Home / Liquidity Risk

Capital Mobilization Growth Rate of Vietnam's Banking System


The growth rate of capital mobilization remained above 20%, but in the following years the growth rate of capital mobilization only reached above 12% (see chart 4.1).


Chart 3.3: Capital mobilization growth rate of Vietnam's commercial banking system

Maybe you are interested!

Source: Annual report of State Bank of Vietnam

Some notable points in capital mobilization activities of Vietnamese commercial banks in the period 2011 - 2015 are as follows:

Firstly , capital mobilization interest rates have complicated developments: There is a race for interest rates, showing signs of strained liquidity in the banking system, the risk of lurking insolvency, threatening the stability and safety of the entire banking system.

Second, the actual mobilization interest rate exceeds the interest rate framework prescribed by the State Bank:

Since September 28, 2011, the State Bank has regulated interest rate frameworks, but in the face of weak liquidity, there is still a situation of pushing up deposit interest rates to attract mobilized capital to compensate for liquidity shortages.

When deposit interest rates rise, commercial banks are forced to increase lending rates, increasing the financial costs of businesses. Tensions continue to increase as businesses’ health declines, their ability to repay principal and interest weakens, and bad debts in the banking system increase. The spiral continues to suck both commercial banks and businesses into crisis.

3.1.3.2. Credit activities

Outstanding credit balance of the Vietnamese banking system has increased quite rapidly. In the period 2011 - 2015, the average outstanding credit growth rate was quite high, reaching over 21.2%.


Unit: %


18.10

14.20

12.51

12.62

8.85

2011

2012

2013

2014

2015

Chart 3.4: Credit growth rate of Vietnam's commercial banking system

Source: Annual report of State Bank of Vietnam

The growth rate of outstanding credit shows that the Vietnamese banking system has made a great contribution to the development of the economy. However, in principle, the reasonable relationship between credit growth and GDP is at 3:1, but in Vietnam this ratio is not maintained evenly (chart 4.2). Before the year, bank credit increased sharply but GDP did not increase proportionally, reflecting poor investment efficiency. Since 2011, despite the State Bank's tightening credit policy, credit growth has gradually decreased and in 2012 reached 8.85% but economic growth still reached 5.03%, showing that investment is more effective. On the other hand, credit activities of Vietnamese commercial banks still contain many limitations:

- The ratio of credit to mobilized capital far exceeds the level allowed by the State Bank, making the liquidity of the system always tense.

- Hot credit growth leads to low credit quality: the consequence is high bad debt.

3.1.4. Risks in the Vietnamese commercial banking system

Due to the small scale and the late establishment of the Vietnamese commercial banking system, its operations are still weak compared to the region and the world, so Vietnamese commercial banks cannot avoid many risks in banking business. Some of the most common risks of Vietnamese commercial banks can be seen as follows:

3.1.4.1. Credit risk

Credit risk is associated with the most important and largest activities of commercial banks.

- credit activities. When carrying out a specific financing activity, the bank tries to analyze the borrower's factors so that the safety is the highest. Credit risk


can be identified through a number of quantitative indicators, typically the bad debt ratio of commercial banks. This indicator reflects how many dong of outstanding debt out of every 100 dong of outstanding debt are bad debts - debts that cannot or are difficult to recover.

As analyzed above about the risks that commercial banks face when achieving credit growth, the problem of bad debt has resurfaced. When first announced in 2011, the bad debt ratio of banks only accounted for about 3% of total outstanding credit. Each year, the bad debt ratio gradually increased. And the first 6 months of 2014 also witnessed a sharp increase in the bad debt ratio from 3.6% to 4.2%. But then, according to data reported by credit institutions to the State Bank, the bad debt ratio in September 2014 reached 3.88%, although at the end of the year the bad debt increased to 4.17%, it tended to decrease in 2015 at 3.81% after many efforts to improve by the State Bank and credit institutions, especially after the establishment of the Asset Management Company of credit institutions (VAMC). However, this is only the data updated by the State Bank of Vietnam from the financial reports of credit institutions and the figures through the remote management activities of this agency are often much higher, the nature of bad debt has not changed much in the past period, so in fact, bad debt is still an alarming problem.


Chart 3.5: Bad debt ratio of Vietnam's commercial banking system over the years

Source: Compiled from annual reports of the State Bank of Vietnam

Specifically, regarding the bad debt ratio of each bank, the end of 2014 is the period when banks are racing to reduce bad debt to 3% - the target set by most credit institutions. As of the third quarter of 2014, bad debt of commercial banks has changed a lot compared to the previous quarter. Some banks even reduced their bad debt ratio lower than the figure at the end of 2013 such as SHB, BIDV, Vietcombank, Sacombank, Techcombank. Among these, Sacombank stands out with a bad debt ratio much lower than other banks.


while it is only at approximately 1%, SHB is the bank that has reduced its bad debt ratio the most compared to the third quarter, from 4.1% to 2.4% (excluding Vinashin's debt).

3.1.3.2. Interest rate risk

When mobilizing capital from businesses and individuals, banks must pay interest. When financing, banks earn interest. Interest rates on loans, deposits and securities fluctuate frequently, which can increase profits for banks and conversely cause losses for banks. It can be said that interest rates are an important tool for banks to compete in mobilizing capital as well as lending to the market. Depositing money in banks is still a quite attractive investment channel today and especially there is almost no risk while the stock market is falling, the real estate market is stagnant, investing in gold and USD can be risky because the free market is strictly controlled.

In addition to the basic interest rate issued by the State Bank in 2010 at 9% and maintained at this level until now in early 2011. In fact, interest rates have been continuously decreasing over the past few years, since 2011. At that time, lending interest rates were at 20-25%/year, liquidity was tense, and races to mobilize funds beyond the interest rate ceiling were common in banks.

With a reasonable “injection therapy” to stabilize liquidity for banks through the open market, interest rates have stabilized. By October 2013, the interest rate level had decreased by 2-5%/year compared to the end of 2012, in which the mobilization interest rate decreased by 2-3%/year, the lending interest rate decreased by 3-5%/year and returned to the interest rate level of the 2005-2006 period.

Continuing the downward trend, in 2014, the State Bank flexibly adjusted down the operating interest rates by 0.5%/year, reduced the ceiling interest rate for short-term loans in VND for priority sectors by 2%/year, reduced the ceiling interest rate for VND mobilization by 1.5%/year combined with a 0.5%/year reduction in the ceiling interest rate for USD mobilization.

The interest rate level in 2014 continued to decrease by 1.5 - 2%/year compared to the end of last year; in which, the mobilization interest rate decreased by about 1.5 - 2%/year, the lending interest rate decreased by about 2%/year. The lending interest rate level is commonly about 7 - 9%/year for short term, the medium and long term interest rate is commonly about 9.5 - 11%/year, state-owned commercial banks apply the medium and long term lending interest rate for priority sectors commonly about 9 - 10%/year. There are even enterprises with healthy and transparent financial situation, effective operation, effective production and business plans and projects, the interest rate is only about 5 - 6%/year.


3.1.3.3. Exchange rate risk

Exchange rate risk is the basic exchange rate risk in the Vietnamese foreign exchange market and is the issue that attracts the top concern of capital managers. Due to the complex developments of the market and the differences in state management, the exchange rate mechanism in our country has some unique features, exchange rate fluctuations greatly affect the foreign exchange business activities of commercial banks.

The tension of the USD/VND exchange rate at the end of 2010 was carried over to the beginning of 2011. And what the market was waiting for finally came with the event on February 11, 2011: for the first time in history, the State Bank decided to increase the exchange rate so strongly, with 9.3% along with tightening the margin from +/-3% to +/-1%. During this year, the exchange rate was affected by the global financial and economic crisis and had many fluctuations. In each period, the State Bank made adjustments and interventions with monetary and fiscal policies, thereby minimizing the negative effects of exchange rate fluctuations, helping commercial banks turn challenges into opportunities for successful foreign exchange trading.

The VND/USD exchange rate in early 2012 remained stable with no fluctuations.

+/-1% according to the BQLNH exchange rate and with a downward trend from 21,030 VND/1USD, down to about 20,850 VND/1USD at the end of the year. In the first 6 months of 2012, the VND/USD exchange rate tended to increase slightly, but in the last 6 months of the year decreased, and the whole year the exchange rate decreased by nearly 0.88%. This is a phenomenon opposite to the exchange rate movement in the market during the turbulent years (2008 - 2011) when the exchange rate always fluctuated in an upward direction from the beginning of the year to the end of the year. The reason is that the State Bank implemented measures to stabilize the exchange rate, especially with the joint efforts of commercial banks, which reduced the exchange rate after a period of fluctuations. With strong fluctuations in the exchange rate, the foreign exchange business activities of Vietnamese commercial banks were greatly affected, net income decreased sharply compared to 2011, many banks even had negative net income from foreign exchange business.

At some points in 2013, the exchange rate pressure increased slightly following developments in the domestic and international financial markets, reflecting the correct law of exchange rate movement. In particular, the longest period of increase occurred at the end of April 2013, when a number of commercial banks raised the USD price to the ceiling of 21,036 VND/USD, even increasing the buying price equal to the selling price to the ceiling of 21,036 VND, the selling price of USD on the free market reached 21,320 VND. To match the market signal, on June 27, 2013, the State Bank adjusted the average interbank exchange rate up by 1% to 21,036 VND/USD, after 1.5 years of stability at 20,828 VND/USD. After that time, the demand


USD at commercial banks has gradually cooled down, causing a spillover effect to the free market, which only accounts for a very small share of the national foreign exchange market. The stable exchange rate has contributed positively to stabilizing inflation, attracting foreign investment, and increasing foreign exchange reserves. Economic organizations and individuals tend to increase the sale of foreign currency to commercial banks to get VND, and remittances have also increased sharply. Therefore, the USD source of commercial banks has become more abundant and the foreign exchange business activities of commercial banks have been promoted.

With the exchange rate developments in 2014, the State Bank has had the third consecutive year of success in controlling exchange rate fluctuations, in the whole year of 2014, the exchange rate was only adjusted by 1%. The liquidity of the currency market thanks to that stability has been significantly improved, effectively serving the operations of the commercial banking system and the operation of the economy. The demand for import, debt repayment, payment, foreign currency transactions from foreign currency sources earned from exports, attracting foreign investment, remittances, smooth operations between customers and banks and on the interbank market.

3.2. Current status of liquidity risk of Vietnamese commercial banks

3.2.1. Current status of liquidity risk of Vietnamese commercial banks

There are many methods to reflect and measure liquidity risk in the Vietnamese commercial banking system. However, with data collected from annual reports and financial statements of commercial banks in the period 2011-2015, the author of the thesis chose to reflect the liquidity status of the Vietnamese commercial banking system through the following indicators.

Minimum Capital Adequacy Ratio CAR

Cash position index: (Cash + Deposits at credit institutions)/Total assets

Liquidity ratio: (Trading securities + Available-for-sale securities)/Total “existing” assets

3.2.1.1. Minimum capital adequacy ratio CAR

Capital adequacy ratio represents the amount of equity capital to support the bank's business operations. The capital adequacy ratio is calculated as a percentage of total Tier I and Tier II capital compared to the bank's total risk-adjusted assets.

CAR = [(Tier I Capital + Tier II Capital) / (Risk-adjusted assets)] * 100%

By this ratio, people can determine the ability of the bank to pay its term debts and face other types of risks such as credit risk and operational risk. For the above reason, managers of the commercial banking system of countries always clearly identify


and requires commercial banks to maintain a minimum capital adequacy ratio.

From October 1, 2010, according to Circular No. 13/2010/TT-NHNN, commercial banks in Vietnam will ensure a minimum capital safety ratio of 9%. During the period 2011-2015, the implementation of Circular No. 13 by the Vietnamese commercial banking system was quite complete.

As of early 2011, there are still 14 banks that will have to rush to complete the target according to the requirement of increasing charter capital to 3,000 billion VND before December 31, 2011 of the State Bank. This race to increase charter capital requires banks to overcome many "obstacles" in the context of the economic difficulties still existing, along with the tight monetary policy, the stock market is unlikely to improve in the short term, and the growth rate of the banking sector is also unlikely to reach expectations. To attract investors when increasing capital, banks must ensure that the dividend level must also increase accordingly. That is, if they want to increase capital by 50%, profits must also increase by 50%. However, this is almost impossible in the context of the State Bank tightening lending to non-production sectors and requiring credit institutions to only develop credit growth plans of less than 20%. Meanwhile, for small and medium-sized commercial banks, profits mainly come from credit activities, especially lending to non-production sectors such as real estate, securities, etc. Therefore, increasing capital from the money of strategic investors and existing shareholders or new shareholders is not easy. Because domestic strategic investors are mainly corporations and state-owned corporations that are currently being strictly managed in terms of investment outside the industry, especially investment in the finance and banking sector. Foreign strategic investors are also considering in the context of the economic situation in Vietnam and the world still having many uncertainties, the business prospects of small and medium-sized banks are uncertain. The gloomy stock market due to economic difficulties and credit restrictions in this sector also discourages existing investors. Not to mention, many large banks, although exceeding the legal capital of 3,000 billion VND as prescribed, have continued to plan to increase capital many times to expand their business as well as meet the requirement of minimum capital safety ratio CAR of 9% as prescribed by Circular 13/2010 and Circular 19/2010 of the State Bank. This also increases the pressure on each dong of capital of banks, especially for small-scale banks. In this race to increase capital, anticipating a possible merger in the near future is something that many experts have mentioned.


Unit: %

13.7 13.64

12.75

11.02

11.92

2011 2012 2013 2014 2015


Chart 3.6: CAR ratio of Vietnam's commercial banking system over the years

Source: Annual report of the State Bank of Vietnam

When charter capital increases, the CAR ratio of each bank as well as the whole system is improved. In 2011, the average capital adequacy ratio of Vietnamese commercial banks was 11.02%, in 2012 it increased to 11.92%, after reaching the highest level in the period 2010-2015 in 2013 at 13.7%, CAR decreased to 13.64% in 2014 and 12.75% in 2015, the basic reason is that charter capital did not increase, while total assets increased very quickly, some loans and investments were not previously included in total outstanding debt, now the State Bank requires banks to include credit in the form of investment trusts, guarantees, corporate bonds, etc.


Chart 3.7: CAR ratio according to Circular 36 of Vietnamese commercial banks in 2015

Source: Compiled by VCBS and author (* 2014 data)

Comment


Agree Privacy Policy *