Banks face challenges when controlling corporate bonds

04-Nov-2020 Intellasia | Bao Dau tu | 6:02 AM Print This Post

The number of corporate bonds suddenly skyrocketed in banks’ portfolios in the first nine months of the year, concerning many regulators.

Banks aggressively spent billions more on buying corporate bonds

According to analysts at SSI Securities Corporation, in the first nine months of the year, the number of corporate bonds issued on the market increased by 79 percent over the same period last year, reaching 341 trillion dong. Although the number of issuances soared, corporate bonds seemed to be more expensive than that last year, when the successful issuance rate reached 98 percent (the same period last year was only 93%). In which, the rate of the successful offering of real estate bonds enterprises had improved dramatically, reaching 97.2 percent (only 87.5 percent in the same period).

The biggest buyers of corporate bonds in the market were, of course, still banks. Many banks’ Q3/2020 financial statements showed that banks’ corporate bonds were up to hundreds of trillion dong. In the first nine months of this year, this number bought by many banks had increased by two times to three times.

Specifically, by the end of September 2020, the number of corporate bonds held by Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) was 54.4 trillion dong, an increase of more than dong 24 trillion dong compared to the beginning of the year, 79 percent higher than that of the same period last year. These bonds accounted for 19.5 percent of Techcombank’s total credit balance.

At Military Commercial Joint Stock Bank (MBBank), the corporate bonds portfolio also doubled compared to the beginning of the year, with a total value of bonds equal to 27.5 trillion dong (just 14.4 trillion dong higher than that in the same period). Or as at Southeast Asia Commercial Joint Stock Bank (SeABank), the number of corporate bonds held by businesses increased by 3.5 times.

It was not bad for banks to diversify their portfolios amid difficult credit growth. In fact, many banks’ business results were still positive in the first nine months of the year, thanks to this turnaround. However, banks’ increase in corporate bond investment was also potentially risky, making regulators feel worried.

Was it possible to prohibit banks from buying debt-reversing bonds?

For a long time, the bank’s purchase of corporate bonds, especially corporate real estate bonds, had been warned by many experts. Nguyen Tri Hieu, a banking expert, said that it was very likely that the bank could bypass the law on lending to reverse debt by bonds.

The State Bank of Vietnam (SBV) also affirmed that there had appeared a credit institution buying corporate bonds for the purpose of debt restructuring. This could lead to many potential risks, especially when enterprises issuing bonds were experiencing difficulties in production and business and unable to repay maturing bond principal and interest, leading to more bonds to restructure debt.

By inspecting, SBV also discovered a number of cases where enterprises issued bonds for the purpose of implementing investment programmes and projects of enterprises, increasing the scale of working capital, but in fact contributing capital, buying shares in others to carry out projects or continue to contribute capital, buy shares. That had resulted in many difficulties for credit institutions to control the purpose of capital use, cash flow from the source of issuance bonds.

Facing the above situation, SBV was drafting a Circular on credit institutions and foreign bank branches to buy and sell corporate bonds. In the draft regulations, commercial banks were only allowed to buy corporate bonds when the non-performing loan (NPL) ratio was below three percent according to the audited financial statements of the preceding year; not to buy corporate bonds issued for the purpose of debt reversal; not to buy corporate bonds issued for the purpose of contributing capital, buying shares in other enterprises.

Le Xuan Nghia, an economist, said that although SBV already had regulations on credit limits for related persons, in fact, many bond transactions between banks and the ‘great-grandchild’ company were transactions of debt rollover that SBV could not fully control.

According to economic experts, tightening the investment in corporate bonds of banks was very necessary, avoiding risks for banks and businesses and protecting investors. The bank was currently one of the largest bond distributors in the market, but most of the bonds that banks distributed were without collateral. After buying corporate bonds, banks would immediately sell them to secondary investors. The risk was then transferred to investors.

 

Category: Finance, Vietnam

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