Capital jumping from stock market to banks

Wednesday, May 21, 2008
With the expected interest rates of 14-15% per annum, making bank deposits proves to bring satisfactory profit with no risks. That explains why money is leaving the falling stock market for banks.

Thanh went to the securities company on Ly Thai To street in Hanoi early this morning to draw VND100mil out of his securities transaction account. Thanh said that he would make a demand deposit at a bank, which, after the removal of the ceiling interest rate scheme, now offers a satisfactory interest rate.

When asked why he would not make a fixed-term deposit to enjoy a higher interest rate, Thanh said that he would withdraw the money to invest in other channels when the stock market showed signs of recovery.

VND deposit interest rates are now 14-15% per annum for 6-12-month term deposits. The demand deposit interest rate is also very high, at 9% per annum, while some banks even offer 11%. Some banks are trying to please their clients by offering very short-term deposits. VP Bank, for example, pays 11.04% per annum for 1-week term and 11.52% for 2-week term deposits.

While banks are delighted with the news about the removal of the ceiling interest rate scheme, the stock market has little to cheer about. The VN Index decreased in the week’s first two trading sessions. It seems that nothing can help stop the slide of the stock market.

The removal of the ceiling interest rate of 12% has been described by many experts as a ‘life preserver’ for banks, but a shock to the bourse.

Dr Ton Tich Quy, Deputy Director of the Securities Research and Training Centre under the State Securities Commission, said that investors will draw back capital from the stock market and make deposits at banks, which will make the stock market fall further and longer.

In the medium term, Quy said, enterprises will meet difficulties in mobilising capital. A lot of enterprises will have to cancel their plans to issue shares. The stock market is not only the playing field of 300,000 investors: it always impacts the OTC market. When the official market fell, the OTC market froze, causing the IPO plans of many enterprises to fail.

Ha Huy Thang, Chief Accountant of Petrolimex, said that his company has cancelled its plan to issue shares to existing shareholders due to the falling stock market.

Thang said that if the company needs capital, it can only borrow money from banks or issue corporate bonds.

However, as the lending interest rates are now very high, businesses have to think carefully before accessing bank loans, and they seem to be borrowing money to implement short-term projects only. Meanwhile, in order to issue bonds, businesses have to have short-term and feasible plans.

However, the removal of the ceiling interest rate scheme is being applauded by securities investors.

An investor at FPTS trading floor, said that the macroeconomic stability, which originates from banking stability, will support the stock market in the long term. “As the lending interest rate is capped at 18%, businesses will not have to borrow money at over 20% as previously. The prices of commodities will stop escalating, and pressure on inflation will be eased,” the investor said.

Sharing the same view, Phuong Thao, an analyst with Sacombank, said that the stock market will be influenced in the short term as investors may draw back money. However, in the long term, only the restraint of inflation and macroeconomic stability can help the stock market develop well. Thao said that the market will not rise again rapidly and sharply, but slowly and steadily.

General Director of SJC Securities Company Huynh Anh Tuan thinks that the stock market may continue sliding in the immediate time, but he said the most important thing now is the liquidity of the market.

“The stock market now relies on the demand of foreign investors,” Tuan said.

The VND deposit interest rate increases, according to experts, will help ease the pressure on banks to sell mortgaged shares. Banks now do not have to sell shares as the problem of low liquidity has been resolved.

However, Tuan said that banks will need a week or two at least to settle their capital problems. (VNE)