Lower sovereign yields and a rally in Asian high yield this year have allowed Vietnamese banks to contemplate international bond issues. Lenders from the Southeast Asian nation look set to continue their foray into the dollar market as they seek to lock in favourably priced funding and circumvent the volatile local interbank market.
“The main thing is a shortage of funds at these banks: deposits are not growing fast enough so they need an infusion of funds from external sources,” said Kim Eng Tan, senior director of sovereign ratings for Standard & Poor’s (S&P). “This is likely why they are looking to tap international markets now.”
“Of course, it’s also related to the fact that the sovereign yield has come down so much over the past few months,” said Tan. “Conditions have become a lot more conducive to go to market now compared to before.”
Vietnam’s five-year bonds were yielding 12.56% at the beginning of the year but began a dramatic slide in late February. They have since dropped by more than an eighth in two months and were trading at 10.86% as Asiamoney PLUS went to press.
“Part of the reason for this international bond issuance is to get the attention of foreign stakeholders and to gauge interest as to how fast the government can accelerate the partial privatisation plan of state-owned commercial banks,” said Ivan Tan, the primary analyst covering Vietnamese banks for S&P. “The other reason is pragmatism: liquidity in Vietnam has been fairly tight.”
“Wholesale borrowing in the Vietnam interbank market can be volatile and quite expensive,” he said. “The advantage of having a short or medium-term bond issuance is you can lock in very cheap US dollar funding at currently low rates and lock it in for the next one to three years.”
The head of an international bank in Vietnam agrees: “The interbank market is certainly still at a very rudimentary stage here. From a funding perspective, bond markets really do provide a pretty good opportunity for the banks.”
Two state-owned Vietnamese banks have held recent roadshows with a view to tapping dollar bond markets. The first was Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) which began meeting with investors on March 19 about a US$500 million five or 10-year bond issue. It is likely to come to market within the next few weeks, according to a banker close to the deal.
Vietinbank was swiftly followed by Vietnam Bank for Foreign Trade (Vietcombank) – the country’s largest lender by market value – which said it was planning to sell up to US$1 billion in 10-year bonds this year.
“What the banks are doing is experimenting with and learning about different ways to capitalise their balance sheet,” said Domenic Scriven, chief executive officer of Dragon Capital, an investment group with around US$1 billion in Vietnamese assets under management. “It’s also a broader thing - at certain levels in Vietnam you go into the markets and you begin a dialogue with the markets without necessarily running equity and capital - it's all about integration.”
“I think it's more of a hedge for any future liquidity problems,” said the foreign bank head. “Particularly amongst the state owned banks, when you speak to them you do hear of more discussions in terms of looking to bond markets for funding.”
Despite the obvious interest of Vietnamese lenders – privately owned Asia Commercial Bank has also said that it’s in discussions to tap international markets – the go ahead for any future issuance will ultimately have to come from regulator State Bank of Vietnam (SBV).
“SBV has taken a little bit more of a cautious approach not to approve any additional overseas bond issuances until they really see some success [with the Vietinbank deal],” said the foreign bank head. “I think it will be incremental and step by step.”
“Vietnam companies need the government’s approval if they want to get a foreign loan or issue a foreign currency bond,” said S&P’s sovereign analyst.” This is especially so for banks.”
“Weak banks are very unlikely to want to get a rating for the purpose of issuing an international bond,” he said. “They are unlikely to obtain government permission and are likely to face weak international demand for their bonds even if permission is granted.”