MINISTRY OF EDUCATION AND TRAINING
THUONGMAI UNIVERSITY
-------------------------
ANH DINH THI PHUONG
BOND INVESTMENT ACTIVITIES OF COMMERCIAL BANKS IN VIETNAM
Major
: Banking - Finance
Code
: 9.34.02.01
SUMMARY OF ECONOMIC DOCTORAL THESIS
Hanoi, 2021
The work was completed at: Thuongmai University
Science instructor:
1. Assoc. Prof. Dr. Trung Nguyen Duc
2. Prof. Dr. Herve Boismery
Review 1:
Review 2:
Review 3:
Thesis will be protected before the thesis review board meeting at
……………………………………………………………………………………
The dissertation can be found at:
National Library
Thuongmai University Library
INTRODUCTION
1. Rationale
in effective combination with the stock market Stock investment in general and bond investment in particular is one of bank’s key operations as stock investment porfolio makes up from one fifth to one third of the total profitable assets of commercial banks. Studies have found that holding stocks necessarily help banks to improve their incomes, liquidity, and asset diversification, thus retricting risks in the their operation. Also, banks and the stock market have a close inter-relationship in which they are at the same time competitors and supporters for mutual development. With their advantage in financial potential, information, and analysis skill, banks are always key investors, issuance underwriters, middlemen, consultants, and trustees on the stock market. As such, the efficient and healthy participation of commercial banks will make great contributions to the overall development of the government’s macroeconomic management, helping to develop the nation’s economy and society.
In the context of the severe competition in traditional banking and profit reduction from credit activities, bank have been expanding and entering transactions in the financial market so as to diversify business and look for profit. However, since the world’s financial crisis in the period 2007-2009, arguments in both academic and policy maker circles have been raised around the role of investment in commercial banks and its influence on the bank’s business performance, credit supply, and the sustainable development of the financial system. A score of regulations have been introduced in the world’s biggest financial markets including the UK, the US, and Europe with different limits on the involvement of commercial banks in the stock market in order to prevent banks from over investing, protect the saver’s benefits, and ensure the role as a financial intermediary of the bank in the economy.
In Vietnam, along with the development of the market economy, the business of commercial banks have been more and more diversed. In parallel with their tgraditional operations, banks have also penetrated into invesment where bond investment is rather common. Recently, bond investment in Vietnam’s commercial banks have been lively with increasing scale, stable incomes, low rate of overdue debts, and diversified investment porfolio with diferent types of bonds, thus positively supporting the business of the banks, making contribution to the effective management of available capital, and ensuring each bank’s liquidity and competitiveness.
However, new moves in the investment trend of commercial banks are posing questions of the safety, efficiency, and healthiness of commercial banks and the banking system in general. A number of commercial banks have boosted bond investment in construction and property despite the fact that the property market hasn’t recovered firmly and many enterprises are still facing difficulties in their business and production. Besides, several bank keep high rates of bond investment that exceed the average of Vietnam’s commercial bank system or even the world’s average. These facts have arousen questions on bond investment management, safety, and efficacy of commercial banks in the new context which is highly challenging and risky.
For the above reasons, research on the situation and suggestions to commercial bank’s bond investment development orientation, strategy, and policy under the current conditions are necessary and urgent. With a hope to solve the existing problems, I have chosen the topic “Bond investment in Vietnam’s commercial banks” for my doctoral thesis.
2. Aim, tasks, and research questions
Research aim The thesis aims to complement and clarify theories on bond investment of commercial banks and suggest solutions to bond investment of Vietnam’s commercial banks on the basis of the conclusion drawn from the situation analysis and predictions of changes in the investment environment in the new context.
Research tasks The main tasks are as follow: Firstly, generalize related studies and find out the research gap to serve the identification of the research object, scope, and method.
Secondly, complement and clarify theories on bond investment of commercial banks including the concept, strategies, and forms of investment, investment management organizations, assessment criteria systems, and other factors. Set up the research model to measure the impact of bond investment on the bank’s business performance.
Thirdly, analyze the current situation of bond investment in the whole system of Vietnam’s commercial banks and select several cases representing groups of banks by scale of operation (asset) as the practical background for the conclusions. Test the research model to make conclusions of the impact of bond investment on the bank’s business performance.
Fourthly, make several suggestions of bond investment to commercial banks, Vietnam State Bank, and other government authorities to improve the quality and efficiency of bond investment and ensure safety for the system of Vietnam’s commercial banks in the future.
Research questions - What are the differences between bond investment of commercial banks and investment of non-bank enterprises? What are bond investment strategies and forms? How is bond investment in commercial banks managed? What are assessment criteria and factors affecting bond investment of commercial banks? - What factors are included in the research method to test the impact of bond investment on the business performance of commercial banks?
- What are the shortcomings and difficulties in bond investment of Vietnam’s commercial banks? How does bond investment affect the business performance of Vietnam’s commercial banks?
- What scale and investment structure should Vietnam’s commercial bank adopt? What should commercial banks and Vietnam State Bank do to improve the quality and efficiency of bond investment and ensure safety for Vietnam’s commercial banks in the future? 3. Object and scope of study
Object The thesis’s research object is theoretical and practical issues on bond investment of
commercial banks. Scope - Content: The study focuses on bond investment of Vietnam’s commercial banks with the main contents of internal documenting, business organization, bond investment performance under the assessment criteria of scale and investment structure (type of bond, term of bond, market, etc.), investment outcomes; measures the impact of bond investment on the business performance of Vietnam’s commercial banks. The research does not concentrate on technical analysis, portfolio management, or risk management, etc.
Due to the large number of Vietnam’s commercial banks (35), in addition to general study on the entire system, the researcher selects 3 cases representing 3 groups of banks (banks at large scale of assets, banks at average scale, and banks at small scale) to provide the practical basis for the assessment and ensure the intensiveness of the thesis.
-Time: The thesis studies bond investment of Vietnam’s commercial banks in the period from 2015 to 2019. The starting point of 2015 was chosen as on 20th November 2014, Vietnam State Bank promulgated Circular No. 36/2014/TT-NHNN specifying limits and rates to ensure safety in the operation of foreign credit institutions and bank branches (which took effect on 1st February, 2015). This is when government management experienced changed in bank operations, and bond investment balance of the bank started to be identified as an element of the total debit balance. Also, the researcher’s published journals didn’t study this period of time.
The investment orientation and suggestions to commercial banks and Vietnam State Bank in bond investment of Vietnam’s commercial banks are made for the period from 2020 to 2025 with a vision to 2030. 4. New contributions
Academic contributions Complement and clarify theories on commercial bank’s bond investment, add assessment criteria (quantitative and qualitative), and investigate the factors affecting commercial bank’s bond investment.
On the basis of the background, build a model to study the impacts of bond investment on commercial bank’s business performance, identifying theo theoretical background in building the model and selecting the factors and adding several internal factors related to the bank’s bond investment.
Practical contributions Discuss Vietnam commercial banks’ bond investment in terms of issuance of internal documents, business organization, and bond investment performance under the criteria set in the literature review; verify the research model and make a conclusion on the influence of bond investment on the business performance of Vietnam commercial banks. On that basis, the researcher comes to conclusions on the shortcomings in commercial bank’s bond investment in the period 2015-2019 including (i) Several commercial banks invest in large scale that exceeds the average of the whole system and the popular average of banks in the world (from one fifth to one third of the total asset value): (ii) The investment strategies of several commercial banks are opposite to the popular investment strategies of the world’s banks (commercial banks with large scale and high management capacity invest in government bonds at higher rates than other bonds while small and medium-sized banks have bigger proportions of their investments in corporate bonds and other credit institutions with longer terms); (iii) Corporate bond investment in commercial banks hides risks and threats; and (iv) The fact that commercial banks invests in other credit institutions inevitably leads to a large amount of capital flowing around in the banking system, slowing down the capital circulation of the economy and having negative impacts on commercial bank’s role as the financial intermediary suplying capital for the economy.
The main reasons for the shortcoming in the current investment of Vietnam commercial banks include (i) Internal regulations of bond investment in commercial banks are rather simple without specifying investment limits on each type of bonds, especially investment limits in venture businesses or bond investment of enterprises issuing with an aim to restructure their liabilities; (ii) The strategies, procedures, and risk management in bond investment in a number
of commercial banks are simple with no use of tools like Duration, Convexity, VaR, etc., no case study and stress test; (iii) Vietnam State Bank hasn’t enacted regulations on commerciank bank’s bond investment in venture businesses and the ratio of bond investment to total asset value, etc.
Investment orientation and suggestions In different commercial banks, the orientation of bond investment is different in scale and structure. It derives from each bank’s awareness, business strategy, management capacity, asset scale, and risk vulnerability, etc. Looking at the reasons for the existing shortcomings and forecast of advantages and disadvantages, the thesis suggests 4 groups of suggestions to commercial banks, Vietnam State Bank, the Government, and related authorities in order to improve the investment quality, efficiency, and safety of Vietnam’s commercial banks in the period 2020-2025 with a vision to 2030. These are (i) Improving internal documents on bond investment; (ii) Enhancing investment in facility and equipment and strictly comlying with internal regulations on risk management in bond investment; (iii) Developing and improving human resources quality for bond investment; (iv) Reviewing, complementing, and perfecting government management documents and fostering control over investment to ensure bond investment security for commercial banks; and (v) Developing and improving the system of market makers.
5. Structure of the thesis In addition to the introduction, the conclusion, the list of the researcher’s related published journals, references, and appendixes, the paper consists of 04 chapters as follow:
Chapter 1: Literature review and methodology Chapter 2: Theoretical background of bond investment in commercial banks Chapter 3: The current situation of bond investment in Vietnam’s commercial banks Chapter 4: The orientation for bond investment of Vietnam’s commercial banks and
suggestions
CHAPTER 1: LITERATURE REVIEW AND METHODOLOGY
1.1. LITERATURE REVIEW
1.1.1. Studies on the relationship between investment/bond investment of commercial banks and traditional banking
In this section, the researcher discussed the findings of Diamond and Rajan, (2011); Lehmann, (2016); Krahnen, Noth and Schüwer, (2017); Stein, (2013); Arping, (2013); Abbassi et al. (2015); Boot and Ratnovski, (2016); Krahnen, Noth and Schüwer (2017) (Kurz, M. and Kleimeie, (2019), etc. 1.1.2. Studies on the impact of investment/bond investment on the business performance of the bank
In this section, the researcher generalized the research results of Nguyen et al., (2012); Deng et al., (2013); Baele et al., (2007); Kohler, (2014); Cebenoyan and Strahan (2004); DeYoung and Rice,( 2004); Stiroh and Rumble, (2006); Lepetit et al., (2008); Michael et al. (2013); Nguyễn Thị Thu Trang and Hoàng Anh Thư (2019), etc. 1.1.3. Studies on the organization of investment/bond investment in commercial banks
In this section, the researcher collected and analyzed the findings of Jan-Pieter Krahnen, Felix Noth and Ulrich Schu wer (201 ) Thị Hương (2003) Nguyễn Thị Anh Đào (2011) and Vũ Hoàng Nam (2015). 1.2. CONCLUSIONS OF THE LITERATURE REVIEW
1.2.1. The scientific and practical significance of the published journals
Foreign works, through experimental research, have tested and identified the influence of investment of commercial banks on their business performance in general and the credit scale in particular, and suggested models, limits, and restricted areas in investment in commercial banks. Domestic studies have clarified several basic theories on stock investment in general and bond investment in particular of commercial banks including stock invesemtn strategies and forms; business models; financial assessment criteria, and several factors influencing bond investment of commercial banks. These academic and practical findings are an important background for the researcher to
look at and develop in his thesis. 1.2.2. Limitations of the published studies
The literature review of foreign and domestic research shows that the number of of independent and specialized studies on bond investment of commercial banks is still limited. Research mainly centers on the general stock investment of commercial banks except for the doctoral thesis by Vũ Hoàng Nam. Apart from the achievements, within their set research contexts, objects, and scopes, the published studies mentioned in the above literature review have the following limitations:
+ Firstly, the scope of research on bond investment (by Vũ Hoàng Nam) is rather narrow focusing on 04 large scale commercial banks which are deeply involved in bond investment, which is not enough to make a complete overview of this activity in the entire system of Vietnam’s commercial banks as the 4 banks only represent large banks, not small and medium- sized ones; besides, groups of banks have different levels of business management and bond investment management. At present, bond investment, especially corporate bond investment, in Vietnam’s commercial banks is increasing, so investigating investment in different groups of banks will help to make more precise and general assessements, thus helping to make suitable suggestions for particular groups of banks.
02/2018/VBHN-NHNN, 19/2017/TT-NHNN,
+ Secondly, the assessment of bond investment situation, organization, and management in several commercial banks in published studies is based on data collected before 2014 without specific interpretation and analysis. Moreover, since the end of 2014, Vietnam State Bank has promulgated a series of legal documents on limits and rates ensuring safety in banking and corporate bond investment of credit institutions including Circulars 36/2014/TT-NHNN, 06/2016/TT-NHNN, 22/2016/TT-NHNN, 15/2018/TT-NHNN, etc. Therefore, the conclusions and suggestions made by published journals on bond investment and the orientation, strategy, and policy in single banks may not match the current context.
+ Thirdly, the research model to investigate the impact of several factors on bond investment of Vietnam’s commercial banks by researcher Vũ Hoàng Nam in his doctoral thesis is not theoretically firm in its construction and selection of factors without typical factors representing commercial banks’ bond investment. 1.2.3. Research gap The limitations of previous studies reveal several unclear or unexplored theoretical and practical issues in published foreign and domestic scientific works including:
- Theories on bond investment: the concept of bond investment in commercial banks, investment management organization; assessment criteria system, and factors affecting bond investment. - The theoretical background for selecting and developing a research model on the impact
of bond invesment on the business performance of Vietnam’s commercial banks in terms of both profit and risk.
- Bond investment in Vietnam’s commercial banks in the period 2015-2019 with a view on the entire system (ensuring a comprehensive generalization), on each bank, and on each group of banks (to see the particular features of bond investment organization and trends in each group of banks by asset scale).
- Bond invesment orientation and strategy and solutions that banks need implment (including general and specific solutions in accordance with each group of commercial banks) in the context of developing the bond market and banks in the period 2020-2025 with a vision to 2030. These gaps are studied to respond to the questions posed in the thesis.
1.3. RESEARCH PRODUCEDURE AND METHODOLOGY 1.3.1.Research procedure
In this section, the researcher presents the research procedure through a model of steps from literature review, theoretical background, and situation analysis to suggestions of bond investment orientation for commercial banks. 1.3.2. Research methods
The data used in the research consist of secondary data (legal documents promulgated by government authorities; internal documents issued by commercial banks; annual report made by Vietnam State Bank, commercial banks, and State Securities Commission of Vietnam; data from report by Hanoi Stock Exchange, General Statistics Office of Vietnam, auditing departments, etc.) Besides, the researcher has consulted several banking researchers, managers, and administrators and bankers who are working in the business departments and risk management in bond investment in commercial banks. Information treatment is a combination of quantitative and qualitative research methods, of which the latter (descriptive statistics, analysis, comparison, case study, etc.) is dominant.
CHAPTER 2: THEORIES ON BOND INVESTMENT OF COMMERCIAL BANKS
2.1. KEY ISSUES ON BOND AND BOND MARKET 2.1.1. Bond In this section, the researcher discusses concepts of bond, the features and types of bond by
several classification criteria like the issuer, interest payment method, interest rate nature, etc. 2.1.2. Bond market
After presenting the concept and classification of bond markets, the researcher analyzes transaction forms and modes for the background of an investigation into forms and modes of bond transactions in Vietnam’s market. 2.2. BOND INVESTMENT OF COMMERCIAL BANKS 2.2.1. Commercial banks’ key operations
To come up with a general view on the operation of commercial banks, before focusing on bon investment, the researcher presents banking operations basing on the balance sheet which include internal operations (capital operation and capital use) and external operations (the services
not shown on the balance sheet like payment, guarantee, trust, agency, consulting and information providing, etc.) 2.2.2. The concept and forms of bond investment in commercial banks
On refering to the concepts of bond investment given by previous studies, the researcher identifies the thesis’ approach and the concept used throughout the paper in which bond investment of commercial banks is when the bank buys bonds or trusts other organizations (investment funds, capital management companies, etc.) with bond purchasing to maximize capital use, diversify income, and spread the risk for the bank.
The journal also analyzes several basic forms of bond investment in commercial banks like direct investment (bank investment) and indirect investment via investment funds (trusted investment); short-term, medium-term, and long-term investment; IPO on primary market, and repurchasing bonds from legal entities and individuals on the secondary stock market, etc. 2.2.3. The aims and features ò bond investment in commercial banks
Modern commercial banks enter into bond investment in order to (i) Stabilize the bank’s income; (ii) Compensate for credit risks; (iii) Supply reserves for the bank; and (iv) Geographically diversify their business. As one type of stock investment, bond investment of commercial banks bear all features of stock investment which are: - Firstly, bond investment is a flexible financial investment activity as bonds usually have higher liquidity than other forms of investment.
- Secondly, bond investment in commercial banks is made in direct transactions with individual bond issuers, via issuance agencies, or via financial intermediaries (investment funds, securities companies) offering bonds to the public.
- Thirdly, bond investment need comply with the market regulations on investment procedures and conditions to be certified exchange members, procurement members, market makers, etc.
- Fourthly, besides abiding by general regulations on bond investment, as a monetary trading institution, the bank must also comply with regulations by Vietnam State Bank and Vietnam Central Bank in this business. 2.2.4. The income and risks in bond investment of commercial banks
Incomes in bond investment are bond yields and bond price differences in the market. One common risk in bond investment of commercial banks is that the bank does not get interest and investment on bonds, or income from selling bond reduces as bond prices in the market go down. There are reasons for the risks in bond investment, and their influence on the real income are varied with different features and vulnerability. 2.2.5. Two sides in bond investment of commercial banks
Bond invesment or commercial banks have impacts on other operations of the banks, helping them to diversify forms of capital raising and using other credit institutions’ capital, etc. However, apart from benefits, bond investment of commercial banks may have negative effects on the nation’s economy and society, the development of each bank, and the safety and sustainability of the entire system if the bank managers do not follow the government regulations and the bank’s internal regulations in investment. The practice of cross-bonding between credit institutions has led to an amount of capital flowing around the system and the increase in the bank’s unreal capital, and difficulties in government authorities’ control over capital adequacy ratio and the proportion of short-term capital for medium-term and long terms lending.
2.3. ORGANIZING AND MANAGING OF BOND INVESTMENT IN COMMERCIAL BANKS 2.3.1. The aim of organizing and managing bond investment
The organization of bond investment in commercial banks aims to: - Ensure the 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
(ROE)
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 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
160%
140%
120%
100%
Quy mô TPDN/GDP Corporate bond/GDP
80%
Government bond/GDP Quy mô TPCP/GDP
60%
Quy mô tín dụng/GDP
Credit/GDP
40%
20%
0%
2015
2016
2017
2018
2019
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-
2019
No. Investor 2015 2016 2017 2018 Unit: % 2019 1 Credit institutions 65.4 31.1 55.2 44.8 51.2 48.8 47.8 52.2 46.3 53.7 2
Non-bank financial organizations
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
Form of transaction
No. 1 2 Outright Repo 2017 50.8 49.2 2018 45.5 54.5 Unit: % 2019 45 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 31st December in each year) 2015 2016 2017 2018 2019
7 4 4 4 4
28 31 31 31 31
3 2 2 2 2
5 8 9 9 9 Type of bank State commercial bank Joint stock commercial bank Joint-venture bank 100% foreign- invested bank
50 51 49 49 49 Branch of foreign bank
(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
02/2018/VBHN-NHNN; 19/2017/TT-NHNN; 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; 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 12th February, 2018, under Circular No. 19/2017/TT-NHNN and Circular No. 02/2018/VBHN-NHNN (effective from 12th 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 15th 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 1st, 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: % 2019 2018 2017 2016 2015 Name of bank
No. The banks with higher ratio of investment to total asset than the system’s average Ocean Bank 1 2 GP Bank 3 Maritime Bank VP Bank 4 Liên Việt Bank 5 Tiên Phong Bank 6 Bảo Việt Bank 7 Average 34.86 37.46 54.23 31.82 34.31 32.66 37.03 20.66 47.99 36.49 41.17 33.69 27.23 32.45 46.89 20.94 37.55 28.74 33.95 23.31 23.52 21.31 38.72 16.86 35.80 19.91 33.25 24.44 19.72 18.13 33.75 14.78 47.77 32.40 46.51 26.94 22.66 23.83 43.73 18.58 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
2015 2016 2017 2018 Unit: % 2019 Criteria 20.66 20.94 18.58 16.86 14.78 No. 1 bond
9.96 10.46 9.37 8.48 7.20 2 Bank
5.85 5.25 4.37 3.60 2.57 3
4.85 5.23 4.84 4.78 5.01 4 other of
Total investment/Total asset Bonds of Vietnam State + Government/Total asset Corporate bond/Total asset Bonds credit institutions/Total
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
Year
Table 3.13: Government bond investment of Vietnam’s commercial banks on the primary market in the preriod 2015-2019 Winning bond value (billion VND) 190.258 229.811 144.375 73.640 Total value of invested bond on primary market (billion VND) 222.410 271.519 162.154 78.998 Number of bidding commercial banks 18 15 16 16
12 36.415 42.968 2015 2016 2017 2018 Quarter I, 2019
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. 2015 2016 2017 2018 2019
1 61 48 43
2 Type of transaction Outright % Repos % 67 535,177.84 33 39 57 52
1,057,859.07 1,676,990.18 1,948,216.51 1,680,671.71 1,881,460.65 47 1,092,840.08 2,118,164.71 2,246,379.25 2,149,914.50 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 1 2 3 Short-term (less than 1 year) Medium-term (1-5 years) Long-term (over 5 years) 2015 44 51 5 2016 2 90 8 2017 1 82 17 4 78 18 2018 2019 2 16 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: % 2019 2018 2015 2017 Name of bank
Ocean Bank GP Bank Construction Bank
16.02 15.08 10.78 19.37 11.60 7.79 11.71 8.87 9.07 53.78 6.99 10.21 10.50 7.16 11.88 11.52 11.77 16.50 11.48 20.88 12.27 14.86 10.22 12.29 13.76 11.31 11.99 9.90
Á Châu Bank Quân Đội Bank Bắc Á Bank Phương Đông Bank - 2.37 0.51 1.49 3.60 1.81 2.59 1.53 1.74 5.25 3.09 2.70 2.33 3.38 5,85 - 1.75 0.84 1.30 4.37 2016 No. The banks with higher ratio of corporate bond investment to total asset than the system’s average 10.97 1 5.96 2 1.05 3 3.76 4 Maritime Bank 7.95 National Bank 5 17.63 Bảo Việt Bank 6 7 12.81 Public Bank The banks with lower ratio of corporate bond investment to total asset than the system’s average 1 2 3 4 Average - 3,63 0,44 1,24 2.57 Source: Reports from Vietnam State Bank and auditing companies
* Bonds of other credit institutions The ratio of investment in bonds of other credit institutions to the total asset of the entire banking system remained rather stable over the years with a moderate rise from 4.85% in 2015 to 5.0% in 2019. The banks with relative large ratio of investment in bonds of other credit institutions to the total asset include Ocean Bank, GP Bank, Construction Bank, Maritime Bank, etc. while banks in group 1 had low rate. Table 3.17: The ratio of investment in bonds of other credit institutions to the total asset in the period 2015-2019
No. Name of bank 2015 2016 2017 2018 Unit: % 2019
The banks with higher ratio of investment in bonds of other credit institutions to total asset than the system’s average Ocean Bank 1 GP Bank 2 3 Maritime Bank VP Bank 4 Bắc Á Bank 5 Việt Á Bank 6 7 Liên Việt Bank Average 8.89 9.74 8.74 8.81 11.08 12.80 11.71 4.79 7.79 12.42 9.94 12.66 10.36 19.68 13.44 5.23 6.52 12.42 11.8 11.09 12.25 22.93 11.25 4.85 8.61 10.01 10.78 11.19 12.43 15.03 10.35 4.84 9.19 8.69 12.04 10.48 11.27 9.26 9.35 5.02 Source: Reports from Vietnam State Bank and auditing companies 3.2.3.3. Income from bond investment
Due to difficulties in collecting information of income from bond investment of each bank, the researcher calculated income from bond inestment basing on the investment value of each type of bonds of the entire commercial bank system in each year and the average interest rate of each type released by HNX.
Table 3.18: Average interest rate that commercial banks earned from government bond investment in the period 2015-2019 Unit: % 2015 2016 2018 No. Criteria 1 Interest rate 2017 Short-term bond (less than 1 year) 4.53 2 4.71 44 4.00 1 2019 3.10 2 3.26 4
2 Medium-term 4.73 bond (1-5 years) 5.50 51 5.59 90 82 3.55 78 3.46 16
3 6.13 Long-term bond (over 5 years) 7.17 5 6.98 8 17 5.03 18 4.53 82 Investment rate Interest rate Investment rate Interest rate Investment rate 4 Average interest rate 5.24 5.68 4.96 3.81 4.33
that commercial banks earned from government bond investment Source: HNX and researcher’s calculation 3.2.3.4. Law compliance in bond investment
Almost all of Vietnam’s commercial banks keep their CAR higher than 9% and comply with the existing law on bond investment conditions as well as regulations on CAR, bad debt rate, etc. However, during the period from 2015 to 2019, 03 joint stock commercial banks acquired by Vietnam State Bank in 2015 (Vietnam Construction Bank, GP Bank, and Ocean Bank) and 01 bank under special supervision (Đông Á Bank) did not provide transparent information on their financial performance and regulations on safety rates. Especially, several bank had bad debt rates of more than 3%. These banks remained their investment activities and were the banks with the highest ratio of corporate bond investment to the total asset in the system. Therefore, the operation of these banks must be revised, especially in the present context when corporate bond investment hides a number of risks. 3.2.4. Study on bond investment of several Vietnam’s commercial bank
To provide practical background for the assessment of bond investment in Vietnam’s commercial banks, the researcher selected 3 bank for case-study: - Vietinbank representing group 1: the banks with the largest asset value and equity, average business efficacy, and long history (founded in 1988). - Military Bank representing group 2: the banks with average asset value and equity, high business efficacy, and average length of history (founded at the end of 1994) - Public Bank representing group 3: the banks with the smallest asset value and equity, the lowest business efficacy, and short development history (founded at the end of 1993).
Each bank was studied in 3 aspects including (i) Promulgation of internal documents on bond investment; (ii) The organization of bond investment, and (iii) Bond investment performance. 3.3. INVESTIGAING THE EFFECTS OF BOND INVESTMENT ACTIVITIES ON THE PERFORMANCE OF VIETNAM COMMERCIAL BANKS 3.3.1. Model and research methodology - Model: • 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; INF - Inflation rate. - Data: dataset of 30 commercial banks in Vietnam for the period from 2009 to 2019. Financial indicators of commercial banks are taken from Bankscope, indicators of Vietnamese economy are taken from the IMF source. - Methodology: descriptive analysis; correlation coefficient analysis, regression analysis using FEM, REM and GMM models, Hausman test. 3.3.2. Result analysis - GMM regression analysis results show that Trad, Loan have a positive influence on ROA, ROE, and a negative effect on bank risk. - The bond investment activities of Vietnamese commercial banks have helped to increase bank income, at the same time dispersing risks and enhancing bank liquidity. 3.4. GENERA ASSESSMENT ON BOND INVESTMENT OF VIETNAM’S COMMERCIA BANKS 3.4.1. Achievements
Achievements: - Bond investment helps banks to diversify their business, increase incomes, and ensure liquidity. - Generally, commercial banks are in compliance with Vietnam State Bank’s current regulations on bond investment conditions and limits.
Reasons: - Most of the banks have promulgated internal regulations on bond investment. Facing the complicated market changes and risk warnings by Vietnam State Bank, several commercial banks have recently limited investment in corporate bonds issued for the purpose of restructuring the issuer’s debts and ceased investment on the primary market in bonds issued by credit institutions. - Vietnam State Bank’s regulations on bond investment conditions and limits have been improved. - The bond market is developing, making certain advantages for commercial banks in
implementing investment. 3.4.2. Shortcomings and reasons 3.4.2.1. Shortcomings
Firstly, the average bond investment scale tends to reduce. Especially, several commercial banks have pretty large investment scale exceeding the average of the entire system and the common average of banks in the world (from one fifth to one third of the total asset value). Excessive bond investment may lead to higher risks and divert the operation of a commercial bank into an investment bank. Secondly, the investment strategies of several commercial banks in Vietnam are against the popular investment strategy in the world.
Thirdly, corporate investment in commercial banks hides a number of risks. Fourthly, that commercial banks invest in the bonds of other credit institutions necessarily
leads to a large amount of capital flowing around the banking system. 3.4.2.2. Reasons for the shortcomings
* Subjective reasons - Though most banks have promulgated regulations on bond investment, they make no specification on the investment limits in each type of bond, especially regulations on purchasing bonds of venture businesses or bonds issued for the purpose of restructuring debts.
- The strategy, implementation, and risk management in bond investment in several banks is still simple and problematic. Risk management in several commercial banks, especially smaller ones, is merely done by following work procedure by internal supervision; and commercial banks haven’t focused on risk assessment and measuring and finding solutions to restrict risks. - The human force in bond investment is small; one part of which is not professionally trained and lacks experience.
* Subjective reasons - Vietnam State Bank hasn’t enacted regulations on bond investment of commercial banks in venture businesses and regulations on the ratio of bond investment to the total asset value.
- The bond market is not well developed, which can be seen in the following facts: (i) The bond market in Vietnam has grown in recent years but still small compared to developed government bond markets; (ii) Market information and infrastructure is limited; (iii) There are no credit rating organizations in the market, and the role as market makers of financial
intermediaries is limited; and (iv) The legal environment of the bond market is not complete.
CHAPTER 4: THE ORIENTATION OF BOND INBESTMENT IN VIETNAM’S COMMERCIAL BANKS AND SEVERAL SUGGESTIONS 4.1. THE ORIENTATION TO DEVE OP BOND MARKET AND VIETNAM’S BANKING IN THE PERIOD 2021-2025 WITH A VISION TO 2030 4.1.1. The orientation to develop Vietnam’s bond market 4.1.1.1. Perspective Firstly, build and develop the bond market to match the development of the economy and other elements of the financial market (the stock market, monetary-bank credit market).
Secondly, develop the bond market both intesively and extensively, ensuring the system safety and gradually accessing international practices and standards, modernizing the market infrastructure, and making the market an important channel in mobilizing medium and long-term capital for the economy at reasonable cost.
Thirdly, continue to develop the government bond market for the development ò the bond market; enhance the corporate bond market, making favorable conditions for enterprises to raise capital, especially medium and long-term capital, and improving business information management and disclosure. Fourthly, improve the transparency and protect the legal rights of market entities. 4.1.1.2. Goal
- General goal Develop a stable bond market and a complete and consistent structure of supply and demand expand investor’s base, upgrade the operation scale and quality, diversify products and operations, and make sure that the market is open, transparent, and efficient; actively integrate into the international market, and gradually access international standard and practices.
- Purposes Make the bond market balance stand at around 65% of the country’s GDP in 2030, of which government bond, government-guaranteed bond, and local government bond balance reach 45% of the GDP in 2030, and corporate bond balance about 20%. Strive to lengthen the average term of government bond issuance in the period 2021-2030 to 7-8 years.
Increase the average trading volume of government bonds, government-guaranteed bonds, and local government bond in each trading session to 2% of the listed bond balance in 2030. Increase the proportion of government bond held by insurance companies, social insurance companies, pension funds, investment funds, and non-bank financial institutions to 60% in 2030. 4.1.1.3. Development orientation - Develop and diversify bond products in a route map matching the development of the market and investor’s demand.
- Develop and diversify the investor system. - Develop the system of market makers, intermediary and market services institutions. - Develop and improve the quality of market information system. - Improve regulations on market goods and entities.
4.1.2. Orientation to develop Vietnam’s banking 4.1.2.1. Goal Strive to make 100% of the commercial banks adopt Basel II at the standard level and pilot
the implementation of Basel II at the advanced level in the commercial banks where the government holds the dominant stake and the commercial banks with good management that have applied Basel II at the standard level;
Have at least 2-3 commercial banks in the top 100 biggest banks (in terms of the total asset) in Asia (2025); 3-5 banks listing their stock on foreign stock markets (2025); reach the development level of the 4 leading countries in ASEAN in 2025; Strive for comprehensive finance in 2030; Raise the proportion of income from non-credit services in the total income of commercial
banks to 16-17%; bring the bad debt rate of the credit institution system to lower than 3%. 4.1.2.2. Development orientation
- Develop modern bank services and products, enhancing access to bank services. - Diversify the channels providing bank services, develop modern bank transaction channels. - Develop the system of credit institutions to be competitive in the domestic and international market.
4.2. THE ORIENTATION OF BOND INVESTMENT OF COMMERCIAL BANKS IN THE PERIOD 2021-2025 WITH A VISION TO 2030 4.2.1. Forecast of advantages and disadvantages in bond investment of Vietnam’s commercial banks 4.2.1.1. Advantages
Firstly, with the development of increasingly diversified bond products including traditional and new products and derivative tools, each commercial bank will have more opportunities to select the types of bonds that are suitable for its investment strategy.
Secondly, with the policies of transforming the business model of commercial banks from “credit monoculture” to diversified non-credit bank services (Decision No. 986/QĐ-TTG and 34/QĐ-NHNN) and adjusting the regulations on the rate of government bond holding by credit institutions towards abolition (Decision No. 1191/QĐ-TTg), commercial banks will have chance to raise the investment rate and improve their flexibility in bond investment.
Thirdly, the development of intermediary entities such as the system of market makers, securities companies, fund management agencies, etc. as well as improved market services, the system of bond market information will be improved to be more adequate and transparent, which are good conditions for commercial banks to have precise bond investment decisions and restrict hidden risks, etc.
Fourthly, in recent years, the legal framework on the bond market and bond investment of commercial banks have continuously promulgated and amended by government authorities, providing firm and clear legal foundation for commercial banks participating in this business. Regulations on the conditions of corporate bond issuance promulgated in Decree No. 81/2020/NĐ-CP on 9th July, 2020 have helped to improve the quality of corporate bond goods, thus containing risks for investors including commercial banks. 4.2.1.2. Disadvantages
Firstly, the development and diversification of the investor system will inevitably increase the competition in the market. In such context, the labor force of the bond investment department of several banks are not professionally train, or/and are engaged in bond investment concurrently. Besides, several commercial banks have not developed a unit of risk research and control (Middle Offices) in bond investment. The staff in this department are thin in the number,
and they have to take several concurrent positions in the bank. This is a big challenge for several commercial bank that can’t be solved in a short time.
Secondly, besides the majority of Vietnam’s commercial banks that have satisfied conditions on corporate bond investment under existing regulations, several banks have not yet promulgated internal documents on bond investment. With poor infrastructure and technology still, others cannot support their bond investment sufficiently.
Thirdly, risk management in several commercial banks, especially smaller ones, hides shortcomings. The steps in detecting, supervising, and dealing with risks are not clear and consistent. 4.2.2.Bond investment attitude and orientation of Vietnam’s commercial banks 4.2.2.1. Attitude to bond investment of Vietnam’s commercial banks
- Comply with the law and internal regulations on bond investment. - Select the investment strategy that is suitable for each bank and that helps to achieve the goals of liquidity safety, income diversification, profitability stability/improvement, and credit risk offset - Improve the management quality and enhance risk control in bond investment. 4.2.2.2. The orientation of bond investment in Vietnam’s commercial banks Firstly, adjust the scale and structure of bond investment at a reasonable level to achieve the targets: reserve, income improvement, and reducing over-focus risks. Secondly, select an investment strategy that match the bank’s management capacity.
4.3.SUGGESTIONS FOR VIETNAM’S COMMERCIA BANKS 4.3.1. Improve internal documents on bond investment
Rapidly supplement and improve the legal foundation in lack at each commercial bank, promulgate regulations on bond investment limits, the procedure of corporate bond invesment for the whole system, and risk management procedures in bond investment, build and apply a suitable set of criteria for this activity, helping managers to make good development strategy. 4.3.2. Enhance investment in facility and strictly comply with regulations on risk management in bond investment Continue to support bond to renovate banking investment
towards technology profesionality, modernization, and automation. The use of modern softwares helps transfer capital business automatically through direct business division (Front Office), risk management division (Middle Office), and payment and settlement (Back Office) and automatize work procedures, thus reducing operation risks remarkably. The input data from the front office will be transferred to the back office in the real time, then verified, compared, and treated. The transactions will be check automatically under the regulations set by the bank. 4.3.3. Develop and improve the quality of the bond investment staff
Renovate and perfect personnel work, gradually restructure the system towards professionality, creating the smooth and consistent coordination of the units. Basing on the actual development of the market, with favorable legal conditions and the rise in new products (termed contract, future contract, short sale, etc.), commercial banks need form independent business divisions (proprietary trading units). Focus on developing proprietary trading under regulations on specific limits with close supervision to restrict arising risks. So that bond proprietary trading could be efficient, it is necessary for the staff to make use of different techniques to look for the bonds with price increase potential after analyzing all related factors. Vietnam’s commercial banks need learn from international lessons in recruiting, training,
assigning, and organizing human resources reasonably. 4.3.4. Other solutions - Raise the awareness of the management board of the role of bond invesment and business in the bank’s general operation and development strategy.
- Improve the effectiveness of management. Build and apply an effective management mechanism for available capital for small commercial banks, especially the centralized capital management and internal capital regulation should be more flexible and efficient than the current way. - Enhance bad debt control and reduction.
4.4. SEVERAL SUGGESTIONS TO GOVERNMENT AUTHORITIES 4.4.1. To Vietnam State Bank
Firstly, review, supplement, and perfect regulations on the safety of bank operation, complement limits on bond investment over the total asset value and investment in the bonds of venture businesses (which should be at the same rate as lending for investment in the bonds of these enterprises), restrict and gradually prohibit investment in the bonds of other credit institutions to stop the capital running around the banking system. Impose strict penalty on the commercial banks that circumvent the law and make illegal bond investment. Secondly, improve the quality of bond invesment supervision and inspection in commercial banks, ensuring bond investment and credit activities comply with the law.
Thirdly, set criteria for classifying and ranking credit institutions, review and complete a suitable management and supervision mechanism for each type of credit institution. Develop a risk alarming system and a mechanism to deal with systemic crisis and the credit institutions with high risks, making sure that Vietnam State Bank can intervene to protect the system’s safety. 4.4.2. To the government and the ministries and industries related to government management over the bond market Firstly, develop the market scale by developing investors and elements of the market, especially the secondary market. Secondly, develop the infrastructure and improve the quality of the market information system.
Thirdly, develop the system of market makers, intermediary entitites, and market services. Fourthly, complete legal regulations on bond goods, issuance, and trade and market entities.
CONCLUSION
In the context of severe competition in the traditional banking and lower profit from crediting, banks have been expanding and entering transactions on the financial market in order to diversify their business and look for profit.
Generally, bond investment in the entire system did not change much in the research period, but several commercial banks had pretty large investment scale in most years (Maritime Bank invested from 33 to over 54% per year; Ocean Bank 34-37%/year). Excessive investment may change the operation nature of a commercial bank. during the past period of bond investment, commercial banks aroused some concerns as a number of banks tend to pour capital
into corporate bonds, especially when companies in property raise capital at high interest rates. This took place in the situation Vietnam State Bank is tightening credit in the property market, lowering the rate of short-term capital for medium and long-term lending. This poses risks in case the enterprise falls into further difficulty, is unable to repay the maturing bond original and interest, and decides to issue more bonds to restructure debts. Besides, the fact that commercial banks invest in the bonds of other credit institutions will lead to a large amount of capital running around the banking system, distorting the overview of the medium and long-term capital scale, having negative influence on the role as financial intermediaries of commerial banks in supplying capital for the economy.
These moves are posing questions on the healthy management and operation, safety and efficacy in bond investment of commercial banks in the new context with challenges and risks. Therefore, there need be a clear, efficient, and suitable management framework for the development of commercial banks in general and the development orientation of the bond market in particular. As well, it is required that Vietnam’s government and Vietnam State Bank introduce clear legal regulations to control and adjust bond investment in commercial banks.
The thesis’s limitations: Besides the achievements, there are several limitations as follow: 1. Due to information security, the researcher couldn’t get sufficient information on invesment (data on bond investmnt by industry and issuer) and income from bond inestment of Vietnam’s commercial banks. The number of respondents is limited. As a result, the thesis can not make in-depth conclusions on bond investment of commercial banks by industry and issuer. 2. Research was mainly done under qualitative methods, the model that measures the impact of bond investment on the business performance of commercial banks is simple; there is no model to study the influence of the factors on bond invesment of commercial banks. These limitations would serve as the orientation for further research by the researcher in
the coming time, given the right conditions.
LIST OF PUBLISHED SCIENTIFIC RESEARCH WORKS
OF THE AUTHOR RELATED TO THE RESEACH TOPIC
1. MSc. Anh Dinh Thi Phuong - Bond investment activities of commercial banks in Vietnam - Current situation and some solutions, Journal of Trade Science, No. 8/2020
2. MSc. Anh Dinh Thi Phuong - Solutions to develop Vietnam's bond market, Journal of Trade Science, No. 8/2020
