Analysts split on interest rate cap

Monday, Apr 07, 2014 08:00

Many analysts agree, saying it is time for the central bank to scrap the ceiling to create a level playing field for banks and accelerate the banking sector's restructuring.

by Compiled

Many HCM City banks want the central bank to abolish the interest cap for deposits of up to six months, considering it a "hurdle" to their deposit mobilisation efforts.

Many analysts agree, saying it is time for the central bank to scrap the ceiling to create a level playing field for banks and accelerate the banking sector's restructuring.

Small banks often have to offer higher deposit interest rates than larger rivals to attract deposits. With their cost of funds going up, they also have to charge higher interest rates for loans, and everyone knows where that path leads.

The central bank's deposit rate cap enables all banks, small or weak, to attract deposits.

If this protection is removed, small and weak banks might have to accept mergers to survive, thus enabling a quick restructure of the banking sector.

But other analysts call for keeping the caps in place since the financial and monetary markets are not too stable.

Maintaining the interest rate cap on less six month term deposits and fixing interest rates at reasonably high levels would not only preclude inflation but also help maintain stability in the market and reduce unhealthy competition between banks, they point out.

Some small banks still lack liquidity and will be ready to offer high interest rates to mobilise deposits if the State Bank of Viet Nam scraps the cap.

At a recent meeting with the media a central bank official said the cap would remain in place through this year, and his bank would only consider its removal when the monetary market and liquidity become more stable. Besides, it would only be implemented in stages, he said.

There is the risk that using administrative tools to regulate the market for too long could distort the market. Nevertheless, withdrawing the measure abruptly is likely to cause chaos.

The central bank has been gradually scrapping deposit interest rate caps. In 2012 it did away with the ceiling for deposits of over 12 months, and then for one-year deposits, and finally for deposits of six to 12 months.

Securities stocks shine

With the stock market rising sharply accompanied by huge increases in value and volumes, stocks of securities companies were the stars last week with all 20 shares listed on the two bourses closing at least 20 per cent up on their prices at the start of the year.

The top performers were SSI, HCM, KLS, HBS, HPC, VIG, AGR, IVS and WSS.

HCM – or the HCM City Securities Company – touched VND43,400 (US$2), representing a 75 per cent gain for this year and its highest level in several years.

VIG, or the Viet Nam Industrial and Commercial Company, has risen by 120 per cent this year, from VND3,200 to VND7,900. Kim Long Securities Corporation (KLS) has nearly doubled from VND8,000 at the start of the year. The company's turnover reached VND88 billion in the first three months of the year, accounting for 50 per cent of last year's total turnover.

AGR, or the Viet Nam Bank for Agriculture and Rural Development (Agribank) Securities Joint Stock Company, is another share that analysts are putting a ‘buy' recommendation, saying its price will go up further and liquidity has improved tremendously.

AGR doubled in a month since mid-February before correcting slightly, and is tipped to go up to VND10,500-11,000.

The securities firm shares have benefited from the strong recovery on the two bourses on the back of recent positive developments on the economic front.

Besides, in the first quarter a lot of money was pumped into the markets due to various reasons, and securities companies have launched several new products to attract investors

But analysts also warn that investors should be cautious since the shares of securities companies are volatile and could as easily go down as rise.

Gold loses glitter

Last Friday gold closed at VND35.35 million (US$1,675) a tael (37.5 grammes), a rise of VND20,000 (nearly $1) from the day before. The metal has lost VND140,000 ($7) since late March, in the process narrowing the gap between domestic and international prices to around VND2.46 million a tael.

Globally, the price fell to US$1,287 per ounce on April 3, meaning there is little room for any further fall.

Analysts said the price is now at the most attractive level in a month, and investors should take advantage. They said a rebound is very likely since demand often increases at below US$1,400 levels.

But gold trading firms and banks said retail trading remains sluggish despite the low prices unlike in the past when there was consistently heavy buying at lower levels.

HCM City-based Saigon Jewellery Company reported that transaction levels are lower than at any time last year. The country's leading gold trading firm said that on occasions only around 700 taels are traded in a day. Last year it never fell below 1,500 taels.

The gold market is trending in line with authorities' expectations, with investors turning their back on the metal because of the gap between global and local prices narrowed.

Banks have stopped all gold loans and deposits and are no longer the key players who could, in the past, influence the market.In fact, many bullion traders have been net buyers in recent times, and so the central bank has not held any gold auctions in recent times due to the low demand. — VNS

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