Circular 36, bad or good for Real Estate Lending?

On May the 27th the State Bank of Vietnam (SBV) confirmed its new guidance relating to the banks Asset Liability Management and Real Estate Loans facilitates, this tightening existing regulations and bringing Vietnam into the same orbit as Basel III .

The effect of the circular on how a bank considers its Asset Liability Management is to require a lowering of the ratio of short term funding used for loans over a 12month period.

Currently banks have the ability to utilize short term funding for up to 60% of a total facility with a maturity a year or more. This will reduce to 50% end 2016, 40% 2017.

“Utilizing Repos, swaps, CP /CDs and interbank lending to finance long term lending can be cynically considered a profits driven approach by the banks, but the reality is that the cost of capital increases significantly when banks have to consider only long term funding options- bonds, various forms of securitization and regulatory capital- so the cost saving from short term funding are actually passed to borrowers by way of lower rates” said Ben Gray Director of Capital Markets with Cushman & Wakefield,

He continued “There is talk that this circular will have the effect of cooling the market at a time of relative recovery for Real Estate, however I am of the opinion that as there is only currently a single bank that is reported to have a ratio of above 40%, we are not going to see an increase in lending costs driven by this element of the new regulatory requirement”

Circular 36 also requires banks to raise the risk weights for real estate loans to 200% by the end of 2016. This increasing up from 150%, but less that the initially suggested 250% in February this year.

Ben commented that “Unfortunately, the SBV has not offered the banks the ability to consider various weights depending on the loan purpose or the asset class. A flat 200% across the board will exert pressure on the banks that are already undercapitalized and this could have an effect of a banks willingness to finance commercial real estate loans due to the lower returns on this capital. Why have your deployable capital secured against real estate when you can free it up for more favorable and profitable classes? So this could lead to either banks lowering their exposure to the real estate sector or slowing their credit expansion”.

“The counter to this that by moving the exposure of Vietnamese banks towards the Basel target of a tangible common equity of 7% of risk-weighted assets, will improve the Banks ratings and in the end this will reduce their costs of both long and short term funding, allowing sensible continued credit expansion”

The sentiment in the Real Estate market is that this is a poor move by the SBV but Cushman & Wakefield feel that it is actually a credit neutral moving to a credit positive step, which will ensure the ongoing structural reform of the banking sector and the protection of the overall economy.

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