The profit margin from forex trading can be narrow

23-Jan-2021 Intellasia | Thoi bao Kinh doanh | 6:02 AM Print This Post

As the Business Times reported, from December 31, 2020, the State Bank of Vietnam (SBV) would stop listing spot rates and stop buying foreign currencies for spot. Instead, from January 4, 2021, this agency would buy revocable foreign currencies for six-month term with a term purchase rate of 23,125 VND/USD.

Banks had big profits thanks to foreign exchange

In the foreign exchange business, most of the net profit came from the foreign currency spot trading, which profited from the difference between the buying price and the selling price.

In some years, the more strongly and often the exchange rate fluctuated, the greater profits banks often banks received and vice versa.

In 2020, the buying rate of the US dollar at commercial banks mainly fluctuated between 23,000 dong to 23,100 dong, while at the trading floor, the purchase price at 23,175 dong per US dollar was maintained until the end of November 2020.

Thus, the difference between the buying price of the US dollar at banks and SBV’s exchange floor for most of 2020 would be around 175 VND/USD. Meanwhile, the highest level in 2019 was only 120 VND/USD, and the highest in previous years was about 80 VND/USD. Then, the gap was widening, ‘the pie’ was much larger than before, the bank’s profit margin accordingly also increased.

Meanwhile, the volume, demand, and scale of foreign currency transactions of the economy was increasingly expanded in 2020. This was reflected in detail through the total export and import turnover of $543.9 billion, increasing by 5.1 percent compared to 2019.

On the other hand, a large amount of foreign currency transactions by banks had been done when SBV boosted buying in the US dollar to increase foreign exchange reserves, which were expected to reach $100 billion. This scale meant the amount of resale, transactions through commercial banks as an intermediary with a significant difference.

In fact, the wide US dollar spread had helped banks achieve higher profit margins in each transaction. As a result, the business results of many banks in 2020 recorded high growth despite the Covid-19 epidemic, including a large contribution from the foreign exchange business.

At the recent 2021 mission conference, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) leaders revealed that the bank’s income from foreign currency trading in 2020 would increase by 24 percent compared to 2019.

However, according to experts, commercial banks would no longer gain from the foreign exchange business, because of the recent SBV’s decision to change the way of buying foreign currencies.

Foreign exchange earnings might decline

According to experts, the decision to stop buying foreign currency for spot and switch to buying revocable foreign currency with six-month term would not affect the supply of foreign currency in the market. However, this decision would put commercial banks under the pressure of greater foreign exchange risk burden and forex income of banks might decrease.

Experts analysed, the suspension of listing the buying rate of the US dollar at SBV’s exchange floor would remove the barier of the USD/VND exchange rate decline on the foreign exchange market.

Nguyen Duc Do, deputy director of the Institute of Economics and Finance, said that SBV would have to limit buying foreign currencies and let the dong increase slightly against the US dollar. It was forecasted that in 2021 the dong would appreciate against the US dollar; the exchange rate amplitude would fluctuate around 0.5 percentage points.

At the same time, the structure of buying and selling foreign currencies also changed. Commercial banks had to actively contact SBV in the event of a large positive foreign currency status. If any, it was conducted, the spot purchase of the US dollar would most likely take place on a specific case.

Besides, the expansion of the US dollar’s buying term to six months with one-time irrevocable condition showed that selling the US dollar with term to SBV had become much more difficult.

Assessing the move to stop buying foreign currency for spot by SBV, SSI Securities Corporation (SSI)’s analysts (SSI Research) said that this policy would strongly affect the profit of forex trading, non-interest income accounted for the quite large proportion at some banks.

The value of forex transactions might remain high, but forex income of banks could decline in 2021, said SSI Research.

However, looking in a positive direction, experts from Bao Viet Securities Company (BVSC) said that the stop of buying foreign currency for spot by SBV would partly help regulate the forex market by spreading the dong to buy foreign currency reciprocally to the market for a long time instead of accumulating the dong supply at a time when buying for spot, especially in the context that remittances often flowed at the end of the year as at the present time.

 

Category: Finance, Vietnam

Print This Post

Leave a Reply

You must be logged in to post a comment.