Central bank rate cuts aimed at credit growth

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The State Bank of Vietnam last week announced that the deposit cap for maturities of less than six months would be cut by 100 basis points to 6 per cent. The refinancing rate would be cut by 50 basis points to 6.5 per cent effective from 18 March.

The discount rate will be cut to 4.5 per cent from 5 per cent, and the repurchase rate will be lowered to 5 per cent from 5.5 per cent, according to the central bank.

"We expect this decision to cut deposit rates to provide little benefit for credit growth," said Eugenia Fabon Victorino, an economist at ANZ.

The central bank's monetary policy head Nguyen Thi Hong said that as of March 13 the lending rate dropped 1.05 per cent against the end of 2013.

Despite such slow credit growth, the State Bank has retained a credit growth target of 12 per cent to 14 per cent this year.

"The rate cuts will effectively reduce bank costs. So they can benefit from a better net interest margin and improve profitability. This means they're likely to lend more," said Alan Pham, economist at VinaCapital.

Ho Chi Minh Securities Company (HSC) in its newsletter to clients stated it also believed that the state bank's move would encourage banks to further lower lending rates and hopefully simulate credit growth. It added that lower rates would send a positive signal to the stock market and the overall economy.

According to HSC, there are three reasons for this latest rate cut. Specifically, inflation has been lower than expected given sluggish consumption and tougher price supervision; credit growth year-to-date has been negative; and strong liquidity in the banking sector has lowered the cost of money across the board.

February CPI was reported at 4.65 per cent year-on-year; marking the slowest year-on-year growth rate since November 2009. While HSC guidance for March CPI suggests the month-on-month could come to just 0.08 per cent month-on-month and a year-on-year growth rate of 4.93 per cent. This would be the slowest pace for March CPI in the last decade.

At the most recent monthly cabinet meeting held on February 28th, the government revised down its official inflation target for 2014 to 6 per cent by a percentage point.

Bond yields, treasury bond coupons and market interest rates have all continued to fall coupled with generous liquidity in the banking sector, said HSC in the newsletter.

While this signals the central bank's intention to spur credit growth, HSBC did not think it would substantially alter credit conditions.

"We expect the rate cut to not have a significant impact on lending growth. With non-performing loans still unresolved, banks are unlikely to push for lending growth," said Trinh Nguyen, economist of HSBC

ANZ in its report also expressed concern over the bad debts burdening Vietnam's banking system. High non-performing loans continue to plague bank balance sheets with various estimates ranging from the official figure of 3.79 per cent to Moody's estimate of 15 per cent.