The Race to Launch Bonds
The Hanoi Stock Exchange (HNX) recently reported on bond transactions at Bac A Bank. The bank successfully issued VND 500 billion of 3-year bonds with an interest rate of 5.2% per year. This marks the third bond issuance by the bank this year. Previously, Bac A Bank issued VND 1,000 billion on April 25 and VND 500 billion on May 15, with interest rates of 4.8% and 5.1% per year, respectively.
MSB also issued VND 1,000 billion, completing the process on May 16, with a 3-year term and a fixed interest rate of 3.9% per year. Earlier, the bank issued VND 2,800 billion with the same interest rate on April 16. At the beginning of the year, Vietbank issued bonds to the public in the third phase, amounting to VND 1,000 billion for a 7-year term with a floating interest rate calculated as the reference interest rate plus a margin of 2.5% for the first 5 years and 3.5% for the last 2 years.
On May 10, Techcombank issued VND 1,500 billion of 3-year bonds at an interest rate of 4.8% per year. On the same day, BIDV also successfully issued VND 950 billion with a 7-year term and a floating interest rate of 5.78% per year. In mid-May 2024, BIDV's Board of Directors approved a plan to issue bonds to increase private capital in 2024, with phase 1 issuing VND 8,000 billion and phase 2 issuing up to VND 6,000 billion.
Previously, FiinRatings reported in their Corporate Bond Market Update for April 2024 that banks, along with the real estate sector, have significantly increased capital mobilization through the bond channel. These two sectors accounted for 56% and 43% of the total issuance value in April, respectively. Notably, Techcombank issued bonds worth VND 3,000 billion with a 3-year term at a 3.7% interest rate, and MB issued 6 lots of bonds worth VND 2,000 billion with terms over 5 years and interest rates between 6.2% and 6.8% per year.
Effective Capital Channel?
Banks have increased bond issuance to supplement medium and long-term capital sources, as regulations on the ratio of short-term capital for medium and long-term loans have tightened, necessitating a balance of capital sources to prepare for credit growth this year.
Statistics from the State Bank of Vietnam show that as of February 29, 2024, the ratio of short-term capital for medium and long-term loans for state-owned commercial banks was 23.61%. However, this ratio for commercial banks was up to 40.14%. Meanwhile, Circular No. 08/2020/TT-NHNN stipulates that from October 1, 2023, the maximum ratio for banks will be 30%. Thus, the pressure to reduce this ratio is significant for joint-stock commercial banks, especially in the context of more attractive investment channels than deposits and bonds.
In April, some banks actively repurchased bonds that were nearing maturity rather than waiting for them to mature. The total value of bonds repurchased before maturity reached VND 10,400 billion, a 7.2% increase compared to March, with bank bonds accounting for 95%. Analysts suggest that repurchasing maturing bonds and issuing new ones is a strategy for banks to quickly restructure their medium and long-term capital sources. Additionally, banks are promoting the issuance of new bonds with terms of 5 years or more to increase tier 2 capital, which is included in the capital adequacy ratio (CAR).
Tips to Increase the CAR Coefficient
Issuing long-term bonds over 5 years helps banks increase their equity capital, thereby achieving the CAR requirement. According to Circular 41/2016/TT-NHNN, the CAR is calculated as equity divided by total assets (adjusted for credit risk) multiplied by 100%, and must reach a minimum of 8%. Equity capital includes long-term bonds and equity.
To enhance equity capital and meet CAR requirements, banks issue long-term bonds and offer depositors higher interest rates than regular savings. For instance, bonds are marketed as higher-risk but higher-yield investments. Savers concerned about liquidity are assured they can resell the bonds to the bank before maturity, effectively holding a bond without a fixed term but earning term interest rates.
However, a financial expert raises concerns about this practice. If banks issue bonds that count toward tier 2 capital and then repurchase them, it raises questions about the term of the repurchased bonds, as tier 2 capital bonds must have a term of 5 years or more. If buyers resell bonds shortly after issuance, banks might still count them as long-term bonds, thus potentially exploiting a loophole in the regulations for maintaining a good CAR coefficient.
In conclusion, while banks are leveraging bond issuance to improve their CAR coefficients and bolster medium and long-term capital, careful scrutiny is necessary to ensure compliance with regulatory standards and maintain financial stability.
Beyond the immediate implications of bond issuance, the long-term impact on the banking sector's stability and growth prospects is crucial. The ongoing adjustments in capital adequacy and the strategic maneuvers by banks to align with regulatory requirements suggest a dynamic and evolving financial landscape.
As regulatory frameworks continue to tighten, banks are likely to face increased scrutiny and pressure to maintain compliance. The introduction of new regulations or the amendment of existing ones can significantly impact banks' strategies for capital mobilization and management. The State Bank of Vietnam's ongoing efforts to monitor and adjust policies will play a critical role in shaping the future of bond issuance and overall banking stability.
Investor sentiment towards bank-issued bonds is also a vital factor. The perception of risk versus reward will influence the uptake of these financial instruments. Banks must continue to build trust and transparency with investors to ensure sustained interest and confidence in their bond offerings.
The integration of technology and innovative financial solutions can further enhance the efficiency and appeal of bond issuance. Digital platforms for bond trading, blockchain-based security measures, and automated compliance tools are potential areas for growth. Banks that leverage technology effectively can gain a competitive edge and attract a broader range of investors.
In summary, the banking sector's strategy of issuing bonds to increase capital and improve CAR coefficients is multifaceted, involving regulatory compliance, market dynamics, and technological advancements. While current practices and trends indicate a proactive approach by banks to navigate the evolving financial landscape, ongoing vigilance and adaptation will be essential to maintain stability and growth. As banks continue to innovate and adjust their strategies, the interplay between regulatory requirements, market conditions, and technological advancements will shape the future trajectory of bond issuance and overall financial health.
