According to the statistics of Nguoi Dong Hanh Press on 18 listed banks, the net loan-to-deposit ratio (LDR) increased by one percent compared to the end of 2019.
Military Commercial Joint Stock Bank (MB) was the bank with the most significant change when net LDR increased by 11 percentage points in Q1/2020, from 91.8 percent to 103%, followed by Tien Phong Commercial Joint Stock Bank (TPBank) which increased by 8.6 percentage points compared to the end of 2019 to 112%.
Some other banks recorded a rise in the above index, including Saigon Hanoi Commercial Joint Stock Bank (SHB) increased by 5.2%, Orient Commercial Joint Stock Bank (OCB) increasing by 4.7%, Vietnam Export Import Commercial Joint Stock Bank (Eximbank) rising by nearly four percent. Vietnam Maritime Joint Stock Commercial Bank (MSB) was currently the bank with the highest net LDR at 122.3 %, an increase of 2 percentage points compared to the end of 2019.
In the opposite direction, some banks with lower net LDR named Bac A Commercial Joint Stock Bank (Bac A Bank), decreasing from 95.8 percent to 89%, Southeast Asia Commercial Joint Stock Bank (SeABank) declining from 98.5 percent to 95.8%. This movement mainly occurred in small-scale banks in the system.
From January 1, 2020, LDR (calculated as the ratio of total outstanding loans to total deposits including deposits, bond deposits, promissory notes, etc.) of commercial banks was at most 85 %, as in Circular 22/2019. The net LDR ratio, as listed above, did not coincide with the LDR calculated according to Circular 22, because it was challenging to identify all the components. Still, the increasing trend of the net LDR indicated the rise of the level of capital balance stress when customer deposits decreased. According to FiinPro data, the net LDR of surveyed banks had continuously increased since Q1/2019 when the credit growth rates of the quarters were higher than deposits.
According to FiinPro, falling customer deposits in Q1 could be due to three reasons. The first was money withdrawal to invest in more attractive channels like bonds or securities. The second was the money withdrawal to spend or to offset the liquidity shortage during epidemics, especially demand deposits, leading to a reduction in the proportion of capital resources of less than three months. The third was money turnover decrease due to the decline of economic activities during the recent epidemic.
In Q1/2020, many banks also reduced 30 percent of the total value of deposits at the State Bank of Vietnam (SBV), deposits at and loans to other credit institutions (CIs) in the assets section of their financial statements.
Banks earn money from the market two
According to the share of a leader of a joint-stock commercial bank, the purpose of LDR was to ensure liquidity for banks. Circular 36 of SBV stipulated that banks that could raise 100 dong could only lend up to 80 dong. The remaining 20 dong must be used to reserve liquidity. Usually, these banks used 20 dong to buy government bonds and sell them in the worst case to get money or to discount with SBV on the open market operation (OMO) market to get cash to pay debt obligations.
When the mobilisation in the market one (the residential market) slowed down, the liquidity in the market two (the interbank market) became abundant thanks to the SBV’s continuous net injection. That caused interbank interest rates to remain low, creating opportunities for commercial banks to access cheap capital.
From the beginning of 2020, except for the sudden peak in early April, the average interbank interest rate tended to decrease. In May, the market two’s interest rate dropped by 170 to 180 basis points, bringing the interest rate to the lowest level in the last four years. Bank liquidity was strongly supported by 100 trillion dong of matured bills.
The number of treasury bills in circulation at the end of May had shrunk to 27 trillion dong and would expire almost (25 trillion dong) this week. The interbank offered rates were expected to remain low.
Before this development, many banks took advantage of capital flows on the interbank to optimise costs. Right from Q1, deposits and borrowings from other credit institutions in the liabilities of Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), Vietnam International Commercial Joint Stock Bank (VIB), and TPBank increased by 23 percent to 27%. In particular, TPBank increased borrowing from financial institutions and other credit institutions by nearly 10.7 trillion dong, equivalent to 27%.
At the annual shareholders meeting in 2020, talking about the increase in mobilisation in the interbank market in Q1, while from the decline in population, Nguyen Hung, general director of TPBank, said despite taking advantage of using capital in the market two, the bank still ensured the prescribed rate. Making the most use of taking capital from market two to lend in market one, according to that Chief Executive Officer (CEO), was to optimise cheap capital flows.
However, the use of capital in the market two was also a factor in helping lower interest rates on the market one in the context of competitive mobilisation. Banks could also lend at lower interest rates, attracting customers.
Deposit interest rates at some major joint-stock commercial banks had decreased by 30 to 50 basis points for 12 and 13-month terms and continued to decrease by 30 to 50 basis points for terms of six months to less than 12 months. Since the beginning of the year, deposit rates of large joint-stock commercial banks had dropped by 60 basis points to 75 basis points for terms of less than 12 months (4 percent to 5.5 percent per year) and decreased from 65 percent to 100 basis points in terms of 12 months and 13 months (5.7 percent to 6.2 percent per year).
The decrease in deposit interest rates at commercial banks with a small market share of 20 to 40 basis points differed with deposit interest rates with large banks widened from 100 basis points to 180 basis points, increasing attractiveness with cash flow. However, small banks were constrained by credit growth, so the ability to absorb deposits was also limited and might also reduce interest rates further shortly.
So far, deposit growth had shown signs of recovery. Specifically, by May 20, capital mobilisation increased by 1.85%, while credit only increased by 1.32 percent compared to the end of 2019.
According to experts, usually, banks would have two ways to find profits from the interest rate differences on markets one and two. The first way was to borrow capital from market two and then perform the trust service for individuals, businesses to deposit money in other banks. However, this method had caused many individuals and organisations to be criminally treated, so, likely, banks would not dare to apply it.
The second way was that banks would borrow money from the second market to re-lend in the market one. In this way, banks could optimise the cost of capital mobilisation, and in fact, there had been some tape to carry out this option. However, in addition to optimising capital mobilisation costs, mobilising market two, and lending on the market one also contained certain risks, and the biggest was liquidity risk.
According to the financial expert Nguyen Tri Hieu, the capital in market two was very short, so there was a potential risk of term difference if lending in the market one. Banks would need to limit this activity, especially for medium and long term loans in the residential market, businesses. According to Hieu, supposed that banks used capital from market two and lent to market one, when capital from market two was due, while the loan in market one was not yet due, banks would have to find other sources to offset or capitalise the interbank market with higher interest rates. Both of these were risky. Hieu said that capital in market two should only be used to meet the liquidity needs for banks, not the primary purpose of lending in the market one.
