Interest rate margin helps banks report high profit

Many banks have announced high profits inspite of continuously claiming about the difficulties in business without the state’s lending rate subsidisation since the start of 2010. The earnings of banks in Jan-May mainly came from interest rate margin (difference between deposit and lending rates).

“The banks that had bought a lot of government bonds earned the large interest rate margin. With the mortgage lending rate of 8 percent pa at State Bank of Vietnam (SBV), the real loan rate of 17-20 percent pa at commercial banks till April end brought in a high profit.” Dr Nguyen Duc Huong, vice chair of LienVietBank said.

Business results of commercial banks in first five months of 2010 showed an impressively positive growth inspite of difficulties. Ocean Commercial Joint Stock Bank (OCB) obtained 112 billion dong in Jan-April pre-tax profit, surging 116 percent respectively as compared with the same period of 2009.

Similarly Saigon Commercial JS Bank (SCB) reported achieving a profit of 352 billion dong, recording a jump of 370.16 percent year-on-year, ABBank 204.44 billion dong, +180 percent, Sacombank 491 billion dong, LienVietBank 202 billion dong and Vietcombank with over two trillion dong.

In the earnings structure, the majority of income of banks mainly was from credit activities. Up to April 30, Sacombank’s earnings from interests (including credit, interbank capital business) accounted for 64 percent of total profit and service provision bringing in 15 percent and the remainder was other profits. Also 55-60 percent of Vietcombank’s profit was contributed by interests.

According to Huong, basically the major profit of banking operations in Jan-April was earned from lending and investment interests (capital contribution, business in securities and finance market, derivative operation) and services. Banks’ profit from services is not highly expected because in fact, banks [including the giant Vietcombank) have to suffer big losses from the services relating to ATM.

Investment activity of banks in first four months was not much satisfactory because enterprises (main borrowers) faced hardships in business. Securities investment particularly created the large earnings to the banks thanks to some stock codes in banks’ investment portfolio posted a 100 percent growth.

SBV governor Nguyen Van Giau while addressing a press conference said that Jan-May had a surplus of low-cost capital source.

Remarkable contribution to banks’ profit is from capital business on the interbank market. Before credit was tightened up, the interbank market (called Market 2 where banks provide loans to each other) was the ideal business venue for the banks with the high liquidity because interbank interest rates used to be higher than the Market 1 (where commercial banks provide credit to individuals and enterprises).

With the interest rate movements from February end till the midst of April, the banks that had advantages in capital earned profits in time, said Nguyen Quyet Thang, general director of GP.Bank.

Quoting Tran Xuan Quang, deputy general director of Bao Viet Bank, overall the banks’ profits come from lending-a traditional operation. Especially, some banks enjoyed benefits from SBV’s negotiated lending rate mechanism.

Although the government aims to lower deposit and loan rates down to 10 and 12 percent pa, the interest rate cap is not expected to decline immediately. So, banks’ profit from now to the year end would rely on credit growth, Quang said.

SGTT

Tags: vietnam bank, Vietnam finance, Vietnam financial, Vietnam interest rates