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Thursday, June 30, 2022

The risk of surging deposit rates

By Thuy Le

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In addition to the risk of bad debts owed by Covid-hit customers, the rise of deposit interest rates rapidly rising is seen as the main risk for the banking system now and in the future. This is expected to narrow the net interest margin of banks, considering how unlikely it is for lending rates to keep pace with deposit rates.

Deposit rates grow rapidly

Techcombank, which has maintained its deposit rates lower than those of state-run banks such as Vietcombank, VietinBank and Agribank over the past two years, announced a remarkable interest rate hike late last month. The rates only inched up 0.1 percentage point for the 1- to 2-month terms and 0.3-0.35 percentage point for the 3- to 5-month ones, while the interest rates for savings of 6-11 months significantly rose by 0.45-0.55 percentage point, and for the terms of 12 months or longer, sharply by 0.65-0.85 percentage point, marking the biggest increase in this bank’s deposit rates in recent years. In mid-April, Techcombank had already adjusted its deposit rates several times, but with a modest addition of just 0.1 percentage point for all terms.

Similarly, VIB’s deposit rates last month picked up 0.5 percentage point for the 1-month term, 0.4 percentage point for the 2- to 5-month terms, 0.7-0.8 percentage point for the 6- to 11-month terms, and 0.3 percentage point for those terms over 13 months.

Meanwhile, NCB increased its interest rates by 0.3 percentage point for deposits of 1-5 months and 0.4-0.5 percentage point for those of six months or more. GPBank hiked its deposit rates by 0.4 percentage point for the terms of six months or longer all at once.

Deposit rates began rising in the fourth quarter of 2021, and the increase continued into the early months of this year, but it was not until the past two months that the increase has been significant and across the board. The list goes on with well-known banks such as SHB, OCB, Viet Capital, Sacombank, SCB, Kien Long, and those rarely altering their interest rates such as GPBank, BaoViet, PGBank, CBBank, Oceanbank, PVCombank, all with a substantial rise. Certain banks such as Bac A even raised their deposit rates three times in a row in March, April and May.

As per statistics on the average deposit rates of 35 domestic banks, the interest rates by the end of May had grown by 120 basis points against March for savings of 1-5 months, by 160 basis points for the 6- to 11-month ones, and by 250 basis points for the terms of 13 months or longer. This suggests how strong the volatility of interest rates in the first two months of the second quarter, especially in May, was. On the bright side, major state-run banks have yet to adjust their interest rates.

Inflationary pressure and competition for capital

Inflationary pressure affecting depositors’ psychology is one of the main reasons why banks have to promptly lift their deposit rates to retain depositors. The consumer price index this May was only 2.86% higher than in the same period last year, but it already rose 2.48% against the beginning of 2022 even though it has been less than half a year, making the goal of curbing inflation at 4% this year more challenging than ever.

Oil prices remain high and are expected to further escalate, the prices of various items, including foods, have skyrocketed as countries around the world are embracing export restrictions, global supply chains are getting disrupted by the Russia-Ukraine war, China is adopting drastic measures against Covid-19, and the greenback has ascended to its highest level in 20 years, all paving the way for inflation to run wild. This, therefore, will exert more pressure on banks’ deposit rates in the coming time.

Meanwhile, credit growth of the banking industry has been consistently strong since the beginning of the year compared to the growth in capital mobilization, putting the system’s liquidity under considerable pressure.

Data show that credit growth in the first quarter was more than 4%, nearly twice as high as capital mobilization, which was 2.15%. According to recent data, credit growth by the end of May amounted to 8.04%, more than double that of the same period last year.

Some banks have now reached their credit growth limits for 2022, demonstrating how strong capital demand is in the economy. As a result, now that the 2% interest rate support package has been launched, these lenders have applied for extensions to their credit growth limits for this year to go ahead with this package. However, this also means the competition for capital will be more intense for the rest of the year, as every bank looks to step up mobilization to obtain enough finance for loans to take advantage of the resources from the 2% interest rate support package for the good of their customers.

What are banks’ risks?

In this situation, it is predicted that the State Bank of Vietnam (SBV) will revise up interest rates again from the second half of 2022, as a way to deal with inflation expectations and follow the trend of monetary tightening among central banks worldwide. Then, a race to hike input interest rates will probably be triggered again, especially when the system’s liquidity is usually under more pressure toward the end of the year.

In an environment where interest rates tend to decline, banks are given many opportunities to boost their profitability since deposit rates fall rapidly. In contrast, lending rates decline more slowly as it depends on the business strategy of each bank. On the contrary, when interest rates go up again, banks may face multiple challenges.

Specifically, in addition to the risk of bad debt owed by customers affected by Covid-19, the trend of deposit interest rates rapidly going up is seen as the main risk for the banking sector now and in the future, as it narrows the net interest margin of banks, considering how unlikely it is for lending rates to keep pace with deposit rates.

Firstly, it is because the central bank’s goal is always to keep lending interest rates stable to support the economy. Secondly, the loan contracts with customers, although most of them coming with floating interest rates, often undergo quarterly or annual adjustments in case the sums involved are medium- or long-term. Thirdly, interest rate hikes are normally met with unfavorable reactions from customers.

Furthermore, surging interest rates make it likely that the government bonds that banks had previously invested in when interest rates stayed low will decline in price, prompting them to make a provision for the devaluation of such bonds or give a stop-loss order. It should be noted that in the context of stagnant credit activities under the impact of Covid-19 for two years now, quite a few banks have stepped up their investment in government and corporate bonds, as well as put money into those bonds issued by fellow lenders.

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