The State Bank of Vietnam (SBV) recently issued Circular 36/2014/TT-NHNN on capital adequacy and liquidity requirements for commercial banks. Circular 36 is said to have an impact on the stock market in the past few sessions. Some new regulations are more stringent, but necessary, particularly those related to bank cross-ownership. Will stock investors have the opportunity or not when Circular 36 taking effect on February 01, 2015 is enacted?
Approaching professionalism
Mr Pham Huyen Anh, Director of Banking Operation Policy Security Department under the SBV, said Circular 36 not only amended inappropriate provisions in Circular 13 but also completed, supplemented and approached more closely to international practices and banking governance, managed and supervised banks, gradually implemented the Basel II regulations on capital adequacy at banks. Particularly, Circular 36 helps improve risk management and ensure the good control of operational quality, solvency, liquidity, safe investment, capital contribution, share purchase and credit lending at credit institutions and foreign bank branches.
According to experts, Circular 36 will restrict cash flows from banks into the stock market. Commercial banks will be only allowed to provide credit in the form of loans and discounts of valuable papers for customers to invest and trade stocks when such lenders meet capital adequacy conditions and have a bad debt ratio of 3 percent or lower. Loans for stock business cannot exceed 5 percent of outstanding credits of banks. Although the Circular takes effect on February 1, 2015, it is causing considerable effects on the stock market. The stock market has lost ground in the past few days.
Mr Pham Phu Khoi, General Director of ACB Securities Company, said that stricter regulations on lending for securities investment will leave substantial impacts on the stock market in the short term. In addition, securities companies which entirely rely on bank loans to finance margin trading will have to face mortgage release if funding banks have lent more than 5 percent for securities investment.
Opportunity for stock market
After Circular 36 limits total credit for this field from 20 percent of registered capital to 15 percent, securities companies have started to recalculate the limit that banks can provide for equity investment. However, these calculations are only estimated because the limit varies from time to time. Input data like total loans, bad debt ratio (banks are disallowed to provide loans for equity investment if their bad debt ratio is 3 percent or higher) are elastic and changeable every day. Input variables will lead to output variables. Therefore, the total quota calculation is not necessary.
According to experts, calculating the total quota will not be as important as the following:
Firstly, banks (especially commercial banks) always give a priority for bankers to borrow their money to invest in bank stocks. If this is tightened, they will withdraw their loans from other borrowers to boost internal lending. “Parent banks” may also stop providing credit for their securities companies. Credit supplies will decline in these two channels.
Secondly, many big bank shareholders borrow to invest in real estate. If their lending is limited, they will give priority to real estate to securities because shares are more liquid. If they have to repay some loans to banks, they may prefer cutting shares to real estate projects. Who will consume such release?
Thirdly, according to Item 5, Article 14, bank credit grant to customers to invest in shares shall not be secured by such shares. This means that assets formed from loans shall not be used as the security for loans. Margin lending will be once only.
Perhaps, bank shares will be first hit and this blow will cause a domino effect on other securities. So, why will Circular 36 pave the way for stocks?
The developments on the stock market in the past months show that blue-chips and stocks with good fundamentals have not increased. A half of trading value on both stock exchanges is leveraged by margin loans. Meanwhile, margin loans are spent on speculative stocks, thus sending the market into a state of instability. If margin lending is slashed, the market will undergo corrections to be healthier. Then, real money will be used on the market and a solid foundation for the market will be established.
The stock market will enjoy a strong growth when gasoline prices plummet. Lower input costs are helping revive manufacturing. Manufacturing companies, including listed ones, will benefit from this. Inflation in 2014 was forecast at 3 percent, the lowest in a decade. This may encourage lenders to slash interest rates by another 1 percent. Meanwhile, traditional investment channels such as gold and foreign currencies are no longer an appeal and real estate market has not fully recovered. Unemployed money will sooner or later be poured into the stock. Good-performing companies and those with high dividend payout ratios will be the destinations of cash flows. The second opportunity for stock investors after 2007 is coming.
Dinh Thanh
(Source: vccinews.vn)