Most banks have announced their third quarter financial statements with positive profit growth. However, the pressure from the economy, the rising fear of the pandemicand bad debt are causing banks to increase their risk provisions.

Many banks have to increase risk provisions for bad debts.

Reduce profits

From the second quarter to the third quarter, the impacts of Covid-19have affected the business operations of banks. Before that, a series of credit packages with preferential interest rates, debt restructuring measures, debt rescheduling and loan interest rate reductions for new and old loans had consumed a lot of business costs and income of banks.

Businesses and people still face many difficulties, increasing bad debts, causing banks to increase risk provisioning, which has a great impact on profit growth.

Looking at the nine-month business results of banks, although many banks still recorded huge profits with double-digit growth, there are banks which saw a decline in profit, causing an increase in risk provisions.

VietBank'sthird quarter consolidated financial statements showed that pre and after-tax profit decreased by 52% and 54% year-on-year, respectively, to nearly VND86 billion and VND66 billion. This is because bad debt increased andthe bank had to make greater risk provision. The cost of provision for credit losses of VietBank in the third quarter of 2020 increased by 65%, to VND25 billion. In the first nine months of 2020, VietBank's credit risk reserve increased by 80% to VND65.92 billion.

At Saigonbank, the profit in the third quarter was only VND52.2 billion, down by 60.5% compared to the same period in 2019. As of the firstnine months of 2020, Saigonbank's pre-tax profit reached VND177 billion, down 19.7% compared to the same period in 2019. In particular, the bank's provision expenses increased to VND20.9 billion, nearly double the VND10.8 billion of the same period last year.

Similarly, Kienlongbank also had to make up to VND83.2 billion of provision expenses, up 96% compared to the same period last year. This bank explained that the sharp increase in provision expenses was due to the increase in specific provision for loans of a group of customers with collateral ofSacombank's STB shares.

In addition tomid-size banks, large-size banks also have to sharply increase the provisioning in the context of rising bad debts. Typically, Vietcombank had to increase provision expenses by nearly 35% compared to the same period, to VND2,025 billion. Therefore, for the first nine months of the year, Vietcombank's profit reached VND15,965 billion, downby 9.4% compared to the same period in 2019.

Pressure but necessary

Although the banks with declines in profits above are not accounting for the majority, for the rest of the year, the pressure on the entire banking industry is still not small.

BIDV Research Institute estimates that internal-balance bad debt by the end of 2020 would be at 3% and by the end of 2021 it would be 4%.

Meanwhile, the handling of NPLs is forecast to be more difficult. In addition, the pandemiccaused weak demand and low confidence, leading to a decrease in demand for loans to expand production and business of enterprises. This causes slow credit growth.

Regarding this issue, economic - financial expert, PhD. Can Van Luc said that the increase in bad debt caused banks to increase provisions. Therefore, along with measures of deferring, delaying, restructuring debt and lowering interest rates, the profits of banks will be affected, estimated to fallby 20-25% in the whole of2020.

According to the calculations by SSI Research of SSI Securities Company, pre-tax profit in the second half of 2020 of the banking industry is estimated to decrease by 22.1% compared to the same period in 2019 due to a decrease of 4% in operating income (TOI) and provision expense increased by 47.8%.

In the middle of the year, the Prime Minister requested regulatory agencies to consider and adjust appropriately the rate of risk provisioning of commercial banks to facilitate and encourage commercial banks to continue reducing lending interest rates. According to experts, the nature of the cost of setting up risk provisions is the provision of a sum of money for problem loans.

Therefore, the cost of the provision will be taken from the bank's profit and deducted from current income before corporate income tax is calculated. The increase in provision expenses means that the scale of taxable profit of banks will decrease, and tax payable will be lower.

However, when each bad debt is processed and recovered, the amount of the provision will be recorded directly into the extraordinary income. Therefore, many banks consider this provision as "savings" that will come back and increase taxable profits in the future.

From now to the end of the year, even into 2021, bad debts and credit risks due to the economic downturn may continue to cling to businesses. Therefore, the risk provisioning is still a problem that forces banks to balance orsacrifice their profits to increase costs. In the remaining months of the year, the State Bank has required credit institutions to strictly control credit for potentially risky areas, especially investment credit, real estate, securities, BOT, and traffic BT. Credit institutions must also focus on handling bad debts, collateral of bad debts and focus financial resources on handling bad debts and minimizing any that arise.