Contribution of banks in Real estate bubble in VN

Besides the irrationality of investors, banks take a big account in creating real estate bubble in the recent years. In 2008, loans on real estate was 138,000 billion VND (≈£3,942,000), in 2010 it nearly doubled, 235,000 billion VND (≈£6,714,000).

Why banks easily lend for real estate projects?

Expected profit when lending for real estate is higher than lending to manufacturing firms (from 4-7% according to Saigon Marketing 

Secondly, banks themselves hold a large amount of property as a channel of investment. I suppose that they may aware of real estate bubble‘s appearance, though they pump more and more in order to blow the bubble bigger and then earn profit easily.

A paradox

Profit of banks in 2011 was announced to be high, and higher than 2010. Vietcombank earned 5,700 billion VND before tax (about £163,000,000), increase by 4%. EBIT of Vietinbank is 8,105 billion VND (≈£231,500,00), and of Eximbank is 4,065 billion VND (≈£11,600,000).

Source : The Saigon Times 

50,000 enterprises were bankrupt or stopped operating in 2011, most of them are small and medium, accounts for 5% of the total. Many causes, but generally the high interest rate (19-23%) in a long period was the sharpest blade.

Comparing the number, banks earned huge profit while firms gained loss or breakeven. Assume that profit is on top, profit is now belongs to a small number of bankers. General speaking, profit of banks come from lending to firms. If firms no longer exist and cannot pay the loans, how long can banks survive?  

Monetary policy of Central Bank of VN and effects

In VN, Central Bank is named The State Bank and the governor is selected by the Government.

In the attempt to control the race on interest rate of financial institutions, CB hired a bunch of policies.

• On September 2010, CB regulated the AER (Annual Equivalent Rate) ceiling at 14%, apply to deposit which is longer than 1 month. However, this policy was not applied successively, because of the relation between demand – supply in the real world. Demand was much higher than supply pushed the race in AER go beyond the control of a single policy. In fact, there were commercial banks which evaded by secretly offering depositor an “award” computed on the deposit, raise the real rate to 17-18%. My case is a real story. When I applied for the UK Visa, it required a deposit account of £20,000. My mom asked several banks while she went jogging in the street. Surprisingly, she was offer a 3% “award interest” by a small bank (its capital is 3000 billion VND – around £85,700,000), and the award was prepaid. It should be noticed that CB did not regulate APR (Annual Percentage Rate). This means AER ceiling would decrease the growth of credit and therefore decrease the volume of loans while the APR was free to fly. Depends on demand and risk aversion of borrower, banks would flexibly apply various interest rate. Commercial banks often chase after profit, easily lend to borrowers who invest in real estate and stock market at a high rate, and forget who really create value for development, may result in an unstable economy and contribute in creating bubbles.

• Regulated the level of reserve requirement on April 2011, to 7% and continuously went up by 1% on September 2011. This policy can be considered as a tool to control the high inflation (CPI on first quarter of 2011 increased by 6.17%, in 2010 the ratio was 11.75%, according to GeneralStatistics Office of VN). A rise in reserve can significantly decline the amount of money which had been pumped into the market in the great celebration 1000^th years of Hanoi. It could lead to an increase in APR due to the supply decreased. Once again, firms who actually need for funds to produce could not approach the high interest rate.

As on lecture, open market operations is a pretty effective tool of CB, it seems that CB of Vietnam had not exploited the potential of this policy. It also indicates that policies of CB are sometimes not based on the real world and they are just immediate reaction.

Causes of the massive wave in banking market in VN

The peak in banking market of Vietnam in the middle of 2000s could be considered a result of the development of stock exchange market and the participation of the foreign banks in domestic market. In my view, there were 3 main reasons:

Firstly, shares of banks were always on top of the market, in terms of both price and value, causing a higher demand and consequently a desire to pump more and more into the market. Therefore, investors who had much and much money wanted to open their own banks, while current banks issued new shares to increase capital.

Secondly, many firms started in the market with market value at only dozens of billions VND, suddenly climbed up at thousands (or even dozens of thousands) of billions VND. It created a huge excess capital that allowed firms to open their own banks, although their specialisation are ship-building, oil or textiles.

Thirdly, many domestic bankers predicted that foreign banks would join the market and probably acquire the domestic banks. Thus they built their network as wide as possible, increase their capital as high as possible, hoping for a dream price of the acquisition.

My motivation for banking bubble in Vietnam

This first post is about why i chose this topic.
If we go back to 5 years ago, there were only 5 or 6 large banks run by the government, their branches only located in big cities and towns. Now, there are dozens of them contiguous. My nearly 700 meters long street has 9 branches of 9 different banks. According to National Bank of Vietnam, there is currently 61 banks in total of four types: Governmental, Commercial, Joint venture, branch of Foreign Bank  in VN, and 100%-foreign-investment in VN. (List of Banks in VN, you can google translate, sorry I couldnot find the English vers)
I therefore have a lot of questions: Why there are so many banks, and so many branches with so high density? How can they make profit while so many fishes in the pond? What has the Central Bank been doing to control?and so forth.
In the latter weeks, I am about to solve this questions in my point of view.