Predicated drop in lending rate anticipated

Banks are turning to bonds to soak up idle capital

According to the State Bank’s latest figures, the banking system’s deposit growth rate in 2013 stood at 18 per cent, while credit held at 12 per cent. This shows redundant capital in the banking system.

Moreover, in an announcement on solutions to boost credit growth in 2014 released last week, the State Bank revealed that after the Tet lunar new year holiday, deposit flows into the banking system had continued to rise as in previous years. However, the State Bank stated that it believed the sharp deposit increase and lower commodity prices after Tet had created conditions that would reduce lending rates by 1-2 per cent.

On the interbank market, transactions were made at a stable rate of 4-6 per cent, much lower than the rate of 12-13 per cent in 2012 when banks lacked liquidity. Specifically, the current overnight rate is around 4.5 per cent, while the one to six week term is 5-6 per cent. Such low rates are contributing to the reduction in many banks’ capital cost burden.

Another evidence of capital surplus in the banking industry is their huge investments in government bonds. The Hanoi Stock Exchange (HNX) report on 2013’s government bond market revealed  that seven of the top 10 active traders on the bond market were banks.  Most active were Maritime Bank, Vietcombank and Techcombank.

According to Doan Trang from Sacombank’s treasury department, the slipping interbank rate has made government bonds a safe and beneficial investment channel for banks, helping offset capital costs.

Statistics from the Ministry of Finance’s Finance and Banking Department show that in 2013, the issuing yield of one to three-year-bonds reduced by 1-1.7 per cent and 5-year-bonds were down by 0.25 per cent. The reducing bond yield is regarded as a positive sign as this is often used as a reference for the debt market.

The HNX report also stated that the primary bond market is characterised by auctioning with price transparency and competitiveness which helps investors save on capital costs, while helping orientate the lending rate.

In addition, the macro-economy always has an important role in reducing interest rates. According to Nguyen Thi Hong, head of the State Bank’s Monetary Policy Department, if the market conditions turn favourable, the interest rate for loans could decrease 1-2 per cent, while still maintaining the deposit rate ceiling. “However, this decrease will depend on the capital input cost and the financial capability of each bank,” added Hong.

Do Ngoc Quynh, head of BIDV’s Treasury Department said that if inflation in the first five months of this year continued to be controlled at reasonable levels, lending rates would decrease.

Current lending rates are commonly 7-9 per cent for agricultural and rural development, exporters, supporting industries, SMEs and high-tech enterprises. Short term rates are typically 9-11.5 per cent, while middle and long terms  tend to stand at 11.5-13 per cent.