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Businesses in quandary due to credit limit

The long-term credit push to support the economy has a distorted capital flow.
Illustrative photo

Banks are issuing bonds to each other as a way to increase scale, credit, and profit, while the bonds market is receiving an onslaught of credibility issues. With a limited credit room, businesses are currently facing many uncertainties.

Cross lending 

Credit activities in the banking system are no longer running busy in 2022, even as the Government and the State Bank of Vietnam remain concerned about rising inflation. This concern is legitimate, and the Government has temporarily succeeded with a Consumer Price Index (CPI) figure that shows an increase of 2.73 percent for the nine months of 2022. However, the control on credit, including corporate bonds, has put the economy and the real estate businesses on shaky ground, with both seeking better suggestions.

Looking back at data from 2019 up until now, from the financial statements of 25 banks, excluding Agribank, it can be said that the average credit growth per year has been more than 15.4 percent. If only credit is counted alone then the increase is 14.8 percent (Table 1). This is to say that the share of bank bonds held by credit institutions and economic organizations, excluding government bonds, only contribute to this increase by 0.8 percent.

Looking at this data to compare with the economic growth, we see that there is an excess of money compared to the real demand in the economy. If the credit value of Agribank is included in the credit of the above-mentioned 25 commercial banks, this credit value is greater than the income generated by the economy. This is the reason why the demand for the price of assets such as real estate is increasing continuously. However, it is strange that the banks supporting economic organizations only increased by an average of 9.0 percent. While the increase was 22.8 percent when including the level of debt securities invested in other credit institutions and economic organizations. This is to say there is a large amount of bonds issued from one bank held by another bank (Table 2).

In the third quarter of 2022, according to reports from the above-mentioned 25 commercial banks, the value of bonds issued by banks and held by other banks is up to VND 567,400 bln (Table 1). It is the bonds factor that has helped banks to issue a large amount of value up to hundreds of thousands of billion dong, which is held by various banks.

Therefore, the injecting of money to lower interest rates, supporting the economy to overcome the Covid crisis, or recovery after the pandemic, only creates opportunities for commercial banks to transfer money to each other through corporate bonds without seemingly violating any regulations. This activity is like one bank depositing money into another bank through an inter-banking system. One bank entrusts through an intermediary of a fund management company or an individual to send money to another bank, as happened more than a decade ago in the case of ‘election of Kiên, Huyền Như’, thereby helping the bank achieve its goals of total asset growth, credit growth, and outstanding profit, even tying the economy to this interlaced system.

Therefore, when the corporate bonds market is focused on management in 2022, commercial banks immediately lack tools to reverse previously issued bonds. A lack of systemic liquidity will occur because it is forced to reduce bond holdings and self-deals.

Corporate bonds market 

Until now, much attention has been focused on the corporate bonds market, and real estate companies are considered criminals. But one needs to see how big the actual size of this market is. According to data collected from Fiinpro and extracted on October 12, 2022, the size of the bonds market in the period between 2019 to 2022, and the total value of bonds issued by businesses, financial institutions, and banks was worth VND 1,158,975,000 bln, equivalent to USD 48 bln. The value of corporate bonds issued by businesses other than financial institutions is worth VND 536,446,000 bln, accounting for 46.3 percent of the total value of bonds. This is to say that 53.7 percent was issued by financial institutions, including banks and securities companies.

As analyzed above, bonds issued by financial institutions are held by the 25 commercial banks listed above with a value of up to VND 567,400 bln, nearly 49 percent of the value of bonds issued. Of the value of bonds issued by credit institutions and businesses, the above mentioned 25 banks held VND 818,600 bln at the end of the second quarter of 2022 or VND 829,600 bln at the end of the third quarter of 2022. This is to say that only VND 277,700 bln to VND 262,200 bln was from issuers. Therefore, the banking system has held up to 71.5 percent of the value of corporate bonds issued. Based on actual data, only VND 84,000 bln of bonds are maturing in 2022, VND 121,200 bln in 2023, and VND 115.08 bln in 2024.

Growth of securities companies

Currently, the Vietnam stock market has nearly 100 securities companies holding large capital amounts. Data from 64 securities companies’ financial statements shows that the main activities of securities companies is lending from resources and pledging shares to investors (Table 4). Proprietary activities account for a small portion of the total capital of securities companies. Recently, many banks have also joined the acquisition and increased capital of securities companies many times. VPBank acquired ASC Securities and quickly increased its charter capital to nearly VND 9,000 bln, with a roadmap to increase capital to VND 20,000 bln. KS Securities also joined the Kien Long banking ecosystem, and Global Mind Capital Securities joined the International Bank (VIB) ecosystem to increase their charter capital.

According to the provisions of Article 103 of the Law on Credit Institutions, banks must establish subsidiaries to participate in activities of underwriting securities; brokerage; managing and distributing securities investment fund certificates; and manage securities portfolios and buy and sell stocks. According to Resolution 86/NQ-CP on capital market development, the stock market capitalization is set to reach 100% of GDP, and the outstanding debt in the bond market is at least 47 percent of GDP, of which the outstanding debt of corporate bonds is at least 20 percent of GDP.

GDP in 2022 is expected to reach USD 394.5 bln. If the goal is to maintain economic growth of 6 percent per year, from now until 2025, GDP is expected to reach USD 470 bln. The stock market currently has a market capitalization of less than USD 250 bln, which means that it requires the capitalization to increase by about USD 220 bln over the next three years. Similarly, the corporate bonds market accounts for 20 percent of GDP, with the value also estimated at USD 93 bln.

To achieve this goal, the Government needs to promote credit, and one of the ways to quickly increase the credit limit will be the corporate bonds tool as described earlier, meaning that banks will race to issue bonds and hold onto each other. At the same time, the bank ownership of securities companies will help to carry out bonds issuance services, irrigate the bank ecosystem, provide margin lending, pledge shares of major shareholders, and try and catch up with trends.

The disclosure of the stock market today shows that many large shareholders in joint stock companies have pledged their shares in the securities companies. In fact, Saigon Investment has written about the number of shares, and the problem that businesses have raised capital from the market for business development. Therefore, if the size of the bonds market is issued by enterprises, then enterprises will be able to solve their own debts when their debts mature with support from securities companies through the number of shares owned by major shareholders. However, many factors have come together now that are causing major shareholders to lose tens of billions of dollars in equity value to secure future debts.

Source: SGGP/ Saigon Investment

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