The government has now taken steps to tighten control under Circular 16/2021/TT-NHNN on the purchase and sale of corporate bonds by credit institutions and branches of foreign banks, which will be effective from January 15, 2022. It remains to be seen whether this regulation will help to tighten banks’ investment in corporate bonds in the near future.
Main bank buyers
The corporate bond market was established in 2000, but in 2011, when Decree 90/2011/ND-CP on the issuance of corporate bonds entered into force, this market had only just begun to develop . In 2018, the corporate bond market showed clear growth. In 2018, the size of the corporate bond market increased by around 53% compared to 2017 and 32 times compared to 2011.
This growth has been unstoppable so far. The growth of the corporate bond market has increased expectations that the bond channel will replace the credit channel, reducing the pressure on medium and long-term capital for banks. However, the sudden development of corporate bonds is currently causing a lot of concern. According to statistics, in 2020 the value of corporate bonds issued reached a record high of VND 429.5 trillion, up 28.3% from 2019.
According to a new report released by the Vietnam Bond Market Association (VBMA), in 2021 there will be a total of 964 corporate bond issues with a total value of VND595 trillion, including 937 individual corporate bond issues. a total value of VND. 570 trillion, representing 95.8% of the issue value. The figure above shows that corporate bonds still rose strongly in 2021 despite a series of decrees and circulars issued in 2020 in an attempt to cool the corporate bond market.
When the trend of raising capital shifts to the corporate bond market, banks are also not on the outside with high raising rankings in the market. In 2021, the commercial banking group overtook the real estate group, leading in issue value with a total volume of VND 223.010 billion. Banks not only issue corporate bonds but also become brokers providing technical support, underwriting and distribution to bond issuers, as well as one of the major buyers in the corporate bond market.
In the “Corporate Bond Market” report published by SSI Securities in November 2021, it was stated that banks and securities companies represented a high share of buyers after the entry into force of Decree 153/2020/ND-CP. Thus, nearly 60% of corporate bonds issued are held by banks and securities companies. Specifically, banks bought VND124.4 trillion, or 27.3%, and securities companies bought VND148.4 trillion, or 32.6%.
Therefore, commercial banks not only play a key role in the credit channel, but also actively participate in the corporate bond channel, while the overall goal of developing this market is to get rid of the burden of capital in the medium and long term for themselves. This is unreasonable and distorts the market. When they join this channel, banks tend to pump more and more capital into corporate bonds as regulators tighten lending activity in risky areas. At the same time, through this source, the banks inject capital into each other to ensure capital adequacy ratios such as for the CAR, the short-term capital ratio for medium and long-term loans according to Basel II.
Leave on the banks
The regulations will force banks to buy corporate bonds in order to limit the inflow of bank capital into the real estate sector through this channel. Although real estate companies do not publicize their buyers, with a high market share of holding corporate bonds of the bank as well as securities companies under the bank, it shows that the bank’s money who flocks to this area is not weak. The Ministry of Finance said that although corporate bonds are privately issued, the collateral ratio is high and the quality of collateral is mainly projects, assets formed in the future or shares. of companies. At the same time, some real estate companies recorded a loss. This is a potential risk with unpredictable consequences.
The second objective of this circular would aim to prevent banks from buying bonds from each other. According to many banks’ announcement, most of the trillion-dong issues were acquired by other credit institutions or securities companies related to other credit institutions. By the end of 2021, the government has instructed the Ministry of Finance to inspect and supervise compliance with the law on the issuance and use of capital obtained from the issuance of bonds, in particular bonds. individual obligations of real estate companies. Credit institutions are linked to real estate companies; companies with large issue volumes with high interest rates; companies with loss-making business results; and corporate issuers without collateral.
Therefore, in the near future with new regulations, the corporate bond buying activities of banks may be enhanced. According to the new regulations, banks are not allowed to buy corporate bonds issued for the purpose of debt restructuring, capital contribution to buy shares and capital increase. However, with the exception of a few banks announcing the issuance of bonds to increase Tier 2 capital, the remaining issuers rarely announce this objective when issuing bonds. There have been many comments that banks have rushed to buy corporate bonds in the past, not excluding the purpose of debt cancellation and corporate debt restructuring, but it is still hard to prove. Therefore, such regulation may fail to control the purpose of issuing corporate bonds.