Banks buy up bonds as dong supply rises

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On June 9, a government bond auction finished with all VND1.5 trillion ($72 million) worth of five-year paper and another VND1.5 trillion worth of three year paper taken. This was the second 100 per cent take-up auction in a row for the State Treasury.

Coupon rates continued the downtrend. Three-year paper was 12.7 per cent per year, 0.3 per cent lower than previously, while the level for five-year bonds was 12.65 per cent per year, 0.35 per cent lower.

A Vietcombank official said the coupon rate had gone down dramatically since June.

The State Treasury’s two auctions have resulted in 0.6-0.7 per cent, per year down against the coupon rate of three- and five-year paper.

“Lending activities are slowing down and thus cash availability in large-scale banks is improving,” said the Vietcombank official.

According to State Bank data, at end of May, credit expansion stood at 6.9 per cent against end of 2010. In May alone, the total outstanding credit was almost the same with a tiny 0.01 per cent month-on-month increase.

Meanwhile, Vietnam dong denominated credit shrank by 0.64 per cent month-on-month in May, the first drop for months.

Meanwhile, the State Bank continues buying dollars from local lenders. Over the first five months of 2011, the authority has bought $1.2 billion. That means it has injected at the same time around VND22 trillion into banking system.

Nguyen Thi Kim Thanh, head of Banking Strategy Institute, said that the process would continue with increased a dollar supply into the banking system.

Banks are lowering dollar denominated deposit rates to the capped level of 2 per cent, per year to individuals and 0.5 per cent per year applied to institutions.

“Low return would encourage dollar holders selling out their dollar. Also, certain amount of bonds issued in previous years is maturing also,” said Thanh.

According to Thang Long Securities Company, around VND13 trillion ($650 million) worth of government bonds matured in March and April only.

State Bank data showed that by May 23, credit growth in the system stood at 6.2 per cent while the target for the whole year was set at under 20 per cent.

By end of May, Vietnam’s consumer price index was up 19.78 per cent year-on-year.

In mid-May, the State Bank decided to lift 7-day lending rate to local banks via the open market operations (OMO) window two times - from 13 per cent, per year to 14 per cent per year, then from 14 to 15 per cent.

Via OMO, the authority is lending to local banks with collateral being valuable paper such as government bonds.