The issue was due to pressure from the State Bank of Vietnam (SBV) looking to upgrade the whole banking system’s safety level under the circumstance of downward risk on global economic growth.
Diverged deposit rates in Vietnam’s banking system are predicted to persist at least in the next six months, particularly with wide-spread gap of the discriminated advantages of large-cap and small-cap banks as the latter conventionally deal with the liquidity issue, according to Viet Dragon Securities Company (VDSC).
The issue was due to pressure from the State Bank of Vietnam (SBV) looking to upgrade the whole banking system’s safety level under the circumstance of downward risk on global economic growth.
Mid- and small-cap commercial banks have been setting higher long-term deposit rates applied to normal deposits or certificates of deposit for the last twelve months. There are familiar names, including Sai Gon Bank, VietCapital Bank, NamABank, CBBank, VietABank, among others, in the extended list. In general, most of them are small-cap and pressured to raise long-term deposits to fulfill the requirement of SBV.
The issue is popular in economies like Vietnam and China where there is a significant government intervention, stated VDSC.
In China, there has been interventions from the People Bank of China (PBOC) in Baoshang, Junzhou and Hengfeng banks in the first eight months of 2019. Investors questioned the creditworthiness of such weak and small bank. Immediately, the interbank funding markets became strained and the spread between the funding costs of weak and strong banks widened from an average of 16 basic points to 90 basic points. According to the International Monetary Fund (IMF), these events underscore several vulnerabilities in Chinese financial system.
Firstly, liquidity, funding and solvency risk. Regional small-cap banks relied on wholesale funding and held a large share of risky assets. A low capital and weak profitability make such banks more vulnerable when the economy slowdown.
Secondly, interlinkages between banks, nonbank financial institutions, and investment vehicles. Banks that rely on funding through certificates of deposit are also investors of investment vehicles or certificate holders of other issuers. They introduce circularity and interconnectedness that amplify the transmission of shocks.
Thirdly, maturity mismatches. Commercial banks issue and rely in short-term and less diversified funding sources while investing in long-term projects, including credit to government’s projects.
All of them warns of liquidity risks and these banks’ tier-1 capital ratio will decrease as the policymakers deliver their tight regulation. From this point, it is not hard to figure out the similarity between Vietnam’s and China’s banking system. In Vietnam, small-cap banks are struggling to raise deposits while 5 years ago, the SBV bought three commercial banks by VND0. Currently, these under supervision banks still suffered losses and the restructure process is incomplete.
In the 8th meeting of the 14th National Assembly, the SBV’s Governor Le Minh Hung said that the bank was actively looking for local and foreign strategic partners to restructure these loss making credit institutions.
Currently, South Korean financial institutions are leading players in Vietnam’s M&A market as their money is poured into most of sectors, including banking, securities and insurance. Therefore, it is not surprising to see that South Korean institutions acquire Vietnamese struggled banks’ stakes.
However, before the success of the deals, the SBV is in charge of handling these banks and stabilising the financial system. The current policy rate cut, dragging interbank rates down, has positively supported the short-term liquidity and make the borrowing/lending rates stay calm on average. But, it is a temporary solution and the divergence of deposit rates is still on the way for at least next six months.
