Vietnam Technological and Commercial Joint Stock Bank (TCB) Earnings Call Transcript & Summary

Good afternoon, and welcome to Techcombank's Third Quarter 2022 Financial Results Presentation. We are reporting a strong quarter amidst continuing global macroeconomic challenges. Our solid balance sheet is continuing to strengthen, while execution of the bank's 5-year strategy remains well on track. Jens Lottner, CEO; and Alex Macaire, CFO, will share more details of the financial results and business updates with you, followed by a Q&A session. Jens and Alex will present in English with live Vietnamese translation available via separate link. We will have another call in Vietnamese on Monday for retail investors. We expect today's presentation and Q&A to last about 90 minutes. With that, I'll turn it over to Jens to begin the presentation.

Thank you, and good afternoon, everyone. Thanks for joining in and to get to the details of the third quarter this year. And what I and Alex will do over the next 90 minutes, we will basically give you some of the highlights and then an update on how we see the economy developing, and we will talk about the financial results and then also give you an outlook of how we see the rest of the year to unfold. So in terms of pure highlights, it was again a very strong quarter. And for Techcombank, overall, we grew NII as well as NFI, especially NFI was coming in pretty strongly across a lot of different dimensions and banca, cards and foreign exchange, but also other products like LC, cash settlement, some of them and really going well beyond 50% year-on-year. And if we exclude some of the recoveries, growth would have been at roughly 16.5% year-on-year, but so we are seeing around 16.9% TOI growth. And at the same point in time, PBT grew even stronger. At this point in time, we are standing around 22% year-on-year growth. And some of that was just due to the fact that as the economy recovered, also some of our provision expenses and requirements from provision expenses were actually going down. Return on assets, still stand very strong, a little bit down, but still at 3.6%, reflecting very strong risk management as well and very efficient use of our balance sheet. And CASA is a little bit down, still one of the leading numbers in the industry, mostly as CASA were shifting towards other asset classes or were even used in order to finance some projects as credit growth was limited in some parts of the economy. And NPLs, still stand very, very low. We have a very stable NPL ratio, and the loan loss coverage ratio is actually well above 100%, 165%. And then last but not least, CAR still stands at 15.7%, one of the strongest in the industry and, of course, well above the regulatory requirements. So as I said, a strong quarter, and I will turn it over to Alex to give you the details of this quarter.

Thank you, Jens, and good afternoon, everyone. So we'll start as usual with an update on the macroeconomic environment. So the key message that the fundamentals of the Vietnamese economy so far are very strong. GDP is on a trajectory of 7% to 8% for the full year, which is better than our previous estimate. Retail sales keep accelerating and were up 17% year-to-date. Foreign direct investment remains strong. So those are powerful engines. And for the time being, they seem able to be -- to offset the headwinds coming from the lower export growth. That's what you can see in the PMI index, which also remains strong. In short, production demand are both well oriented, and the areas to watch out for are more on the monetary side, it is first inflation, which for the time being, is under control, but could increase in the fourth quarter. And then it is the exchange rate of the dong versus the U.S. dollar. So far, it's fair to say that the resilience of the dong has been quite remarkable compared to other currencies. At the same time, we see some pressure coming from the lower trade surplus as well as the higher U.S. dollar interest rates. So it means that the central bank in this context has had to strictly control the supply of money and liquidity to the economy, which has had a knock-on impact on the interest rates. So let's move on now to an overview of the liquidity environment in the banking sector. I usually present this slide later in our analyst presentation. But I've brought it forward given the rapid changes in the financial environment. Overall, you can see that '22 stands out compared to the previous years in the fact that the growth of credit has far outpaced that of deposits, and it's very significantly different from the prior years. And if you look at the CASA ratio in the banking system, you can see that it has reduced actually from 22% to 20% since the month of April. So this has clearly created a strain on the funding of the banking system and the consequence has been a rapid increase in interest rate of around 70 basis points for deposit rates and as much as 300 basis points for interbank rates. On the asset side, the repricing in the market has not been as fast as the increase in deposit rates. And overall, this new environment means a period of pressure on the net interest margin, not just for Techcombank, but probably across the banking sector. With that, let's move on to a detailed review of our performance during Q3. So first, the financial highlight. Overall, our TOI in the third quarter grew at a pace of 16.8%, which is broadly in line with the previous quarter. The growth of our NII, as you have seen, slowed down a bit due to the context I described earlier, which is more scarce CASA, increased cost of fund and partial and gradual repricing on the lending side. Looking ahead, we will have to see how lending rates adjust taking into account also the need to support economic agents and their borrowing needs. As far as we are concerned, we are confident that our strategy, which is focused on retail and SME enabled by digital and partnerships, we are confident that this strategy will drive competitive advantages on CASA. So over time, there will be forces which will counterbalance the NII headwinds that I mentioned. Now if we look at the other aspects of our financials. So beyond NII, it's fair to say that they are quite strong. Our NFI grew at an accelerated rate of 38% in the third quarter and taking our NFI to TOI ratio to 25%. On NIM, on ROE, on ROA, on CASA income ratio, our efficiency remains one of the highest in the banking market. And on risk, our balance sheet is strong and healthy with an NPL ratio of just 0.6% and capital adequacy ratio of 15.7%. And our baseline credit rating was also recently upgraded by Moody's to BA2, which is actually currently the highest credit rating of any bank in Vietnam. So in short, it's a strong performance in environment of persisting headwinds. This slide shows our PBT in a bit more details. So during the first 9 months of the year, our NII increased by 21%, and our NFI grew by 33%. We will look at this in more details later. The contribution of other income was impacted by the context of increased interest rates, which has reduced actually the opportunities for trading gains on debt instruments. As I mentioned in the previous quarter, we also incurred losses on our government bond portfolios, which we will be able to reverse later in the fourth quarter due to a change in accounting regulations. On recoveries, we generated VND 1.1 trillion of recoveries and income during the first 9 months of the year. So this for me is the proof of the effectiveness of our collection processes as well as the quality of the collateral held against our credit exposures. On OpEx, the trend was in line with the strategy of investing into talent, digital, marketing and technology. Finally, our provision expenses reduced by 38% -- actually, sorry, 39% compared to the prior year, which reflects the strong health of our credit books. All in all, we recorded a PBT of VND 6.7 trillion for the third quarter of the year and VND 20.8 trillion for the first 9 months of the year, which is up 22% on 2021, as Jens mentioned. This slide gives you more insight into the growth of our NII. As you can see, our net -- our interest earning assets grew by 18% year-on-year with a very different profile compared to the prior year. So we reduced our portfolio of corporate bonds by minus 26%, and we increased our customer loans by the same proportion. And as we explained in the previous quarter, and as you will see later in the presentation, we have also shifted our credit exposure away from wholesale banking and into retail and SME, in line with our diversification strategy. Looking at asset yields, you can see some pickup from 7.2% in Q2 to 7.4% in Q3. So this modest increase reflects what I mentioned earlier, right, the fact that we have shifted into retail and SME where spreads typically are lower but where the capital consumption is also significantly lower. On funding, our deposits remained broadly stable, reflecting the context of tighter liquidity in the economy, as I described. We were also probably more impacted comparatively due to the profile of our customer base and the fact that it's more skewed towards the high net worth on African segments, where deposit positions tend to be more volatile and fluctuate in line with investment opportunities. On the cost of funds, the increase in the third quarter reflects the trend I showed earlier, right, both for deposit rates and for entire bank rates. Overall, our net interest margin decreased when we would have hoped to be able to keep it stable. But at the same time, I would like to highlight that it's also at least partly a consequence of a conscious decision to shift towards a different business model, while margins might not be as high going forward, but where our risks will be significantly more diversified and where importantly, the fee component in our revenue will be much higher, leading to the same overall profitability but with a less risky business model. Let's look now at [ credit ] balances in a bit more details. So if you compare our books at the end of the quarter with a position 1 year earlier, you can see that our corporate bonds and wholesale exposures have gone down, right? And that all the growth in our credit books has gone to the retail and SME segments. It is, therefore, again, quite a different bank, I think, right, from a risk profile perspective versus what it was only like 12 months ago. While the overall credit assets have increased by 21%, the number of borrowers has increased by 52%, which means that our credit portfolios are now diversified across a much higher number of borrowers. And close to 50% of our assets now are in the retail segment, where our exposures is, by definition, to the entire spectrum of activities in the economy. So from there, it is clear to me that our balance sheet today is a lot more diversified than it was like 12 months ago. I will not comment again on credit yields. I will just draw your attention to the chart on the right-hand side. You can see that short-term loans have increased more than 2x faster than medium and long-term loans. And this again points to the fact that the level of risk in our balance sheet overall has decreased. And it shows that we are trying to optimize not just for margins but that we are also focused on increasing the resilience of our balance sheet ahead of the next stages in our development where it will be about scaling up our customer base leveraging digital and partnerships. So this slide presents a view of our credit exposures by sector and by product. A few points to highlight here. First, our corporate loans increased by a moderate 3% year-on-year. And within that, our exposure to the ReCoM sector have gone down by 1%. At the same time, we were able to significantly grow our credit books in other sectors, particularly FMCG, Utility, Retail, Logistics and others. So we want to continue with this diversification strategy. On retail, our total loan books have increased by 61% year-on-year as a result of the accelerated expansion I talked about earlier. The year-on-year growth in mortgages has reached 68% and for credit cards, plus 93%. For credit cards, actually, we could have grown our books even faster, but we took the decision to curve the growth in order to fully test the reliability of our underwriting and risk management processes. So at this stage, we are seeing a high profitability on our book of cards across both NII and NFI and therefore, likely that this product will hold the key to our expansion into the retail segment in the coming quarters. It will also help us support our net interest margin, and it will be propelled by our new partnerships with Masan. So as you know, we launched in September, a new one-stop shop concept for banking services, which will bring Techcombank's offerings into Win mart stores. And this will give us the platform to further scale up our retail customer base in our target segments. Now a quick focus on deposits. I will not spend too much time on this slide as I have already explained the trends on deposit volumes and deposit rates. Our cost of funding went up, and this trend is likely to continue in the short term. Liquidity in the banking system has to remain constrained as a matter of fact in order to contain inflation and interest rates also have to stay high in order to support the value of the dong. So one of the way forward for us will be on portfolio management and on expanding into credit card and unsecured lending, as I mentioned. And for this, we will be able to leverage our machine learning models for more efficient underwriting and also better targeting and better anticipation of delinquency behaviors. But even more importantly, our strategy has not changed. It's about growing CASA and growing the proportion of CASA in our deposit base. In 2022, it's fair to say that we were a bit held back by the tighter liquidity in the banking system as well as some stability issues with our app, which have now been resolved. So we hope, and we are aiming for a very different outcome in 2023 with a reliable app, which is now topping the charts on the app stores and with the new and exciting partnerships with Masan, which will allow us to grow our customer base at scale. Let's now spend a bit more time on our fee income. So as I mentioned, it's for me, one of the white spots in our performance this quarter. Overall, we managed to grow our NFI by 33% for the first 9 months of the year despite the headwinds from COVID and despite the headwinds from negative sentiment on bond and equity markets. I will quickly go through a few highlights. So letters of credit, cash and settlement, fees were up 110% year-on-year. As I mentioned in the previous quarter, we made a number of investments in those areas, including digitizing our processes, rolling out a new corporate mobile banking app, upgrading our trade services and our working capital proposition. FX sales also benefited from these investments in those platforms, and were up 70% year-on-year. Cards were up 60% year-on-year on the back of even customer propositions and new underwriting processes and propensity models. And it was one of the first use cases for our cloud-based digital and analytic infrastructure. Banca was up 50% year-on-year. So in the month of August, we launched a new product -- a new insurance product, co-created with Techcombank, and it was the first in the market. And we also launched a new campaign, Partner For Life. And as a result of that, we made it back to the #1 position during the month of August. Finally, IB fees went down 11% year-on-year in a context, which remains difficult for bond issuances. We had the opportunities to talk about it in our previous conversations. We remain confident in the potential of this product in Vietnam, and we remain confident. So in the competitive advantage is that we have built in this area with our subsidiary, TCBS. Turning now to operating costs. So our level of expenses this quarter was a bit down below -- a bit below that of the previous quarter. So beyond the seasonality effect, that was also the fact that there was a carryover impact from the attrition we experienced in the second quarter as well as releases of provisions we had accrued for staff compensation and rewards. Our cost income ratio was lower than 30%, and the growth of our total costs for the first 9 months of the year was 21%. So this level of growth is in line with our strategic plan and reflects our investments into digital talent and technology. A quick focus now on asset quality metrics. So as you can see, our credit cards in Q3 stood at just VND 0.6 trillion, which is only in line with our level we observed since the end of last year. On a net basis, after recoveries, our average credit cost over the last 5 months was exactly 0.0%. The NPL ratio also remained low at just 0.6% in Q3. It was actually 0.0% as well for our wholesale banking exposures. And our coverage ratio remained healthy at 165%, which means that our level of provision is quite comfortable compared to the NPL we are currently seeing in our books. So this slide presents our restructured loan balances which continue to run off to just VND 0.4 trillion, which is around 0.1% of our total loan portfolios in Q3, and most of our customers have been able to either exit the program or repay their loans. We already touched on the resilience of our balance sheet. On capital, we added another VND 5.4 trillion of equity during the third quarter. Our CAR, capital adequacy ratio, is stable at 15.7%. It was supported by the shift of our credit exposures from wholesale banking to retail and SME, where risk weights are typically lower. And on liquidity, both of our key ratios remain comfortably below the regulatory minimums with our short-term funding to medium long-term ratio improving to 27.1%, which is significantly below the new regulatory limit of 34%. Finally, a glimpse into our performance compared to that of our peers during the second quarter. So TCB was number one for CASA ratio, number one for cost of funds, number two for net interest margin and number two for special mention plus NPL ratio. We will turn now to the projections for the remainder of the year. So clearly, the growth of the GDP is not going to be the main problem of Vietnam for 2022. We estimate that the final GDP growth for the year will be in the region of 7.5% to 8% driven by strong domestic demand, strong foreign direct investment and tourism. And it is, I think, a remarkable performance given the overall global environment. However, the issues that we've seen could rather be on the monetary policy side, where the challenges will be about containing inflation and supporting the value of the dong while ensuring sufficient supply of liquidity to the economy. With that, let's look at our guidance for the 2022 outturn. So credit growth, as usual, within line with the quota that we will receive from the State Bank of Vietnam. As you know, up until now, we have received a quota of 11.7%. On cost of funds and NIM, we expect, as I mentioned, further pressure in the short term before assets are fully repriced by the market. And for this reason, the NII growth should moderate compared to 2021. NFI growth should also be down from a very high base in 2021. Our cost income ratio could increase a bit while remaining, I would say, broadly in the same ballpark. As for NPL and credit costs, we should end the year broadly at the same level as in 2021, which is very low compared to the rest of the industry. So this concludes the financial part of our presentation. I will now hand it over to Jens for a quick recap on our strategy.

Thanks, Alex. Let me use that opportunity to just probably put some of the numbers which Alex has just shown into context. What we said and we continue to say is that ultimately, we're really shifting the book more towards retail and SME, and that we also, within retail, will start expanding into other segments. And with that strategy, there are a couple of key components, which I think you start seeing the first signs, but which, again, will continue and would start driving more of our business. So the first one is, and as we always have said, the exposure on the corporate banking side to developers was one of the key areas in terms of our value chain to actually start expanding also into the affluent segment. And with that in mind, it was always that the customer base, which we're having on the overall retail book is actually very much geared towards the affluent customers. And one of the key products very clearly is actually real estate -- real estate related. So 50% of all the [ wells ], it's actually in this part. So therefore, what we are doing is we are basically using this as a hook product in order to start getting into relationships with affluent customers. And as we have shown over the last kind of year, there was probably an uptick of between VND 70 trillion to VND 80 trillion in exposure, but probably even more importantly, around 200,000 more customers who actually start taking loans from us on the mortgage side, which again leads to a much better risk portfolio, but on the other hand, also to an opportunity to expand from there into other areas like wealth management. At the same point in time, we are going into tiers, which are probably not as wealthy yet and rather the kind of mass affluent and part area and mass affluent area like what we branded [ Inspire ] or really into the broader consumer banking space. And in that area, we actually work very much with partners, and in that case, Masan to create new ecosystems and new ecosystem value propositions. And again, that will allow us on the basis of technology and a very, very good underwriting data and machine learning models, et cetera, to start creating completely new experiences, which we actually can scale up, which will also, again, allow us over time to have a constant feed not just from the retail -- from the real estate side into the affluent -- mass affluent segment, but also actually allowing us to grow with our customers and over time as they start accumulating wealth, give them a broader range of solutions. So therefore, a lot of the things you saw already start manifesting itself and in the way how our retail book is shifting, in the way how banker grows, how credit card is growing, is not just kind of that we are making up for something else, but this is all part of a very deliberate strategy, which we have put in play over the last quarters in which now will start showing some of the results. And what I mean with that is, so if you just look into the number of lending customers, and as we said, 1 year ago, we have roughly 420,000 customers. Right now, we have 640,000 customers. So there's an increase of 52%, which again gives us on our lending side, a very different set of exposures. If you look at the same point in time into our risk weights, you see that the book starts actually shifting as we start shifting from wholesale banking from an 110% average risk weight ratio to 72%, which means, again, much more efficient way of using capital and also in terms of risk-adjusted returns on risk-weighted assets actually at least continued on profitability, like what we've seen in the past. And last but not least, it was always a question of how can we really expand our book and our reach to customers in a way that we're actually still not sacrificing profitability. And again, if you look into the marginal cost income ratios at this point in time into our different segments in retail, and you see that 2 already running at 20%, one is, at this point in time, running at 40%. But again, as we start scaling up more and more, these marginal costs will actually also start coming down even further. So what it means right now is actually that we start developing the models that even as we start scaling up, we're not jeopardizing at all an overall cost/income ratio, but it allows us actually to grow in a very different manner and also in areas which might actually not be as constrained by credit quotas. So again, I think it's important, and we will report more of that over time to just take stock a little bit and see that some of the shifts we had talked about and really start taking up shape and therefore, again, should also give a little bit more insight in terms of some of the financial numbers, why are they developing the way, how they're developing and what is the underlying strategy. And as Alex also said, we believe actually we're very much on the way of implementing the plan which we had laid out for 2020 to 2025. So with that, probably I think, we take a break.

[indiscernible] do the Q&A session for the third quarter 2022 Techcombank results. The first question is for Jens. There have been a lot of news regarding some companies in the real estate market and banks, specifically FLC, [indiscernible] and SCB. What is the potential systemic issue? Are there any systemic issues arising from those situations? Are you seeing deposits and withdrawal at a level that is higher than normal. We've also observed an increase in the term deposit rates for the -- for 12 months for Techcombank to 7.5% to 8%. Could you explain the rationale behind that increase?

Sure. So first and foremost, let me make just a very simple comment, we don't see any systemic issue at this point in time. And if you go one by one, and I think as we said beforehand, I think there were probably some practices in the bond market. And I think rightfully, the regulator went in strongly and started correcting that, and we completely supportive of that because we believe in the long term, it just helps the market. In terms, again, of banks, yes, there were some rumors and some noises. But again, because there was very strong messaging and also support from the Central Bank, I think we've seen very, very normal operations at this point in time across the industry, but also clearly on our side as well. Lastly, in terms of the deposit rates, I mean, as Alex has shown and liquidity has tightened, there's overall pressure, which comes from developments even outside of Vietnam, which is just the pressure due to the rate hikes by the Fed and other central banks around the world. So we are ultimately a price taker. So we increase our interest rates in line with market to make sure that we stay within our risk limits and like we see, have the right funding ratios and the right funding sources. So again, from that perspective, we just adjusted. As you can see, our cost of funds overall are still very, very low. So -- and we don't have any problems for funding. There's no faster withdrawal or anything like that, it's just normal market behavior as we follow what others are doing in the market. And again, that, I think, is just a reflection of the overall situation.

Thanks, Jens. As a follow-up, there's a question from Credit Suisse in Wellington. How do you assess the year-to-date developments that have negatively affected and further -- may further impact the bond market? And because the real estate market is -- accounts for a large portion of the bonds that were being issued in recent years. If developers cannot tap this bond market, what's the impact on the banking sectors? And will the banking sector be able to absorb this unserved credit from real estate developers?

So again, I -- in terms of the effects, first, is it necessary to actually do the current set of actions? I think again, yes, and very simply. And the more transparency, the more rules and the more we understand actually for what reason things are issued and then people following a very clear guidelines set out by the regulators, I think it makes it easier for everyone. So at the same point in time, does it affect the bond market? Yes, it does. And clearly, we've seen a slowdown in issuances and probably with the changes in -- as announced in Decree 65, we will probably see still a little bit of an adjustment period. But over time, again, I think things will be coming back because capital markets are just a very important source of funding and for the banking industry and for the overall industry because the bank balance sheets on their own cannot finance everything. So from that perspective, we believe actually that in the near term, the bond market will probably be slowing down a little bit. However, good issuers and good credit will always find its way. Now will we find its way in the bond market? Will we find financing through bank balance sheets? That will depend a little bit on the risk appetite of every single bank, that will also depend on the overall credit quota, set by SBV next year. But again, we believe good credit will find a way to get a finance for good projects. So therefore, whatever kind of short term and dislocations we have might probably rather affect weaker credit, not good credit. And in the long term, as everyone starts shaping up again, risk management practices are probably tightened and all of that. I think we see that this all goes back to normal. And again, we will see probably even stronger rebounding bond market.

This question is a little bit overlapping with the first one, but it seems like people want to hear the -- any impact from -- negative impact on VTB on Techcombank's normal business operation? Is there any -- are there any changes to underwriting practices or other risk management due to recent events?

So we talked before and I can only repeat it, we will never comment on individual names on either if they're clients, non-clients, whatever. We will just not -- this is not our policy to serve somebody and has questions to this regard, probably best to ask directly the affected parties. What I'm unhappy to comment on is like how we're looking at bond markets underwriting et cetera. So basically, our risk management practices have not changed, right? They are as strong as they are, and we are underwriting credit in a way that we could think about it as much as credit. So for us -- and we are evaluating it as if we would be -- or as we would be taking it on our own balance sheet on our own risk. So we're not using that in order to distribute risk, which we're actually not uncomfortable with. So from that perspective, again, our risk management practices, which we are constantly reviewing are as strong as ever, and we don't see any reason to change that. We talked to be -- we talked already about the effect on the bond market and on the real estate market. But as you can see, even since these kind of effects were already out there, probably in the beginning, first quarter, we still actually show pretty good results because we are having a very diversified portfolio. So from that perspective, when it comes to normal operations, et cetera, nothing is really changing. And last one, when it comes to asset quality and all of that, so we are doing regular stress tests as part of ICAP, and this is also a requirement of the SBV. And we're doing scenarios which are even tighter and then -- and what the regulator would be required. All of these scenarios are not leading us to believe that there is any unusual stress in our portfolio that we would be in a situation where even if worst-case scenarios would happen, we would breach any of our internal risk limits or any regulatory triggers. So from that perspective, again, we don't see any stress on balance sheet in our portfolio.

The next question is also for you. Again, given the recent events in some areas, how robust is your underwriting practice in order to screen up companies that potentially commit wrong doing, particularly on the bond activities? And if your clients happen to get caught -- how do you deal with the possibility of clients getting caught in some of these prohibited activities? And what would be your plan to deal with such an event?

Again, these are -- I mean, interesting questions, but to a certain extent, at least when we look at our book, also a little bit of theoretical exercises at this point in time. So we have very clear risk parameters. And when we look into any kind of credit, large credit and small credit, and we have very clear approvals for customers, and we do our KYC in order to make sure that we really identify exactly who are we lending to. We review these risk appetite limits, triggers and really also make sure during any extent that we ensure compliance with whatever we have agreed with people we are lending money to. And at the same point in time, we have early warning triggers to actually see if anything is not going according to plan. And so in that case, again, as I can just stress again, we look at the portfolio. We do our stress tests and we look through all eventualities. At this point in time, we're not seeing a case on where and what is right now described. The bonds, which we have issued in the past, if you see our NPL ratios, et cetera, we never had such a situation. And if we're getting to such a situation, we will deal with it, but that's not something right now we need to look at.

Next question is for Alex. Could you share the current outlook on the liquidity environment? Do you expect interbank rates to continue to move higher? Or should it start to ease? And then also, what do you think about the impact in 2023? What do you think that the interbank rate impact will be on the system and Techcombank specifically in terms of cost of funds and NIM?

Thank you. And I agree that it's an important question, Mark, on the future economic environment. So in short, we believe that the liquidity in the banking system will continue to remain tight. So first, there is pressure on the amount of currency inflows due to anticipated headwinds and the growth of exports and the growth also of foreign domestic investment. And also importantly and beyond that, the authorities will have to continue to tightly control the supply of money to the economy in order to contain inflation and so show up the value of the dong. So in this context, it's difficult to think of scenarios in which there could be a massive reduction in interbank rate. So it's almost impossible to predict over the long term. But what I could say is that in the short term I would expect interbank rates to hover around the level they reached at the end of September, which is roughly 5%. So now when it comes to the impact of these higher interbank rates, I would say it will depend on the situation of each banking institution. As far as Techcombank is concerned, what I can say that the impact is broadly neutral because if interbank rates increase, it means that we are also able to redeploy our excess liquidity at a higher rate. And then regarding the longer-term perspective for NIM, so I had the opportunity to talk about it during my presentation. In the short term, clearly, we see pressure, right, from the higher cost of funds and from the fact that the market hasn't yet reflecting the higher cost of fund in lending rates. And whether or not it will be able to do it in the future or whether or not amending rates will increase is hard to predict at this stage, particularly given the need and the expectation as well that the banking sector will support the economic agents and avoiding borrowing rates to grow too much. As far as we are concerned, we will definitely look to offset the impact of this pressure on our NIM. And the way we'll do it is by expanding, as I said, into credit card and unsecured lending by growing our CASA deposits and also -- and importantly, by increasing the proportion of fees in our revenue. So our strategy is clear. And I think now for the first time this year, we have all the required levels in place in order to deliver it.

As a follow-up to that, do you expect the higher interest rate environment to have an impact on the bank's book quality and credit costs?

An important question, indeed. Our -- well, theoretically, you would expect that higher rates would translate into higher borrowing costs, and this can indeed be a concern. But primarily, if it combines with a slowdown in economic activity, but that's not what we are seeing at least for the moment, right? So as we discussed at the beginning of the presentation, GDP is accelerating and the cash flows of our customers generally are very strong, right? And then beyond that, as you saw and as we explained in our results, it's not like the borrowing or lending rates have increased massively up until now, the increase in lending rate has been quite moderate. So for all these reasons, we do not expect any significant impact of the higher rates on the credit quality in the banking system. As for the last part of the question, so we do constantly carry out stress test. And up until now, the stress test showed that even under significantly deteriorated economic conditions, we will not reach any of our risk limits.

The next question is regarding FX exposure. In the past, you've spoken about FX exposure and hedging. Now given the recent VND depreciation, could you talk about -- could you just repeat the hedging policy and how well it's done given the recent move and also discuss the all-in costs for some of the foreign currency loans compared to domestic funding sources now?

Yes. Thanks for this opportunity to clarify our hedging strategy. So on FX, our approach is very simple. We just hedge our net FX exposure so that it would be neutral. And our strategy in this respect hasn't changed. When it comes to interest rates, we have a holistic approach. So we look at indicators like the present value of 1 basis point, so of the structural interest rate risk in the banking book. And this approach also applies to our foreign debt in foreign currencies. So this has led us to hedge actually the majority of our exposure to U.S. dollar rates via interest rate swaps, right? So as for the question around the cost of our debt in U.S. dollars, so it used to be very competitive compared to the other options available in the domestic market. It's less the case today. However, the reason why we took on these loans in U.S. dollar and overseas markets is not cost. It's more the fact that it's -- it provides a source of stable, medium, long-term funding, which is a good match from a cash flow perspective for our medium to long-term assets. And this advantage absolutely remains. And then regarding the last question, regarding where this -- the cost of hedging our debt in U.S. dollar booked? They are booked actually in other income in net gains or losses from other investment securities.

The next question is for Jens. What is your view on banking operations, the real estate and bond and stock market in 2023, given the latest comments from the government that there might be more investigations on real estate and financials and banking? And could you comment on some of the real estate market supply and demand factors, especially where Techcombank typically finances?

Sure. Yes. Thanks for the question. So let's start maybe with the real estate markets. Again, the -- a lot of the measures right now taken also with the government was to basically come down the real estate market and as we saw some excessive behaviors. So I think right now, probably these measures will really start taking place. So things are slowing down a little bit and again, also the financing is probably more sustainable. So therefore, again, I think for the next quarters, in general, that might actually be coming down. We might also see a shift of some of the areas, which were very much catered towards high end to make sure that we actually also see more social housing projects, et cetera, more affordable housing which is in line with the government policy. But again, probably a little bit of a slowdown in -- across the market, while there will still be high pockets of growth in certain areas. And bond market, again, the same like what I said beforehand, will be slowing down, and there are changes required according to 65, which will probably put a little bit more requirements on issuers and we will probably change a little bit the profile of investors. But again, I still think these are kind of adjustments over, I don't know, next 2 or 3 quarters, after which the market will be come back again and probably will be stronger than beforehand. Stock market, I'm really probably not engaging on that one. I think the market, right now, what we're seeing is probably one of the worst performers in the world. I think it seems to be overreacting to a lot of information right now. But again, as usual, markets, trying -- once they get all the right information trying to be rational. So again, I think a lot of these things right now are probably a little bit not sufficiently understood, oversold. So probably it's coming back. But again, I'm not making any predictions on that. There are definitely people who are better positioned than me. When it comes to us, right, yes, we are kind of -- on the bond market, we are a big player. So again, probably there might be a little bit less demand in the beginning, but we also said over time, we believe it actually benefits the strong players. So again, as things are coming back as people are looking for professional advisers and all of that, we should be in a very good position. On the real estate market, what we are right now seeing in our book, we still see actually pretty strong demand. We are financing the higher end of the portfolio, and we are financing only in top-tier locations, with top-tier developers with great reputation. So again, that part of the market is relatively untouched. So we will see -- as again, it will probably slow down a little bit and just as people are trying to understand what are the right -- or if there are any implications coming out of all these news. But again, I think it will just continue to grow. What might change a little bit is that people thought of it as the best investment opportunity because there were also other asset classes which were lacking. But right now, as bonds or interest yields are going up as term deposits are, again, becoming more attractive. And at the same point in time, maybe that some of -- as demand is cooling down, not every project will be basically financed. So there's probably also a little bit of additional supply coming into the market that might bring down the prices a little bit. And so again, that will all slow down. But again, the secular trend, the secular trend, which is really still saying that we need much, much more housing across all categories in Vietnam is unbroken. So therefore, we believe it's actually coming back. And for us, as we are playing in these markets, again, I think we have in the plans for next year. Again, I think there will be some adjustments we need to make. But I think this is rather more technical in nature in order to make sure that we ensure that we still have the return on equity, the return on assets, we are used to. But as you saw from our profile when it comes to net interest income but also fee income, we have a pretty broad range of areas where we can make money, and we will just strengthen these a little bit more. And then as other things are coming back, we will start bringing them up again. So for us, it's pretty much business as usual. And as we said, over the last 2 quarters, probably we already faced a little bit with that situation. And as you can see from our results, we managed actually pretty well through these.

Alex, Jens talked about Decree 65, which became effective on September 23, what are the impacts on TCB? And what's your view on the bond market impact here?

Yes. Thank you for the question. Actually, I think Jens already answered it partly. But the first consequence of Decree 65 is that it will create additional conditions for issuers with the use of proceeds will be controlled more tightly. And also, in most cases, companies will have to get an external credit rating. So this puts additional burden on issuers. But at the same time, it also creates opportunities for the strong players, as Jens said, right? So players who will be able to come up with simple and efficient propositions. And this is what we are working on. And as far as the investors are concerned, the new decree actually expands the base of eligible investors through the inclusion of a new criterion based on taxable income. And then beyond that, it's also, I would say, probably we will increase the trust that investors will put into the bond market. So overall, the impact should be positive. And if we anticipate that the bond issuance market is going to remain slow for the foreseeable future, as Jens explained, it's for reasons which have to do with the overall sentiment in the market much more than with the impact of Decree 65 because the impact of Decree 65 will actually be positive for us given our position in this market.

The next question is for Jens. What is your latest credit quota granted by the SBV? Do you expect another upward adjustment before the end of the year? Given that this year, it looks like Techcombank's credit quota is lower than it had been in other years compared to the rest of the banks. Could you make some comments on that? And whether it impacts any plans for you over the next 5 years?

Sure. Thanks for the question. The credit quota ultimately is a measure for the Central Bank to steer actually on the economy -- the credit growth in the economy. And this year, clearly is probably not typical for a normal year or what we've seen in the past. And there were certain areas where, in the beginning of the year, the Central Bank really wanted to make sure that things are reined in. And then as we started going to the second half of the year and with all the changes in the global economy and the Fed rate hikes, depreciation, appreciation and all of that, it becomes more and more an important measure by the SBV to basically start controlling the environment and basically setting monetary policy. So therefore, the quota -- under which conditions quotas are set and all of that really depends very much on the environment. And so therefore, we don't know exactly what the next year's environment is. And hence, that's a little bit hard to comment. For this year, there were also a couple of different elements, which were that those banks which had started to take action and support the state bank in taking care of some of banks which were a little bit more in trouble, these so-called 0 dong banks were basically granting higher quotas. And again, it's probably unclear to at least a lot of market participants, if that additional allocation, which was granted to these banks, if that is basically everything, if there's more to come in the next years and all of that, which, again, is also for the Central Bank to decide. So from that perspective, we are actually somewhere in the -- actually really on the average of the industry. We still believe that given our kind of risk management quality, the quality of our book, CAR and all of this, we will still be very much able to deal with all or any credit quota, which is given to us. And again, I think once some of these unusual developments are probably behind us, we will see how SBV again will work and use that credit quota instrument. From our perspective, right now, as you can see, we were -- we said this in the past, we are on a 20% trajectory. Growth trajectory wanted to grow kind of the assets at roughly 20%. We wanted to grow PBT at 20%, and we wanted to go with a return on equity of 20%. And these numbers still hold. So -- and therefore, again, at this point in time, we have not changed any of our projections for the 2025 plan. And again, we will look at these over time. But as I said, this year is probably a little bit unusual. But again, we also don't know exactly what the future will hold, and we will see. But we believe there's enough resilience in our business model to still continue on the trajectory we have mapped out for us.

Alex, the next question asked, last quarter, you mentioned that CASA was down, and it was a temporary versus the long-term CASA goal. This quarter, CASA was down again, do you still think it's a temporary development? And have you changed your long-term view on where CASA balance could go?

Yes. Thank you. Fair question. Maybe when I said temporary, I should have clarified what I meant by that. Temporary for me, means it doesn't change our medium, long-term objective of 2025, right? And we've always been clear that along the way, as we progress toward our 2025 objectives, there will be volatility. Sometimes we will be up, sometimes we will be down. But as long as we are progressing in the right direction, as long as we still believe that we can hit our 5-year target, and this is what I mean by temporary. So now as far as the context of the decrease in our CASA ratio, I commented on it during my presentation, it is broadly in line with what we have seen in the wider banking market. I think it's fair to say that we were probably comparatively more impacted than other banks due to the profile of our customer base, the fact that it is more skewed towards high net worth and affluent customers, which tend to hold more volatile deposit positions and also react more quickly to investment opportunities. So now with regards to our 2022 outlook. As I said, we do not expect that we will be able to get back all the way to 50%, and this because of the headwinds that we are seeing in the market. But if we now look forward to 2025, we are still confident with our objective of reaching 55% CASA ratio, and our strategy of accelerated expansion into retail and SME, supported by digital and partnerships is what will get us there.

The next question is on fee income. You recorded particularly impressive growth in banca, cards, FX, et cetera. Could you share what kind of growth you would expect for fiscal year '23 and beyond? Do you expect the current impressive growth to continue?

Thanks. Yes, it's true. I was realizing actually that we were potentially creating expectations through the growth we have reported so far on our NFI. So what I can say is that NFI is absolutely core to our strategy, and it becomes even more so, I would say, in the current environment with higher cost of funds and more constrained credit quotas as well. So you can expect that the strategy of the bank will continue to be 100% geared toward sustaining the growth of our fee income. So we have a medium- to long-term objective, which is to reach 30%, NFI/TOI ratio by 2025. And in order to deliver that, we will have to grow our NFI faster than our NII, and on average, at a pace which will be in excess of 25%. So that's what I can say, right? So between now and 2025, our average growth rate year-on-year should be in excess of 25%. But as I said, some years, we will be higher; some years, we might be lower, and it's very difficult to predict.

The next question is regarding home buying and mortgages. Your target client segment is the affluent, which may already have their first home. Could you share some insight on how much of your mortgage loan book is for speculative purposes rather than a first home purchase? And then could you comment on the current situation and low liquidity in the property market and how it might affect the loan book?

Yes. Thank you. So we estimate that the majority of our mortgages, maybe 70% to 80%, are taken up in order to buy a home in which our customers will live. So now when it comes to the question around the liquidity in the market, the reality is that what we are seeing, and I think Jens mentioned it earlier, that this liquidity remains high, particularly in the upper segments where you will have people buying properties for investment purposes. So in other terms, and in a nutshell, there is no indication that this data, that there will be a significant change in behavior from our customers. And it's more a question of monitoring how things will develop. And if something interesting happens, we will let you know.

And the next question is, could you discuss the plan to -- and strategy to expand your exposure to other sectors other than ReCoM? And how does this change given what's happening in the real estate market this year and potentially into next year?

Thanks. And that's, I would say, probably one of the questions that come up most frequently though Jens touched on it already quite a lot, right? So there are secular trends, which will continue to support the growth of this sector over the short term and over the medium to long term. So our approach to this sector has not changed, and we remain very comfortable with our strategy and our current position in this particular sector. Now at the same time, what is important of this phase to be able to control the risk and also go through potential cyclical adjustment. So that's why we have invested heavily in developing expertise in all aspects, all of deposit sectors, be it technical understanding of development challenges as well as the regulatory and legal angles. Beyond that, we are very conservative in our risk appetite. We only do business with a very limited number of developers with whom we have long-standing relationships. We also have developed an integrated approach where we would have direct relationships with contractors, with builders up until the end of the chain when we issue mortgages. So this allows us to have a very good and holistic understanding of all the technical, commercial, financial risks involved in the sector. And this translates in the fact that our NPL ratio for our wholesale banking exposures, as I mentioned, and as of today is exactly 0.0%. So it's not that we want to move away from ReCoM because it's a very profitable sector for us. And it's also, as Jens mentioned earlier, a very good tool to acquire high net worth and affluent customers. It's more that we want to grow in other sectors.

The last question is for Alex. Why did provision expense increased 46% Q-on-Q in the third quarter, especially on the specific provision side? Is there anything that we should be particularly worried about? And do you have to revise your credit cost expectations for the fourth quarter and beyond?

Yes. Thank you. So for the third quarter, as I mentioned, we recorded provision expenses or credit costs of VND 0.6 trillion, which is broadly in line with what we saw since the end of last year. And if you do the comparison versus Q2, actually, it's more that Q2 was probably abnormally low for reasons, which have to do partly to the release of provisions that we were holding against our loans and our loans in the COVID restructuring program. So if you look at 2022, as I mentioned, we expect our overall credit cards to be in line with what we observed in 2021, where our NPL ratio was around 0.7%. And if we look to 2023, we have no reason clearly at this stage to have particular concerns about the performance of our credit books. It's more that over time, we expect our NPL ratio to increase as we expand into credit cards and unsecured lending.

This concludes the third quarter 2022 financial results presentation. Please contact the IR team for any additional questions that were not covered. We look forward to speaking to you again in 3 months.