Outlining deep scrutiny of HSBC Vietnam bond activity

Nguyen Tri Hieu - Chairman Advisory Council, United Capital Management JSC

HSBC Vietnam, a subsidiary of HSBC Group, has announced successful bond issuance in the country, signifying a positive development for the domestic capital market, despite the relatively small issuance volume.

Some in the industry expressed surprise over HSBC’s share issuance on returning to Vietnam after 25 years. However, with the size of the first issuance being small, the VND600 billion ($26.1 million) will not be enough to influence the domestic bond market.

In addition, compared to HSBC’s reputation and its asset size, the move could be seen as market exploration or a PR trick to buoy up Vietnam’s capital market.

This, however, could gradually support internationalising the country’s capital market that is still modest as compared to the stock market. Other bond issuers could also learn from the lender’s issuance standards and methods, including interest rates, fees, and repayment schedules.

According to statistics by the Hanoi Stock Exchange, companies issued a total of VND159 trillion ($6.9 billion) in the first six months of the year, up 50 per cent compared to the same period last year. Also during the first half of the year, commercial banks issued VND42.5 trillion ($1.8 billion) of bonds with an average term of 4.7 years and an average interest rate of 6.72 per cent. Compared to the deposit interest rate, the interest rates of these banks are high and could strongly attract retail investors.

The bond market accounts for around 10 per cent of Vietnam’s GDP and is in need of reputable issuers like HSBC to reduce negative factors emerging in the capital market. The recent case of Hi Long Holding in China is an unfortunate lesson for bond holders as the company was unable to repay $165 million in debts.

Currently, many real estate bond issuers are looking for ways to attract capital in the stock market. Meanwhile, individual investors with limited knowledge and financial analytical skills are especially keen on high interest rates. This development, however, poses a certain risk for the economy as many corporate bonds can become bad debts.

Bonds issued by real estate businesses have certain benefits as they might reduce the burden on the credit system amidst a currently staggering credit balance of around 137 per cent of the national GDP, equivalent to VND8.2 quadrillion ($356 billion), while the nation’s GDP sits at around VND6 quadrillion ($260 billion). With this scale, there is a great risk if real estate developers use the capital raised from bonds ineffectively or for improper usage apart from the declared purposes. If not careful, they may lose the ability to repay debts or eventually go bankrupt, especially since the legal framework remains somewhat vague in some related points.

One shortcoming of Vietnam’s capital market – which is also a risk that HSBC has taken – is the lack of a preliminary assessment of the securities’ credit value. Vietnam’s capital market lacks a reputable credit rating company, unlike other markets like the United States with Standard & Poor’s, Moody’s, and Fitch Ratings. However, although Vietnam has practically applied the market economy since 1986, up until today there has not been a single agency like this.

People have been aware of this problem for more than 10 years, and failure to assess the creditworthiness of the bond issuing company can lead to a lack of transparency and instability in the capital market. Hence, it remains difficult for financiers to quantify securities with good, average, and subprime ratings.

Another shortcoming is the absence of a “bankruptcy court”. Many court cases related to bankruptcy have been processed by civil or criminal courts if fraudulent and criminal activities are involved.

Public information on bankruptcy cases is very limited except for popular cases. Vietnam needs a system of bankruptcy courts to make these cases transparent and enable the society to learn from them. Only if failures of bond issuers are brought to the court, the public may learn the high degree of risks involving bond issuance, especially when the corporate bond market is still very young and under-developed.

Meanwhile, Vietnam’s securities are often self-assessed by investors, with only a few banks being rated by international credit rating agencies. Because of this, and HSBC’s global reputation, the number of buyers for its bonds have outperformed the plan already. It is known that some credit rating companies have been licensed by authorised agencies but their entrance into the market still remains to be seen.

Nevertheless, banking stocks have been strongly rising since 2018, with the VN-Index reaching a historic high of 1,170 points, despite the shortcomings and weaknesses in the local banking system – an unlikely development as bank shares would normally suffer under downward impact.

Transparency and appropriate regulations remain the two major issues in Vietnam’s bond market and the capital market in general. A comparison with the US capital market highlights these issues. There, stock exchange commissions, such as in New York, San Francisco, and Chicago, are responsible for reviewing issued bonds based on predetermined criteria and regulations to reduce risks for the market. As a result, businesses may easily issue bonds on the capital market, but they have to meet high commercial and legal standards. Weak companies have little chance to get through the screening by the public and regulators.

Meanwhile, HSBC’s bond issuance in Vietnam may also set a precedent for other foreign banks to raise capital. However, foreign banks only account for around 10 per cent of the total Vietnamese bank assets, with some of them even withdrawing capital out of the market.

Vietnam does not yet fully apply international standards, especially in risk management, which makes the entry and development of foreign banks difficult, except for some banks from wider Asia.

For many international banks that have already applied high standards in risk management and capital adequacy based on Basel III or even Basel IV, it is inconceivable that they would allow their branches to go to Vietnam and operate in a market that just now enters Basel II. That may create a discrepancy between what they do in their headquarters and in Vietnam, as foreign bank branches in Vietnam have to apply the risk management methods prescribed by their parent banks. That explains why foreign banks in Vietnam are not considered very successful though they have been here for at least 25 years.