One of the reasons why many investors were not interested in banking stocks, apart from the specific characteristics in business as well as accounting, was also the cyclical risk. In the downward phase of the economy, the banking industry had to face more threats, besides the decline in revenue in business segments, there was also the risk of generating a large amount of bad debt.
In order to prevent the unpredictable situation in the future, many banks were forced to make ample provisions in advance. If the situation were not too tragic, banks could still refund provisions, even reversing off-balance sheet debt in the future. If the status became tragic, the bank would avoid shocks.
The problem was, the more the credit risk provisioning increased, the lower the bank would profit. Right in Q1/2020, despite having not been affected too much by the Covid-19 epidemic, several banks had chosen to increase provisioning and record significantly more bad debts, along with that was intense debt elimination to ease the later pressure.
The most typical cases were the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) (HoSE: VCB) and Military Commercial Joint Stock Bank (MB) (HoSE: MBB). Last quarter, Vietcombank’s provision for credit losses increased by 43%, although its asset quality had always been rated at the highest level of safety in the system. More aggressively, MB had doubled its provision in comparison with the same period last year.
In both cases, despite being banks with the highest potential for profit growth before the Covid-19 epidemic occurred, by the end of Q1, the provision made the profits of Vietcombank and MB all decline.
It seemed that the big banks were more cautious during the Covid-19 season. Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) also made strong provisions in Q1. Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) also started to significantly increase its deduction, although it used to be very small.
However, many other banks still prioritised immediate profits when the provisioning amount in Q1/2020 increased insignificantly, even decreased in some cases. But this option was hard to maintain in the coming period, especially in Q2/2020, which was considered the worst quarter for businesses, including banks.
Depending on the choices of each bank, the amount of provision was different, and therefore, the profit fluctuations were further.
From an investment perspective, many investors wondered when pouring capital into bank stocks, because profit was always an essential guideline in stock valuation. But even some banks chose to set aside a small provision to prioritise profits; anxiety would still be weighed on investors because of the risk of future profit shocks if the economic situation became worse than expected. When the shock occurred, the stock market price was likely to be heavily affected.
In an uncertain period, the bank’s level of risk tolerance was always upheld. ‘Stress tests’ were essential in this context.
The ‘investment master,’ Warren Buffett, deciding to pour capital into Wells Fargo Bank between 1989 and 1990 full of uncertainty when the California real estate bubble burst, also gave a simple ‘stress test.’ For instance, 10 percent of Wells Fargo’s balance had problems and would lose 30 percent of the principal (and 100 percent of the interest), the company would break even. Wells Fargo later became one of Warren Buffett’s most effective investments.
When developing the stress test, each investor had different assumptions for the operating model of each bank. However, a simple stress test was still an important reference for investors, especially when compared on an equal level.
If the pre-provision profit and the regular provision of 2020 were similar to 2019, how many more bad debts could be written off? VietnamFinance’s calculations showed that Techcombank (HoSE: TCB), Tien Phong Commercial Joint Stock Bank (TPBank) (HoSE: TPB), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) (HoSE: VPB), MB (HoSE: MBB) and HCM City Development Joint Stock Commercial Bank (HDBank) (HoSE: HDB) were the top five names.
Accordingly, Techcombank could erase the bad debt amount equivalent to 5.56 percent of its outstanding loans. This figure in TPBank was 4.04%; VPBank was 4.02%; MBB was 4.01%; HDB was 3.43%. Other notable names to mention were Vietnam International Commercial Joint Stock Bank (VIB) (3.16%), Vietcombank (3.15%), and Asia Commercial Joint Stock Bank (ACB) (2.8%).
The above comparison helped investors to understand the banks’ tolerance level against the pressure of provisioning. It should be noted, however, that risk-favouring banks, most notably VPBank and HDBank, both owned the two leading consumer finance businesses, would naturally face higher provision pressure in the downward phase of the economy. Therefore, the determination of the risk appetite of each bank should also be combined to make a more effective assessment.
