Natural Disasters and Business Performance of Commercial Banks: The Moderating Role of Capitalization and Provisions for Loan Losses

Abstract

This study investigates the impact of natural disasters on the performance of commercial banks, with a focus on the moderating roles of capitalization and loan loss provisions. Utilizing panel data from 29 Vietnamese commercial banks over the period 2009-2024, sourced from FiinPro, Open Development Mekong, and the General Statistics Office of Vietnam, the analysis employs the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) model. The findings reveal that loan loss provisions positively moderate the procyclical relationship between disaster-induced damages and bank profitability, measured by return on assets (ROA) and return on equity (ROE). In contrast, capitalization only exhibits a statistically significant moderating effect on the relationship between natural disasters and ROE, also in a positive direction. These results suggest that banks should prioritize credit risk management and maintain adequate capital buffers to enhance profitability, even under adverse environmental conditions. Furthermore, green finance and green credit should be emphasized as integral components of risk mitigation strategies.