The financial statements of the 3rd Quarter 2019 of all banks showed better results than in the same period last year, with a higher growth rate. Simultaneously, the State Bank report presented before the 8th National Assembly Session on bad debt ratio plummeted to 1.98%, including the bad debts sold to the Asset Management Company of Vietnam’s credit institutions (VAMC) at only 4.84%, lower than 7.36% in 2017 and 5.85% in 2018. So do these figures reflect the current bad debt scenario?
Tricks to deposits and guarantees of banks
At the end of 2018, the Government issued Decree No. 163/2018/ND-CP on corporate bond issuance. This regulation paved the way for enterprises to mobilize a new capital channel. This led to a boom in corporate bond issuance in 2019, especially when the Government directed restrictions in the flow of loans into the real estate market in lending activities by commercial banks.
According to SSI Retail Research, up until now, there are 44 real estate enterprises that have issued corporate bonds with 139 releases, with issuance value upto VND 47,800 bn, with successful issuance rate of 77.3%, lower than other enterprises groups. Does success come to enterprises, especially real estate enterprises, when issuing bonds to raise capital?
From the perspective of capital, an important factor to decide the success of corporate bond issuance is the bank's hand. The bank's hand is not the buyer of this bond, but is the distributor and underwriter, even for payment guarantees of corporate bond batches. We summarize this operation with a brief description as follows:
Those who are depositing savings into the bank will receive advice from the bank staff that instead of depositing savings in the bank with a savings interest rate of 7%/year, customers have 2 options: either withdraw deposits to buy corporate bonds (at interest rate of 10%) guaranteed by the bank itself with the interest rate equal to the interest rate of deposits (7%); or customers can mortgage a deposit savings book to get a bank loan (at 9% interest) to buy corporate bonds (at 11% interest rate) guaranteed by the bank.
With the second form, the bank will benefit in both deposit targets and credit growth. Depositors also achieve deposit rates and the difference between bond interest rates and borrowing rates. But both forms push the banking system into the same nature, but not in the control of the State Bank. Activities from this operation are separated from the balance sheet, instead of banks directly lending to real estate enterprises from customer deposit. Through this form, statistics sent to the State Bank under Circular 02 do not reflect the true nature, that is the reason for the State Bank report when it mentioned bad debt on-balance sheet.
Off-balance sheet commitments and potential risks
The bank's credit activity not only reflect on customer credit or bond holding investment until maturity, but are also related to off-balance sheet commitments. These commitments include loan guarantees, L/C commitments, other guarantees, and other commitments. It is worth mentioning that the value of these off-balance sheet commitments and guarantees of many banks is higher than the credit that banks lend to customers.
These are potential debts with higher risks than the strictly regulated credits from the State Bank. However, it is rarely mentioned in the bad debt reports of the banking system. Currently, the fact that the quality of debt arising from these commitments and guarantee activities has not been explained in the notes to the financial statements, as well as statistics and analysis from the state management agencies.
Looking at the items of off-balance sheet reports, in addition to the "other guarantee" operations, other committed items account for a fairly large value in some banks such as: VPBank has the item "other commitments" on the total off-balance sheet commitments up to VND 111,622/204,413 bn; TCB with VND 194,824/43,202 bn.
Here, we refer to the content of the operation, which is recorded by the bank in off-balance sheet accounts under "other guarantees", as a payment guarantee for an enterprise issuing corporate bonds. If an enterprise borrows capital directly from a bank, it must comply with very strict regulations on credit activities, and when an enterprise does not pay the debts in time, the bank will have to move to the debt group and make provisions. Meanwhile, the payment guarantees for an enterprise issuing corporate bonds is not necessary to comply with the provisions of credit activities, and when an enterprise does not pay the debt in time for the guaranteed corporate bond buyer, the bank will not reflect the debt quality of the debtor issuing corporate bond, unless the Court has declared a liability to pay from the guarantee bank for corporate bond buyers.
Looking at the statistics table (value of the "other guarantees" of the bank) of some commercial banks, other guarantee commitments are worth up to tens of trillion dong, even increasing compared to the value at the beginning of the year. This has proven the proliferation of corporate bond issuance in earlier times, as well as when the corporate bond market has grown. Should the State Bank monitor and report this information to supervisory agencies to accurately assess the bad debt picture of the banking system?
Financial statements of 3rd Quarter 2019 of some listed real estate companies on the stock market with long-term corporate bond issuance debt. (* figures are from 2nd Quarter 2019 financial statements):
| Stock code-listed company | Outstanding long-term corporate bonds (VND bn) |
| VIC | 13.524* |
| NVL | 7.926* |
| KDH | 224* |
| DXG | 2.101 |
| PDR | 757 |
Value of "other guarantees" of banks (* report from 2nd Quarter 2019)
| Bank | Beginning of 2019 (VND bn) | 30 Sept. 2019 (VND bn) |
| STB | 6.932 | 8.151 |
| ACB | 2.651 | 3.051 |
| HDB | 3.337 | 3.309 * |
| TCB | 19.043 | 23.075 * |
| VPB | 13.860 | 16.848 |
| VIB | 6.173 | 5.506 |
| MBB | 71.203 | 70.318 |
| EIB | 3.081 | 5.270 * |
Translated by Minh Châu
