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Friday, June 14, 2024

Low credit growth may redirect bank money to securities

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Quite a few securities companies have sharply revised down their lending rates for margin trading since the Lunar New Year. As the credit growth of the banking system remains sluggish, this source of capital for low-interest margin loans is truly remarkable.

The stock market took an unexpected dive several times this March, and the VN-Index fell to its lowest since December 2016 at 650 points. During this toughest time of the market, it is extremely important to find ways to revive investor confidence, prompting the authorities to adopt a lot of policies to considerably reduce taxes and securities transaction fees.

For their part, securities companies on the one hand have to compete with the policy on transaction fee cuts—some even offer free lifetime trading—and on the other hand, sharply lower their interest rates for margin loans to stimulate investors (the number of new accounts opened since March has hit a record high). In the past four months, quite a few securities companies have revised down their margin interest rates to around 9%, forming a new margin interest rate level. Some firms have even completely exempted investors from interest rates if the latter buy stocks in the first 10 trading days.

Compared with the previous period, this interest rate has dropped by 3-5 percentage points, as the market witnesses fierce competition from foreign players, especially those from South Korea currently looking to gain market share in Vietnam.

The dramatic surge in charter capital after the acquisition and restructuring of domestic securities firms or the establishment of new ones, plus financial support from the parent company and the ability to access international funds at a low cost, has enabled foreign players to become trend-setters and exert impact that significantly changes the rule on the local stock market.

However, domestic stock brokers were quick to adapt to the new game, making use of drastic cuts of taxes, fees and interest rates for margin loans to attract customers. For instance, SSI has soon launched a VND2 trillion margin loan package, offering a preferential interest rate of 9% for existing investors and new customers since March. Similarly, Bao Viet Securities Company (BVSC) introduced a margin loan package with an annual interest rate of 9% on May 29. Meanwhile, HSC has applied this interest level since April 28.

From June 1 to August 31, Vietcombank Securities Company (VCBS) runs a preferential program which cuts their margin interest rate to 9.5% per annum. Most recently, VPS Securities Company (a subsidiary of VPBank) further brought down their margin interest rate from 9% to a record low of 7.5% applicable from June 1, with no interest charged on the first day loans are given out. This rate is only 2.5 percentage points higher than the banks’ lending rate applicable to the priority sectors.

Along with competitive pressure, the recent fall of interest rates in the economy when the State Bank of Vietnam (SBV) in the year to date has twice lowered the ceiling deposit rates for terms of less than six months plays a part in dragging down the interest rates for margin loans at securities companies. As a result, the amount of outstanding margin loans has risen again since March, in contrast to stagnant credit growth in other areas.

Sluggish credit growth

As per the latest figures provided by the SBV, the credit growth of the whole banking sector as of June 16 had been only 2.13%, less than half of the growth rate recorded in the same period last year. In particular, outstanding loans to SMEs and consumer loans both registered negative growth compared to the beginning of the year, while credit extended to other sectors such as agriculture and rural areas, supporting industries and high-tech enterprises also saw modest increase. Notably, there were times in April and May when outstanding loans were dragged down, despite a series of preferential credit packages launched by banks.

In the opposite direction, when outstanding margin loans at securities companies at the end of the first quarter were still 15% lower than early this year, they had as of end-May grown by an average of 20% against late March and are now at a higher level than the beginning of the year, according to some securities companies. It can be said that this capital flow has partly helped the market positively recover in the past three months, building up adequate support amid the prevailing trend of net selling by foreign investors.

It is also necessary to acknowledge that in the context that the economy is still mired in troubles and every business activity remains potentially risky as the epidemic is still out of check in many countries, affecting production and commerce, banks’ extension of loans may be fraught with danger, when capital demand of the business community has not really recovered.

On the contrary, promoted by the prospect of the rebound of the stock market, the demand for margin loans among domestic investors has soon grown again. It is very likely that bank credit will source securities lending through securities companies.

Under current regulations, banks’ loans for real estate and securities are restricted. The credit risk coefficient applied to these two sectors when calculating the capital adequacy ratio (CAR) of banks is much higher than those in other sectors, at 200% and 150% respectively. However, in practical terms, banks have been active in lending to the real estate sector in recent years as this market became so active.

Securities may therefore be no exception, especially when the equity capital of many banks has recently grown sharply thanks to the increase in their charter capital and issuance of long-term valuable papers. Therefore, despite a higher credit risk coefficient, banks now still have enough to lend if they want.

In addition, to ensure the competitiveness of securities companies which are their own subsidiaries, quite a few banks are obliged to boost financial support for such affiliates. By doing so, these lenders also help themselves optimize their excess capital when it is temporarily difficult to lend to other areas.

For securities companies without a bank’s backing, bond issuance and investment trust aimed to attract more capital for margin loans may be an option, with many buyers probably acquiring capital from banks.

By Thuy Le

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