Vietnam Banks Break Loan Rules to Meet Demand: Mortgages

Posted on August 2, 2012


Vietnam to Buy Bad Debt From Banks to Ease Risk of Collapse

Nguyen Thi Bich Ngoc, a hotel sales manager in Hanoi, is among Vietnamese buyers being lured back to the property market by lower interest rates and cheaper homes.

“Until recently I didn’t have any strong intention to buy a house,” says Ngoc, who borrowed four billion dong ($192,000) to purchase a three-story property about 1 kilometer south of Ho Chi Minh’s mausoleum. “Property prices are going down. Interest rates are good. The timing is very good.”

Home loan applications have jumped since March, with buyers lured by 500 basis points of interest rate cuts, price declines of as much as 15 percent, and smaller, more-affordable apartments being offered by developers. Banks are skirting rules and may risk a cash crunch to meet demand: all have violated the central bank’s 30 percent cap on the use of short-term funds for loans with terms longer than a year, State Bank of Vietnam Governor Nguyen Van Binh said July 20.

“If you increase your exposure to the mortgage market but still have a lot of short-term funding, you will end up with a massive funding mismatch,” said Fiachra MacCana, managing director of Ho Chi Minh City Securities Corp. (HCM) “The banks already have a massive funding mismatch, they can’t really push it too much out there.”

At Joint-Stock Commercial Bank for Foreign Trade of Vietnam, the country’s largest listed lender by market value known as Vietcombank, home loans rose more than 15 percent in the second quarter.

Ignoring Risk

Vietnam – Banks’ bad debts to real estate sector worse than initially reported

Banks are ignoring the funding risk for now, betting mortgages are safer than commercial loans as businesses struggle with rising inventories and an economic downturn. Total credit expansion slowed to 0.93 percent in the first seven months from the end of 2011, the government said July 31, compared with its target of 14 percent to 15 percent for the full year.

“Banks now want to turn to mortgage loans because business loans are not going anywhere,” said Alan T. Pham, Chief Economist at VinaCapital Group in Ho Chi Minh City. “Banks are afraid of more non-performing loans, more bad debt from business, so they think that home owners are safer.”

Bad debt in the Vietnamese banking system remains on an “uptrend,” Vu Duc Dam, chairman of the Government Office, said at a July 31 press conference in Hanoi. Bad debts rose to 4.47 percent of total lending as of May 31, from 3.07 percent at the end of 2011, according to the country’s central bank.

Bad Debt

Non-performing loans are “significantly understated” and could be three or four times higher than the official estimates, Fitch Ratings said in a March report. Vietnam’s finance ministry will buy collateralized bad-debt from commercial banks to strengthen their balance sheets under a plan to overhaul the industry by 2015 approved by Prime Minister Nguyen Tan Dung in March.

Banking stocks are up as much as 54 percent this year on the monetary easing and plan to buy bad debt. Stocks may continue to climb as more details of government plans to remove bad-debt from banks’ balance sheets emerge, even as earnings are dented by credit provisions, said Michel Tosto, director for institutional sales and brokerage at Ho Chi Minh City-based Viet Capital Securities.

“From a trading perspective, they will probably do well in the next rally,” he said.

Still, banks’ ability to profit from the uptick in demand for loans is being hindered by the lack of a long-term bond market, MacCana said. Of 182.4 trillion dong of outstanding government bonds, 15-year debt accounts for around 0.5 percent of issuance, compared with 44 percent issued with a five-year tenor, according to data compiled by Bloomberg.

Lower Rates

Vietcombank, rated B+ by Standard & Poor’s, has set aside 2 trillion dong for home loans between May and September, with interest rates as low as 12 percent, according to Pham Thuy Nga, director of retail banking. The lowest rate offered before the central bank started its rate cuts was 18 percent, according to Nga. The lender is Vietnam’s fourth biggest bank by assets.

The State Bank of Vietnam has lowered its key refinance rate by 500 basis points since March to 10 percent, as annual inflation plunged back toward single digits from a high of 23 percent in August last year.

Vietnam Joint Stock Commercial Bank for Industry and Trade, the country’s third-largest lender by assets known as VietinBank, will allocate 5 trillion dong in the second half of this year for home loans, according to a July 30 e-mailed statement in response to questions from Bloomberg. The B+ rated lender will offer preferential annual interest rates of 12 percent on the loans.

Debut Sale

VietinBank, the second-largest lender by market value on the Ho Chi Minh City stock exchange, sold $250 million of U.S dollar-denominated bonds, the first issue by a Vietnamese commercial bank, according to data compiled by Bloomberg.

The 8 percent notes due in May 2017 yield 8.38 percent, according to prices from ING Bank NV. The notes pay the highest coupon of any U.S. dollar bond sold by a commercial bank in South East Asia in the last year and maturing within the next five years, Bloomberg data show.


Vietnam’s New War Against…

Back in April we wrote about Vietnam and gold investment, a brief look at the Vietnamese government’s attempts to ‘stabilize’ the economy through a series of restrictions on the gold market.

These restrictions included banning gold as a medium of exchange and issuing 7 ‘solutions’ which were designed to reduce ‘goldization’ the practice of replacing the dong with gold in transactions.

As many readers already know, Vietnam has a huge affinity with gold. So much so that house prices are priced in both dong and gold. According to Ronald Stoerferle’s ‘In Gold We Trust’ 2012 report, ‘Overall gold demand amounts to roughly 3.1%of GDP’ Stoerferle also notes that by comparison it is less than 0.5% in China.

These moves by the government aren’t so much to change the behaviour of citizens but also their psyche. Further measures have been put into place in the last month in order to reduce the dependency on gold.

Ban on gold mobilisation and gold lending

To ‘prevent gold speculation’ the State Bank of Vietnam (SBV) has issued a directive ordering credit institutions to halt gold mobilisation and lending in gold from November 25 2012.

Gold speculation is popular in the country, namely in Ho Chi Minh which accounts for nearly 76% of the national total. Banks mobilise capital in the public’s gold to sell for Dong in order to settle liquidity problems.

Prior to July, commercial banks reportedly rushed to raise gold deposit interest rates in an effort to improve their liquidity – they used mobilized gold in order to borrow on the interbank market. However, according to reports, it is now easier to do this without mobilizing gold as bank liquidity has been improved. Therefore banks no longer have to mobilize gold.

In line with the directive, credit institutions will only issue short-term gold certificates, for those depositing physical gold bullion, to pay customers upon request, these will terminate on the 25 November.

Gold and inflation

Gold controls such as those mentioned above and in our previous research has come into force in order to try and control inflation of the dong. In the last year inflation has reached highs of 17%. Resolution 11, brought in to force in March 2011 in order to reduce inflation in the country, has included a series of measures in order to gain tighter controls on money, credit and the budget deficit.

One of the measures implemented by the central bank saw the interest rate on dollar deposits reduced to 3% whilst the 14% rate was maintained for Dong deposits.

Last month, this tactic was carried through to the gold market where the lowering of interest rates on gold deposits has been the first step by banks to stop mobilizing gold and reduce the attractiveness of storing gold with a bank. They of course hope this will slow down gold investment.

The Vietnamese Business Times outlined:

– Saigon Bank, which previously offered very high interest rates of up to 4.6 per cent per annum to attract deposits, has slashed the interest rates to 2.2 per cent at the highest, which is applied to 6-9 month term deposits. Meanwhile, the interest rate of 2 per cent is being applied to other kinds of deposits.

– Nam A Bank, which once paid 4 per cent per annum to gold depositors, now pays 1.8 per cent per annum for 1-3 month term deposits, and 2 per cent for longer term deposits.

– At ACB, the gold deposit interest rate has dropped to 0.9 per cent per annum at the highest, while the depositors at the bank last month received approximately 2 per cent.

– Viet A’s and Eximbank’s interest rates have been hovering around 0.6-0.9 per cent.

Currency controls

The SBV have said that the new regulation regarding the mobilisation of gold will not impact the majority of Vietnam’s citizens in the countryside as they traditionally do not store gold in the banking system. However, it may well impact the price they receive for their gold in both the official and underground gold market.

In early July the SBV confirmed that it had taken over gold bar production in late May, making Saigon Jewellery Company (SJC) the national brand. ‘Since then, all production of gold bars in the country has been exclusively handled by the government’. This was expected following an announcement in November 2011 which announced the company would be put under government management.

SJC, according to their website, account for 90% of the gold bar market. The brand was selected for its popularity, ‘to save money for the state and avoid creating chaos in the production and trading of gold bars, ‘ stated the Deputy governor Le Minh Hung in the Vietnam Economic Times.

Citizens, all of whom are familiar with gold investment, have expressed concern that once SJC becomes the official brand of bullion it will be controlled like a currency. As the SBV will set the price each day, people fear the bullion will be put under further strict control, similar to currency controls.

Similar to legal tender laws in which the central bank has monopoly of control over currency creation, Vietnamese citizens have now had to come to terms with the idea that not all of their gold holdings will carry equal ‘value’ in the marketplace.

Despite the fact that the SBV has not banned any particular brand of bars, when it now comes to selling your gold, many shops will only accept SJC bars, whilst those who will accept the gold will only accept non-SJC bars at significantly reduced prices.

This decision by gold shops, to only accept SJC-branded bars, is thanks to the SBV announcing that it is considering only having SJC branded bars in the market place, as it ‘would be easier for the monetary authority to manage the gold market.’

Gold trade controls

Further rules also being considered by the SBV in the last month include the banning of travellers from bringing gold bars and gold ‘material’ in and out of the country. Only small amounts of jewellery – under 300g – will be allowed, otherwise customs officials will have to be informed and taxes will have to be paid.

Reasons listed for considering such a rule include the SBV’s aims to ‘strengthen the management of gold bullion…to keep the market stable…Strict management will create the right conditions for the processing of gold trading and ensure the rights of residents and gold enterprises.’

In our humble opinion, it seems that all the reasons given by the both the government and the SBV as to why the various gold controls are taking place i.e. the rights of citizens, to ensure a fair markets etc., are actually the very opposite of why they are being enforced.

The main reason so many people advocate a return to gold, and gold investment, is because it is the currency of humanity. It is chosen by citizens when they feel they are no longer receiving value from their nation’s currency. In the last year the cost of living has risen by 18% – third only to Venezuela and Ethiopia. The most cited reason for gold purchases in Vietnam is as its use as a savings vehicle. It’s a currency which everyone understands and it holds its value.

However, the Vietnamese authorities are doing their utmost to try and control it like a paper currency. As we have warned before, the government needs to be careful that these new gold policies do not increase the feelings of insecurity within the country. At the moment there is a fine balancing act between the fear of paper currencies from the citizens and the fear of gold by the government.

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Jan Skoyles contributes to the The Real Asset Co research desk. Jan has recently graduated with a First in International Business and Economics. In her final year she developed a keen interest in Austrian economics, Libertarianism and particularly precious metals.

The Real Asset Co. is a secure and efficient way to invest precious metals. Clients typically use our platform to build a long position and are using gold and silver bullion as a savings mechanism in the face on currency debasement and devaluations. The Real Asset Co. holds a distinctly Austrian world view and was launched to help savers and investors secure and protect their wealth and purchasing power.

Jan Skoyles

Posted in: Corruption, Economy