Covid-19 epidemic could increase banks' bad debts

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Credit growth in the first quarter of 2020 of TPBank was high compared to the average. Source: Internet

Credit growth is differentiated among banks

Credit in the first quarter of 2020 recorded the lowest growth rate in the past four years, when it only increased by 0.68%, according to data released by the General Statistics Office as of March 20. According to the update of the banking industry by SSI Securities Company, the slow growth of credit was recorded at three state-owned commercial banks, as well as commercial banks such as MB and ACB. This may stem from the fact that these banks are more cautious when making new disbursements to limit credit risk in the future.

Meanwhile, VPBank, HDBank and TPBank banks broke the pattern and exploded with a high credit growth rate – about 4.8% by the end of February 2020 for VPBank, 5% by the end of February 2020 for HDBank and 9% by the end of March 2020 for TPBank. SSI experts believe that VPBank and TPBank are especially active in buying corporate bonds. For HDBank, the high credit growth was due to loan agreements with a number of business customers that had been signed in late 2019.

Bad debt will increase if the epidemic is prolonged

Predicting profits for banks this year, the SSI report said that, because the situation of Covid-19 epidemic began to worsen fromthe second week of March, the impact of the epidemic on business results of most banks in Q1/2020 is not significant. Except for some banks that choose to take the initiative in setting up credit risk provisions in advance to have more reserves in the future.

However, in Q2/2020, SSI believes that interest income, fee income and bad debt collection will decrease when banks meet customers' needs by providing preferential loan interest packages and cut transaction and payment costs.

SSI presents two scenarios on the disease situation, in which, in the firstcase, the disease will be controlled by the end of the second quarter of 2020, while in the worst case the disease will not be controlled by the end of 2020. Accordingly, banks' profit before tax growth is forecast to be 7.2% and 0.8% for the two scenarios mentioned, respectively.

For consumer credit activities, the impact is expected to occur in two stages. For phase 1, demand for borrowing from popular and low-income segments remains, as customers still need cash to cover living costs. However, for phase 2 when the epidemic is complicated and peaks, in theory, the income of the low-income customer segment will be affected first, and the borrower's ability to repay debt under this scenario will decrease rapidly at this time.

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The difference between the base case and the worst-case scenario will be more evident in the banking business results of 2021. SSI predicts that by that time, the rate of bad debt formation will be higher and the increase in bad debt may stem from the global Covid-19 outbreak.