Will banks’ profits in 2021 be affected by provision expenses?

26-Jan-2021 Intellasia | VnEconomy | 6:52 AM Print This Post

The new draft amending Circular 01 is causing bad debts to emerge and raising concerns about the high cycle of credit costs. This will create a large differentiation in banks’ profits in 2021.

In the recent update report on the banking industry, Viet Dragon Securities Company (VDSC) assessed that in the context when the economic growth is at the lowest level in the decade, the number of business closure soared, the banking industry still recorded good profits.

Specifically, some banks still attained high net interest income thanks to lending to less-affected segments; while the profits of some other banks were supported by the upfront fees from exclusive bancassurance contracts, the opportunities from the fluctuating gold market, the widening exchange rate gap, and the deep interest rate decline.

More notably, bad debts tended to strongly decrease compared to the middle of the year. Typically, Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) saw the bad debt ratio falling to 0.6 percent from one percent in the third quarter (Q3) of 2020. Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank)’s bad debt ratio dropped to below one percent from 1.9%, while that of Tien Phong Commercial Joint Stock Bank (TPBank) declined from 1.8 percent to 1.1 percent after Q4. Similarly, the bad debt ratio of Military Commercial Joint Stock Bank (MBBank) decreased from 1.5 percent to 1.1%.

To achieve such bad debt settlement results, VDSC believed that banks have used large provisions to write off bad debts. “This can be a preparation for the uncertainty in the newly formed bad debt forecast, changes of bad debt groups, and collection of restructured debts in 2021,” said VDSC’s experts.

Regarding provision expenses, state-owned banks are seeing lower credit cost increase due to a cautious approach in 2020 which resulted in a good buffer (bad debt coverage ratio) and high base of provisions.

More specifically, the current credit cost of state-owned banks (1.5%) is expected to be enough to cover 50 percent of the restructured debts grouped into bad debts (equivalent to one percent of the total outstanding loans) and newly formed bad debts (one percent of the total outstanding loans) in two years, assuming that there is no significant increase in the rate of newly formed bad debts or restructured debts.

Meanwhile, at the four largest private joint stock banks, to assess the preparation of the leading private joint stock banks regarding the reserve buffer, VDSC excluded Vietnam Prosperity Commercial Joint Stock Bank (VPBank), which has a portfolio bearing risks from consumer credit, from the list. The three remaining private joint stock banks will maintain higher credit costs compared to the nine months. The bad debt ratio of one percent, the proportion of restructured debts of 2.2 percent compared to the outstanding loans, and the annual bad debt formation rate of 0.9 percent will need a long time to maintain a high provisioning rate, based on the cost of credit of 1.2%.

On the other hand, in 2021, banks may have to provision for the restructured debts according to the draft amending Circular 01. According to the document submitted to the Ministry of Finance, the draft amending Circular 01 requires commercial banks to keep the debt groups unchanged, restructure the affected debts, exempt and reduce interests for qualified customers, and more importantly start to provision for the debts restructured based on the nature of the loans.

At the same time, the State Bank of Vietnam (SBV) also proposed to extend the time of provisioning for banks according to the roadmap ending in 2024. This will help reduce the pressure of increasing provision expenses and give banks more time to handle bad debts.

Thus, when banks are having big differences in terms of bad debts, restructured debts which are classified as bad debts, bad debt coverage ratio, in the case when banks have to set up provisions according to the above draft amending Circular 01, the provision expenses will be strongly differentiated, leading to a differentiation in the profits in 2021.

However, this does not take into account the business activities as well as other potential income, or the room to cut costs, the factors which help reduce the impact of the high provisioning costs on pre-tax profit.

Agreeing on the forecast of the high provision expenses, VDSC still emphasized that “the concerns about bad debts may not be as bad as expected. The slowdown in the formation of restructured debts after the recovery process and entering a period of stable economic activities is a signal”

 

Category: Finance, Vietnam

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