In the past 12 months, local small and medium-sized commercial banks continuously raised long-term deposit interest rates through conventional deposits or issuance of long-term certificates of deposit products.
A report by Viet Dragon Securities Corporation (VDSC) said that the list of banks raising long-term deposit interest rates continued to be extended with familiar names such as Saigon Bank for Industry and Trade (Saigonbank) and Viet Capital Commercial Joint Stock Bank (Viet Capital Bank), Nam A Commercial Joint Stock Bank (Nam A Bank), Construction Commercial One Member Limited Liability Bank (CBBank), Vietnam Asia Commercial Joint Stock Bank (Viet A Bank), etc. In general, these were small and medium-sized banks with limited capacity and needed to promote mobilisation to meet financial safety regulations from the State Bank of Vietnam (SBV).
In the context of increasing pressure on economic growth, the determination of SBV in efforts to improve the safety of the financial system had touched on the inherent problem of Vietnam’s banking system, VDSC said. The system’s resources focused on some of the top banks, while a series of small banks often faced liquidity problems.
For example, in China, in the first eight months of 2019, the People’s Bank Of China (PBOC) had to intervene directly in the operations of three regional banks, including Baoshang Bank, Jinzhou Bank and Hengfeng Bank. Weak business operations had made investors concerned about the financial health of these small banks.
Almost immediately, the credit mobilisation gate on the interbank system was limited, and the gap in capital mobilisation cost compared with the big banks was widened dramatically. According to the International Monetary Fund (IMF), the above developments point to three vulnerabilities of the Chinese financial system, including:
Liquidity risk, capital mobilisation and solvency: Small commercial banks often found it difficult to diversify their mobilised capital flows and hold risky debts. Sheer capital scale, the inefficient business, made these banks vulnerable when the economy fluctuated in a negative direction.
The linkage between banks, non-bank financial institutions and investment instruments: Commercial banks that raised capital through certificates of deposit were often also investors in debt instruments of other banks. That led to the viscous flow of money and the spread of the shocking effects when they occur.
The difference in term structure: Commercial banks often issued and depended on short-term, less diversified capital mobilised capital while investing, lending for long-term projects, including granting credit to local projects and central governments.
These things increased the liquidity risk of banks, and the capital adequacy ratio would almost certainly decrease when legislators make tightening financial safety regulations.
In turn, it was easy to see the similarity with the Vietnamese banking system as small joint-stock commercial banks were struggling with capital raising. In the previous five years, SBV had to buy three commercial banks at the price of 0 dong, including CBBank, Ocean Commercial One Member Limited Liability Bank (OceanBank) and DongA Joint Stock Commercial Bank (DongA Bank). Currently, these banks still had accumulated losses and equity losses, while the restructuring process had been challenging and could not be completed.
In the latest developments from the 8th session of the 14th National Assembly, SBV was actively seeking partners and negotiating with domestic and foreign investors wishing to participate in the restructuring projects mentioned above.
VDSC said that in the current financial market, Korean financial institutions played a crucial role in merger and acquisition agreements in all three sectors, which were banking, securities, and insurance. Therefore, not excluding the possibility, the word ‘Korea’ would be mentioned in the share purchase and restructuring of weak banks in Vietnam.
However, before that, the burden still rested on SBV.
Reducing operating rates, thereby reducing lending rates on the interbank market, was supporting banks lacking short-term liquidity and stabilising deposit rates. However, that was only the temporary measures and the phenomenon of interest rate differentiation among banks would continue for the next six months.
