The State Bank of Vietnam (SBV) reduces the interest rates will help VN Index increase in the long term.
Assuming that in the case of the lending and deposit rates of the whole market decreased by 0.25 percentage points compared to the current average level, the impact on the whole market is positive.
In terms of industry groups, commercial real estate is rated the most positive. Meanwhile, insurance is the only industry group that has been negatively rated.
In the report of the Impact of Decision 1870 on the macro economy and the stock market published on September 16, 2018, BIDV Securities Company (BSC) has made comments on the impact of SBV’s interest rate cut to the stock market.
Accordingly, for the countries that have great impacts from monetary policy changes to the real economy, there are delays, from 9 months to 18 months. However, the impact of the rate cuts will usually be considered by investors in the session in which the rate cut information is published, and gradually reflected in the results of businesses and the acceptation ability of investors for valuation.
BSC believes that SBV’s rate cut will usually cause VN Index to increase an average of 0.26 percent in the session and extend to 3.4 percent next month. Although dropping slightly after three months, VN Index usually gain in six months after the rate cut has gradually affected the economy.
BSC analysed that the rising trend of the stock market caused by the reduction of interest rates would increase investors’ expectation on business results of production and trading. The increase in profits came from two main reasons which were due to a slight reduction in borrowing costs, which would improve the cash flow operations of the business and create more funds to carry out investment projects, financial activities and M&A deals. At the same time, consumers would spend more when loan interest rates declined and, consequently, it increased sales of businesses.
Moreover, the basic valuation for businesses will be increased in the calculations of investors because they think that: enterprises will benefit from economic stimulus policies while capital and opportunity cost will be lower.
These factors have made the interest rate almost tend to be opposite to the rise of the stock market.
According to BSC, this interest rate cut does not have much impact on the interest rate level in the market I, but only a signal that Vietnam will be able to loosen monetary policies to support the economy. However, it is assumed that in the case of the lending and deposit rates of the whole market, it will decrease by 0.25 percentage points compared to the current average rates and assess the impact on industries. In this case, the effect on the whole market is positive. In terms of industry groups, commercial real estate is rated the most positive. Meanwhile, insurance is the only industry group that has been negatively rated.
The real estate industry is one of the sensitive sectors for interest rate fluctuations. Accordingly, changes in the adjustment of lending rates can directly affect two factors: the capital cost structure of real estate businesses, with the structure of capital financing from banks, often accounts for 30 percent40 percent of the total project cost and real estate market demand, most of which will come from buyers.
BSC assesses the two above factors also have opposite movements with interest rates. Assuming that the interest rate is reduced by 0.25 percent, the expected EBT of this group will increase by about 3.6 percent. Some businesses that benefit mainly have high average debt/ equity ratio and high interest expense in the profit structure.
The insurance industry is negatively rated with the view that the main profit of the insurance industry now comes from bank deposit rates (about 80 percent of total investment assets), interest rates of the banking sector. In general, there will not be much fluctuation, the deposit of the insurance industry has the nature of deposits in large quantities, so it always has better rates, which is difficult to be lowered in the case of the deposit rate of the whole market.
In the case of a decrease of 0.25 percent deposit interest rate, although it is very unlikely that the interest rate of insurers will be reduced, BSC estimates that it will impact strongly on financial income of insurance businesses.
In the case of government bond interest rates (government bonds), this has a positive impact on the life insurance industry when the portfolio of these businesses is mainly government bonds with high interest rates. However, the proportion of government bond investment in non-life insurance enterprises is not much.
