Investment & Finance

Securities companies face risks in raising capital

Saigon Investment
(Saigon Investment) - The issuance of shares to increase capital in securities companies was much easier in previous years, even receiving the consensus of shareholders. 

Illustrative photo.

Illustrative photo.

However, the current methods of increasing capital are likely to lead to complicated consequences, not only for the securities company, but also for the market in general.

Too hot too fast

During the trading session on 15 June, the code VCI of Ban Viet Securities suddenly exceeded the milestone of VND 100,000 per share. At this price, VCI became the first securities company in the market with a market price exceeding the 3-digit mark. If we take the starting point of VND 46,100  per share at the beginning of February, VCI recorded an increase of upto 120%. The upward momentum of VCI includes two waves. The wave in May was due to the information on the second quarter business results, and the recent wave related to the news that this securities company will be issuing 166.5 million shares to increase the charter capital at the ratio of 1:1.

Previously, VNDirect Securities Company (VND) also saw increase close to the ex-rights date of 10 June, to VND 57,600 per share. At this price, VND also recorded an increase of more than 100% compared to the beginning of the year. The reason why investors scrambled to buy VCI also came from the plan to offer 214.5 million shares to existing shareholders at a ratio of 1:1, selling at VND 14,500 per share.

Saigon Securities Company (SSI), a giant in the industry, also recorded a historic peak of VND 53,000 per share in the trading session on 14 June. Similar to the above cases, SSI recorded an increase of 100% compared to the beginning of the year, with the main motivation also coming from the information on the issuance of shares. Specifically, SSI plans to issue 329 million bonus shares at a ratio of 6:2, and offer 110 million shares at VND 10,000  per share.

Raising capital

According to VND, the offer aims to increase the charter capital of VND 5,300 billion to supplement the investment in valuable papers on the market, supplement the securities underwriting activities, and supplement the issuance and distribution of covered warrants. However, the main purpose is to supplement capital for margin lending activities. This is also the main purpose that the capital doubled in the case of VCI.

Similarly, the upcoming issuance of shares to increase capital to VND 11,000 billion of SSI will help the company become the securities company with the largest charter capital, which will be double the charter capital of the securities company in second place currently, namely, Mirae Asset with VND 5,455 billion. The main purpose of SSI in the upcoming capital increase is to supplement capital for margin lending.

In the opposite direction, small securities companies also are racing to increase capital to supplement capital for margin lending, even increasing their capital from tens of billions of dong to VND 1,000 billion to meet the criteria for margin. For example, Da Nang Securities Company (DSC) plans to increase its capital from VND 60 billion to VND 1,000 billion. APG Securities Company (APG) issued shares to increase capital by more than VND 340 billion and spent VND 140 billion and 41% of the issued capital with this for margin lending.

According to analysts, the driving force for securities companies to aggressively raise capital to serve margin lending is the huge profit margin of this business segment. Income from margin lending is also a factor contributing to positive business results for securities companies in the first quarter of the year. According to statistics, 31 out of  35 listed securities companies had pre-tax profits of a total of VND 3,716 billion, up nearly 46 times compared to VND 81.4 billion achieved in the first quarter of 2020.

With the margin lending interest rate at securities companies usually around 12% to 14% per year, while deposit mobilization is usually about 8% per year, securities companies have earned significant profits from lending activities. Some securities companies have even launched forms of mobilization from co-investment, taking advantage of customers untransmitted funds with low mobilizing interest rates to lend on margin. For foreign securities companies, profit from margin lending is even higher due to lower funding sources compared to domestic securities companies.

Risk of bubble

The explosion in market liquidity over past times received support from margin cash flow. It is estimated that margin lending in the whole market by the end of the first quarter of 2021 was about VND 110,000 billion, equivalent to USD 4.8 billion, and this is a record figure on the Vietnam stock market. Compared to the previous quarter, outstanding loans of securities companies in the market increased by about VND 20,000 billion. The promotion of margin lending in past time has caused many securities companies to reach their limit and make it difficult to lend because current regulations only allow each securities company to lend a maximum of two times its equity.

According to securities experts, margin lending is at a ceiling level and is even being pushed to a higher level, causing the stock market group in particular and the market in general to enter a risky phase. This is a completely valid statement if you look at the market performance in the last week trading session. In these trading sessions, most of the stocks of securities companies plummeted, from 3% to 10% for stocks on HoSE and HNX and nearly 15% for stocks listed on UPCoM. It is forecast that sessions like these with stocks of securities companies will take place more often.

These strong declining sessions will definitely affect the stock issuance plans of securities companies, especially small securities companies that are trading around par value. Suppose, if the issuance is successful, the securities companies will also face great pressure. This is how to maintain efficiency, how to maintain business results corresponding to that increase in capital, such as capital increase plan, revenue, profit, dividend, and moreover impact to the price of the stock being traded.

One securities expert has warned that if the profit level is not guaranteed after capital increase, it will cause great pressure on businesses, because the ability to pay dividends will be more difficult. The expert also believes that it is very likely that the market will fall into a state of short-term stagnancy due to the movement of cash flow and especially the possibility of a surplus in supply when these stocks come rushing into the account of investors.

Kim Giang

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