Banks compete to attract investments through CDs

Recently, corporate bonds that offer an interest rate of 10-12% have become a popular investment channel competing directly with other channels like banking deposits.

Viet Capital Bank is currently the bank with the highest deposit interest rate: 10.2%/year.

Viet Capital Bank is currently the bank with the highest deposit interest rate: 10.2%/year.

Hence, bankshave to increase  not only their long term interest rate strongly but also the rate of Certificate of Deposits (CDs) to above 10%/year.

Interest rate increasing continuously

On 19 August, Viet Capital Bank announced issue of CDs to identified individuals and institutions at interest rate of 10.2%/year. This interest rate is 2-3% above the average deposit rate of other banks and 1% higher than the interest rate of CDs two years ago.

The notional amount of CDs which were issued to individuals and institutions are at least VND 10mn and VND 100mn, respectively. The interest rates of CDs were 9.5%/year for 24 months, 9.8%/year for 36 months, 10%/year for 48 months, and 10.2%/year for 60 months. The interest rates will be fixed during the term of CDs and interest income will be paid every 6 months or 12 months. Besides the higher interest rate, CDs were also allowed to transfer any time the owners needed.

CDs were first used in Vietnam in 1994 when banks started to raise long term funds. However, raising funds through CDs has only been growing strongly since 2017 when the interest of CDs was higher than the average deposit rate.

In 2017, VietABank issued CDs at 8.2%/year, VIB issued CDs at 8.5% for the term of 61 months and at 8.7% for the term of 84 months. In the same year, NCB and SHB issued CDs at 8.8% while Sacombank and VPBank issued CDs at 8.88% and 9.2%, respectively.

The attractive interest rate of CDs has helped increase the proportion of deposit and CDs in totally raising funds of banks from 73.7% to 76.9%, and the proportion of funds which were raised from interbank market fell from 11.1% to 10.8%.

Recently, most banks, from small commercial banks to big state owned banks, have competed to attract more funds through CDs issuance.

For example, BIDV offered clients 7.6% for fixed-rate CDs and 7.5% for floating-rate CDs. Sacombank offered 8.6% for 84-month CDs with amount of at least VND 1mn. LienVietPostBank issued CDs at 8.1%/year for terms of 15 months, 18 months, 24 months and 36 months. This interest rate is 0.7-1% higher than the interest rate of deposit of the same term. SHB issued VND 10,000bn to individuals and institutions at 8.9%/year while VIB and VietABank also issued CDs at 9.1%/year.

Pressure on banks

Banks have increased their interest rate of long term deposit, bond and CDs to raise the mid and long term funds. However, gold price has moved up strongly recently making this investment channel become more attractive. Furthermore, the interest rate of corporate bonds now is quite popular at 10-12%, or even 14%, much higher than deposit rate. Hence, people who have VND 100mn can invest in corporate bond to get the interest rate which is 2-3% higher than the deposit rate. This creates pressure for banks in raising long term capital.

In the first half of 2019, the deposit growth was lower than in the same period last year. Some banks even posted a negative deposit growth. According to some banking experts, deposit and bonds of banks now face direct competition from corporate bonds.

According to Bui Quang Tin, Banking University, HCM City, when depositing at banks for long term, depositors can withdraw their money before maturity. In this case, depositors only receive the demand deposit interest rate. However, when buying CDs, people are not allowed to withdraw before maturity date. The only way to cash out is transfer the CDs to others or use CDs as collateral to get bank loans.
In order to attract more fund, issuing CDs is a solution. If banks increase deposit rate to above 9%, they will violate the regulation. However, issuing CDs at the interest rate of above 9% is no problem.

Compared to bond issuance, CDs issuance is much easier. Banks have full right to issue CDs. To issue bonds, banks have to summit documents to get approval from State Bank and State Securities Commission. However, raising capital through issuing CDs requires banks to pay higher interest rate.

Currently, in the interbank market the overnight and 1-month interest rates have decreased slightly and fluctuated around 3%/year. However, the interest rate of other longer terms have increased quickly. On the other hand, the 3-month interest rate climbed from 3.85% in July to 4.08% now, and the 6-month interest rate surged from 4.28%/year to 5.63%/year.

This movement shows that the policy to reduce the ratio of short term deposits to long term loans has impacted the OMO market. Most banks have been short of long term funds but redundant on short term capital.

The demand for long term funds is expected to increase in coming times, hence, the interest rate of CDs is forecast to continue increasing as well. This has been considered a good chance for investors, for buying CDs at high interest rate while the interest and principal of CDs is guaranteed like other deposits. However, experts think that investors should consider carefully before buying CDs.

Thien Minh

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