Banks need to use risk backup tools to deal with the COVID-19 pandemic

19-Sep-2020 Intellasia | Dien dan Doanh nghiep | 6:02 AM Print This Post

The COVID-19 pandemic had proposed the risk of increasing banks’ bad debt. Therefore, banks needed to use regulatory risk provisions for efficient and safe growth.

The Business Forum Magazine reporter had an interview with Vu Dinh Anh, a Financial expert, on this issue.

-How did the expert evaluate the business activities of commercial banks in the first eight months of 2020?

It was apparent that the economic growth rate in Q1/2020 decreased sharply, to 3.82%, due to the impact of the epidemic, and even down to 0.36 percent in Q2/2020, which was the lowest quarterly growth rate since the announcement of this index in early 2006. With the gross domestic product (GDP) in Q2/2020 creating a new bottom in the context of continuing complicated epidemics, the GDP growth outlook for the remaining two quarters of this year, as well as for the whole 2020, was still facing many difficulties.

It was worth mentioning that in the problematic context of the economy, the banking sector had shown a useful role in assisting the state in comprehensive financial and monetary regulation and sustainable development. In particular, banks had provided credit programmes to support people and businesses heavily affected by the COVID-19 pandemic, typically large credit support packages from Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank).

However, with the unpredictable developments of the economy and the impact of the COVID-19 pandemic, the banking sector might face a double impact. The possibility of bad debts of the banking system would increase in the last months of the year, while the borrowing and lending reduced and would continue to decline in the coming period.

According to the expert’s observations, few banks would accept to sacrifice immediate profits to increase buffer for bad debt provision. Only a few banks, such as Vietcombank, had increased provision expenses by 21%, resulting in a three-percent decrease in profit before tax compared to the same period last year; Military Commercial Joint Stock Bank (MB) increased provision expenses by 40 percent in the first half of the year, resulting in only five-percent growth in profit before tax.

The increase in the coverage ratio of non-performing loan (NPL) would ensure that banks could withstand well in the upcoming bad debt storm, and Techcombank was a typical case. The bank’s provision expenses for the first six months of this year increased dramatically, by more than five times the same period last year. The fact that Techcombank used more than 1.7 trillion dong to handle risks in the first half of this year caused the NPL ratio by the end of Q2 to drop to below one percent. Only group five debt decreased by 65 percent compared to the end of 2019, to more than 900 billion dong.

It was worth mentioning that, despite having a large reserve capital buffer, and the capital adequacy ratio (CAR) always maintained at a high level and reached over 16 percent at the end of Q2. Techcombank’s six-month profit reached more than 6.7 trillion dong, which was 19 percent higher than the same period last year. This was why many international organisations assessed that Techcombank was a bank with strong asset quality, capital foundation, and stable profitability.

-On the other hand, the banking industry would find it not easy to stimulate people’s demand. While for businesses, all activities, which were in fragile status, the met this difficult time. In that context, how could banks grow safely?

The most significant difference, as Dinh Anh analysed above, was that banks had to sacrifice profitable growth to increase backup buffer.

Because in the first six months of this year, the number of enterprises temporarily suspending their business increased by 33.6 percent over the same period in 2019, making about 2 quadrillion dong of credit balance potentially risky. Thus, the impact of the epidemic had resulted in the inability of customers to pay debts on time and had increased the overdue debt ratio, also bad debts. Forecasts showed that the NPL ratio for the whole of 2020 would be around four percent.

Besides, the taste of choosing small but fine customers, focusing on businesses with financial potential, as well as customers with sustainable financial income, was how banks could get sustainable and safe growth like the way of Vietcombank, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) or Techcombank.

For example, Techcombank had diversified its income sources, focusing on non-interest income, from essential fees such as cards, insurance, bond issuance, and general banking services. Therefore, Techcombank’s revenue growth in the first six months of 2020 reached 30 percent higher than that of the same period in 2019, much higher than the overall growth rate of the industry.

-Statistics showed that demand deposit ratio (CASA) decreased in all banks with an average decrease of two percent to four percent, due to the demand for liquidity by customers. How about this trend?

Increasing a CASA ratio or a high demand deposit ratio led to a low cost of capital and an increase in net income margin ratio (NIM). This was a trend that many banks were targeting. However, since Q2, business results of banks had showed two characteristics, which were increased NPL and weaker CASA rates.

Some statistical data showed that Vietcombank, MB and Techcombank were the three banks with the leading CASA rate in the past five years (2015-2019). In which, MB had maintained its CASA rate consistently above 30%, and Vietcombank had had a CASA rate of over 27 percent in the past five years.

In the first six months of this year, CASA in the ‘Big4′ group all decreased, and Vu Dinh Anh observed that Techcombank was going upstream with the CASA ratio at the end of Q2/2020 reaching 34.4%, MB was holding performance, accounting for 33 percent of customer deposits. The next banks were Vietcombank with 28%, Vietnam Maritime Joint Stock Commercial Bank (MSB) 20%.

It must be affirmed that the CASA race of banks was not over yet, and breakthroughs like Techcombank come from the focus on technology investment and platform digitisation.

Because the bank settlement activities received many opportunities from the impact of the COVID-19 epidemic such as changing perceptions, habits, and non-cash payment behavior of customers. As a result, the number and value of payments via cards, online banking, or mobile phones had all grown enormously, along with many new products with many utilities being applied.

Businessman often said, high profits went along with risks. Nevertheless, Techcombank chose the business model of ‘low risk high profit’. Was this a paradox?

In the context of the global recession, the story of Techcombank was typical of a journey to overcome challenges. The success of this bank had received an essential contribution from the strategy ‘Customer was the focus’ and a business choice called ‘Low Risk High Profits’.

First of all, Techcombank’s profit brfore tax continued to grow at a high rate, at 19 percent year-on-year growth, extending its 19-quarter consecutive growth streak, which was a considerable effort. Techcombank’s CASA bounced back to 34.4%, at a time when other banks both reduced their CASA ratios and credit sources.

One of the most critical issues to control the credit flow to achieve the target was to control the cash flow, understand the business borrowing demand. Furthermore, the number of Techcombank customers continued to grow, with more than 330,000 new customers in the first six months of 2020.

In particular, the bank’s customer base was mainly high-income earners (for individual customers) and large-cap businesses, which might have many reserves to overcome this period.

Personnel, risk management and operation, and data were the three platforms that Techcombank was focusing on implementing to fulfill its customer-centric goal. Notably, building excellent data helped Techcombank understand customers, thereby developing services and suitable plans to each of the key customer segments, creating conditions for customers to identify risks proactively and to manage the bank better. With this strategy, Techcombank’s employees’ health index or employee’s engagement and effectiveness indexes were high.


Category: Finance, Vietnam

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