Risks contained in investment in corporate bonds

In the first eight months of this year, it is estimated that the total amount of corporate bonds being offered was more than VND129 trillion and successful issuance rate was 90.8 percent, or nearly VND118 trillion. Of which, banks issued more than VND56 trillion worth of bonds, accounting for nearly half of total value of issued bonds in the market.
There were 12 commercial banks having had successfully issued bonds with a rate of up to 99.6 percent, or VND56 trillion in the first eight months of this year. Particularly, 11 banks issued successfully 100 percent, only Seabank failed to sell out two lots. Among these banks, five banks, which had the highest amount of bonds issued, accounting for more than 80 percent of total bond value, included VPBank with VND13.86 trillion, of which there were US$300 million worth of international bonds, HDBank with VND11.6 trillion, ACB with VND7.85 trillion,VIB with VND6.45 trillion and LienVietPost Bank with VND6.1 trillion. Most of bonds of commercial banks have terms of  2-3 years with interest rates at 6.5-7.3 percent per annum.

Noticeably, up to 40 percent of bonds issued by banks was bought by securities companies. However, according to SSI Securities Company, the amount of bonds bought by securities companies was much higher than their capital scales. Securities companies themselves have also had to issue bonds to mobilize capital so it is possible that securities companies are intermediaries. Moreover, because average interest rate was at 6.72 percent per annum, just same as mobilizing interest rates of large commercial banks, the group with lowest interest rate, bonds of commercial banks are mostly not attractive to regular investors. Buyers are mostly securities companies under banks so there is high possibility that securities companies bought bonds on behalf of banks.

Financial statements of 18 commercial banks in the market showed that in the first half of this year, the amount of bonds of credit institutions held by commercial banks increased by around VND56 trillion. Therefore, commercial banks might cross own each other. The purpose is to increase mobilization source and raise the proportion of medium and long term capital so as to meet the order of the State Bank of Vietnam to reduce the proportion of short-term capital in medium and long-term loans.

With strong financial potential, commercial banks have been playing the role of the largest investor in the bond market. Not only owning bonds of other banks, commercial banks also invested in bonds of economic organizations in order to diversify investment forms as well as disburse capital for enterprises. According to the semi-annual reports of 12 commercial banks listed on the market, by the end of June, the total securities outstanding, including corporate bonds held by banks, was more than VND178 trillion, up 2 percent over the end of last year. Some commercial banks tended to invest in bonds of strong economic organizations, such as bond outstanding of MBBank increased by nearly 79 percent compared to the end of last year and that of TBBank rose by more than 25 percent. Banks with largest investment proportion in corporate bonds include Techcombank with VND60.7 trillion and MBBank with VND15.6 trillion. Many bonds bought by these banks were issued by real estate and construction enterprises.

Statistics also showed that among a worth of VND36.876 trillion of real estate bonds being issued in the market in the past six months, banks have bought more than 20 percent. Expanding investment quickly through purchasing corporate bonds of real estate companies will contain many risks as this business model has high demand for capital and growth is slowing down.

A financial experts said that the fact that banks hold corporate bonds has been occurring for years. This is expected to be the way to solve the question of capital of enterprises which reached maximum loan amount. Especially, if the balance of investment in construction and real estate bonds of banks is high while this market has not recovered stably, risks always exist. Therefore, it is necessary to review and control banks which invested in corporate banks.

In fact, in comparison with lending money, buying corporate bonds will help commercial banks to be more flexible as they can sell a part of their bonds to organizations, investment funds and individual customers when they need to adjust their assets on the balance sheets. However, some banks also used corporate bonds, through complicated financial transactions to restructure debts of the issuers or for other purposes. Amid the situation, the State Bank of Vietnam recently ordered commercial bank to strengthen control on corporate bond investment activities and said that it will strictly fine violations so as to reduce potential risks.

Among nearly VND129 trillion worth of corporate bonds offered, bonds issued by banks accounted for 45 percent, real estate 24 percent, tourism and entertainment 10.4 percent, construction 7.5 percent and securities companies 3.9 percent. However, many tourism companies issued bonds to invest in resort real estate.

By Nhung Nguyen – Translated by Thuy Doan

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