 2008 was USD 13 bn (VND 221 trn).

Foreign exchange trading: Being formerly the export and trade department of

State Bank of Vietnam (SBV) has allowed VCB to establish a strong track record

and foothold in foreign exchange transaction and trade financing. In 2008, VCB

carried out over US$30bn in foreign currency transactions, representing

approximately one third of all trade payments in Vietnam which is unrivaled among its



domestic banking peers. Besides that, VCB has developed extensive international

network and has built up strong agency relationship with around 1,200 international

banks and bank agencies in 85 countries.

The card business serves as one of the major non interest income contributors for

VCB. Over the years, VCB has established a dominant position in the payment card

business. Credit cards service enjoys significant volume and thus makes high profits

since VCB applies the international fee grid. It expects to bring VND 275 bn (USD

16m) in profits in 2009 (Jaccar’s estimate). The bank can get at least 0.5% interest if

loaning this amount out on the inter-bank market, enjoying VND 17.5 bn (USD 1 m)

in profits per month . Owning a wide-spreading network of 1,200 ATMs and 7,800

POS and managing 3 million debit cardholders and 250,000 credit cardholders, VCB

has a fruitful territory for the fee income. This income contributes a large part to the

8.3% of the total revenue from the service income.

III.3.4. Market Position

Asset

VCB is the third largest banking group in Vietnam by assets with approximately

VND221,950 billion ($12.75 billion) in total assets as at 31 December 2008,

representing a market-share of 15% by assets among domestic banks. VCB’s scale

has enabled the bank the capture the lion’s share of loans to blue-chip state-owned

and equitized companies. The Group has built strong relationships with corporate

customers such as PetroVietnam, Electricity of Vietnam, Vinashin, Vinafood and

Vietnam Steel Corporation. VCB is a market leader across corporate banking

segments in Vietnam, supported by a dominant position in trade financing and

international payments (with a market-share of approximately 27%), in lending to

export-related industries, as well as in foreign exchange transactions.

Market share

Currently, VCB is a market leader in many respects. It is the most profitable banking

and financial services group in Vietnam, having the highest Profit Before Taxes (i.e.

VND 3,357 bn or USD 200 m) after booking a huge amount at provision reserves,

which is VND 3,050 bn (USD)180 m) (non-consolidated).



The market leader position is built up on the corporate banking segment and on

international financial settlement services. It handles over one-third of export trade

payments in Vietnam and holds 17% market share in import financing and 27% in

international payments. On the retail banking market, VCB operates the second

largest ATMs network (with 1,200 machines) and is the number 1 in providing

POS (with 7,800 devices) throughout the country. It manages over 250,000 credit

cards (holding 40% in international credit card issuance) and over 3 million debit

cards (33% market share).

Profitability: Return on Assets (ROAA), Return on Equity (ROAE)

VCB has improved its operations dramatically in the past five years. Despite the

fierce competition from other SOCBs, the JSCBs and the international banks, VCB

maintained good growth in its profitability. Margins and ROE have recovered sharply

since 2002 when ROE hit a low of just under 7.5%. The bank’s PBT (non-

consolidated) in 2008 is VND 3,557 bn (USD 197m).

At present, VCB has a stronger financial performance and position compared with

other SOCBs. It is the most profitable and efficient SOCB. In 2008, VCB achieved

ROAE and ROAA of 15.77% and 1.03% respectively. During the same period, the

average ratios of other SOCBs are 15% and 0.7% respectively.

VCB’s ROAA is below the average Asian banks’ ratio of 1.45% and higher than the

US banking industry of 0.86%. Like other SOCBs, however, VCB’s ROAE, which

is 20.3%, surpassed the average ROE of 16.33% for Asian banks and 8.17% for the

American. They imply that VCB is more profitable and more leveraged than Asian

incumbents.

As compared to the top ten JSCBs, VCB takes advantage of its resources less

efficiently. The Tier-1 banks have average ROAA of 2.37% and the Tier-2,

1.67%. In terms of maximizing shareholders’ funding, VCB is better than the Tier-2

banks. However, it needs to work harder to approach Tier-1 banks’ achievements.

Ratio 2005 2006 2007 2008 5-year Av. SOCBs Tier 1

JSCBs

Tier 2

JSCBs

Asian

banks

US com.

banks

ROAA ROAE

1.01% 16.54%

1.89% 29.42%

1.32% 19.43%

1.03%

15.77% 1.31%

20.3% 0.70%

21.78% 2.37% 30.33%

1.67% 14.52%

1.45% 16.33%

0.86% 8.17%

Source: Jaccar



III.4. Financial Highlights and Forecasts

In order to value VCB, we estimate key assumptions as followings:

KEY ASSUMPTIONS

FY ended 31 DEC, in VND bn 2004A 2005A 2006A 2007A 2008A 2009F 2010F 2011F 2012F 2013F 2014F

Cash and cash equivalents growth 0.67% 20.52% 32.51% 8.67% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%

Loan growth 35.30% 13.88% 10.97% 43.97% 15.65% 20.00% 25.00% 25.00% 25.00% 25.00% 25.00%

Loan overdue/gross loan 2.14% 3.23% 2.75% 3.31% 4.62% 4.60% 3.00% 3.00% 3.00% 3.00% 3.00%

Provision to NPLs ratio 72.32% 68.09% 80.09% 65.06% 80.00% 75.00% 75.00% 75.00% 75.00% 75.00%

Deposits growth 27.00% 23.88% 9.25% 18.21% 10.93% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%

Balance with central bank/Deposits 2.95% 5.78% 9.89% 8.24% 19.46% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%

Investment in securities growth 9.25% 32.05% 30.28% 3.30% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%

Equity investment -11.31% 2.42% 20.10% 101.47% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

Fixed assets growth 19.63% 4.75% -8.52% 29.71% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%

Total assets growth 13.93% 22.11% 18.24% 12.43% 21.00% 21.00% 21.00% 21.00% 21.00% 21.00%

Shareholders' Equity 17.21% 32.21% 21.79% 1.76% 11.41% 25.14% 16.06% 16.95% 17.79% 15.88%

Borrowings from the SBV growth -13.43% 39.22% -22.97% -24.99% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Interest income growth 46.3% 44.3% 24.4% 10.7% 0.6% 18.3% 18.4% 18.5% 18.6% 18.79%

Interest income/total earning assets 3.7% 4.8% 5.7% 6.0% 5.9% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%

Interest expenses/interest bearing debts 2.2% 2.4% 3.5% 4.2% 4.3% 3.5% 3.5% 3.5% 3.5% 3.5% 3.50%

Interest expenses growth 24.3% 73.8% 38.2% 11.9% -3.6% 18.2% 18.3% 18.5% 18.6% 18.9%

Non-interest income growth 119.0% 2.9% 43.3% 19.1% 37.7% 20.0% 30.0% 30.0% 30.0% 30.0% 30.00%

Non-interest expenses growth -31.7% 32.1% 43.4% 33.4% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Personnel expenses growth 74.9% 13.5% 43.8% 19.8% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Effective Tax Rate 26.3% 26.6% 26.1% 24.6% 21.8% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Payout Ratio 53.4% 31.8% 40.0% 40.0% 40.0% 50.00%

Based on the above key assumptions, we make financial projections in the next 5 years with more details with the rationales included.



BALANCE SHEET PROJECTION


A. Loans

Item 1 Loans 52,459 59,072 65,882 94,301 107,586 129,125 164,114 205,142 256,428 320,535 400,668

Item 2 Loans overdue 1,146 1,972 1,861 3,231 5,207 6,226 5,076 6,345 7,931 9,913 12,392

Item 3 Loan loss reserve (829) (1,343) (1,490) (2,102) (4,264) (4,981) (3,807) (4,758) (5,948) (7,435) (9,294)

Total A 52,776 59,701 66,252 95,430 108,529 130,371 165,383 206,728 258,410 323,013 403,766

B. Other earning assets

Item 4 Balances with the central bank 2,607 6,336 11,848 11,663 30,561 6,597 7,916 9,499 11,399 13,679 16,415

Item 5

Current A/C, deposits, placements with

banks 38,602 42,384 52,235 41,598 30,368 44,285 42,885 41,808 38,379 31,607 20,709

Item 6 Investment in Securities 21,569 23,564 31,117 40,538 41,876 48,158 55,381 63,688 73,242 84,228 96,862

Item 7 Equity investment 537 476 488 586 1,180 1,215 1,252 1,290 1,328 1,368 1,409

Total B 63,315 72,760 95,688 94,384 103,985 100,254 107,434 116,285 124,348 130,882 135,396

C. Total earning assets (A+B)) 116,091 132,461 161,940 189,814 212,514 230,625 272,817 323,013 382,758 453,895 539,162

Item 8 D. Fixed assets 915 1,095 1,147 1,049 1,361 1,565 1,800 2,070 2,380 2,737 3,148

E. Non-earning assets

Item 9 Cash and cash equivalents 1,993 2,006 2,418 3,204 3,482 13,411 16,690 19,142 22,290 26,334 30,792

Item 10 Other assets 1,007 1,158 1,447 3,341 4,593 3,516 4,131 4,897 5,811 6,899 8,206

Total E 3,000 3,165 3,866 6,545 8,075 16,927 20,821 24,040 28,100 33,234 38,998

Total Assets 120,006 136,721 166,952 197,408 221,950 249,117 295,437 349,123 413,239 489,866 581,307

G. Deposit and money market funding

Item 11 Customer deposits 88,503 109,637 119,779 141,589 157,067 188,480 226,177 271,412 325,694 390,833 469,000

Item 12 Current A/C of banks, payables to SBV 13,664 11,829 16,468 12,685 9,516 9,991 10,491 11,016 11,566 12,145 13,359

Item 13 Term deposits from other banks 8,410 4,126 12,494 17,940 23,901 26,291 28,920 31,812 34,993 38,492 42,341

Total G 110,577 125,592 148,741 172,214 190,483 224,762 265,587 314,239 372,253 441,470 524,700

H. Other fundings

Item 14 Others 2,248 2,712 7,084 11,642 17,677 8,990 10,623 12,570 14,890 17,659 20,988

I. Equity 7,181 8,416 11,127 13,552 13,790 15,364 19,227 22,314 26,095 30,738 35,619

Total Equity and Liabilities 120,006 136,721 166,952 197,408 221,950 249,117 295,437 349,123 413,239 489,866 581,307

Discrepancy 0 0 0 0 0 0 0 0 0 0 0

CAR 9% 10% 10% 11% 11% 11% 12% 12% 12% 13% 13%

Provided on Jaccar and VCB prospectus, based on Basel I



INCOME STATEMENT PROJECTION


Item 15 Interest Income 4,337 6,345 9,157 11,389 12,611 12,684 15,005 17,766 21,052 24,964 29,654

Item 16 Interest expenses (2,441) (3,034) (5,273) (7,289) (8,157) (7,867) (9,296) (10,998) (13,029) (15,451) (18,364)

Net interest income 1,897 3,311 3,884 4,100 4,455 4,818 5,709 6,767 8,023 9,513 11,289

Item 17 Non-interest income 947 975 1,397 1,664 2,291 2,749 3,573 4,645 6,039 7,851 10,206

Item 19 Non-interest expenses (499) (341) (450) (645) (861) (1,033) (1,240) (1,488) (1,786) (2,143) (2,571)

Item 20 Personel expenses (226) (395) (449) (645) (773) (1,005) (1,306) (1,698) (2,208) (2,870) (3,731)

Item 21 Depreciation (158) (232) (314) (337) (230) (313) (360) (414) (476) (547) (317)

Item 22 Provision (463) (1,559) (174) (944) (2,111) (717) 1,174 (952) (1,190) (1,487) (1,859)

Profit before tax 1,499 1,760 3,894 3,192 2,771 4,498 7,551 6,861 8,403 10,316 13,018

Income tax expenses (395) (467) (1,017) (785) (605) (1,125) (1,888) (1,715) (2,101) (2,579) (3,254)

Net Profit 1,104 1,293 2,877 2,407 2,166 3,374 5,663 5,146 6,302 7,737 9,763

KEY FINANCIAL RATIOS


Profitability

Average Yield on Loans 8.09% 10.39% 13.52% 11.68% 11.18% 9.37% 8.87% 8.40% 7.96% 7.55% 7.18%

Average Yield on Deposits 2.76% 2.77% 4.40% 5.15% 5.19% 4.17% 4.11% 4.05% 4.00% 3.95% 3.92%

Cost-to-Income Ratio 31.04% 22.58% 22.98% 28.24% 27.63% 31.07% 31.31% 31.55% 31.78% 32.02% 30.79%

ROAA 1.03% 1.01% 1.89% 1.32% 1.03% 1.43% 2.08% 1.60% 1.65% 1.71% 1.82%

ROAE 18.00% 16.54% 29.42% 19.43% 15.77% 23.15% 32.74% 24.77% 26.04% 27.23% 29.43%

Asset Quality & Provisions

NPLs 1146.00 1,972.00 1,861.00 3,231.12 5,207.04 6,226.17 5,075.68 6,344.60 7,930.76 9,913.44 12,391.81

End of Period Reserves

(828.84)

(1,342.73)

(1,490.47)

(2,102.20)

(4,264.20)

(4,980.94)

(3,806.76)

(4,758.45)

(5,948.07)

(7,435.08)

(9,293.85)

NPLs growth 72.1% -5.6% 73.6% 61.2% 19.6% -18.5% 25.0% 25.0% 25.0% 25.0%

Loans loss reserve coverage 72.3% 68.1% 80.1% 65.1% 81.9% 80.0% 75.0% 75.0% 75.0% 75.0% 75.0%



III.5. Valuation

III.5.1 Valuing VCB using DDM

We applied a 2-stage Dividend Discount Model. We assume that the bank has two stages

of development. The first stage is from FY2009-2014, and the second is 2015 to

perpetuity. The model will derives the present value of all future dividends, to find out

the value of the bank’s stock.

Assumptions for this model are as follows:

- Chartered capital of the bank of VND15 trillion since FY2014.

- In the first stage: Dividend will be paid at VND 1,200 per share5 in FY2009-FY2010

as announced by the bank managers and dividend payout ratio will be keep at 40-50%

for next years. We set payout ratio of 40% in FY2011-FY2013 and 50% in FY2014.

- In the second stage: Dividend grows at a steady state rate since FY2015 to perpetuity.

1. Calculating cost of equity

The Cost of Equity is calculated based on CAPM: Ke = Rf + Beta*E[Rm-Rf]

Risk free rate

We used 10 year government bond of Vietnam as a risk free rate. Risk free rate (Rf)

therefore, are estimated to be 9.30%

10-year government bond6 YTM in Jan 2009

Rf 9.30%

Beta

In determining the cost of equity for discounting, because it is difficult to derive a

suitable beta for Vietnam banking sector, the beta of bank industry of emerging country

in 2009 was used.

5 In Vietnam they announce dividend ratio based on fix par value of VND10,000 per share. Vietcombank

announce dividend ratio of 12% means that VND 1,200 for each share. 6 Asia Bond Monitor QI-2009 – Asian Development Bank



Market risk premium

According to Damodaran writing we have total risk premium of Vietnam as follow:

Total risk premium

2005 10.20%

2006 8.66%

2007 9.29%

Sep-08 10.89%

Jan-09 12.88%

Expected total market risk premium - FY2009 10.38%

Due to volatile time, we used average total risk premium rather than the most update one.

So the Vietnam total risk premium of 10.38% is used.

Cost of equity

COST OF EQUITY 2009

Risk free rate - Rf 9.30%

Beta 0.78

Total risk premium 10.38%

Average Cost of Equity 17.40%

From the above table, the average Cost of equity is estimated at 17.40%, which will be

used in the Dividend Discount method to estimate the value of VCB shares.

2. Estimating growth rate

Dividend Growth Rate g=(1-payout ratio)*ROE

g= retention ratio *ROE

Retention ratio FY20014 50.00%

ROE FY2014 27.41%

g= 13.70%

The growth rate of dividend, therefore, is 13.70%



3. Terminal value

The terminal value depicted the present value of the free cash flows after the terminal

projection year to perpetuity, FY2014.

Termination value using DDM

Dividend growth since FY2014 to perpetuity (g) 13.70%

Dividend payment FY2014 (in VND bn) (Div2014) 3,254

Required rate of return from FY2014 to perpetuity (Ke) 17.40%

Terminal Value 2014 = Div 2014 x (1 + g) / (Ke -g) 100,155

The weighted average of terminal value of Vietcombank end of FY2014 is VND 100,155

Then the free cash flows and terminal value is discounted to acquire the PV of the bank.

With our earnings model, the present value of Vietcombank is VND 51,711

2009F 2010F 2011F 2012F 2013F 2014F

Growth rate 13.70%

Expected EPS 2,249 3,775 3,430 4,201 5,158 6,509

Expected payout ratio 53.35% 31.79% 40% 40% 40% 50%

Expected Dividend per share 1,200 1,200 1,372 1,681 2,063 3,254

Mid point 0 1 2 3 4 5

Present Value of Dividend 1,200 1,022 996 1,039 1,086 1,459

Terminal Value 2014 100,155

Present Value of Terminal Value 44,910

Total 1200 1022 996 1039 1086 46,369

Present Value of a Share 51,711

III.5.2 Valuing VCB using Multiples Methods

Refer to benchmark similar size of banks over the Asia, we can see below to assist our

relative valuation, we have selected the following banking peers as our comparables.

These companies are selected because they are operating in a relatively high growth

environment and are market leaders in their respective countries. On the domestic front,

we have selected ICB, ACB and STB as our comparables. These comparables give an



average expected P/BV of 3.7x for 2008; P/E at 22.3x for 2008.

Market Actual Actual Actual Actual Actual

Banking comparison Country Cap

(US$

mn)

2007

P/B

2008

P/B

2007

P/E

2008

P/E

2008

ROE

Industrial and Commercial Bank

of China

China 338,566 5 4.4 34.2 24.8 18.9

Bank of China Limited China 195,129 4 3.5 28.5 21.1 16.9

Bank of Communications Co

Ltd

China 88,190 5.7 4.9 42.9 31 19.1

China Merchants Bank Co Ltd China 76,835 9.2 7.6 46.4 31.7 21.3

State Bank of India India 30,981 2.8 2.5 17.7 15.2 16.5

ICICI Bank Limited India 32,203 2.9 2.7 30.3 24.5 12

HDFC Bank Limited India 15,236 5.4 4.7 38.6 29.5 16.8

PT Bank Rakyat Indonesia

(Persero) Tbk

Indonesia 10,479 4.9 4.1 19.3 15.7 29.1

Bank of Philippine Islands Philippines 4,025 2.5 2.5 16.2 14.1 14.7

Bangkok Bank PCL Thailand 7,215 1.3 1.2 11.1 10 12.8

Asia Commercial Bank (ACB) Vietnam 5,806 9.1 3.4 30.7 11.8 36.5

Sacombank (STB) Vietnam 2,181 4.1 1.6 24.9 9.9 22.75

Vietinbank Vietnam 11,779 n.a 4.8 n.a 51.1 9.9

Average 4.7 3.7 28.4 22.3 19.0

Source: Reuters, Bloomberg, Jaccar

As the result, we computed & estimated from average P/E; P/B of banking sector, the

price for VCB is 50,241 as average P/E market & 37,740 as average P/B market, below

is our computation. The earning / equity projected from above forecast of earning model:

Chartered Capital 15,000

Number of shares (bn) 1.50

Earnings FY2009 (VND bn) 3,373.85

Average PE 22.34

Price of VCB valuing via PE (VND) 50,244.39

Equity FY 2009 15,363.89

Average PB 3.68

Price of VCB valuing via PB (VND) 37,740.02

However, as in the case of the P/E ratio, differences in profitable growth opportunities,

risk profile, or business mix will affect the MBV ratio of a specific bank. Similarly, the

provisioning policy for nonperforming assets or the accounting rule used at the time of a

merger can affect the reported book value of equity.



The Multiple approaches are widely used by bank analysts. Nonetheless, opponents to

this approach recommend focusing, not on accounting figures such as earnings or book

value of equity, but on the reality of future cash flows generated by the bank.

A second problem with the market multiple approach is the implicit assumption that the

stock market values the shares of banks correctly. This might often be true in efficient

markets. In an emerging market like Vietnam, this assumption does not apply.

Furthermore, VCB shares are now still traded in the OTC market, which is very far from

being efficient, we would need to see the listing benchmark after big-bang date of 30

June 2009.

However, the market multiple approach should not be dismissed, as it provides a useful

benchmark, the current valuation by the stock market. One would need strong arguments

to deviate substantially from current market valuation.

Summary

There are no big gaps in results from our applied methods. With DDM method, the price

of Vietcombank is VND 51,711 per share. In the meanwhile, they are VND 37,740 and

VND 50,241 for P/B and P/E Multiples Method. We apply weights to reach weighted

average price of around VND 48,000 per share.

Methods DDM P/E P/B

Present Value of a Share 51,711.50 50,244.39 37,740.02

Weighted applied 50% 25% 25%

Estimated Price of Vietcombank share 48,000



Part IV

CONCLUSION

VCB is really an interesting case study for us. VCB is really a leading bank in Vietnam.

With its prospect, the bank is believed to have a strong growth in its business and be

possible to reach its targets in the future. Completing the valuation, our recommended

target price of VCB is around VND 48,000 per share.

We have used two different approaches to value the price of VCB: Dividend Discount

Model (DDM) approach and Multiples approach. Each one showed their strength and

weakness in valuation in practice in Vietnam.

The DDM approach with its simplicity and intuitive logic, showed its advantages when

valuing a bank share price. Firstly, VCB is a big one with mature businesses and stable

growth rates. Secondly, in the volatile time now, it was reasonable to base on dividend

level that managers set as a level that they can sustain even with volatile earnings.

Finally, it just required fewer assumptions to get forecasted dividend than to forecasted

free cash flows, especially estimating capital expenditure and working capital for a bank

like VCB. Beside the advantage are disadvantages of this method. In VCB case, we have

no choice to estimate next year dividend, just basing on the commitment letter of bank

managers because the bank has just transformed from state-owned bank into joint stock

bank mid-2008. Moreover, VCB has CAR ratio below the required level of Basel, so the

bank cannot let the payout ratio at the level that reflects all its capacity in the first years



of transformation. One again, we used the announced number of 40%-50% of payout

ratio for the next first five years.

We’ve now just passed the worst time with the financial crisis and most of independent

institutions or organizations showed their cautious view on the economy of the world as

well as Vietnam. They reported significant changes in rating Vietnam in many respects;

however, when they released their reports, Vietnam has showed many green signals in

the economy as well as the bank sector. That’s the reason why we started our valuation

with an update on the macro economy of Vietnam and then used their forecast on

Vietnam as a reference only or we used average numbers to reduce the impact of negative

view in a volatile time.

Moreover, VCB has never been traded officially in an exchange floor and there are only

three bank listed in Vietnam which almost much smaller than VCB size. We therefore

found hard to reach sector data to estimate.

With difficulties mentioned above, we used Multiples approach as a way to re-test the

price of VCB with market impact. PE and PB multiples were used and showed no big gap

compared to the result received from DDM. In this approach, we used average PE and PB

of some banks in the region which have the same size with VCB to calculate group

average and used it to estimate VCB price.

Which is the best approach in valuing a bank in Vietnam like VCB and which is the right

valuation for it? It is so hard to answer. However, with this valuation, we have showed

our independent view in bank sector analysis as well as valuing VCB. Dealing with a

great number of obstacles and limitations, we all did our best to prove the feasibility of

application valuation methods in Vietnam. We hope that this project is not only an

academic product but a valued reference to make investment decision for VCB for the

time being.



Reference:

1. A. Damodaran, Investment Valuation, Second Edition 2002

2. Digging Into The Dividend Discount Model - by Ben McClure

3. Intrinsic Value and Dividend Discount Methods - http://www.gurufocus.com

4. Bloomberg, Reuter, Mekong Security, SanOTC.com, Jaccar.

5. The Economist Intelligence Unit, Country Report, February 2009

6. Vietnam’s One Stop Financial Portal, www.stox.vn

7. Vietnam Economic Times

8. Deutsche Bank, World Outlook, 30 March 2009

9. Deutsche Bank, Vietnam Bank Primer, 18 April 2007

10. Moodys ratings, www.moodys.com

11. Aswath Damodaran, last updated January 2009,

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html,

12. Bloomberg, Reuters

13. PricewaterHouseCoupers, Beyond the Brics: a broader look at emerging market

prospects,

http://www.pwc.com/Extweb/pwcpublications.nsf/docid/146E4E4D524871548

52573FA0058A179

14. World Bank, Taking Stock, For the Mid-year Consultative Group Meeting for

Vietnam, 06 June 2009

15. Annual Report of Vietcombank 2004, 2005, 2006, 2007, 2008

16. Brealey/Myers/Allen - Corporate Finance, McGraw-Hill, eighth edition,

17. Investment Valuation - Tools and techniques for determining the value of any

assets,

18. Vietnam Bank primer - Deustche Bank, issued on 18 April 2007

19. Banking in Vietnam - A competitive landscape - issued Sep 2007

20. Valuation Methodologies - Wall Street Training

21. Financial Valuation Workbook - Jame R. Hitchner. Dividend policy -

Frankfurter

http://www.gurufocus.com/

http://www.stox.vn/

http://www.moodys.com/

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html

http://www.pwc.com/Extweb/pwcpublications.nsf/docid/146E4E4D52487154852573FA0058A179

http://www.pwc.com/Extweb/pwcpublications.nsf/docid/146E4E4D52487154852573FA0058A179



APPENDIX

ASSET SIDE

Loan growth


Item 1 Loans

52,459

59,072

65,882

94,301

107,586

129,125

164,114

205,142

256,428

320,535

400,668

Loan growth is projected to be 20% due to economic downturn in 2009 and 25% in the five years onward. The rationales for our

projection are as below:

GDP of Vietnam for the last five years is 7.8% per annum. Loan growth in Asia countries has been 1.5x-3.0x of GDP growth. Average

loan growth of VCB over the past five years is 24%. Average loan growth of Vietnam banking industry over the last five years is 20%.

The State Bank of Vietnam will continue to ease monetary policy to spur economic activity, including stimulus package and interest

subsidy lending program. In the increasing competition pressure from joint stock and foreign banks, we forecast VCB will continue

keep its big brother role in Vietnam banking sector to ensure credit growth rate at 25% pa.

Loan overdue


Item 2 Loans overdue

1,146

1,972

1,861

3,231

5,207

6,226

5,076

6,345

7,931

9,913

12,392

Gross loan

53,605

61,044

67,743

97,532

112,793

135,352

169,189

211,487

264,359

330,448

413,060

Loan overdue as % of gross loan 2.1% 3.2% 2.7% 3.3% 4.6% 4.6% 3.0% 3.0% 3.0% 3.0% 3.0%

YoY gross loan growth 13.9% 11.0% 44.0% 15.6% 20.0% 25.0% 25.0% 25.0% 25.0% 25.0%

Loan overdue is projected to decrease compared to 2008, with a ratio of 4.6% in 2009, equal in 2008 and falling to 3% in 2010-2014.

We expect the bank will strengthen its risk management practices with cooperation of its potential foreign strategic investor.



Loan loss reserve


Item 3 Loan loss reserve

(829)

(1,343)

(1,490)

(2,102)

(4,264)

(4,981)

(3,807)

(4,758)

(5,948)

(7,435)

(9,294)

Loan loss reserve as % of loan

overdue 72.3% 68.1% 80.1% 65.1% 81.9% 80.0% 75.0% 75.0% 75.0% 75.0% 75.0%

Loan loss reserve as % of gross

loan 1.5% 2.2% 2.2% 2.2% 3.8% 3.7% 2.3% 2.3% 2.3% 2.3% 2.3%

The VCB has been implementing prudent credit policies and bad loan write-offs. Loan loss reserve to NPL ratio decreased from

80.1% as at 31 DEC 2007 to 65.1% as at 31 DEC 2008. We assumed that loan loss reserve to NPLs will decrease slightly to 80% in

2009 and keep 75% in 2010-2014 due to rigorous negotiations and effective resolutions of bad debts due to international standard

practices in credit risk management system supported by potential foreign strategic partner.

Balance with central bank


Item 4 Balances with the central bank

2,607

6,336

11,848

11,663

30,561

6,597

7,916

9,499

11,399

13,679

16,415

Total customer deposits 88,503 109,637 119,779 141,589 157,067 188,480 226,177 271,412 325,694 390,833 469,000

Balance with central bank as % of

total customer deposit 2.95% 5.78% 9.89% 8.24% 19.46% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%

Total deposit mobilization

102,167

121,467

136,247

154,274

166,583

198,472

236,667

282,427

337,260

402,978

482,359

Total loans

52,776

59,701

66,252

95,430

108,529

130,371

165,383

206,728

258,410

323,013

403,766

Loan as % of total deposit

mobilization 51.7% 49.2% 48.6% 61.9% 65.2% 65.69% 69.88% 73.20% 76.62% 80.16% 83.71%

Balance with central bank basically is compulsory reserve of deposits mobilization from customers. According to the Decision No

379/QĐ-NHNN dated 24/02/2009, for VND deposit, compulsory deposit rate was required at 3% for customer deposit for term up to

12 months, and 1% of customer deposit from 12-24 months. For foreign currency deposit, compulsory deposit rate is required at 7%

http://www.luatgiapham.com/phap-luat/hanh-chinh/2618-quyet-dinh-so-379qd-nhnn-ngay-24022009.html



for term deposit up to 12 months and 3% for term deposit from 12-24 months. Hence, it is projected to be 3.5% of the total customer

deposits.

Balance with other banks


Item 5

Current A/C, deposits, placements

with banks

38,601.9

42,383.5

52,234.8

41,597.6

30,367.8

44,284.6

42,884.7

41,807.7

38,378.8

31,607.3

20,709.3

Deposit with banks/total deposit

mobilization 37.8% 34.9% 38.3% 27.0% 18.2% 22.3% 18.1% 14.8% 11.4% 7.8% 4.3%

Total 89% 84% 87% 89% 83% 88.0% 88.0% 88.0% 88.0% 88.0% 88.0%

Vietnam government will continue ease monetary policies to spur economic activity and limit the effect of global economic crisis. The

bank will increase its lending activity in the coming years. So the inter-bank lending will decrease, balances with other banks to total

deposit mobilization will be down 5 years onward.

Investment in securities


Item 6 Investment in Securities

21,569

23,564

31,117

40,538

41,876

48,158

55,381

63,688

73,242

84,228

96,862

YoY growth 9.2% 32.1% 30.3% 3.3% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

The bank has its wholly-owned Vietcombank Securities Company (VCBS). Average growth in securities investment is 19% for the

last four years. The Vietnam stock market has been recovering and showing the potential development in coming years. Investment in

securities is projected to growth at 15% per annum in 2010-2014.

Equity investment


Item 7 Equity investment

537

476

488

586

1,180

1,215

1,252

1,290

1,328

1,368

1,409

YoY growth -11.3% 2.4% 20.1% 101.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%



VCB will expand its investments in domestic infrastructure and real estate and expect benefit from the government’ support for

domestic investment in infrastructure projects, to meet country large development need. Equity investment is projected to increase at

3% per annum.

Fixed assets


Item 8 Fixed assets

915

1,095

1,147

1,049

1,361

1,565

1,800

2,070

2,380

2,737

3,148

YoY growth 19.6% 4.8% -8.5% 29.7% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0%

VCB has been widening its retail banking business. The bank will continue invest more investment capital to upgrade information

technology and ATM network. VCB’s system is currently behind international standard. We forecast they will invest in fixed assets

by 15% per annum, a bit above average fixed assets growth is 12% over the last four years.

Other assets


Item

10 Other assets

1,007

1,158

1,447

3,341

4,593

3,516

4,131

4,897

5,811

6,899

8,206

Total earning assets

116,383

133,328

162,942

191,330

215,598

234,391

275,372

326,482

387,378

459,962

547,047

Other assets as % of Total earning assets 0.9% 0.9% 1.7% 2.1% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

LIABILITIES SIDE

Customer deposit


Item

11 Customer deposits

88,503

109,637

119,779

141,589

157,067

188,480

226,177

271,412

325,694

390,833

469,000

YoY growth 23.9% 9.3% 18.2% 10.9% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%



Customer deposit is projected to grow at annual rate of 20% in 2010-2014. The rationale for our projection is that the average growth

rate is 16% for the last five years. Deposit growth rate is similar to trend of loan growth rate. In VN Business News, UK’s Standard

Chartered release a forecast that Vietnam GDP growth would be 4.2% in 2009 due to strong impact of the global economic recession,

and 6-8.5% in 2010-2014 when Vietnam economy is fully recovered. Deposit growth rate is nearly 3x of GDP growth and then around

the average rate of the last 5 years.

The Vietnam Government is implementing ease monetary policy to spur economic activities, limit impact of global economy

recession. So the prime rate would continue keep the recent base of 7% and will not increase in medium term. In the mean time,

Vietnam securities market is estimated to continue grow in the next years and therefore investing money in securities market will be

increasing trends.

Borrowing from the central bank


Item

12

Current accounts of banks and

payables to SBV

13,664

11,829

16,468

12,685

9,516

9,991

10,491

11,016

11,566

12,145

13,359

YoY growth -13.4% 39.2% -23.0% -25.0% 5.0% 5.0% 5.0% 5.0% 5.0% 10.0%

Borrowing from the central bank growth is projected to be at 5% per annum. VCB is assumed to have preference to borrow from the

state bank due to the linkage between VCB and the Vietnam State Bank.

Borrowing from inter-bank growth


Item

13 Term deposits from other banks

8,410

4,126

12,494

17,940

23,901

26,291

28,920

31,812

34,993

38,492

42,341

YoY growth -50.9% 202.8% 43.6% 33.2% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Borrowing growth from other banks is projected to be at annum 10%. Being the big commercial bank, VCB need borrow money from

inter-bank resource to finance its growing business due to the economic growth.



Other funding


Item

14 Others

2,248

2,712

7,084

11,642

17,677

8,990

10,623

12,570

14,890

17,659

20,988

Others as of % of interest bearing

debts 2.0% 2.2% 4.8% 6.8% 9.3% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Other borrowings mainly include accrual interest payable from interest bearing debts. Average other funding to interest bearing debts

is at 5% for the last five years, which is projected to be 4%.

PROFIT AND LOSS

Interest income


Item 15 Interest Income

4,337

6,345

9,157

11,389

12,611

12,684

15,005

17,766

21,052

24,964

29,654

Total earning assets

116,091

132,461

161,940

189,814

212,514

230,625

272,817

323,013

382,758

453,895

539,162

Interest income as % of total earning

assets 3.7% 4.8% 5.7% 6.0% 5.9% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%

Interest income to total earning asset ratio is 5.2% in 2008, in an increasing trend and average ratio is 5.2% for the last five years. The

Sate Bank stipulated the current base rate of 7% and limit ceiling lending rate at 10.5%. However, after Vietnam economy is currently

having recovery signal from end of QII/2009 then there will be a need to remove ceiling lending rate to spur lending activities and

help Vietnam banks optimize their lending rate. The removal ceiling lending rate requirement is also in the middle term

recommendation report of IMF for Vietnam government, June 2009.

According to our projection, net income to total earning assets is estimated to be 5.5% per annual. Average interest earning margin is

forecasted to be stable at 2% per annum. Average Interest income growth is estimated to be 17% per annum from 2009 to 2014.



Interest expenses


Item 16 Interest expenses

(2,441)

(3,034)

(5,273)

(7,289)

(8,157)

(7,867)

(9,296)

(10,998)

(13,029)

(15,451)

(18,364)

Total interest bearing debts

110,577

125,592

148,741

172,214

190,483

224,762

265,587

314,239

372,253

441,470

524,700

Interest expenses as % of interest

bearing debts 2.2% 2.4% 3.5% 4.2% 4.3% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Average margin 1.5% 2.4% 2.1% 1.8% 1.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

Interest expense to interest bearing debts is forecasted to be stable at 3.5% per annum, compared to the average ratio 3.3% for the last

five years. It is estimated to increase annually 20%.

Non-interest income


Item 17 Non-interest income

947

975

1,397

1,664

2,291

2,749

3,573

4,645

6,039

7,851

10,206

YoY growth 2.9% 43.3% 19.1% 37.7% 20.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Non-interest income as % of interest

income 21.8% 15.4% 15.3% 14.6% 18.2% 21.7% 23.8% 26.1% 28.7% 31.4% 34.4%

The non interest income (including services banking fees, foreign exchange dealing gain/loss, securities investments gain/loss and

dividends) which grow at average rate of 38% for the last five years. We believe that VCB will continue play its leader role in

services, products and especially international payment services for domestic enterprises.

Although the growth estimated slower in the coming years due to the catching-up of the other domestic banks and international

institutions, we believe that the growth rate will be 10% in 2009, also impacted by economic downturn, and increase non-interest

income percentage 30% from 2010-2014.



Non-interest expenses


Item 19 Non-interest expenses

(499)

(341)

(450)

(645)

(861)

(1,033)

(1,240)

(1,488)

(1,786)

(2,143)

(2,571)

YoY growth -31.7% 32.1% 43.4% 33.4% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

Non-interest expenses as % of non-

interest income 52.7% 34.9% 32.2% 38.8% 37.6% 37.6% 34.7% 32.0% 29.6% 27.3% 25.2%

Average interest expenses growth is 9% for the last four years. Non-interest expense is as 38% of non-interest income in 2008. Non-

interest expenses growth is forecasted to be 20% in 2009 and 25% in 2010-2014.

Personnel expenses


Item 20 Personnel expenses

(226)

(395)

(449)

(645)

(773)

(1,005)

(1,306)

(1,698)

(2,208)

(2,870)

(3,731)

YoY growth 74.9% 13.5% 43.8% 19.8% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

Personnel expense is forecasted to be 30% in 2009 and 35% per annum in 2010-2014. Average personnel expenses growth is at 36%

over the past four years. Salary payment is currently low for employees and the bank targets to provide more good incentive to attract

high qualified staff for the bank.

Depreciation


Item 21 Depreciation

(158)

(232)

(314)

(337)

(230)

(313)

(360)

(414)

(476)

(547)

(317)

Existing asset to be depreciated (272) (272) (272) (272) (272) -

new asset acquired in 2009 depreciated (41) (41) (41) (41) (41) -

new asset acquired in 2010 depreciated (47) (47) (47) (47) (47)

new asset acquired in 2011 depreciated (54) (54) (54) (54)

new asset acquired in 2012 depreciated (62) (62) (62)

new asset acquired in 2013 depreciated (71) (71)

new asset acquired in 2014 depreciated (82)



New CAPEX is depreciated/amortized over 5 years

Corporate income tax

Corporate tax rate is currently 25% in 2009, it may decrease but conservatively, we keep the rate at 25% fore the next years.

RISK FREE RATE



COUNTRY DEFAULT SPREADS AND RISK PREMIUM

Last updated: January 2009

This table summarizes the latest bond ratings and appropriate default spreads for different countries. While you can use these numbers

as rough estimates of country risk premiums, you may want to modify the premia to reflect the additonal risk of equity markets. To

estimate the long term country risk premium, I start with the country rating (from Moody's: www.moodys.com) and estimate the

default spread for that rating (based upon traded country bonds) over a default free government bond rate. This becomes a measure of

the added country risk premium for that country. I add this default spread to the historical risk premium for a mature equity market

(estimated from US historical data) to estimate the total risk premium. In the short term especially, the equity country risk premium is

likely to be greater than the country's default spread. You can estimate an adjusted country risk premium by multiplying the default

spread by the relative equity market volatility for that market (Std dev in country equity market/Std dev in country bond). I have used

the emerging market average of 1.5 (equity markets are about 1.5 times more volatile than bond markets) to estimate country risk

premium. I have added this to the historical premium for mature markets of about 5% to get the total risk premium.

Country Region Long-Term Rating Adj. Default Spread Total Risk Premium Country Risk

Premium

Albania Eastern Europe & Russia B1 650 14.75% 9.75%

Argentina Central and South

America B3 900 18.50% 13.50%

Armenia Eastern Europe & Russia Ba2 400 11.00% 6.00%

Australia Australia & New Zealand Aaa 0 5.00% 0.00%

Austria [1] Western Europe Aaa 0 5.00% 0.00%

Azerbaijan Eastern Europe & Russia Ba1 300 9.50% 4.50%

Bahamas Caribbean A1 140 7.10% 2.10%

Bahrain Middle East A2 160 7.40% 2.40%

Barbados Caribbean A3 175 7.63% 2.63%

Belarus Eastern Europe & Russia B1 650 14.75% 9.75%

Belgium [1] Western Europe Aa1 70 6.05% 1.05%

Belize Central and South

America Caa1 1200 23.00% 18.00%



Bermuda Caribbean Aaa 0 5.00% 0.00%

Bolivia Central and South

America B3 900 18.50% 13.50%

Bosnia and Herzegovina Eastern Europe & Russia B2 750 16.25% 11.25%

Botswana Africa A1 140 7.10% 2.10%

Brazil Central and South

America Ba1 300 9.50% 4.50%

Bulgaria Eastern Europe & Russia Baa3 260 8.90% 3.90%

Cambodia Asia B2 750 16.25% 11.25%

Canada North America Aaa 0 5.00% 0.00%

Cayman Islands Caribbean Aa3 120 6.80% 1.80%

Chile Central and South

America A1 140 7.10% 2.10%

China Asia A1 140 7.10% 2.10%

Colombia Central and South

America Baa3 260 8.90% 3.90%

Costa Rica Central and South

America Ba1 300 9.50% 4.50%

Croatia Eastern Europe & Russia Baa2 225 8.38% 3.38%

Cuba Caribbean Caa1 1200 23.00% 18.00%

Cyprus [1] Western Europe Aa3 120 6.80% 1.80%

Czech Republic Eastern Europe & Russia A1 140 7.10% 2.10%

Denmark Western Europe Aaa 0 5.00% 0.00%

Dominican Republic Caribbean B2 750 16.25% 11.25%

Ecuador Central and South

America Ca 260 8.90% 3.90%

Egypt Africa Ba1 300 9.50% 4.50%

El Salvador Central and South

America Baa2 225 8.38% 3.38%

Estonia Eastern Europe & Russia A1 140 7.10% 2.10%

Fiji Islands Asia Ba2 400 11.00% 6.00%



Finland [1] Western Europe Aaa 0 5.00% 0.00%

France [1] Western Europe Aaa 0 5.00% 0.00%

Germany [1] Western Europe Aaa 0 5.00% 0.00%

Greece [1] Western Europe A1 140 7.10% 2.10%

Guatemala Central and South

America Ba1 300 9.50% 4.50%

Honduras Central and South

America B2 750 16.25% 11.25%

Hong Kong Asia Aa2 100 6.50% 1.50%

Hungary Eastern Europe & Russia A3 175 7.63% 2.63%

Iceland Western Europe Baa1 200 8.00% 3.00%

India Asia Ba2 400 11.00% 6.00%

Indonesia Asia Ba3 525 12.88% 7.88%

Ireland [1] Western Europe Aaa 0 5.00% 0.00%

Isle of Man Financial Center Aaa 0 5.00% 0.00%

Israel Middle East A1 140 7.10% 2.10%

Italy [1] Western Europe Aa2 100 6.50% 1.50%

Jamaica Caribbean Ba2 400 11.00% 6.00%

Japan Asia Aa3 120 6.80% 1.80%

Jordan Middle East Baa3 260 8.90% 3.90%

Kazakhstan Eastern Europe & Russia Baa1 200 8.00% 3.00%

Korea Asia A2 160 7.40% 2.40%

Kuwait Middle East Aa2 100 6.50% 1.50%

Latvia Eastern Europe & Russia A3 175 7.63% 2.63%

Lebanon Middle East B3 900 18.50% 13.50%

Lithuania Eastern Europe & Russia A2 160 7.40% 2.40%

Luxembourg [1] Financial Center Aaa 0 5.00% 0.00%

Macao Asia Aa3 120 6.80% 1.80%

Malaysia Asia A3 175 7.63% 2.63%

Malta [1] Western Europe A1 140 7.10% 2.10%

Mauritius Africa Baa2 225 8.38% 3.38%



Mexico Central and South

America Baa1 200 8.00% 3.00%

Moldova Eastern Europe & Russia Caa1 1200 23.00% 18.00%

Mongolia Asia B1 650 14.75% 9.75%

Montenegro Eastern Europe & Russia Ba2 400 11.00% 6.00%

Morocco Africa Ba1 300 9.50% 4.50%

Netherlands [1] Western Europe Aaa 0 5.00% 0.00%

New Zealand Australia & New Zealand Aaa 0 5.00% 0.00%

Nicaragua Central and South

America B3 900 18.50% 13.50%

Norway Western Europe Aaa 0 5.00% 0.00%

Oman Middle East A2 160 7.40% 2.40%

Pakistan Asia B3 900 18.50% 13.50%

Panama Central and South

America Ba1 300 9.50% 4.50%

Papua New Guinea Asia B1 650 14.75% 9.75%

Paraguay Central and South

America B3 900 18.50% 13.50%

Peru Central and South

America Baa3 260 8.90% 3.90%

Philippines Asia B1 650 14.75% 9.75%

Poland Eastern Europe & Russia A2 160 7.40% 2.40%

Portugal [1] Western Europe Aa2 100 6.50% 1.50%

Qatar Middle East Aa2 100 6.50% 1.50%

Romania Eastern Europe & Russia Baa3 260 8.90% 3.90%

Russia Eastern Europe & Russia Baa1 200 8.00% 3.00%

Saudi Arabia Middle East A1 140 7.10% 2.10%

Singapore Asia Aaa 0 5.00% 0.00%

Slovakia Eastern Europe & Russia A1 140 7.10% 2.10%

Slovenia [1] Eastern Europe & Russia Aa2 100 6.50% 1.50%

South Africa Africa A2 160 7.40% 2.40%



Spain [1] Western Europe Aaa 0 5.00% 0.00%

St. Vincent & the

Grenadines Caribbean B1 650 14.75% 9.75%

Suriname Caribbean Ba3 525 12.88% 7.88%

Sweden Western Europe Aaa 0 5.00% 0.00%

Switzerland Western Europe Aaa 0 5.00% 0.00%

Taiwan Asia Aa3 120 6.80% 1.80%

Thailand Asia Baa1 200 8.00% 3.00%

Trinidad and Tobago Caribbean Baa1 200 8.00% 3.00%

Tunisia Africa Baa2 225 8.38% 3.38%

Turkey Asia Ba3 525 12.88% 7.88%

Turkmenistan Eastern Europe & Russia B2 750 16.25% 11.25%

Ukraine Eastern Europe & Russia B1 650 14.75% 9.75%

United Arab Emirates Middle East Aa2 100 6.50% 1.50%

United Kingdom Western Europe Aaa 0 5.00% 0.00%

United States of America North America Aaa 0 5.00% 0.00%

Uruguay Central and South

America B1 650 14.75% 9.75%

Venezuela Central and South

America B1 650 14.75% 9.75%

Vietnam Asia Ba3 525 12.88% 7.88%

Last updated: January 2009

Aswath Damodaran

MEBF 5th Thesis - Valuation of Vietcombank - G3

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Transcript of MEBF 5th Thesis - Valuation of Vietcombank - G3