Banks no longer find it easy making profits from bonds

01-Dec-2020 Intellasia | Vietnam Finance | 6:02 AM Print This Post

While the corporate bond market became a ‘hot fever’ and risks were increasing, regulators had moved to control this market more closely, so this market’s patrons like banks could hardly avoid being affected.

Tighten the banks’ buying corporate bonds

In the past two years, when real estate businesses faced difficulties and could not pay their debts, they promoted to issue bonds to mobilise capital, and the leading partner was none other than banks.

Many people believed that real estate businesses had used part of the money to sell those bonds to repay their own debts, which was a form of debt rollover. According to TS. Nguyen Tri Hieu, a finance and banking expert, these actions posed many risks to the economy, so regulators needed to pay special attention. In addition to that, the Covid-19 epidemic had caused the economy to be stagnant, and many businesses that used to borrow money had difficulty paying their debts, so they had to apply for deferral and postponement of debt repayment. Therefore, bank lending became more difficult.

All banks’ financial statements showed that corporate bonds had been invested heavily recently. For example, at Military Commercial Joint Stock Bank (MB), the corporate bond portfolio of September 30, 2020, had doubled compared to the beginning of the year, with a total value of bonds held up to 27.5 trillion dong. Similarly, the amount of corporate bond that Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) was holding by the end of September 2020 was 54.4 trillion dong, increasing by more than 24 trillion dong compared to the beginning of the year and by 79 percent compared to the same period in 2019. This had become a concern, so the Ministry of Finance and the State Bank of Vietnam (SBV) must issue warnings.

On the other hand, SBV was collecting market opinion on the draft Circular regulating the purchase and sale of corporate bonds by credit institutions in a stricter direction. According to this agency, management practice showed risks in commercial banks’ corporate bond trading activities.

The draft Circular was built based on inheriting Circular No. 22/2016 and Circular No. 15/2018 on the purchase and sale of corporate bonds to edit, supplement and replace the content no longer suitable with the practice of buying and selling corporate bonds of credit institutions. In which, SBV had set a regulation that commercial banks could only buy corporate bonds when their bad debt ratio was below three percent according to the audited financial statements in the preceding year.

Notably, commercial banks were not allowed to buy corporate bonds issued to restructure the issuing company’s debts (debt rollover). Because according to SBV, banks had bought corporate bonds for debt restructuring over the past time, becoming potentially risky.

Besides, commercial banks were also not allowed to buy corporate bonds to contribute to capital or buy shares in other businesses. Because through the inspection of credit institutions’ operations, SBV had discovered several cases in which enterprises had issued bonds to carry out investment programmes and projects, increase the scale of working capital. However, the actual purpose was to mobilise capital to contribute capital, buy shares in other businesses. This made it difficult for banks to control the purpose of capital use, cash flow from bond issuance sources, implementation of projects, SBV emphasized.

The heat of real estate bonds would cool down

Explaining why businesses increased bond issuance, Do Ngoc Quynh, general Secretary of the Vietnam Bond Market Association (VBMA), said that bank credit was the channel for a single loan before the bond market was formed. When the market came into operation, the buyers would be mainly banks.

However, from 2011 onwards, the banking sector accelerated restructuring, SBV had introduced a credit growth ceiling and allocated a credit growth limit according to each bank’s capacity. At the same time, banks had to apply the Basel II standards from 2020, so the maximum loan/deposit ratio would be 80%. Even in some banks, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), this rate was only 60 percent to 70%. Thus, banks would have about 20 percent to 40 percent of the secondary liquidity reserve.

With this reserve ratio, banks could deposit money at the SBV at zero percent interest rates, lend to each other on the interbank market, or invest in corporate and government bonds to optimise their capital efficiency. However, then, the interbank interest rates and the government bond interest rates were low, so banks bought corporate bonds due to their high interest rates, said Quynh.

Facing the fact that banks had increased investment in corporate bonds, especially real estate businesses, a financial expert, Phan Dung Khanh, said that it was not excluded that banks bought corporate bonds to reverse debts. Because real estate businesses were in trouble, the previously unpaid loans would turn into bad debts, while banks’ bad debts were mostly related to real estate. The evidence was that since the beginning of the year, the bank had continuously offered to sell and mortgage the assets of real estate companies or real estate-related companies.

With more tightening of bond issuance activities and restricting banks from investing in real estate corporate bonds, the real estate bond market would hardly continue to increase, Khanh said.

The October 2020 bond market report released by KB Vietnam Securities Company (KBSV) showed that corporate bond issuance’s total value had decreased sharply. Specifically, the volume of corporate bonds issued in October 2020 reached 8.7 trillion dong, a decrease of 39.4 percent compared to September and a decrease of 90 percent compared to August’s peak month.

However, the banking and real estate groups were still the two largest bond issuers on the market, accounting for more than 72.7 percent of October’s total value. The group of banks had successfully issued more than 3 trillion dong, with the main contribution coming from Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and Vietnam International Commercial Joint Stock Bank (VIB). The real estate industry recorded a successful issuance value of 3.345 trillion dong, mainly from Vinpearl JSC (accounting for 66 percent of this group’s total issue value).

The corporate bond market cooled down markedly in the past two months mainly due to the new regulations in the direction of stricter bond issuance in Decree No. 81/2020/ND-CP, effective from 1/9/2020. This was also the reason why businesses had to race to issue bonds in August.

According to KBSV’s assessment, with the new regulations, businesses in general, real estate businesses in particular, would no longer easily raise capital through bond channels as before. Besides, according to Circular No. 75/2004/TT-BTC guiding the issuance of bonds to the public, only business enterprises must make profits in the year immediately preceding the year of registration and had no accumulated losses. Next to the new issue registration year to issue bonds, making a profit in a challenging year like 2020 was not easy.

Moreover, the fact that loyal customers who were banks were no longer allowed to invest in corporate bonds in the near future freely also made this market less attractive. The corporate bond market had shifted from institutions to individuals when SBV controlled more tightly buying bonds by banks. However, it would be difficult to replace the bank’s role in this market, Quynh acknowledged.

 

Category: Finance, Vietnam

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