A VietinBank transaction office in Hanoi. Photo: VNAHanoi (VNS/VNA) – As many banks have been stepping upbond redemption before maturity, experts warned that the activity can affectthe banks’ ability to supply capital for the economy and boost credit growth inthe remaining months of this year.
According to the latest bond market report of the second quarterof 2023 issued recently by VNDirect Securities, the buybacks of corporate bond debtincreased again and a large amount of bonds were repurchased by banks beforematurity.
Specifically, in the second quarter of 2023, nearly 62.54 trillionVND of bonds were bought back in advance, up 76.8% compared to the firstquarter of 2023 and 4.9% over the same period last year. In which, banks boughtback 63.7% of the total value, equivalent to 39.84 trillion VND.
Data from the Vietnam Bond Market Association (VBMA) also showedbanks bought back more than 17 trillion VND worth of bonds in May alone,accounting for 66% of the total value of bonds bought back, at nearly 25.6trillion VND.
Most of the bonds repurchased before maturity by banks came with a long term ofthree years and fall due in 2024 or 2025.
VNDirect's analysts said the main motivation for banks to buy back bonds beforematurity was low credit demand, sharply dropping deposit interest rates andabundant liquidity of the banking system in the first months of this year.
With credit growing by a modest 3.13% as of June 20 this year, the lowest levelin the past ten years, banks found themselves sitting on mountains of cash. Inan attempt to reduce capital redundancy and optimise capital efficiency, bankshad little choice but to buy back bonds. As the demand for loans in the economyremained woefully low, banks used their excess money to step up bond buybacks.
The buybacks of bonds that have yet to fall due was seen as a suitable strategyin the first months of this year. However, for the remaining months of thisyear, experts are concerned that the buybacks of long-term bonds, if continued,will adversely affect the banks’ ability to supply capital for production andbusiness, and boost their lending.
Experts explained that many forecasts show credit demand will be stronger inthe second half of this year due to the recovery of the economy. Bankstherefore need to have enough capital to meet loan demands of firms andindividuals.
Notably, according to Dr. Phung Thai Minh Trang, head of the Hoa SenUniversity’s Finance and Banking Faculty, when lending, banks must ensure theratio of short-term capital, which is allowed to use for medium and long-termloans, as regulated by the State Bank of Vietnam (SBV). Meanwhile, according toa new SBV regulation, from October 1 this year, the ratio will be reducedfrom 34% to 30%.
The strengthening of long-term bond buybacks before maturity of banks canreduce their medium- and long-term capital, which will cause the ratio ofshort-term capital used for medium- and long-term loans to increase and fail tomeet the SBV’s regulation. Banks, therefore, will have to reduce their lending.
For the above reasons, Trang said, credit growth may be affected by the banks’bond buybacks.
However, Trang expected the adverse impacts of the bond buybacks could bereduced thanks to the rising value of savings at banks. According to the SBV’sdata, since the beginning of the year, the value of deposits raised by banksreached more than 12.69 quadrillion VND, some 268 trillion VND higher thanoutstanding loans. The rise of savings has helped the deposit growth rate togradually catch up with the credit growth rate.
In addition, Trang said, about 88% of deposits in the banking system have shortterms of less than 12 months. Therefore, the recovery of this capital indicatorcan also help to reduce the impact of the bond buybacks.
Although the short-term capital ratio used for medium- and long-term loans atbanks is expected not to change much, Trang recommended that banks themselvesshould prepare measures to ensure the harmony between safety and profit goalswhen the SBV’s new regulation, which is aimed to minimise liquidity risks forbanks, takes effect from October 2023.
In April this year, the SBV issued Circular 03/2023/TT-NHNN to suspend theimplementation of Clause 11, Article 4, Circular 16/2021/TT-NHNN, whichpertains to the purchase and sale of corporate bonds by local banks and foreignbank branches.
During Circular 03’s validity from April 24 to December 31 this year, banks canbuy back the unlisted corporate bonds they previously sold, subject to specificconditions outlined in the circular. They can also repurchase their own bondsif all conditions are met and an agreement with bondholders is reached, orthere is a provision for buyback in earlier regulations.
Despite the difficulties faced by the corporate bond market, certainbanks still plan to raise capital through this market. For example, Vietcombankrecently approved plans to issue bonds to the public in two batches with atotal value of 9 trillion VND. As banks have continued to exhibit consistentperformance, investors are confident in purchasing their bonds, which offerhigher interest than savings accounts./.
According to the latest bond market report of the second quarterof 2023 issued recently by VNDirect Securities, the buybacks of corporate bond debtincreased again and a large amount of bonds were repurchased by banks beforematurity.
Specifically, in the second quarter of 2023, nearly 62.54 trillionVND of bonds were bought back in advance, up 76.8% compared to the firstquarter of 2023 and 4.9% over the same period last year. In which, banks boughtback 63.7% of the total value, equivalent to 39.84 trillion VND.
Data from the Vietnam Bond Market Association (VBMA) also showedbanks bought back more than 17 trillion VND worth of bonds in May alone,accounting for 66% of the total value of bonds bought back, at nearly 25.6trillion VND.
Most of the bonds repurchased before maturity by banks came with a long term ofthree years and fall due in 2024 or 2025.
VNDirect's analysts said the main motivation for banks to buy back bonds beforematurity was low credit demand, sharply dropping deposit interest rates andabundant liquidity of the banking system in the first months of this year.
With credit growing by a modest 3.13% as of June 20 this year, the lowest levelin the past ten years, banks found themselves sitting on mountains of cash. Inan attempt to reduce capital redundancy and optimise capital efficiency, bankshad little choice but to buy back bonds. As the demand for loans in the economyremained woefully low, banks used their excess money to step up bond buybacks.
The buybacks of bonds that have yet to fall due was seen as a suitable strategyin the first months of this year. However, for the remaining months of thisyear, experts are concerned that the buybacks of long-term bonds, if continued,will adversely affect the banks’ ability to supply capital for production andbusiness, and boost their lending.
Experts explained that many forecasts show credit demand will be stronger inthe second half of this year due to the recovery of the economy. Bankstherefore need to have enough capital to meet loan demands of firms andindividuals.
Notably, according to Dr. Phung Thai Minh Trang, head of the Hoa SenUniversity’s Finance and Banking Faculty, when lending, banks must ensure theratio of short-term capital, which is allowed to use for medium and long-termloans, as regulated by the State Bank of Vietnam (SBV). Meanwhile, according toa new SBV regulation, from October 1 this year, the ratio will be reducedfrom 34% to 30%.
The strengthening of long-term bond buybacks before maturity of banks canreduce their medium- and long-term capital, which will cause the ratio ofshort-term capital used for medium- and long-term loans to increase and fail tomeet the SBV’s regulation. Banks, therefore, will have to reduce their lending.
For the above reasons, Trang said, credit growth may be affected by the banks’bond buybacks.
However, Trang expected the adverse impacts of the bond buybacks could bereduced thanks to the rising value of savings at banks. According to the SBV’sdata, since the beginning of the year, the value of deposits raised by banksreached more than 12.69 quadrillion VND, some 268 trillion VND higher thanoutstanding loans. The rise of savings has helped the deposit growth rate togradually catch up with the credit growth rate.
In addition, Trang said, about 88% of deposits in the banking system have shortterms of less than 12 months. Therefore, the recovery of this capital indicatorcan also help to reduce the impact of the bond buybacks.
Although the short-term capital ratio used for medium- and long-term loans atbanks is expected not to change much, Trang recommended that banks themselvesshould prepare measures to ensure the harmony between safety and profit goalswhen the SBV’s new regulation, which is aimed to minimise liquidity risks forbanks, takes effect from October 2023.
In April this year, the SBV issued Circular 03/2023/TT-NHNN to suspend theimplementation of Clause 11, Article 4, Circular 16/2021/TT-NHNN, whichpertains to the purchase and sale of corporate bonds by local banks and foreignbank branches.
During Circular 03’s validity from April 24 to December 31 this year, banks canbuy back the unlisted corporate bonds they previously sold, subject to specificconditions outlined in the circular. They can also repurchase their own bondsif all conditions are met and an agreement with bondholders is reached, orthere is a provision for buyback in earlier regulations.
Despite the difficulties faced by the corporate bond market, certainbanks still plan to raise capital through this market. For example, Vietcombankrecently approved plans to issue bonds to the public in two batches with atotal value of 9 trillion VND. As banks have continued to exhibit consistentperformance, investors are confident in purchasing their bonds, which offerhigher interest than savings accounts./.
VNA
