Banks in dilemma to cut interest rates | Bank and finance

Current dilemma

The world’s major central banks such as the FED, ECB, BOJ and BoE are preparing for the biggest quantitative tightening in history due to rising global inflation. On March 16, the Federal Open Market Committee (FOMC), which is the decision-making body of the Fed, decided to raise interest rates by 0.25%, and the Fed is expected to raise 0.25% when of six of the remaining meetings this year, which means raising the interest rate to around 1.75% to 2% per annum. After that, the FED can raise interest rates three more times through 2023. The rate hike comes after nearly two years of the FED cutting interest rates to near zero and implementing of an asset purchase program of at least $120 billion per month, to stimulate the economy to overcome the recession caused by the long Covid-19 pandemic.

In Vietnam, inflationary pressures are also becoming increasingly evident, as domestic and international supply chains remain disrupted. At the same time, global commodity prices continue to rise, while Vietnam’s economy is heavily dependent on imported raw materials. Recently, record high gasoline prices have heightened public concerns. Many factors are now resonating, including the cost of pushing and importing inflation. Mr. Nguyen Xuan Dinh, Deputy Head of Policy Department, Price Management Department, Ministry of Finance, predicts that inflation could exceed 4%, or fluctuate between 3.6% and 4.3%.

Although inflation is expected to rise in Vietnam, the State Bank of Vietnam cannot act as a major central bank as domestic developments are not aligned with global markets. When countries tighten quantitatively, the VND 350 trillion economic recovery and development support program will be rolled out and capital will be disbursed in 2022 and 2023. Along with imported inflation, the disbursement of the economic recovery and development support program the recovery above will drive up aggregate demand which will rise further. Therefore, while the trend is towards tightening and loosening of monetary policy, raising interest rates becomes common to address the risk of inflation and the risk of global financial instability. Vietnam requires banks to guarantee credit for the economy to recover and reduce interest rates on loans to support businesses and exporting companies. However, this will place the State Bank of Vietnam in a tight dilemma.

Difficult to reduce the rate

Commercial banks have moved in line with the market, when interest rates on deposits have risen since the start of the year. In a number of deposit conditions, banks have pushed interest rates quite high, and the larger the deposit, the more priority is given to interest rates. SCB currently has the highest interest rate in the market at 7.5% per annum for savings deposits of VND 500 billion or more, with a tenor of 13 months. At the same time, the highest interest rate on online deposits is 7.35% per annum. The ACB charges an interest rate of 7.1% per annum on a deposit of approximately VND 100 billion with a term of 13 months. Techcombank pays 7.1% interest per annum if customers deposit from VND 999 billion or more, with a 12-month term and a non-prepayment covenant. MSB has the highest savings interest rate of 7% per annum.

Banks have to adapt quickly and are unable to fix the increase or the entry interest rates as the demand for capital is recovering nicely. According to data announced by the State Bank of Vietnam, credit growth as of February 25 reached 2.52%. Compared to the 2.74% increase on January 28, credit growth in February has narrowed somewhat, but that’s because February coincided with the Lunar New Year holiday, which reduced the credit application.

According to BIDV Securities Joint Stock Company (BSC) forecasts, credit demand in 2022 will remain high and could increase by 14%. SSI Securities Joint Stock Company expects credit growth to be around 14% to 15%. Bao Viet Securities Joint Stock Company expects credit growth of up to 15%. The basis of these forecasts is the economic recovery after the pandemic as well as a support program of VND 350 trillion, rolled out for the 2022 to 2023 phase, which includes a support credit program with an interest rate of 2 %, up to VND 40 trillion, which will also drive credit growth this year.

Credit has increased sharply and banks need money to lend. However, as of February 25, capital raising has increased by 1.29% compared to the end of 2021, which means that the capital raising velocity is only half of the lending rate. It also means that this is a repeat of the same scenario as last year. The sharp decline in interest rates over the past two years has prompted people to turn to higher yielding investment channels, such as stocks or real estate, rather than savings. Demand for capital has risen again and banks cannot sit back and watch idle money flow through other channels as it did last year.

In the interbank market, liquidity stress is also evident. From the beginning of the year until now, the State Bank of Vietnam has been continuously injecting into the open market. The Treasury also buys foreign currency to support market liquidity and reduce interest rates. However, the key interbank interest rate is still above 2% per year. On March 15, the interbank interest rate for the overnight term was 2.18% per annum, for a one-week term it was 2.28% per annum and for a two-week term , it was 2.51% per year. This time last year, this interest rate was only 0.27% per annum, for a one-week term it was 0.37% per annum, and for a two-week term weeks, it was 0.49% per year.

The goal of 14% credit growth after a loan interest rate cut becomes a difficult problem to solve. When market interest rates rise, the State Bank of Vietnam does not have the ability to reduce operating interest rates. The 2% interest rate support credit package is theoretically the basis for companies to access lower interest rates. However, when the interest rate on deposits increases, the interest rate on loans will increase accordingly, and the 2% support will only ensure that the interest rate on loans that businesses will pay to the future will remain stable. On-balance sheet NPLs this year are expected to reach 2.3% to 2.5%, with the current balance-sheet NPL rate standing at 1.9%. Therefore, banks need to maintain a good profit margin to have money to provision for these future risks.

Saigon Investment

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