Why Vietnam’s tight-fisted banks may boost stocks

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Banks in Vietnam have long suffered under a cloud of bad loans, dampening credit growth, but now CIMB believes that will send the stock market sharply higher.

It's about falling interest rates.

"Falling inflation and aggressive purchases of Vietnam government bonds (VGBs) by banks have pushed down yields," CIMB said in a note last week, noting that the 10-year VGB yield is down around 260 basis points so far this year.

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While the bond purchases are a sign that banks are still too risk averse to lend to customers, "falling yields help stock prices in a variety of ways, even if they are caused by weak credit growth, which is, in turn, dampening domestic demand," CIMB said.

How much help might stocks get? CIMB expects shares to climb 25-30 percent next year, in addition to the index's around 23 percent gains so far this year.

"Lower interest rates encourage savers to buy stocks, especially as gold is currently out of favor with many local investors, and a 200bp fall in Vietnam's cost of equity implies another around 25 percent or more increase in stock prices," it said.

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While Vietnam's savers traditionally favored gold, recent volatility in the metal's price as well as the government's clampdown on unapproved gold trading floors has damped its appeal, CIMB said. Savers are also wary of the other traditional safe-haven, real-estate, which hasn't recovered from the popping of a massive bubble in 2010, it said.

A lack of desire to lend has also spurred banks to cut their deposit rates to unattractive levels, it said.

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CIMB also expects banks may be preparing to use gains on purchases of VGBs to help smooth earnings as they begin to provision for non-performing loans (NPLs), with any progress in cleaning up bad loans likely to offer a share catalyst.

Others aren't as certain that lower interest rates will drive Vietnam's stocks higher.

"We expect another round of interest rate cuts and a further 0.45-0.5 percent devaluation of the Vietnamese dong are on the cards. But empirical evidence and current market conditions suggest these might have only a limited short-term impact on the equities markets," analysts at Maybank-KimEng said in a note last week.

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But Maybank-KimEng advises buying Vietnam's shares on dips, expecting "real reforms" are in the works.

"We look forward to more progress on the IPO of state-owned enterprises, the resolving of NPLs and banking reforms," it said, noting 71 IPOs have been undertaken in the first nine months of the year, more than the previous two years combined.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1