Caution is the watchword

VNStockNews.com - Borrowing against shares is on the rise again as the stock market rebounds, but investors and stockbrokers have learned their lesson from two years ago.

Nguyen Tuyet Vu wanted to buy more shares as the stock market continued to rally in August, but she didn’t have enough idle cash for the amount she had in mind.

So Vu decided to take out a mortgage loan, or borrow against the shares she already owned, betting that her speculation would be rewarded with higher share prices still.

“I had VND100 million (US$5,600) in cash and borrowed VND50 million to buy more shares,” Vu said as she watched the ticker at the Ho Chi Minh City branch of Bao Viet Securities.

With the value of her shares rising around 20 percent in August, Vu made VND10 million for the month yet paid less than VND1 million in interest on her loan.

“I think mortgage lending is a vital service for investors,” she declared.

The stock market rebound has boosted confidence and encouraged more and more investors to borrow against shares, brokers said.

The VN-Index broke through the 500-point level on August 13 and went past 600 on October 14. It has more than doubled since hitting a four-year low on February 24.

Nguyen Mien Tuan, general director of Viet Dragon Securities, said his clients had borrowed VND100 billion ($5.6 million) in September, significantly up from the VND30-40 billion per month early in the year.

Saigon Securities Inc., Vietnam’s largest brokerage, said third-quarter mortgage lending was up more than 60% compared with earlier quarters.

Circular effect

The increased mortgage lending has played a prominent role in the VN-Index’s gains, brokers said.

There are no risks in sight for now, they added.

Yet both investors and securities firms are more cautious thanks to the lesson they learned after the market overheated in 2007, they said.

“Investors have wised up and are thinking more carefully before putting money into the market, while the brokers are managing mortgage lending at a safe level.”

By March 2007, the VN-Index had hit a record high of 1,170 points. A dramatic correction soon followed, with the index slumping 66 percent in 2008.

“Lending against shares is a product. The positive side is that it helps the stock market’s development,” said Chung Han Luong of the Consulting and Investment Department of Tan Viet Securities’ HCMC branch.

On the negative side, whether it is risky or not depends on securities companies’ management, he said.

“Many brokerages I know manage the service well; they offer a 30-40 percent lending to the market price of collateral shares, or they cap on a certain lending amount when the market prices of stocks have gone out of safe provision, whichever smaller. Nevertheless, it should contain potential risk for those who do not put a maximum cap on as stock prices rise,” said Luong.

“If the government bans or limits mortgage lending, the market may lose some steam and brokerages that are not good at managing risk will be sorely affected,” he said.

But he also reckons mortgage lending is safe now, in general.

Nguyen Hai Son, deputy director of the Brokerage Department of FPT Securities, agreed that the service was not a problem.

“Thanks to lending against shares, market liquidity has increased. The service also helps listed companies overcome the economic slowdown faster as they can raise capital through issuing shares more easily.

“Investors have learned big lessons from 2007. So now, they are more cautious and wiser in managing their money.”

An executive at Asia Commercial Bank, who wished not to be named, said though lending against shares was on the rise, it was still well below the maximum level allowed by the central bank.

The State Bank of Vietnam stipulates that banks can lend as much as 20 percent of their registered capital to stock investors.

Referring to the stock market’s outlook, Son said it was still positive and tipped the VN-Index to reach 650-700 points around year-end.

“The Vietnamese economy depends on exports. So, good signs from Vietnam’s main export markets such as US and Japan will benefit many companies, including those in the seafood, footwear, textile, and garment sectors.”

Besides, many large listed companies have raised their earnings targets for 2009 after posting better-than-expected figures for the first nine months of this year, he said.

Foreign investors are still pouring money into the Vietnamese stock market for these reasons, Son said.

“Securities are the most attractive asset class in Vietnam at the moment, as the real estate market has yet to recover fully, gold is only a wealth preserver and is not a profitable channel, and the dollar is strictly monitored by the government,” he added.