Contrary to analysts’ forecasts, the mobilisation interest rate level of banks, after inched up in late 2017 and early months of 2018, has been stable and fallen back again in the context of the abundant liquidity. However, lending rates remain unchanged and cannot yet be reduced. So what is the cause?
In May, numerous banks cut mobilisation interest rates, some state-owned banks like Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) even reduced the rates twice. Meanwhile, the group of joint stock banks such as Military Commercial Joint Stock Bank (MB), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Asia Commercial Joint Stock Bank (ACB) or Saigon Hanoi Commercial Joint Stock Bank (SHB) also cut mobilisation rates on many terms.
With the continuous decline in mobilisation rates since March until now, the cost of capital of many banks have been lowered. Nevertheless, lending rates have not shown any signs of being adjusted, and some banks have even raised the basic interest rates to thereby raising lending rates.
For the first time in many years, the government does not have to loosen monetary policy to support the economic growth. Indeed, with Gross Domestic Product (GDP) in the first quarter (Q1) reaching 7.38 percentthe highest level in the past 10 years, the GDP growth target of 6.7 percent in 2018 is within reach. Along with the strong rebound of crude oil and positive trade surplus, many economists said that the monetary policy should not be overly loosened because it may lead to macroeconomic instability.
Accordingly, the credit growth target of the banking sector can hardly be expanded like in 2017 (to support economic growth). Thus, the credit growth target of banks is unlikely to be expanded by the State Bank of Vietnam (SBV). With the limited remaining room for developing credit, banks should consider holding lending rates at high level to get the optimal profit, as all banks plan to achieve a trillion dong or even a dozen of trillion dong.
With tightened output supply while the demand for loans from the economy continues to be high from enterprises to individuals, banks are not “foolish” to lower lending rates which could affect their profitability, especially in the context when many banks still have high bad debt volume and non-profit assets still account for large proportion.
The frozen bad debts, despite having been gradually melting under settlement policies of management authorities in the recent time, still more or less weaken the profitability of banks. Thereby, the new loans and good debts still need to ensure reasonably high lending rates to offset the losses caused by the long existing bad debts.
When the profits from investment channels decline
Normally, the mobilisation fund of banks will be balanced for lending, investing in bonds and capital trading on the interbank market. When lending is not allowed to be extended, banks do not have many opportunities to make big profits on the two remaining markets as before.
The government bond yield has continuously dropped in recent time and are almost at the lowest levels. By the end of May, the winning government bond yield on 5-year tenor was just around 3 percent, while that of the popular 10-year was less than 4.3 percent. For such low bond yield, although banks have abundant source of capital, they are not very much interested in pouring capital into government bonds. Statistics showed that the winning rate and offering rate of government bonds in April and May reached respectively 30 percent and 37 percent, significantly down compared to the 80-90 percent in the previous period.
Trading capital on the interbank market also did not see much prosperity. The lending rate among banks continued to be maintained at low level of 1-2 percent depending on the term, significantly higher than banks’ current mobilisation rates. Most banks still trade on the interbank market mainly to optimise the use of capital, avoiding to have a large volume of cash with no profitability.
This in the three popular capital output channels of banks at present, only lending channel allows banks to actively determine selling prices. Therefore, banks have to maintain high lending rates to offset the interest rate margin decline in the remaining to investment channel and also to prevent the Net Interest Margin (NIM) to not fall further, especially when in the recent time this indicator has been affected significantly due to bad debts as well as the tightened lending limits.
Particularly, as the lending channels having high interest rates like consumer finance and real estate investment are tightened and repeatedly warned by the SBV due to the growing risks, banks have more motivation to maintain the lending rates in other customer segments while they are unable to further lower lending rates as expected by borrowers in general and enterprises in particular.
