Balancing Interests

At the end of each year, we look back on what has happened in the past 365 days and pin new hopes on the New Year. 2010 was tied to monetary market uncertainties and hardships for banking operations, but many lenders announced unexpectedly large profits for the context - a result which was lessened the sympathy of the business community. While companies struggled through the economic crisis and paid sky-high interest rates, banks seemed to lack sympathy.

 

The harmonious interest for borrowers and lenders has been put forth. At the extraordinary meeting with the National Assembly’s Commission on Economic Affairs in late 2010, Governor of the State Bank of Vietnam, Nguyen Van Giau, faced many difficult questions on this issue.

 

Like other years, no banks reported operating losses last year and only a few of them missed earnings estimations. Some lenders far exceeded their profit plans. Military Bank (MB) reported VND1,800 billion profit in the first 10 months of 2010, beating the full-year target of VND1,700 billion, which was then revised up to VND2,000 billion. Eximbank expected a full-year pre-tax profit of VND2,200 billion in 2010, but it completed 96 % of the plan within 11 months. With nearly VND2,300 billion of pre-tax profit as of mid-December, Eximbank President Dang Van Thanh projected the profit to top VND2,400 billion in 2010.

 

Better-than-estimated earnings pleased shareholders but raised questions among the business community. At Governor Nguyen Van Giau’s hearing at the National Assembly Commission on Economic Affairs, Nguyen Thi Nguyet Huong, a commission member, said the increase in deposit rates to 14 % at commercial banks also meant a rise in lending rates. A lending rate of 18 % was unbearable even for large concerns, let alone small ones. When they cannot stand the pressure of capital costs, they will increase selling prices.

 

Parliamentarians also demanded to make public the differential between deposit rates and lending rates at commercial banks. Dr Cao Si Kiem, former Governor of the State Bank and incumbent deputy, now representative of the rights and interests of small and medium enterprises, frankly said: The interest rate policy must ensure the harmony of interests for banks, people and enterprises. "It is impossible to live on the loss of others’ motivation.”

 

The Governor explained that the differential between deposit rates and lending rates was narrowed to 2.5 % last year, compared with 3.42 % in 2005, 4.63 % in 2006, and 4.62 % in 2008. He noted that bank profits accrued from various sources, not only credit operations. However, for years, banking services did not generate as much profit as lending operations. In fact, according to many reports, banks’ profits mainly came from interest differential. Bao Viet Securities Company (BVSC) said in a report that the proportion of interest rates in revenues of the five largest commercial banks rose significantly in the year to the end of September 2010. Asia Commercial Bank (ACB) saw growth from 56 % to 78 %, Vietcombank from 74 % to 78 %, and Eximbank from 82 % to 88 %. Meanwhile, other sources of income decreased in the reporting period. Net income from service charges declined 10 %, revenues of gold trading and foreign exchange were down 30 %, and securities investment revenues slumped 30 %. Vietinbank’s net rate income totalled VND2,927 billion in the third quarter alone, up 42 % from the same period of 2009 with VND2,049 billion. Sacombank also raked in nearly VND920 billion of net rate income in the third quarter, up 60 % year on year.

 

On the 2.5 % differential between deposit and lending rates, the Governor said: "If the differential between deposit rates and lending rates is from 2.2 % to 2.5 %, banks can stand but if the gap is lower, they are very vulnerable.”

 

The economy and the business community continued to undergo a rough year of 2010. High interest rates, volatile exchange rates and soaring material prices forced companies to raise selling prices and accept dropping sales because living standards of people were affected by escalating inflation. This hardship further weighed on businesses. According to business associations, many small and medium-sized enterprises were unable to operate effectively because they had relied on bank loans for a long time and high lending rates pulled the plug on their access to bank loans. Many companies had to downsize their operating scales. According to the Vietnam Steel Association (VSA), many steelmakers were reporting unprofitable operation because lending rates soared to19 % per annum. Last month, steelmakers hiked selling prices to offset rising exchange rates, not lending rates. Thus, they will probably increase selling prices in the coming time. Cacao and coffee companies, unable to continue all their production plans, had to drop or cancel many construction contracts and accept fines because they lacked capital to purchase materials at good prices.

 

No matter how difficult the economy and no matter how volatile interest rates or exchange rate are, banks in Vietnam never suffered a loss like their corporate and individual customers. Risks of banks are raised when interest rates are high, but borrowers must have mortgaged security, mainly undervalued real estate. This practice alone is enough to ensure the stability of Vietnamese banks. As the Vietnamese capital market remains undeveloped, companies with limited financial capacity must rely on bank loans. When rates climb and the economy weakens, it is only companies that take the hit, not banks.

 

According to Governor Nguyen Van Giau, to deal with 11.75 % inflation, many banks had to break out of agreed rate limits to ensure a positive net interest rate. However, the head of the banking sector also admitted that unexpected soaring interest rates, especially in the last two months of 2010, worsened economic uncertainties. Banks embarked on a race with unfair measures to attract deposits, while high interest rates were a living death for borrowing companies.

 

The Governor also admitted persistent management weaknesses and internal defects of the credit institution system. The rate race, which was put to an end by State Bank intervention, was triggered by unequal financial capacities of banks, especially small banks. The central bank is studying measures to support small lenders. Specifically, they may be subject to a lower compulsory reserve ratio, expected at 1 %, to boost liquidity.

 

In the central bank’s year-end meeting with international financial and monetary institutions and foreign credit institutions in Vietnam, Governor Nguyen Van Giau stressed that SBV would regulate monetary policy flexibly and prudently in 2011 in order to control inflation and stabilise the economy to boost economic growth. In 2011, monetary policy is expected not to cause shocks as it did in 2010. The business community expects to live with macroeconomic stability, lower interest rates and wider access to bank loans.