Liquidity Drain Spreads to Securities Companies

The analyst cited SME case of failure to settle payment on November 1, 2011 resulting in bid orders cancelled as the first alarming bell.

He pointed out that liquidity risk is a result of poor management of money flows and which is the most dangerous risk leading to default. When a company cannot pay due debts other creditors will try to call their debts (like bank-run) sending the company to liquidity run-out and insolvency despite their profitability.

Loans to Equity Ratio at 10 listed Securities Companies. Source: SGTT, Q3/2011 Financials 

Securities companies normally keep low cash and cash equivalents due to their low profitability. However, amid economic uncertainty and credit crunch in 2011, their practice poses great risks on high interest rates, falling assets values, securities investment losses.

Q3/2011 financial reports showed that securities companies in Vietnam, especially small ones, are holding low cash -to-short term loan ratio and some failed to meet State Securities Commission’s (SSC) regulation on capital adequacy request.

According to SSC, as many as 12 securities companies has useable funds under 180% as of October 2011, 5 companies has the funds under 120%- the level that requires special watch.

SME Securities company’s financial reports showed that the company had cash and cash equivalent of VND7.735 billion of which VND6,297 belonged to customers; loans-to-equity rose to 2.91 times. The figures indicated that SME faces liquidity problem if it cannot sell its assets.

As of Q3.2011, other securities companies also faced the same problems including TAS with cash and cash equivalent to short term loans of 12.27%, APG of 11.22% and GBS of 3.02%.

Cuong expected a wave of money withdrawal from securities companies because investors worry of 2 factors:

First, some securities companies have been reported using customers’ money as their accounts are not separated. Investors deposit and withdraw money through banks but into or out of securities companies’ account. This practice allows securities companies to use customers’ money to earn interest.

Secondly, many securities companies even used customers’ money and other sources to lend to earn interest rate spread of 2-5%. However, securities are not banks and they are not allowed to raise funds from the public or backed by other banks or central bank, therefore, when they cannot collect bad debts, their liquidity drain is just a matter of time.

The analyst thinks the liquidity in the securities sector is just the beginning as securities companies cannot easily access to bank loans to cover their problems as they did in early 2011 due to credit crunch and tight monetary policy. Banks themselves had to raise funds at 27% p.a. interest rate in the inter-bank system and some were even requested to have some collaterals to back their borrowings.

Banks will also have to cut non-production loans to under 16% by December 31, 2011 in line with SBV regulation.

Besides, many banks’ current loans to securities companies will become mature and liquidity drain would put them into bad debts

Cuong expects restructuring securities system will come after the banking sector’s.