Collateral shares to banks cast shadow over market

Friday, May 2, 2008
The diminishing value of shares accepted by commercial banks as collateral for loans has put pressure on many banks to protect the value of their security interests by selling off the shares before market values fall further.
The upshot: if banks act on the rational impulse to cut their losses, they will dump huge numbers of shares on an already depressed stock market. The prospect has given many in the securities industry, as well as State regulators, a bad case of the heebie-jeebies.
Before the State Bank cracked down on the practice about a year ago, commercial banks accepted an enormous quantity of stock as collateral in loans to stock market investors. Many of the borrowers have since lost money on their stock investments and banks fear that the loans may fall into default.

Each day that the banks delay selling the shares to pay off the debts, the collateral is losing value.
The clock is ticking
During the hot growth of the stock market in 2006-07, investors were easily profiting from securities investments. Investors were readily able to mortgage their appreciating shares and reinvest in even more.

Then the State Bank, sensing the risk of a bubble bursting and leaving commercial banks in a crisis, cracked down on the process.

Late last year, the stock market plunged, and the shares held as collateral by commercial banks lost an enormous proportion of their value.

Earlier this year, commercial banks began dumping shares, and the VN-Index fell to the 500-mark.

With the stock market now restricted to a daily trading band of 2%, there’s little room for shares to regain their lost growth, and commercial banks are now chomping at the bit to sell more shares and realise the value of their collateral. But, for the moment, the State Bank has cried, whoa, Nelly.

"Even though the State Bank has ordered State-owned commercial banks not to sell collateral shares, and has strongly encouraged private joint-stock banks not to, as well, the existence of these shares is a burden on the market," said independent market analyst Nguyen Tien Dung.

"Sooner or later, the banks will sell these shares on the exchange despite the warning from the State Bank," Dung said, warning that the volume of shares held by commercial banks was too much for the market to absorb at a time when the market was already oversupplied.

John Nolan, an analyst for a HCM City fund management board, said, "In different markets worldwide, market regulators have a dedicated fund to solve market problems. Why doesn’t your country have a similar fund?"

According to Nolan, the State Bank could spend a certain amount of money from such a risk management fund to buy back collateral shares. The shares could then be held for a certain period.

When the market warmed up again, commercial banks could then buy back the shares from the State Bank and re-sell them at a profit.

In the meantime, commercial banks were following the State Bank directive and holding onto the shares, said Le Xuan Nghia, head of the State Bank’s Banking Strategy Department.

"The banks themselves have begun to understand that selling more shares at a time when the market is already facing oversupply doesn’t benefit themselves. That’s why they’ve delayed selling shares," said Nghia.

"I’ve also heard that the Government may direct the State Bank to implement a discount loan to commercial banks at 9% a year, which would be enough to get them to delay selling the shares for a while," he added.

Mortgaged out

A large number of collateral shares are also lurking in the vaults of securities companies that have offered mortgage services to their clients.

Dung noted that these also posed a danger to an oversupplied market as securities companies were under no regulation requiring them to delay foreclosing on shares and selling them.

"It’s understandable that firms or banks need money at this moment, and may be forced to sell shares because investors have not paid off their debts," said Dung.

However, Dung noted, this action could be delayed for a time with a guarantee from market regulators to ensure the viability of securities companies during this difficult period.

"The listed companies’ association has urged securities companies to delay selling mortgaged shares. But at the core is how much securities companies will be aware of their actions in the near future," said Nguyen Son, head of the market development department of the State Securities Commission.

"The more they are aware, the more we are assured of a solution." (Viet Nam News)