Vietnam Prosperity Bank (VPBank) has recently asked written opinions from shareholders for international bond issuance and listing. The first plan is to issue US$1 billion worth of three- to five-year bonds this year and next. The second plan is to issue US$120 million worth of three-year green corporate bonds to finance the green portfolio or loans meeting green criteria.

In early June, Tien Phong Commercial Joint Stock Bank (TPBank) worked out a plan to issue US$200 million worth of international bonds, scheduled from June 28 to July 12, 2019. In September last year, HDBank asked for shareholders’ opinions for issuing US$300 million worth of five-year-and-one-day convertible bonds with a fixed interest rate to less than 100 investors.

Over the past two years, besides issuing foreign currency bonds, banks have aggressively sought foreign capital through credit or trade financing contracts. In August last year, Lien Viet Post Bank signed a US$50-million three-year credit agreement with JPMorgan Chase Bank, N.A., Singapore branch. A month later, SHB inked a US$20-million loan contract with Russia’s International Investment Bank (IIB) and a EUR20-million loan contract with Russia’s International Bank for Economic Cooperation (IBEC).

The International Finance Corporation (IFC) is a familiar name in providing trade financing or foreign currency loan packages for local banks. In 2018, IFC provided US$100 million for Oriental Commercial Bank (OCB) and US$100 million for TPBank after pouring VND405 billion into this bank to acquire ạ 5% stake in 2016. Earlier in 2017, An Binh Bank (ABBank) received a US$150-million syndicated loan from IFC, and Vietnam International Bank (VIB) obtained a US$185-million financing package with a five-year term from IFC and three foreign banks.

Possible risks

The first issue of long-term bonds is aimed to increase equity capital and improve the capital adequacy ratio (CAR). Under the current regulation, valuable papers with terms of five years upwards are included in tier-2 capital of credit institutions. Therefore, banks have aggressively issued bonds in Vietnam dong as well as foreign currency. Asia Commercial Bank (ACB) has recently issued VND2.5 trillion worth of three-year bonds. VietinBank plans to issue VND10 trillion worth of bonds this year.

Issuers of bonds in domestic currency generally have to offer an interest rate high enough to attract investors, as this rate must offset inflation and be more attractive than the rate for savings deposits of 12 months upwards. Meanwhile, foreign currency bonds can be issued at an “easier” interest rate, thus helping cut the financial cost for credit institutions. With the U.S. Federal Reserve’s (Fed) forecast interest rate cut in the coming time, the interest rate risk for bonds or loans with floating interest rates is now reduced significantly compared with previous years.

Notably, foreign currency bonds are also exposed to exchange rate risks besides interest rate risks, as banks often convert most of the foreign currency revenue into dong for lending to enjoy a higher interest rate margin if the value of the dong depreciation is lower than the benefit gained from the conversion. For example, if banks sell foreign currency to get dong for lending at an interest rate of more than 4% per annum compared with rate for foreign currency lending, the depreciation of the dong against the U.S. dollar must be below 4%; otherwise, banks will suffer losses.

In recent years, the dong-U.S. dollar exchange rate has been kept quite stable, with the dong depreciation rate in the official market not in excess of 2% per annum. This is an important factor for enterprises and banks as well to confidently seek U.S. dollar loans on the international market. The exchange rate development has also been predictable, as the money regulator has maintained commitments and intervened when needed.

With the positive prospect of foreign currency inflow from foreign investment and ample inward remittances, the dong is forecast to continue stability against the U.S. dollar, especially when the dollar is showing sign of decline on the international currency market after the Fed has hinted at the possibility of policy reversal.

Apart from raising equity capital, long-term foreign currency capital also helps banks increase mid- and long-term funds to ensure business expansion, especially when the financial resources of local investors remain limited. The ratio of short-term capital use for mid- and long-term lending is expected to be reduced to 30% in 2021-2022, so banks are urgently in need of mid- and long-term capital. This capital demand is particularly high for banks strong in retail banking and consumer finance.

Furthermore, since the deposit rate for U.S .dollars was reduced to zero in 2015, foreign currency deposits at banks have declined or flowed to big banks strong in foreign currency trade like Vietcombank. Meanwhile, the demand for foreign currency loans at banks has remained big. Therefore, banks short of foreign currency funds will lose clients in the import-export trade.

For example at VPBank, foreign currency deposits by end-Quarter 1 was nearly VND4.97 trillion in dong equivalent, while outstanding foreign currency loans was nearly VND6.79 trillion. Compared with end-2018, foreign currency deposits had declined 15% while foreign currency loans had surged 41%. The foreign currency deposits plunged 57% against end-2015 following the general market trend.

In the context that the risks of foreign currency interest rates and exchange rates are reduced significantly at present as well as in the future while banks still have big demand for increasing equity capital and mid-and long-term funds but domestic financial sources remain limited, seeking foreign currency capital offshore appears to be the most appropriate strategy.