Banks take bond path to liquidity, capital enhancement

Tuesday, Jul 12, 2016 15:36

Many banks have opted to issuing long –term bonds to improve their equity to increase their chartered capital amid the difficult economic situation. — Photo

HCM CITY — At its annual general meeting in 2016, the National Citizen Bank (NCB) approved a plan to increase its chartered capital by issuing bonds worth VND1 trillion (US$44.44 million) with covered warrants. The bonds will have a three year tenor and a coupon rate of 9.5 per cent.

Covered warrants are issued by financial institutions rather than companies, so no new stock is issued when covered warrants are exercised. Rather, the warrants are "covered" in that the issuing institution already owns the underlying shares or can somehow acquire them.

Recently Asia Commercial Bank also announced plans to issue VND2 trillion (US$88.88 million) worth of bonds for a tenor of five years and floating interest rates matching Vietcombank’s interest rate for 12 month dong deposits.   

Vietcombank itself has already outlined a plan to issue bonds together with a private placement of shares to foreign investors.

Market observers said in recent years many banks have opted to issuing long –term bonds to improve their equity to increase their chartered capital amid the difficult economic situation.

The banking sector has also been facing other risks, with many lenders having to struggle with bad debts.

As a result, many lenders find it difficult to persuade people to buy their shares, especially after the central bank prohibited cross ownership by banks.

Their problems are compounded by the fact that the major shareholders of many banks are state owned firms, who have been ordered by the Government to sell off their stakes to focus on their core businesses.   

Analysts said in this scenario the lenders would benefit by issuing bonds since it would prevent their shares from being diluted.

Bond issuance would also help the banks increase their tier 2 capital, or even tier 1 capital in future if they are convertible or bonds with warrants. 

Increasing their core capital would help the banks expand their business without following foul of the Basel Norms that mandate the capital adequacy ratio for lenders globally.

Another obvious benefit is that the banks can retain the amount raised from a bond issue for a fixed period unlike any deposit and at interest rates not much higher than on deposits.

Most banks now offer interest rates of 6.5 7.5 per cent for 12 month deposits, while bonds usually carry a coupon rate of 8.5 9.5 per cent for terms of three to five years.

But the nature of bond investors has changed somewhat in the last few years.

In the past those who bought banks’ bonds were mainly other banks who wanted to help each other increase their assets and capital. So this was contrived and quite risky.                 

But now the buyers are more diverse, and likely include domestic and foreign individuals and organisations.

Foreign currency loans have few takers

According to a report from the State Bank of Viet Nam’s Credit Department, bank loans grew by 6.82 per cent as of late June, slightly higher than the 6.37 per cent a year earlier.

Lending in dong increased by 8.11 per cent and accounted for 90.8 per cent of total loans. Loans in foreign currencies declined by 4.64 per cent.

Many analysts blamed the slowdown in foreign currency credit growth on exchange rate risks and low demand.

In a circular last year the central bank ordered banks – both local and foreign to limit foreign currency loans except to importers and businesses with overseas investment, as it sought to tighten dollar credit to prevent dollarization of the economy.

However, two months later, vide another circular, it allowed lenders to resume lending dollars to exporters until the end of this year.

Many businesses are reluctant to borrow in dollars since they are afraid the greenback could appreciate since it is a safe haven and there are many political and social upheavals occurring around the world which could send all investors scurrying back to the dollar for safety.

In recent months demand for foreign currencies has generally been on the decline, with the central bank buying US$8 billion worth of forex during the period.

Analysts attributed this to the fact that the country’s imports declined by 0.5 per cent this year while exporters were cut off from foreign currency loans for two months by the SBV circular.

In the past many enterprises preferred to borrow in dollars since the interest rates were much lower than on dong loans.

But they no longer want to do so because the gap between the interest rates is not large while exchange rate risks are very high. 

Many banks have gradually eased back on foreign currency loans and switched instead to buying and selling since the central bank’s ban on lending in other currencies will return by yearend.

To recompense, they are trying to sell foreign currency products with flexible terms to meet customers’ demands and encourage them to shift from borrowing foreign exchange to selling and buying it.   

But analysts expected foreign currency credit growth to improve at the end of the year since exports and imports usually spike during that period.

The exchange rate will still no doubt play a big role in enterprises’ decision to borrow in foreign currencies: they might buy if there is volatility and borrow if things are steady.

Another major factor in the decision will be inflation, which is threatening to rear its head again. This could again widen the gap between the interest rates on dollar and dong loans, and many firms could again want to borrow the greenback.

Ban slapped on old equipment import

Last November the Ministry of Science and Technology issued a circular on the import of used machinery and equipment.

The circular, which took effect this month, seeks to implement the Government’s goals of renovating technologies to improve the country’s competitiveness and precluding the possibility of it becoming a technological dumping ground.

It prohibits the import of equipment whose ages exceed 10 years.

But it has come under fire from critics.

Many analysts said Viet Nam’s imports of equipment and machinery, including used ones, are very high and so the ban would affect many businesses. 

According to the General Department of Viet Nam Customs, in just the first five months of this year imports of equipment, machinery and technology lines were worth US$10.59 billion, with foreign companies accounting for nearly US$5.79 billion of the imports and Vietnamese firms for the rest.

The imports are expected to keep increasing since foreign and domestic investment in Viet Nam will also increase thanks to the many free trade agreements Viet Nam has signed with other countries and territories.

Many Vietnamese enterprises are small and with shallow pockets, meaning few can afford to buy brand new machines and an overwhelming majority has to depend on import of used ones.

The HCM City Association of Mechanical Engineering Enterprises said the circular would cut imports of machinery and equipment by 99 per cent since those aged less than 10 years account for just 1 per cent of imports.

In that case, many Vietnamese firms will have to settle for low quality but cheaper Chinese machinery.

Japanese, South Korean and German machines remain very good even when they are aged over 20 years.

Experts agreed that while it was necessary to prohibit imports of used electronic equipment aged more than 10 years, it should not be applied to hi tech mechanical equipment.

They warned that if the Ministry of Industry and Trade did not scrap the regulation, the mechanical engineering industry would face difficulties, and it would have a knock on effect on many other sectors.— VNS











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