Vietcombank deposit rate cut, bolt out of blue for rivals

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Staff work at a branch of Vietcombank in Hanoi

The state-owned Joint Stock Commercial Bank for Foreign Trade of Vietnam announced large cuts to its deposit rates on April 6.

Vietcombank, as the bank is commonly known, said on its website that the cuts, the second in a month, has made its deposit rates among the lowest in the country.

The minimum rate on deposits of less than a year is now 6 percent, down from 7.3 percent and 1.5 percentage points below the rate cap set by the State Bank of Vietnam.

Nguyen Phuoc Thanh, the bank's general director, said the bank is set to trim loan rates to boost lending. Credit growth has been 4.56 percent in the year-to-date, and this is likely to rise to 12 percent for the whole year, he said.

Deposits have grown steadily despite the previous cuts, he said, and the bank is "prepared" to cope with possible massive withdrawals due to the lower rates.

Liquidity concerns

It is acknowledged that any adjustment to interest rates by a public bank sparks off a trend.

Vietcombank's move surprised other banks, who had earlier rejected suggestions about cutting deposit rates saying that would affect deposits.

In March the central bank lowered the maximum deposit rate to 7.5 percent from 8 percent, its first cut after six last year. Analysts then called for further cuts saying the earlier ones had failed to translate into lower lending rates.

The chairman of a commercial bank based in Hanoi, who asked for anonymity, said Vietcombank's latest cut took his bank by surprise, but it is considering if it can make similar cuts.

Phan Huy Khang, general director of Sacombank, said his bank is mulling over the issue and would decide soon.

Sacombank's lending has risen by a "not very strong" 4 percent this year, he said.

Two days after Vietcombank's sudden deposit-rate cut, the Commercial Bank for Investment and Development of Vietnam (BIDV), Vietnam's largest joint-stock lender by assets, also reduced its minimum rate for deposits of less than a year to 6 percent. For longer terms, the rate is 8 percent. 

Economist Le Dang Doanh, referring to other banks' reaction to Vietcombank's move, said he preferred small reductions in deposit rates.

Large cuts would hinder deposit growth, and idle money could flow into gold and dollars instead, threatening the economy's stability, he warned.

Sai Gon Tiep Thi newspaper quoted Nguyen Duc Huong, vice chairman of LienVietPost Bank, as saying there could be a liquidity crisis for banks if they keep cutting deposit interest rates.

He expected banks to cut the rate to 4-5 percent so that they can lend at 8-9 percent, but "who will [want to] deposit their money in banks then?"

Boosting lending

Deposits grew by 5.3 percent in the first four months while loans grew by 1.4 percent against a full-year target of 12 percent.

According to the central bank, more than VND160 trillion was deposited in banks in the first four months of this year. Trinh Quang Anh, director of the Vietnam Investment Development Group's Research Center, said he estimated the banking system made loans of VND30 trillion during the same period, while spending VND50 trillion on government bonds.

Vietnam's government bond yields were 7.4 percent on average, Anh said. Meanwhile, based on his calculation, the average cost of deposits is approximately 8.6 percent.

"Why have banks had to invest in bond? Because they can't make loans," Anh said.

Tuoi Tre newspaper quoted economist Nguyen Tri Hieu as saying a rise of just 2.41 percent in consumer prices this year allows lending interest rates to be cut.

With the spread between deposit and loan rates now at 4-5 percentage points, economists and corporates think banks can slash the latter by 1-2 percentage points.

Vu Viet Ngoan, head of the National Financial Supervisory Commission, said loans outstanding in the banking system is estimated at nearly VND3,000 trillion (US$143.37 billion).

Banks are lending at 10-15 percent, which local firms complain they cannot afford.

Ngoan said banks should quickly follow up the deposit rate cuts by also cutting loan interest rates.

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