Banks should tighten valuation controls on their corporate bond investments – experts

VIETNAM, Aug. 18 – HÀ NỘI — Banks must strengthen their controls over the valuation of corporate bond investments to prevent excessive risk and misuse of funds raised by companies, experts have said.

In early April, the Banking Supervision Agency, under the State Bank of Vietnam (SBV), conducted an inspection of corporate bond investment activities at seven banks, while the Ministry of Finance inspected a bank.

According to the SBV, at the end of 2021, there were 41 credit institutions holding VN274 trillion ($11.7 billion) in corporate bonds, of which more than 75% are held by ten major banks – Techcombank, MBBank, VPBank, TPBank, BIDV, Vietcombank, VietinBank, HDBank, ABBank and SeABank. In some banks, the value of corporate bonds exceeds 10% of total assets.

Although the results of the inspection have not been released, a senior SBV official said in an interview with Vietnam Investment Review that a number of credit institutions failed to accurately assess the plans for issuance of bonds.

In particular, there was a lack of clarity and transparency in how the companies planned to use proceeds from corporate bond sales. The results of the inspection showed that there are signs that companies have spent the money from the bond issue for evil purposes, including cases where the funds were used to repay bank loans, buy stocks, lend and transfer the money to issuers.

Economist Nguyễn Xuân Nghĩa said that there is a phenomenon where the capital raised from bond issuance is distributed to organizations and individuals who have relationships with each other or the money is withdrawn in large amounts, which makes the cash flow very complicated and difficult to determine the end use of the funds raised.

The pursuit of growth and huge profits may have led banks and other investors to ignore potential malfeasance in corporate bond business, Nghĩa added.

The violations were also the result of a lack of special attention on the part of the board of directors, the management board and the heads of units/divisions of certain credit institutions to quickly correct shortcomings and errors internally. Internal inspection, control and audits of credit institutions are not always effective and internal regulations have not been regularly reviewed, updated and supplemented, he added.

Issuers’ financial strength may also be weak, including a high debt-to-equity ratio, zero or low net income from core business activities and retained earnings in recent years, the SBV executive said.

“The determination of bond demand and duration is not based on the issuers’ actual bond issuance plans,” the officer said, adding that tracking, supervising and collecting documentation proving the purposes of the money raised from bond issues by issuers is still a formality, but investors often do not fully exercise the rights permitted by law to manage and oversee the use of funds raised from the bond issue.

Furthermore, the valuation and management of collateral was not strictly controlled due to professional limitations, while some borrowers did not fully follow the provisions of the law, the SBV and the regulations of credit institutions in their loan relationship.

According to an analyst from VNDIRECT Securities Company, credit institutions need to increase their ability to rate and assess debt, especially corporate bond investments, to reduce risk.

Accordingly, the expert suggested that credit institutions should intensify the inspection and monitoring of the use of capital by issuers to ensure that capital is used for the right purposes, and strengthen risk management to investments in corporate bonds.

Furthermore, make credit institutions more accountable in the agreements for the provision of services linked to corporate bonds signed, implement the responsibilities of the representatives of the bondholders in accordance with the regulations. In particular, exercise all rights permitted by law to control and supervise to ensure that funds from bond issuance are used for the proper purposes set out in the issuer’s plan. —VNS

James V. Hayes