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Increase in cash flow
Capital mobilization of the banking system until 25 August only grew by 4.44% compared to the end of 2020, while credit in the economy grew by 7.06%. There were low deposits, and high loans, but unlike before, commercial banks are not in a hurry to increase input interest rates to attract capital, but even reduce interest rates slightly.
In a recent report, Bao Viet Securities Joint Stock Company (BVSC) said that by the end of September, deposit interest rates continued to maintain the downward trend from previous months. In this, the average deposit interest rates in September decreased for a six-month term from 0.03% to 4.71%, and for a twelve-month term from 0.002% to 5.561%.
On the surface, low capital mobilization is explained as meeting reduced interest rates of the State Bank of Vietnam. Moreover, the current credit growth rate is still very slow due to the negative impact of the Covid-19 pandemic on production and business activities, causing a decrease in the demand for loans by enterprises. The credit growth of the economy reached 7.42%, although significantly higher than 5.48% in the same period last year, but if calculated from 25 August to now, credit only increased by 0.32%.
When businesses reopen for production again, the State Bank of Vietnam says it may consider increasing the credit limit for commercial banks, so as to stimulate the economy. It can be confirmed that liquidity in the current system is quite abundant through inter-bank interest rates that have remained at a low level. Recent evidence shows that the State Bank of Vietnam offered bids on the open market, but no banks actual bid. However, the main factor that banks are still confident about is the huge amount of money continuing to flow into banks through issue of bonds.
According to the Vietnam Bond Market Association (VBMA), based on data published until 30 September 2021, by the Hanoi Stock Exchange (HNX) and the State Securities Commission (SSC), there were a total of 42 bond issuances in September in the form of private placement with a total issuance value of VND 29,734 bn.
In this, the banking group led in terms of issuance volume, accounting for 47% of the total issuance value, with VND 13,860 bn. Banks with large issuance volume include BIDV with VND 3,240 bn, OCB with VND 2,000 bn, and Vietinbank with VND 2,050 bn. In the first nine months of the year, commercial banks took the lead with a total issuance value of VND 132,300 bn. Previously, in 2020, the banking group issued bonds worth VND 138,916 bn, up 11.2% compared to 2019, accounting for 31.7% of the total volume of corporate bonds issued, and the largest issuers in the market.
Securities companies prefer bonds
Commercial banks actively issuing bonds can be considered as throwing arrows to hit at many targets. First, the State Bank of Vietnam allows maintaining the ratio of using short-term capital for medium and long-term loans at 40% until the end of September 2021. From 1 October 2021 until 30 September 2022, this rate will decrease to 37%. From 1 October 2022, to 30 September 2023, it will be 34% and from 1 October 2023 it will be 30%. Thus, issuing bonds will help banks to meet this requirement soon, and increase long-term capital for lending in the context of the Covid pandemic, as it is difficult to mobilize capital from the people.
Second, some banks promote this channel to increase medium and long-term capital and also increase Tier 2 capital. For example, in September, there were VND 6,210 bn worth bonds issued to increase Tier 2 capital of BIDV, Vietinbank, VIB, and MB. Accumulation of last nine months shows that the banking group has issued VND 31,700 bn of bonds for the purpose of raising Tier 2 capital, accounting for 24% of the total issued value of this group.
The bond issuance report of banks shows that most of the issued bonds are bought by securities companies and domestic banks. There is an opinion that the securities companies prefer the bank bonds to diversify their investment portfolio. However, according to Dr. Nguyen Tri Hieu, a financial expert at banks and securities companies, buying a lot of bonds is not for the portfolio but for inventory to sell to individual investors. The explanation given by Dr. Hieu, is that only professional investors are entitled to buy corporate bonds as per Decree 153/2020/ND-CP of the Government.
Nonetheless, the problem of circumventing the law for individual investors to become professional investors is very easy. According to regulations, an individual holding listed securities is a professional securities investor, registered for trading with a value of at least VND 2 bn as certified by a securities company. In order to obtain this, securities companies can lend to investors in the form repurchase agreements. As the law does not stipulate how long an individual investor may be a professional investor, the loan-repayment can be done in a very short time. Accordingly, securities companies that have direct contact with the bank will be effective bond distribution channels for this group for the bank to attract capital.
Normally, bank bonds have a high level of safety, so it is natural that investors are interested in buying bonds, instead of just pouring money into stocks. However, before the phenomenon of banks buying bonds from each other, there are also many warnings. Speaking to Saigon Investment, an economic expert said that the fact that one bank buys bonds from another bank can be considered a form of increasing technical capital through bond cross-investment. The bank buying bonds will have a diversified investment portfolio, but if buying long-term bonds over five years in form of convertible bonds or secondary debt, the issuing bank will be counted in Tier 2 capital.
In fact, they are not allowed to do so, because long-term capital must be real. As for the issue of this bank, the acquisition of another bank can be a form of exchanging with each other the same amount of money, through buying and selling around, which can increase virtual Tier 2 capital. This particular economic expert also believes that the State Bank of Vietnam should further examine this issue. If it happens, it is necessary to take strong measures, because the increase of technical capital is not beneficial to the economy. The numbers are shown on the books, but the actual cash flow has not changed much.
