Interest rate ceiling fall puts pressures on banks

22-Nov-2019 Intellasia | Vietnam Finance | 6:02 AM Print This Post

The State Bank of Vietnam (SBV) had recently issued two documents to adjust the interest rate ceiling, both the mobilisation and lending in the market one (market of economic organisations and residents but excluding credit institutions.)

Accordingly, the maximum interest rate applicable to demand deposits and terms of less than one month decreased from one percent per year to 0.8 percent per year. The maximum interest rate applicable to term deposits from one month to less than six months reduced from 5.5 percent per year to five percent per year.

The credit institution set the interest rate for deposits with terms of six months or more based on market capital supply and demand.

Along with that, SBV also lowered the maximum short-term lending interest rate in dong for capital necessary for agriculture, rural areas, exports, supporting industries, small and medium-sized enterprises and high technology applications from 6.5 percent per year to six percent per year.

The decision of SBV to lower the interest rate ceiling came shortly after the message of reducing interest rates from the head of the prime minister Nguyen Xuan Phuc at the National Assembly forum on November 8.

Although being more or less prepared before SBV officially decided to lower the interest rate ceiling, a series of banks had urged to reduce deposit rates in many periods. However, this decision of SBV would undoubtedly put absolute pressure on many banks.

Theoretically, reducing the ceiling interest rate would make the current deposit interest rate reaching the ceiling flow to lower risky banks (usually from small banks to large banks), because the interest rate received was the same.

Part of the cash flow would follow the longer term, which was currently not adjusted by the interest rate ceiling.

But most notably, the cash would also flow from the banking channel to other investment channels because deposit rates had been less attractive.

In general, lowering the ceiling interest rate would put pressure on capital mobilisation on most banks, in which the smaller the bank, the higher the pressure.

To partially measure the level of pressure, one can look at the Loan-to-Deposit Ratio (LDR). The smaller the ratio, the lower the mobilisation pressure. On the contrary, the higher the ratio, the higher the mobilising pressure, forcing the bank having to accept to raise the long term mobilisation without the interest rate ceiling, causing the increase in capital cost to reduce profit.

However, not all banks publicly announced the LDR, especially the figure at the end of September 2019 was almost unavailable. However, it was possible to roughly calculate the LDR in market one (equal to customer loans on customer deposits). LDR in market 1 (hereinafter referred to be ‘LDR-MK1′) did not include inter-bank deposits and valuable papers, such as bonds, promissory notes, deposit certificates.

Basically, LDR-MK1 was directly proportional to LDR. The smaller the LDR-MK1, the lower the pressure to raise capital in market one and vice versa, the higher the LDR-MK1, the higher the pressure to raise money in market one, forcing banks to accept interbank mobilisation and valuable papers, as well as raising deposits at long terms without interest rate ceilings, leading to an increase in capital costs to reduce profits.

VietnamFinance statistics for 29 Vietnamese commercial banks showed that the top three banks with the lowest LDR-MK1 ratio were National Citizen Commercial Joint Stock Bank (NCB), Vietnam Maritime JointStock Commercial Bank (MSB) and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank). The case of NCB was somewhat sudden due to money sent customers soared 24 percent in the first nine months of this year, causing LDR-MK1 to drop significantly.

LDR-MK1 was low, which meant low pressure on capital mobilisation. In fact, Vietcombank and MSB were the two leading banks to reduce lending rates with a broader scope of reduction than SBV’s decision.

Some other banks were also under pressure to raise capital, such as Sai Gon Thuong Tin Commercial Joint Stock Bank (Sacombank), Sai Gon Joint Stock Commercial Bank (SCB), Vietnam Export Import Commercial Joint Stock Bank (Eximbank), Asia Commercial Joint Stock Bank (ACB), An Binh Commercial Joint Stock Bank (ABBank), with the LDR-MK1 ratio below 90%.

Among the 29 banks, 10 banks had an LDR-MK1 ratio higher than 100%, showing the higher pressure of capital mobilisation. The overwhelming cased were small and medium-sized banks such as Saigon Bank for Industry and Trade (Saigonbank), Kien Long Commercial JointStock Bank (Kienlongbank), Saigon Hanoi Commercial Joint Stock Bank (SHB), Lien Viet Post Joint Stock Commercial Bank (LienVietPostBank), Orient Commercial Joint Stock Bank (OCB), HCM City Development Joint Stock Commercial Bank (HDBank), Southeast Asia Commercial Joint Stock Bank (SeABank), Vietnam International Commercial Joint Stock Bank (VIB) and Tien Phong Commercial Joint Stock Bank (TPBank). Only one large bank was Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank).

Thus, although the smaller the bank, the bigger the pressure would be, among the smaller banks some were more pressured than the rest.


Category: Finance, Vietnam

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