Bond investment activities of commercial banks in Vietnam

Income approach:

Bank Risk (or Profitability) i, t = α0 + α1 × oanInc / OpInci, t + α2 × ComInc / OpInci, t + α3 ×

Trad / OpInci, t + α4 × Controls t + vi + εi, t

• Asset approach:

Bank Risk (or Profitability) t = β0 + β1 × oan / TAi, t + β2 × Trad / TA i, t + β3 × Controls t-1

+ vi + εit

Bank Risk or Profitability, respectively, is dependent variable, including ROA, ROE to measure

business performance and Z-Score to measure bank risks.

Controls are control variables, namely:

TA - Bank size;

LOAN - The ratio of outstanding loans to total assets;

EQUITY - The ratio of equity to total assets;

COST - The ratio of operating expenses to total assets;

DTL - The ratio of customer deposits to total liabilities;

GDP - Economic growth;

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he safety and efficiency and reduct risks in bond investment. - Specify the functions, rights, and responsibilities of related units and individuals, improve the flexibility, awareness and sense of responsibility of each unit and individual engaged in bond investment. - Make sure that bond investment complies with the laws, government policies, and each bank’s internal orientation and regulations. 2.3.2. Issuing internal policies/regulations on bond investment The internal policies/regulations on bond investment of commercial banks often contain the following aspects: - Regulations on bond investment strategy and implementation organization. - Procedures of bond appraisal, approval, and buying decision. - Types of bonds to buy and capital sources used for investment; policies and regulations on safety in bond investment. - Regulations on post-investment management and supervision; provision and risk handling for corporate bond investment balance. - Regulations on accounting, statistics and recording, and internal supervision in bond investment, etc. 2.3.3. The organization of bond investment implementtion To carry out bond investment, depending on its own condition and development strategy, each bank may set up specialized units like a capital management company or an investment fund or do overall business management by assigning the functions and tasks of bond investment to its units and departments. Either model chosen, bond investment is implemented by 03 departments: business (front office), research and risk management (middle office), and operation (back office). 2.4. BOND INVESTMENT PFERFORMANCE AND FACTORS AFFECTING BOND INVESTMENT OF COMMERCIAL BANKS 2.4.1. The criteria reflecting bond investment performance On studying the related published works, the researcher develops 12 criteria in 3 groups: Investment scale (1 criterion); Investment risks and bond investment quality (8 criteria); and income from bond investment (3 criteria). 2.4.2. The model of impacts of bond investment on commercial banks’ business performance Consulting the models by DeYoung and Rice, 2003; Odesanmi and Wolfe, 2007; Chiorazzo et al., 2008; Baele et al., 2007; etc., the researcher builds a research models comprising 2 dependent variables ROA (ROE) i,t(Business performance) and Z- SCOREi,t(Bankruptcy risk); 5 independent variables (loans income rate, service income rate, stock investment income rate, lending rate, and stock investment scale); 7 control variables (the bank’s scale, loans outstanding balance, the bank’s equity, costs of operation, customer savings, economic growth rate, and inflation rate). 2.4.3. The factors affecting bond investment of commercial banks The thesis analyzes 5 subjective factors (the bank’s business strategy, financial potential, risk management in bond investment, human resources quality, technology and facility) and 4 objective factors (the economic environment, the political and legal environment, customer information, organizations and individuals selling bonds, and the development of the bond market) CHAPTER 3: THE CURRENT SITUATION OF BOND INVESTMENT IN VIETNAM’S COMMERCIAL BANKS 3.1. OVERVIEW OF VIETNAM’S BOND MARKET AND COMMERCIAL BANK SYSTEM 3.1.1. Vietnam’s bond market Vietnam’s bond market took shape in the mid-1990s of the past centure when Vietnam’s government announced the establishment of Vietnam State Treasury and transferred the task of managing funds belonging to the state budget from Vietnam State Bank to Ministry of Finance. Since its foundation, Vietnam State Treasury has raised capital for the state budget and development investment through the issuance of government bonds. Over 20 years of operation, Vietnam’s bon market has developed strongly and rapidly, but not yet sustainably and proportionately as growth is mainly seen in the government bond market while the market for corporate bond is rather small with limited exchanges and small value of issuance by a handful of enterprises. Government bonds accounts for 85-87% of the bond market, and corporate bonds 13-15%. Diagram 3.2: Values of capital markets in Vietnam over GDP in the period 2015-2019 Collected At the end of quarter 3, 2019, Vietnam’s bond market (including both government bond and corporate bond) reached USD 95.37bn, equivalent to 37.6% of the GDP and equal to the rate of the Philippines but well behind 60% of China and Thailand. The rate was even lower than developed economies in Asia like Japan (214% of its GDP), North Korea (120%), etc. * Government bond Government bond investors were credit institutions and non-bank financial organizations. Among credit institutions, commercial banks accounted for approximately 90% of government bond investment. Table 3.1: The proportion of investors holding government bond in the period 2015- 0% 20% 40% 60% 80% 100% 120% 140% 160% 2015 2016 2017 2018 2019 Quy mô TPDN/GDP Quy mô TPCP/GDP Quy mô tín dụng/GDP Corporate bond/GDP Government bond/GDP Credit/GDP 2019 Unit: % No. Investor 2015 2016 2017 2018 2019 1 Credit institutions 65.4 55.2 51.2 47.8 46.3 2 Non-bank financial organizations 31.1 44.8 48.8 52.2 53.7 Source:Department of Banking and Financial Institutions, Ministry of Finance In 2019, with an aim to restructure public debt portfolio towards extending the lending terms of state budget and improve the sustainability of debt portfolio, Vietnam State Treasury centred on issuing government bonds with terms of 5 years or more, especially bonds with 10- year term that accounted for 92% of the total capital mobilized through bond issuance. The liquidity of the secondary market was high, and Repo transactions surpassed Outright. Table 3.2: Forms of government bond transactions on the secondary market Unit: % No. Form of transaction 2017 2018 2019 1 Outright 50.8 45.5 45 2 Repo 49.2 54.5 55 Source:HNX * Corporate bond The value of corporate bond issuance (including credit institutions) generally grew over the years, reaching VND 224,000bn in 2018 and VND 280,141bn in 2019 (a rise of 25% over 2018). As a result, the value of the bond market soared from 9% of the GDP to 11.3% in 2019. Of 211 companies offering bonds to the public in 2019, there were 129 unlisted ones. in 2019, commercial banks were the biggest bond issuers making 41%, followed by property enterprises that accounted for 38%, energy and mineral companies, infrastructure developers, securities companies, and other businesses that comprise from 3 to 9%. Generally, corporate bond interest rates are higher than government bond, and the rates varied between types of businesses. Corporate bonds in property and infrastructure bore the highest interest rates while banks and financial institutions offered the lowest bond interest rates. Corporate bond buyers were, to a large extent, securities companies, fund managing companies, professional investment funds, and commercial banks (directly or through branches). These are the organizations with large budgets and bond appraisal capacity, and they are prepared to take risk in buying bonds. 3.1.2. Overview of Vietnam’s commercial banks * The number of commercial banks Table 3.3: The number of commercial banks in Vietnam in the period 2015-2019 (As of 31 st December in each year) Type of bank 2015 2016 2017 2018 2019 State commercial bank 7 4 4 4 4 Joint stock commercial bank 28 31 31 31 31 Joint-venture bank 3 2 2 2 2 100% foreign- invested bank 5 8 9 9 9 Branch of foreign bank 50 51 49 49 49 (Source: Vietnam State Bank’s Website) As of 31st December, 2019, in Vietnam there were 31 joint stock commercial banks, 4 state commercial banks (including Bank for Agriculture and Rural Development and 3 joint stock commercial banks acquired by Vietnam State Bank at 0 VND in 2015 which are Vietnam Construction Bank, Global Petroleum Bank (GP Bank), and Ocean Bank). Of the 31 joint stock commercial banks, 10 were listed on HOSE (Hochiminh City Stock Exchange) ( Joint Stock Commercial Bank for Investment and Development of Vietnam, Joint Stock Commercial Bank for Industry and Trade, Vietnam Import Export Joint Stock Commercial Bank, Military Joint Stock Commercial Bank (MB), Saigon Thuong Tin Commercial Joint Stock Bank, Vietnam Joint Stock Commercial Bank for Foreign Trade, Ho Chi Minh City Development Joint Stock Commercial Bank, Vietnam Technological and Commercial Joint Stock Bank, Tien Phong Joint Stock Commercial Bank, Vietnam Prosperity Joint Stock Bank (VPBank)), 3 listed on Hanoi Stock Exchange (Asia Joint Stock Commercial Bank, National Citizen Joint Stock Bank, Saigon - Hanoi Joint Stock Commercial Bank), and 3 listed on Upcom (Unquoted Public Company) (Bac A Commercial Joint Stock Bank, Lien Viet Post Joint Stock Bank, Vietnam International Joint Stock Commercial Bank (VIB)). * Assets in commercial banks The total asset value of the whole banking system and the average asset value of a Vietnam’s bank kept rising from VND 151,412.43 bn in 2015 to VND 243,967.13 bn in 2019. Basing on the asset scale, the system of Vietnam’s banks can be divided into 3 groups: (i) the banks with the asset value of over VND 1,000,000 bn in 2019; these are the banks with the biggest asset value in the system of Vietnam’s banks are present including Vietnam Bank for Agriculture and Rural Development, Bank for Investment and Development of Vietnam, Vietnam Bank for Industry and Trade, and Joint Stock Commercial Bank for Foreign Trade of Vietnam; their asset values are 5-6 times the average of banks; (ii) the banks with the asset value in 2019 from over VND 300,000 bn to over VND 500,000 bn (none has from VND 600,000 bn to VND 1,000,000 bn); (iii) the banks with the value asset in 2019 of less than VND 300,000 bn, of which there are 7 banks with the value assets of less than VND 100,000 bn. * Capital in commercial banks The charter capital of the entire system and the average charter capital of a bank in Vietnam went up slightly over the years. Four banks in group 1 above (Vietnam Bank for Agriculture and Rural Development (Agribank), Bank for Investment and Development of Vietnam (BIDV), Vietnam Bank for Industry and Trade (Vietinbank), and Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank)) and Vietnam Technology and Commercial Joint Stock Bank (Techcombank) has the charter capital that is about 3 times the average of a bank. Several banks like Techcombank and VPBank have seen their charter capital rocket in the past two years. The equity of the banking system and the average equity of a bank in Vietnam grew slightly over the year, but BIDV’s equity rose dramatically in 2019. The four leading banks in asset value (BIDV, Vietinbank, Vietcombank, and Agribank) had the equity of 4-5.5 times the average equity of a bank. * The business performance of commercial banks In the period 2015-2019, the banks’ ROA and ROE varied continuously. The banks with large asset value and equity (group 1) such as BIDV, Vietinbank, and Agribank were not ones with the highest ROA and ROE (except Vietcombank). Several bank with average asset value and equity (group 2) like Techcombank, VPBank, Phương Đông Commercial Bank, and MB had high ROA. Meanwhile, VIB, Ti n Phong Bank, Phương Đông Bank, Á Châu Bank, and MB had rather high ROE. Several banks in group 3 like Vietnam Public Joint Stock Commercial Bank and Vietnam Thương Tín Joint Stock Commercial Bank had negative ROA and ROE in a couple of years. 3.2. THE CURRENT SITUATION OF BOND INVESTMENT IN VIETNAM’S COMMERCIAL BANKS 3.2.1. The legal foundation for bond investment of Vietnam’s commercial banks Besides legal documents (Law on credit institutions, Law on securities, Law on Enterprises, and Government’s decrees on bond issuance), over the years, Vietnam State Bank – government authority in banking has promulgated 7 circulars to provide the legal foundation for bond investment of Vietnam’s commercial banks including circulars 36/2014/TT-NHNN; 06/2016/TT-NHNN; 19/2017/TT-NHNN; 02/2018/VBHN-NHNN; 22/2016/TT-NHNN; 15/2018/TT-NHNN; and 22/2019/TT-NHNN. * Regulations on bond investment conditions Under existing regulations, commercial banks wishing to invest in corporate bonds must have: (i) an internal credit ranking system to rate bond issuers, and (ii) internal regulations on buying corporate bonds pursuant to the existing regulations by government authorities with at least the following contents: - Procedures of corporate bond appraisal, approval, and purchase decision; principles of corporate bond purchase assigning, trusting, and approving; regulations on risk management in corporate bond buying ensuring the transparency between the appraisal and decision to buy corporate bond. - Principles and criteria to assess the risks in buying corporate bond from different enterprises and types of corporate bond; - A system of risk measurement and management, the conditions, methods, and procedures of risk treatment; and provision pursuant to regulations; - Internal supervision over bond purchase. Besides, since 12 th February, 2018, under Circular No. 19/2017/TT-NHNN and Circular No. 02/2018/VBHN-NHNN (effective from 12 th February, 2018), in order to invest in corporate bond, commercial banks must ensure the minimum CAR of 9%, and the bank mustn’t provide credit for their customers to invest in corporate bond if their bad debt rate stands at 3% or higher. * Regulations on bond investment limits Circular No. 22/2016/TT-NHNN (taking effect on 15 th August, 2016) states that the corporate bond investment balance counts on the total outstanding credit balance for customer and other stakeholders. Therefore, bond investment must also comply with regulations on credit limits. Commercial banks are responsible for setting corporate bond purchase limits: Buying bonds issued by one enterprise; Buying bonds issued by one enterprise and its associated enterprises; Buying corporate bonds with and without guarantee; and buying corporate bonds for sale, for investment, and keeping to maturity. Circular No. 36/2014/TT-NHNN (effective from 1 st , February, 2015) only limits the outstanding credit balance for one customer to no more than 15% of the bank’s equity, no more than 25% for one customer and stakeholders, and no specific regulations on bond investment. However, as the outstanding corporate bond investment balance is counted on the total outstanding credit balance, the bank must also abide by this regulation. Circula No. 06/2016/TT-NHNN (effective from 1st, July, 2016) adds that commercial banks must not provide credit to customers for investing in unlisted corporate bonds; state commercial banks can invest at most 25% of the previous month’s average short-term capital in corporate bonds, and joint stock commercial banks at most 35%. Circulars No. 19/2017 and No. 02/2018/VBHN-NHNN(effective from 12st, February, 2018) complements that the total outstanding credit balance for investment and trading in corporate bonds of credit institutions must not exceed 5% of the charter capital and granted capital. Under the existing regulations, the corporate bond investment balance of commercial banks is a component constituting the total outstanding credit balance, but the total balance of corporate bonds invested by commercial banks is not subject to adjustments under this regulation. 3.2.2. The current situation of bond investment organization and management in Vietnam’s commercial banks 3.2.2.1. The current situation of issuing internal regulations on bond investment In accordance with Vietnam State Bank’s existing regulations on bond investment, in recent years, to provide the background for the implementation of bond investment, most banks have issued internal regulations on this operation. The coverage of the regulations on types of bonds, however, varies. Several banks issues specific internal documents for each investment area (corporate bond investment and government bond investment) like PVcomBank or MB. Some others only make regulations on corporate bond investment while others make general regulations on all types of bonds. Besides, a number of banks do not issue their own documents on bond investment. Basing on the real situation of the bond market, the bank’s Board of Members/Board of Directors issues a resolution on bond investment policy for each issuer which specifies the maximum volume of investment and assigns the General Director to direct transaction offices and related units to implement. 3.2.2.2. The current situation of bond investment implementation To implement bond investment, depending on its conditions and development strategy, each bank may select a different organization model: (i) Organize specialized investment unit by setting up fund management companies or bond investment funds (TCBF of Techcombank, BVBF of Bảo Việt, MBBF of MB, or VTBF of VietinBank, etc.); (ii) And/or invest through the bank’s existing units. Most of the banks carry out bond investment through their existing units. The investment operation often relates to several departments such as the business department (branches, transaction offices, etc.); units in the headquarter such as the business units/unit of capital and financial market, unit of operation, unit of risk management, unit of internal inspection- supervision, unit of finance-accounting, unit of legislation, etc. Basically, Vietnam’s commercial banks build and carry out their bond investment with similar steps: setting the target, selecting the type of investment, building the investment strategy, selecting the type of bond, and measuring and assessing performance. Bond investment aims at different goals, but the main aim is to support the available capital management of the bank itself, ensuring the solvency of the entire system. Additionally, bond investment also aims to diversify business to create stable income for the bank in the context of large mobilized capital and limited lending capacity and other forms of credit. 3.2.3. The current situation of bond investment in Vietnam commercial banks 3.2.3.1. The number of commercial banks, the scale and ratio of bond investment to total asset In the past time, most commercial banks in Vietnam have invested in bonds, but at different scales and ratios of bond investment to the total asset. Large banks in grou 1 including Vietinbank, BIDV, Vietcombank, and Agribank have the investment value of over VND 100,000 bn per year, but there are banks which invest only over VND 1,000 bn/year. These are small banks in group 3 in the above ranking. The ratio of investment to the total assets of the entire banking system tended to decrease over time from 20.66% in 2015 to 14.78% in 2019. Several banks have relatively large proportion of bond investment in the total asset including banks in group 2 and groups 3 suchs as Đại Dương, Hàng Hải, Bảo Việt, Tiên Phong, etc. Table 3.10: The ratio of total investment to total assets of Vietnam’s commercial banks in the period 2015-2019 Unit: % No. Name of bank 2015 2016 2017 2018 2019 The banks with higher ratio of investment to total asset than the system’s average 1 Ocean Bank 34.86 47.99 47.77 37.55 35.80 2 GP Bank 37.46 36.49 32.40 28.74 19.91 3 Maritime Bank 54.23 41.17 46.51 33.95 33.25 4 VP Bank 31.82 33.69 26.94 23.31 24.44 5 Liên Việt Bank 34.31 27.23 22.66 23.52 19.72 6 Tiên Phong Bank 32.66 32.45 23.83 21.31 18.13 7 Bảo Việt Bank 37.03 46.89 43.73 38.72 33.75 Average 20.66 20.94 18.58 16.86 14.78 Source: Reports from Vietnam State Bank and auditing companies 3.2.3.2. The current structure of bond investment Table 3.11: The structure of bond investment in Vietnam’s commercial banks by product in the period 2015-2019 Unit: % No. Criteria 2015 2016 2017 2018 2019 1 Total bond investment/Total asset 20.66 20.94 18.58 16.86 14.78 2 Bonds of Vietnam State Bank + Government/Total asset 9.96 10.46 9.37 8.48 7.20 3 Corporate bond/Total asset 5.85 5.25 4.37 3.60 2.57 4 Bonds of other credit institutions/Total 4.85 5.23 4.84 4.78 5.01 asset Source: Reports from Vietnam State Bank and auditing companies Over the past years, bond investment in commercial banks focused on government bond (accounting for approximately 50%), with the rest divided among corporate bonds and bonds of other credit institutions. The ratio of bond investment to the total asset of commercial banks decreased from 20.66% in 2015 to 14.78% in 2019. The biggest reduction was the rate of investment in corporate bonds (over 50% from 5.58% of the total asset to 2.57%) while investment in government bonds went down slightly, and investment in bonds of other credit institutions did not change noticeably. * Government bond Table 3.13: Government bond investment of Vietnam’s commercial banks on the primary market in the preriod 2015-2019 Year Number of bidding commercial banks Winning bond value (billion VND) Total value of invested bond on primary market (billion VND) 2015 18 190.258 222.410 2016 15 229.811 271.519 2017 16 144.375 162.154 2018 16 73.640 78.998 Quarter I, 2019 12 36.415 42.968 Source: HNX In the period 2015-2017, commercial bank bidders purchased bonds at the largest volume, making up more than 70% of the total bonds issued in bidding. This was also the key group of investors in the market with the winning rate remained over 80%. However, since 2018, the winning rate of commercial banks have fell sharply due to more active participation of insurance companies in the market. Table 3.14: Government bond investment of Vietnam’s commercial banks on secondary market in the period 2015-2019 Unit: billion VND No. Type of transaction 2015 2016 2017 2018 2019 1 Outright 1,057,859.07 1,676,990.18 1,948,216.51 1,680,671.71 1,881,460.65 % 67 61 48 43 47 2 Repos 535,177.84 1,092,840.08 2,118,164.71 2,246,379.25 2,149,914.50 % 33 39 52 57 53 Source: HNX On the secondary market, government bond investment of commercial banks was done in the forms of Outright and Repos with 28 commercial banks as trading members. Along with the rise of Repos transactions in the market, the rate of Repos transactions of commercial banks also grew continuously from 33% in 2015 to 53% in 2019. In 2018 this was 57%. In the mean time, Outright investment in commercial banks shrank from 67% in 2015 to 47% in 2019. Over the past 5 year, commercial banks have mainly invested in medium-term government bonds. In 2019 there was a big change in the investment structure as long-term investment rocketed from 5% in 2015 to 82% in 2019. This reflects the adjustments in the capital mobilization policies of the government with an aim to restructure public debt portfolio towards extending lending terms of state budget ensuring the sustainability of the debt portfolio. Table 3.15: The structure of government bond investment in Vietnam’s commercial banks in the period 2015-2019 (by term) Unit: % No. Bond term 2015 2016 2017 2018 2019 1 Short-term (less than 1 year) 44 2 1 4 2 2 Medium-term (1-5 years) 51 90 82 78 16 3 Long-term (over 5 years) 5 8 17 18 82 Source: HNX * Corporate bond The ratio of corporate bond investment to the total asset of the whole banking system tended to become smaller over the years from 5.85% in 2015 to 2.57% in 2019. The banks with large proportion of corporate bond investment in their total asset were mostly in group 3 like Ocean Bank, GP Bank, Vietnam Construction Bank, Vietnam Maritime Bank, etc. Banks in group 1 and group 2 had low or average rate of corporate bond investment. Table 3.16: The ratio of corporate bond investment to the total asset of Vietnam’s commercial banks in the period 2015-2019 Unit: % No. Name of bank 2015 2016 2017 2018 2019 The banks with higher ratio of corporate bond investment to total asset than the system’s average 1 Ocean Bank 16.02 11.88 14.86 8.87 10.97 2 GP Bank 15.08 11.52 10.22 9.07 5.96 3 Construction Bank 10.78 11.77 12.29 53.78 1.05 4 Maritime Bank 19.37 16.50 13.76 6.99 3.76 5 National Bank 11.60 11.48 11.31 10.21 7.95 6 Bảo Việt Bank 7.79 20.88 11.99 10.50 17.63 7 Public Bank 11.71 12.27 9.90 7.16 12.81 The banks with lower ratio of corporate bond investment to total asset than the system’s average 1 Á Châu Bank 3.09 1.81 - - - 2 Quân Đội Bank 2.7

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