Excess capital
According to the Bao Viet Securities Joint Stock Company, the deposit interest rates in July in all banks decreased for both six-month and twelve-month terms. For the six-month term, the average interest rate in commercial banks with state capital decreased the most, by 0.5%, falling from 4.9% to 4.4%. The group of big banks with capital of more than VND 5,000 bn decreased by 0.14%. Deposit rates for a twelve-month term also saw the strongest drop in state-owned commercial banks, with a drop of 0.5%, from 6.12% to 5.62%, while in big banks it decreased by 0.12%.
Reducing deposit rates to lower lending rates is always the wish of an enterprise. Until now, the trend of reducing deposit rates has seen significant changes, but lowering deposit rates has not brought much good news at this time. The decrease in deposit interest rates is not entirely due to the policy of supporting businesses through monetary policy, but by the market. Banks can mobilize capital but cannot lend, so they are forced to lower interest rates.
A report of the State Bank of Vietnam to the Ministry of Planning and Investment on the implementation of monetary policy says that as of 28 July, capital mobilization increased by 5.31%, system credit increased by 3.45% compared to the end of 2019, while in the same period last year credit increased by 7.13%. Therefore, reducing deposit rates in this period is necessary to reduce costs when liquidity is in abundance.
Interbank interest rate continuously created a new bottom in July, when it dropped sharply to around 0.12% and 0.5% overnight for one week and two week terms. Accordingly, in the last week of July, interbank interest rates for these terms were only 0.2%, 0.37% and 0.45% per year. By 5 August, these interest rates were 0.25% per year, 0.33% per year and 0.4% per year.
By 31 July, the State Bank of Vietnam did not intervene in the open market for eight consecutive weeks, when liquidity in the interbank system was abundant and the interbank interest rate continuously created a new bottom. However, now with the second wave of Covid-19 pandemic breaking out unexpectedly, production and business activities continue to face many difficulties. This may cause credit growth to remain low and deposit interest rates may be under pressure and decline in the near future.
Redirecting investment
When mobilization is high, lending is low, and with excess liquidity banks have to find solutions to create better capital output as well as better returns. In the second quarter financial statement, it clearly shows a change in cash flow through investment activities. For example, in MB, debt securities issued by domestic economic organizations increased by 82%, to around VND 22,100 bn. The Vietcombank financial statement also showed that there were VND 18,000 bn in debt securities issued by other credit institutions in the available-for-sale investment securities, and VND 45,569 bn of debt securities issued by other credit institutions in the held-to-maturity investment securities. While VPBank also holds more than VND 27,830 bn of debt securities issued by economic organizations, nearly double of VND 14,222 bn at the end of last year.
One leader of a joint stock commercial bank shared that in the past, the bank had implemented a preferential interest rate reduction program to accompany businesses, however, credit output is still facing many difficulties and it is forecast that credit growth this year will be low. In this context, banks are under pressure such as for reducing staff salaries, and convincing shareholders to reduce profits. Currently, the use of financial channels, and raising capital from customers and investing in high-quality financial assets, have become key activities for banks to achieve the required interest rate differential. At the same time, investment securities are easy to buy and sell or pledge to borrow additional capital, so they can meet the liquidity needs in time.
In addition, in recent times, many companies issuing bonds tend to buy back before maturity. In this case, banks who buy corporate bonds will be entitled to additional interest payable by the company when buying back bonds before maturity. Some banks also choose to invest in corporate bonds for redistribution to individual investors who are depositors at banks.
According to a financial expert, because of the above reasons, the amount of corporate bonds held by individual investors has increased dramatically recently, and as businesses are the bank’s problem, regulators also need to pay attention to these phenomena. Currently, the real estate industry is still facing many challenges while production and business activities in all enterprises are lying stagnant due to the ongoing Covid-19 pandemic. Therefore, there is still a risk for both banks and individuals to buy corporate bonds from the bank's wholesale and retail channels.
