Banks rushing to issue bonds

In July 2007 alone, the total value of bonds issued by commercial banks reached VND21,500bil, including the VND3tril worth of bonds issued by the Bank for Investment and Development of Vietnam (BIDV).

Banks are seemingly rushing to issue bonds at this moment, and analysts say that this is the result of the decision by the central bank in May to require higher compulsory reserve ratio on bank deposits. The decision has certainly led to the higher cost of capital mobilisation, which explains why banks have to find another way to mobilise capital. Issuing bonds proves to be a good solution, because banks do not have to make compulsory reserves for the capital raised from bond issuances as they have to do for the capital raised from bank deposits.

Commercial banks are ready to pay high interest rates for the bonds in order to attract more buyers. In the long term, the interest rates for deposits are expected to increase gradually, thus making the high interest rates banks have to pay at this moment cheaper.

Banks are rushing to issue bonds also because the issuances may help raise their total assets. Big total assets can satisfy shareholders of banks while attracting more clients.

However, the problem lies in the fact that banks are still trying to raise more funds though their usable capital remains profuse. The financial reports of several banks show that the mobilised capital has increased sharply in the last time, while outstanding loans have not increased accordingly. Last month BIDV issued VND3tril worth of bonds. Though the bank has not declared detailed figures, sources said that the buyers of the bonds were mainly other commercial banks.

Some analysts think that banks are trying to issue bonds because they want more long-term capital. Currently, the banking system is the biggest lender. The stock market is still in its first stage of development, and only few enterprises can access this capital source. Only a few enterprises have raised funds by issuing bonds, including the HCM City Infrastructure Investment (CII), which issued VND500bil worth of bonds last month with the guarantee of VIB Bank and VISecurities. There are many reasons behind the underdevelopment of the bond market, but the biggest reason, according to Dang Doan Kien, Director General of VISecurities, is that Vietnam still lacks credit rating firms, which can release credit ratings of enterprises as bond issuers.

In fact, the move by banks to issue bonds in the last time has been encouraged by the State Bank of Vietnam and the Ministry of Finance. On August 1, Deputy Prime Minister Nguyen Sinh Hung signed a document, requesting relevant ministries to join forces to control inflation. The central bank has been asked to check monetary policies, control payment instruments, and urged to use open market tools in order to limit the supply of cash. Therefore, bond issuance, which helps withdraw cash from circulation, has been backed by the central bank.

Sources said that several other banks were seeking permission to issue bonds and the proposals would be accepted.

Despite a lot of efforts, the consumer price index (CPI) jumped high in the first seven months of the year to 6.19%, higher than last year’s same period level of 4.4%. Controlling inflation is the most important task for the remaining months of the year. However, analysts have warned that it will be very difficult to obtain the goal at the same time as stabilising the exchange rate to encourage exports. International economics has the theory of the ‘impossible trinity’, which means three things cannot be obtained at the same time: free capital movement, a fixed exchange rate, and an independent monetary policy.

Source: VNE