Foreseeable losses for banks’ financial investments

Monday, May 5, 2008
A lot of securities companies and commercial banks have reported losses on their securities investments as the stock market has been falling since the end of 2007.

The Refrigeration Engineering Enterprise (REE), which reaped several hundred billions VND from securities investments in 2005, 2006 and the first three months of 2007, has reported the loss of VND100bil for the first quarter of 2008. The La Nga Sugar Plant, which injected VND17.7bil in 10 share items, has also reported heavy losses.

All securities investments bringing losses

In 2007, Eximbank sold VND500bil worth of stakes to 17 strategic partners at a price 8 times higher than the face value (VND4tril or $250mil). However, as Eximbank’s share price has dropped to VND36,000/share (- 50%), the said 17 partners have suffered the loss of VND2,200bil ($137.5mil).

A lot of securities companies have reported losses on securities trading deals. Six securities companies are offering themselves for sale after a period of suffering losses. Sources say that the director of a state owned bank’s securities company borrowed money from the company to make private trading deals, and since the deals failed, the director has had to leave his post.

Financial reports show that all joint stock banks have investments in securities, and it is certain that the financial reports will show big losses for the investments due to the falling stock market.

ACB seems to be the leading securities investor. Its audited financial report shows that by December 31, 2007, the bank’s total investment value in stocks had reached VND9,636bil ($602.25mil), equal to 23.2% of the total outstanding loans and investment value of the bank (VND41,446bil or $2,590.37mil).

South East Asia Bank had the total investments in securities of VND3,968bil ($248mil) by December 31, 2007, while VIB bank VND6,676bil ($417.25mil), Military Bank VND2,169bil ($135.56mil), and Techcombank VND6,842bil ($427.62mil).

Being a joint stock bank with a modest scale of operation, An Binh Bank, which has shifted to operate as an urban bank from a rural bank, also had investments in securities of up to VND3,569bil ($223.06mil), equal to 52.55% of its total outstanding loans (VND6,800bil or $425mil).

Lessons for business strategy should be drawn

Stock prices have decreased by 50% compared to the end of 2007, and it remains unclear when the market will recover. Therefore, it is foreseeable that joint stock banks will incur losses for securities investments in 2008.

In principle, enterprises in general and commercial banks in particular should only make investments in securities with a certain proportion, while they should focus on their main business fields. However, the high profit gained in the early 2007 made them forget the principle.

They may also well understand that in all investment cases, they have to make provisions in anticipation of price decreases. However, some banks seemed to ignore this principle as well. (VNE)