Corporate bond arena sharpens up for banks

Corporate bond arena sharpens up for banks, illustration photo

Vietnamese banks are ramping up their foray into corporate bonds as a part of their portfolio diversification strategies. Particularly, debt issued by property companies has skyrocketed and accounted for a major share of lenders’ investment, fuelled by interest rates that have remained low.

By the end of September, the amount of corporate bonds held by Techcombank was VND54.4 trillion ($2.35 billion), up 79 per cent over the same period of 2019. These bonds account for 19.5 per cent of Techcombank’s total credit balance.

Techcombank revealed to win a great bond fee of VND894 billion ($38.87 million), up 165 per cent on-year in the first nine months of 2020 since the issuers ran before the effective date of Decree No.81/2020/ND-CP on September 1 on issuance of corporate bonds. Total corporate bond volume advised by the bank grew by 114 per cent on-year and total distribution volume to retail increased by 42.8 per cent on-year.

Credit growth achieved 9.2 per cent year-to-date at the end of the third quarter, from 3.5 per cent in the previous quarter thanks to a 41 per cent on-quarter growth in corporate bond investment.

Meanwhile, VietinBank recorded its profit from buying and selling investment securities, which corporate bonds play an essential role, after the first nine months of 2020 reached VND640 billion ($27.83 million), a sevenfold increase higher than the same period in 2019.

Mid-size lender Vietbank reported its profit from investment securities in the third quarter of 2020 hit VND177.26 billion ($7.7 million), up 2.2 times.

Military Bank (MB) is also active in the field by doubling the value in its corporate bond portfolio to reach VND27.5 trillion ($119.6 million).

SeABank also follows suit by tripling its corporate bond buying.

Accommodative monetary stance sustained the growth of local currency bond markets in the region, with currencies and equity markets gaining in early November.

“We saw an improvement in the global investment sentiment, but uncertainty over the trajectory of the coronavirus disease pandemic still weighs on the region’s economic outlook,” said Asian Development Bank (ADB) chief economist Yasuyuki Sawada. “The region’s large and growing local currency bond markets can help finance a sustainable and inclusive post-pandemic recovery.”

It is noted that banks are diversifying their portfolios amid difficult credit growth. However, lenders’ stepping up investment in corporate bonds also carries potential risks.

According to the ADB, a credible local rating agency is a key missing ingredient in Vietnam’s corporate bond market. Furthermore, the ongoing pandemic remains the biggest downside risk to the regional bond market and the global outlook, particularly with the possibility of new waves of positive cases and related restrictions on economic activities. Ongoing trade tensions between China and the US are an additional risk.

On the other hand, the State Bank of Vietnam (SBV) is working on a draft circular that outlines that commercial banks are not allowed to buy corporate bonds in order to restructure debts of the issuers. The SBV cautioned banks which have bought corporate bonds for the purpose of debt restructuring would be at significant default risk of high-yield, or junk bonds. In addition, commercial banks are not permitted to purchase corporate bonds for the purpose of capital contribution or shares purchasing in other enterprises.

“This makes it difficult for banks to control the purpose of capital use, cash flow from bond issuance sources, and project implementation progress,” the SBV representative noted.

Economist Nguyen Tri Hieu stated that lenders are ramping up their corporate bond purchases, especially real estate bonds. However, this is a group of businesses that are being warned by the local regulators. Holders of bonds issued by real estate providers might be left empty-handed if the realtors fail to pay back the debt.

There are, however, serious questions about the risks ahead due to this debt splurge, as the domestic corporate bond market, largely dominated by real estate providers, has been encapsulated with no collateral, no independent credit rating agencies, and no underwriter.

The Ho Chi Minh City Real Estate Association also warned that a majority of loans made to real estate firms, including bond purchases by both institutional and individual investors, may lead to a significant amount of non-performing loans. Moreover, local authorities should pay attention to consumer lending, especially when some people borrow money to buy properties instead of building and repairing their houses as contracted.

Market watchdogs question the consequences of a series of businesses not fulfilling their ability to pay bondholders, saying the market could continuously collapse, including real estate businesses and banks.