Banks reap big wins from corporate bonds increased risk

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4640 2046 4 - Banks reap big wins from corporate bonds increased risk
24 of 26 surveyed banks have profit from investment securities in the first nine months of 2021 Photo: ST

Big “players” in the corporate bond market

Implementing the provisions of the Law on Securities, the Law on Enterprises and guiding documents, the Ministry of Finance has been strengthening supervision over the corporate bond market. The Ministry of Finance has directed the State Securities Commission to inspect several enterprises with large bond issuance volume; enterprises issuing unsecured bonds; and enterprises with weak financial situation.

Regarding mechanisms and policies, the Ministry of Finance has actively coordinated with ministries and sectors to strengthen management and supervision of the corporate bond market. Accordingly, request the State Bank to inspect and supervise credit institutions’ mobilization of capital from bond issuance and coordinate in sharing information on inspection and supervision results; propose the Ministry of Construction to manage the real estate market, and warn real estate businesses about risks of “hot” growth; and work with the Ministry of Public Security on the legal framework and the issue of corporate bonds to enhance coordination and information sharing.

Banks’ structure of investment securities includes valuable papers, mainly debt securities, including corporate bonds, government bonds, and bonds of credit institutions. In particular, bonds are papers of great value in banks’ investment securities portfolios.

A survey of business results from 26 banks listed on the stock exchange showed that, in the first nine months of 2021, 24 banks made profits from investment securities.

Earning the most profit was VPBank with more than VND2,366 billion, up to 2.7 times higher than VND871 billion in the same period of 2020. In which, the total value of available-for-sale investment securities of VPBank was at VND75,145 billion, accounting for a high proportion of corporate bonds with nearly 41%.

Techcombank ranked second with income from investment securities amounting to VND1,472 billion, up 48% over the same period in 2020. In particular, at this bank, corporate bonds accounted for 62.5% of the total investment value.

At TPBank, the investment securities trading segment brought VND1,462 billion, 2.5 times higher than the same period last year, contributing 14.8% to total operating income, in which, corporate bonds accounted for 25% of the total value.

Along with the three banks mentioned above, many banks also significantly increased the proportion of value in investment activities to buy corporate bonds. SHB’s nine-month corporate bond accounted for 31% of the total value of investment securities.

At MB, the value of available-for-sale corporate bonds accounted for 31% of the total value of available-for-sale investment securities. These corporate bonds have maturities from five months to more than 15 years with interest rates ranging from 6.5-11.1%/year. Held-to-maturity corporate bonds with a term of 3-10 years will have higher interest rates at 8.7-10.5%/year. This type of bond accounted for 67% of the total value of investment securities held to maturity.

Beware of “three-no” bonds

The Covid-19 pandemic in the first months of the year, especially in the third quarter, affected enterprises’ business activities, causing a decrease in the demand for loans. Therefore, finding non-credit income solutions is inevitable.

According to experts, investing in bonds helps banks to receive periodic interest and settle the investment on the maturity date, or when the issuer buys back the bond. Data from FiinGroup showed that more than 70% of outstanding corporate bonds are held by banks. Nguyen Dinh Tung, General Director of OCB, said that the bank’s profit partly comes from bond trading, mainly government bonds. Specifically, government bonds accounted for 62.7%, bonds issued by other credit institutions accounted for 34%, and the rest were corporate bonds.

For banks, investing heavily in corporate bonds is not only for profit, but largely because the fact that from October 1, 2021, Circular 08/2020/TT-NHNN amending and supplementing a number of articles of Circular No. 22/2019/TT-NHNN stipulating safety limits and ratios in the operations of banks and foreign bank branches, required a reduction in the ratio of short-term capital for medium and long-term loans from 40% to 37%.

Moreover, after 10 months of 2021, many banks have reached the 2021 credit limit, so it will be difficult for cash to flow strongly to businesses. Thus, banks have to step up buying corporate bonds to supply capital to the market. Additionally, banks that buy bonds will not have to make provisions like in credit activities, so it does not affect operating expenses in the business report.

Banking and finance expert Dr. Can Van Luc: Banks buy corporate bonds to lend

It would be normal for investment and financial funds to buy corporate bonds, because these institutions are not subject to a credit ceiling limit. However, banks buy corporate bonds to lend to businesses in different forms. Also, if banks invest in a convertible bond, it won’t be good when that bond turns into a stock later. This will become a problem that banks are investing in the different industry, going against the trend of divesting capital outside the industry, divesting capital out of non-banking business areas.

Huong Diu

However, the global financial market since September has been “shaken” by the “debt bomb” named Evergrande. It is China’s leading real estate group drowning in more than US$300 billion in debt, most of it in bonds. This is a warning about the “bubble” of corporate bond investment in Vietnam. According to experts, many businesses have issued “three-no” bonds with no credit rating, no collateral, and no payment guarantee. Meanwhile, the analysis of the bond structure of some banks showed a divergence in investment; many units still poured money into corporate bonds.

Moreover, there is a paradox in the market. Banks are currently in second place with a total corporate bond issuance volume of VND149.1 trillion (data for the 10 months of 2021 of the Vietnam Bond Market Association), but they also act as investors to buy bonds directly or indirectly through securities companies. Banks are also responsible for underwriting corporate bonds. Therefore, these problems pose great risks not only for investors but also for the financial and monetary system.

Banking and finance expert Nguyen Tri Hieu said that banks have recently increased their holdings of corporate bonds, while these are risky bonds without collateral. In particular, the risk is also increased because businesses are affected by the pandemic, making the financial situation negative. Therefore, the consequences will be unpredictable if banks continue to invest in this type of capital.

Thus, this expert recommended that all bonds purchased from a business by banks must be added to the balance owed by businesses to banks, thereby controlling their investments and liabilities.

In particular, the purchase of corporate bonds by banks in the future may be tightened with a series of bans in the Draft Amendment to Circular 22/2016/TT-NHNN regulating the purchase of corporate bonds by credit institutions and foreign bank branches. Accordingly, credit institutions are not allowed to buy bonds issued by enterprises for the purpose of restructuring the debts of the issuing enterprises themselves; not allowed to buy bonds issued by enterprises with the purpose of contributing capital or buying shares in other enterprises; only allowed to buy corporate bonds when the bad debt ratio is below 3%.

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