Small banks race to mobilize capital

SGI

Recently many smaller Joint Stock Commercial Banks (JSB) have been pushing deposit rates to high levels to meet with the financial safety regulations of the State Bank.

CBBank is one of the banks that are forced to raise deposit rates to compete in attracting capital.

CBBank is one of the banks that are forced to raise deposit rates to compete in attracting capital.

This can lead to liquidity risks for banks and the capital adequacy ratio could certainly fall sharply when legislators tighten financial safety regulations.

Existing risks

In fact, about a year back, commercial banks had already begun raising long-term deposit interest rates via conventional deposits or by issuance of long-term certificates of deposits.

Now the list of banks raising long-term deposit interest rates is getting longer and longer, with familiar names cropping up such as Saigon Bank, VietCapitalBank, NamABank, CBBank, and VietABank. These are all small and medium-sized banks with limited capacity, and in desperate need to mobilize capital to meet with the financial safety regulations of the State Bank of Vietnam.

In the context of increasing pressure on economic growth, the SBV has made efforts to improve the safety of the financial system in general by addressing the inherent problems in the banking system in the country. Up until now, the system resources focus on only some of the top banks, while a series of smaller banks often face liquidity problems. Broadly speaking, this is a common problem in non-market economies with clear state intervention.

For example, in China, in the first eight months of 2019, the People Bank of China (PBOC) had to intervene directly in the activities of three regional banks, Baoshang, Jinzhou and Hengfeng. Weak business activities had made investors worried about the financial health of these smaller banks. After intervention, almost immediately the credit mobilization on the interbank system was limited, and the difference in capital mobilization cost compared to the larger banks was suddenly widened from 16 bps to 90 bps.

According to the International Finance Corporation (IMF), the above developments point out three vulnerabilities in the Chinese financial system. The first is liquidity risk, capital mobilization and solvency. Small-sized commercial banks often find it difficult to diversify their capital flow and hold onto risky debts. Thin capital scale and inefficient business operations make these banks vulnerable when the economy fluctuates in a negative direction.

The second risk is the link between banks, non-bank financial institutions and investment tools. Commercial banks that raise capital via certificates of deposits are often also investors in debt at other banks. This leads to a vicious capital flow and spread of shock waves.

The third risk is difference in term structure. Commercial banks often issue and depend on short-term and less diversified mobilized capital flow to invest and lend for long-term projects, including credit for projects of local and central governments.

Burden on SBV shoulders

The above risks increase the liquidity risk in banks and the capital adequacy ratio will almost certainly decrease sharply when legislators tighten financial safety regulations. We can easily see the similarity with the Vietnamese banking system, as small commercial banks are struggling with capital mobilization.

Currently, the interest rate on a 12-month term in some commercial banks is around 9% per year, while many banks have issued certificates of deposits with interest rate of more than 10%.
In fact, in the previous five years, the SBV had to buy three commercial banks at zero dong value, namely CBBank, Ocean Bank and Dong A Bank. Currently, these banks still have accumulated losses and equity losses, while the restructuring process has encountered many difficulties and cannot be completed.

After the eighth session of the fourteenth National Assembly, SBV has been actively seeking partners and negotiating with domestic and foreign investors who want to participate in the restructuring plans of the above banks.

In the current financial market, Korean financial institutions play a key role in merger and acquisition agreements in all three sectors of banking, securities and insurance. Therefore, it is no surprise when the name "Korea" is mentioned again and again when purchasing shares and restructuring weak banks in Vietnam.

However, before this actually happens, the burden is still on the State Bank of Vietnam. Reducing operating rates and consequently reducing lending rates on the interbank market supports banks that lack short-term liquidity and stable deposit rates. However, this is only a temporary solution and the interest rate differentiation phenomenon among banks will continue in coming months.

Translated by Francis

Vu Anh Tu, Rong Viet Securities Company (VDSC)

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