Mar 30, 2012
The action in the interbank market has begun to bifurcate, as was expected, into those who can and those who cannot borrow on it. Weak banks are finding themselves in the unenviable position of not having the collateral to post to get a favorable rate on a loan no less the loan itself. The larger banks are flush with liquidity, now having the collateral to post with each other after the SBV issued bills of exchange at above market rates as measured by the government bond market last week.
This has also pushed up rates on the benchmark 5 year bond this past week, as banks eschewed them for the same short-duration bills of exchange (up to 180 days) from 11.44% to 11.49%.
The net effect of all of the recent changes to the interest rate structure and bond/note issuance is that the weaker banks are now effectively strangled from raising capital needed to service their liabilities. On the heels of this the SBV has now put nine banks on notice to submit M&A/consolidation plans by September or be forcibly restructured by the central bank.
What we've seen, so far, is only the beginning of the plan of the SBV to help the weaker banks.
According to a banking specialist, the investment and securities business segment this year still has growth opportunity, especially for debt securities such as government bonds and bills of exchange of the central bank because the deposit interest rate from now till the end of this year will fall to 10 percent per year under the central bank's roadmap, so when buying government bonds and bills of exchange at the coupon rate of 11-12 percent per annum, commercial banks will not only benefit in interest rate but also easily use it as collateral to borrow capital on open market operations (OMO) to address the demand of liquidity when needed.
Especially, in the current capital abundance situation at large commercial banks, the central bank can issue bills of exchange with attractive coupon rate to draw this available capital sources and then return to cash-strapped small banks through refinancing measure. This will help small commercial banks avoid raising capital at all costs and borrowing capital in the interbank market.
In essence, the SBV and the government plan to sell government bonds at say 11-12% while banks are paying 10% on deposits, which if the CPI can get below 10% will create demand to save at positiive real interest rates. Then the SBV can recapitalize the weaker banks by lending to them at more attractive terms then they are currently facing, making money on the spread (as always).
Much of this, as I've said in the past, is predicated on there being a strong demand for Vietnamese exports to drive foreign exchange reserves into the country to pay for all of this. As long as there is an appetite for government bonds at those coupons the costs can be minimized.