Proprietary trading benefits securities companies

July 15, 2018 - 21:03

HCMC Securities Corporation (HSC) reported VNĐ325 billion in pre-tax profit in the first quarter of this year, a year-on-year increase of 250 per cent.

HCMC Securities Corporation (HSC) reported VNĐ325 billion (US$14 million) in pre-tax profit in the first quarter of this year, a year-on-year increase of 250 per cent.

Sài Gòn Securities Joint Stock Company (SSI) reported VNĐ492.2 billion in pre-tax profit, up 46 per cent.

Analysts pointed to the stock market’s tremendous performance in terms of both liquidity and prices since late last year for this.

By early April the benchmark VN-Index was up at a record high of 1,204.33 points.

The second reason was the launch of derivative products in the third quarter of last year.

Derivatives enabled investors to hedge their portfolios, and securities companies laughed all the way to the bank.

Since its launch last August the volume on the derivatives market rose almost 10 times to 563,500 contracts worth VNĐ61.9 trillion last April.

Although the market has tanked since early April the country’s three bourses saw trading worth VNĐ270 trillion in the second quarter, up 36 per cent from the first quarter and 70 per cent up year-on-year.

Now, after falling relentlessly for three months, the VN Index has gone from being one of the world’s best-performing indices to among the worst-performing.

The third and possibly the biggest reason was proprietary trading.

In the two first quarters, securities companies are reckoned to have earned profits of more than VNĐ1.3 trillion.

The big winners were HSC, Việt Capital Securities Joint Stock Company, VNDirect, Sài Gòn-Hà Nội Securities Joint Stock Company (SHS) and SSI.

HSC earned VNĐ185 billion while for SSI it was a whopping VNĐ570.2 billion.

But analysts were wary of proprietary trading and said securities firms should not focus on this business since it would put them at great risk depending on the market movement.

The securities firms would likely have to cope with conflicts with investors’ benefits, experts said.

What happens when banks’ liquidity shoots up?

In the fourth week of June the interest rate on the inter-bank market dropped by 0.3-0.5 percentage points from the previous week to 1.1 per cent, 1.1 per cent and 1.6 per cent for overnight, one-week and one-month loans.

This saw many banks quietly cut their savings deposit interest rates.

Not only small banks but also big ones have gone with this trend, cutting their interest rates for short-term deposits by 0.1-0.2 percentage points.

Analysts explained this by saying that many banks were awash in liquidity.

The question is why are banks so liquid at a time when demand for funds increases since most enterprises start preparing for the year-end peak sales period?

Analysts attributed it to the State Bank of Việt Nam’s policy of tightening lending to risky sectors.

The central bank earlier this year asked lenders to tighten loans to the stock and property markets, warning about increasing risk of bad debts.

It wanted them to keep the growth of credit to these sectors within “safe” limits.

They had to keep track of debtors’ finances and the progress of their projects, it said.

Credit expansion should go hand in hand with careful oversight to ensure loans were used for the intended purposes and did not add to the bad debts, the statement said.

Following the central bank’s orders, banks have been scrutinising companies’loan applications more carefully than before to minimise risks, and, not surprisingly, lending has reduced.

Most banks have also hiked interest rates on loans related to real estate, particularly for mortgages, by 1- 2 per cent in recent months.

This has reduced demand, and thus loans to this market segment have also gone down.

Besides, the health and thus capital absorption capacity of enterprises in other sectors remain weak.

All these have resulted in a sharp drop of credit growth in recent months, causing banks’ liquidity to spike.

In the first half of this year credit growth was a mere 6.5 per cent, 2.2 percentage points lower than in the same period last year.

Meanwhile, deposits grew at 7.78 per cent in the first half, much higher than the 6.8 per cent a year earlier, according to figures from the National Financial Supervisory Committee.

Another important reason is that the central bank has so far this year made net purchases of foreign currencies exceeding $11 billion, thus injecting VNĐ210 trillion ($9.1 billion) worth of đồng in the market.

Analysts said the liquidity was a mixed blessing. While one benefit is that the banks can lower deposit interest rates to reduce the cost of funds, in the longer term it could affect their profits since they have failed to use their cash to create profits.

It could also create competition between banks to lend, drive up the prices of other asset classes like government bonds and even cause inflationary pressure, they said.

But notably, despite being awash in funds, banks seem to have no plans to cut lending interest rates. — VNS