Regulations expected to limit growth of corporate bonds
Regulations expected to limit growth of corporate bonds
In recent publications, Saigon Investment has written about the risk concerns in the sudden growth of corporate bonds.
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The Government has now taken steps to tighten control under Circular 16/2021/TT-NHNN in the purchase and sale of corporate bonds by credit institutions and foreign bank branches, which will be effective from 15 January 2022. It is to be seen whether this regulation will help tighten bank investment in corporate bonds in the near future.
Banks main buyers
The corporate bond market was established in 2000, but by 2011 when Decree 90/2011/ND-CP on issuing corporate bonds took effect, this market had just started to develop. By 2018, the corporate bond market marked a clear growth. In 2018, the corporate bond market size increased by about 53% compared to 2017 and 32 times compared to 2011.
This growth has been unstoppable till now. The growth of the corporate bond market has increased the expectation that the bond channel will replace the credit channel, reducing the pressure on medium and long-term capital for banks. However, there are currently many concerns about the sudden development of corporate bonds. According to statistics, in 2020, the value of corporate bonds issued reached a record of VND 429,500 bn, up 28.3% compared to 2019.
As per a new report published by the Vietnam Bond Market Association (VBMA), in 2021 there will be a total of 964 corporate bond issuances with a total value of VND 595,000 bn, of which there are 937 individual issuances with a total value of VND 570,000 bn, accounting for 95.8% of the issuance value. The above figure shows that corporate bonds still increased hotly in 2021 despite a series of decrees and circulars issued in 2020 with the aim of cooling down the corporate bond market.
When the trend of capital mobilization moves to the corporate bond market, banks are also not outside with high mobilizing rankings in the market. In 2021, the commercial bank group surpassed the real estate group, leading in issuance value with a total volume of VND 223,010 bn. Banks not only issue corporate bonds but also become brokers providing technical support, underwriting, and distribution for bond issuers, as well as one of the main buyers in the corporate bond market.
In the report "Corporate Bond Market" published by SSI Securities in November 2021, it was said that banks and securities companies account for a high portion of buyers after Decree 153/2020/ND-CP came into effect. Accordingly, nearly 60% of corporate bonds issued are held by banks and securities companies. Specifically, banks bought VND 124,400 bn, accounting for 27.3%, and securities companies bought VND 148,400 bn, accounting for 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 remove the burden of medium and long-term capital for themselves. This is unreasonable and distorts the market. When joining this channel, banks tend to pour capital into corporate bonds more and more, as regulators tighten lending activities in risk areas. At the same time, through this source, banks are pouring capital into each other to ensure capital adequacy ratios such as for CAR, the ratio of short-term capital for medium and long-term loans according to Basel II.
Leash on banks
Regulations will place a leash on banks to buy corporate bonds to limit bank capital flowing 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 money from the bank flowing into this area is not small. The Ministry of Finance said that although corporate bonds are issued privately, the ratio of collateral is high and the quality of the collateral is mainly projects, assets formed in the future, or shares of enterprises. At the same time, there are real estate companies that have recorded a loss. This is a potential risk with unpredictable consequences.
The second purpose of this Circular is said to be aimed at preventing banks from buying bonds from each other. According to the announcement of many banks, most of the issuance of thousands of billion dong was acquired by other credit institutions or securities companies related to other credit institutions. By the end of 2021, the Government has requested the Ministry of Finance to inspect and supervise the compliance with the law on the issuance and use of capital obtained from the issuance of bonds, especially individual bonds of real estate enterprises. Credit institutions are related to real estate enterprises; enterprises with large issuance volumes with high-interest rates; enterprises with loss-making business results; and issuing enterprises without collateral.
Hence, in the near future with new regulations, corporate bond buying activities by banks may be tightened. 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 increasing capital. However, except for a few banks announcing the issuance of bonds to increase Tier 2 capital, the remaining issuers rarely announce this purpose 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 reversal and debt restructuring for businesses, but it is still difficult to prove it. Therefore, this regulation may not be successful in controlling the purpose of corporate bond issuance.
