Although the State Bank of Vietnam has put a tight lid on credit and loans in recent years, particularly for real estate ventures, there still remains some high risk areas that could cause complex problems for banks in the future.
Robust credit growth
In recent years, real estate credit has been divided into real estate investments and loans for housing. Thus, management agencies control real estate credit, limit capital into high risk segments such as high-end real estate projects, and direct capital flow to actual real estate market needs. Data from the State Bank of Vietnam for the years 2017 until 2019 shows that outstanding credit for real estate businesses decreased from 45.63% at the end of 2017, to 35.49% at the end of 2018, and down to 32.95% by the end of 2019.
However, when the State Bank of Vietnam updated real estate credit in a report sent to the National Assembly in May, the outstanding loans in priority areas did not increase as compared to the same period last year, but instead real estate credit balance showed a substantial increase, despite the negative effects of the Covid-19 pandemic. By the end of March 2020, credit to the real estate sector had increased by 1.23% compared to the end of 2019, and accounted for 19.31% of total outstanding credit, in which outstanding loans for housing accounted for about 62.43% of all outstanding real estate loans. This shows that the proportion of outstanding credit for real estate businesses in the first quarter of 2020 increased 37.57%, compared to 32.95% at the end of 2019.
Besides a robust credit growth, capital from banks also poured into real estate enterprises through corporate bonds. In a report on the corporate bond market for the first six months of 2020, the SSI Securities Corporation listed leading real estate companies as per volume issuance in the first two quarters of 2020. One particular group had even issued VND 47,200 bn in the second quarter of 2020, nearly double the amount issued in the first quarter or in the same period in 2019. Real estate corporate bonds issued in six months were valued at VND 71,600 bn, which was up by 57.5% compared to the same period in 2019. Even commercial banks bought VND 28,200 bn of real estate corporate bonds of primary level, accounting for 40% of total bonds issued in the first six months.
Real estate companies have found it difficult to raise loans from banks and have shifted to mobilizing capital by issuing corporate bonds, but currently concerns have been raised on banks investing heavily in real estate corporate bonds as well.
Concern for banks
Since the beginning of the year up until now, auctioning off bad debts of real estate projects has been ongoing. In early April, the BIDV Branch of Transaction-II announced the selection of a debt auction organization for the Tai Nguyen Construction Production and Trade Company Limited. Collateral was land use rights and future land-attached assets belonging to the Kenton project in the Phuoc Kien Commune in Nha Be District in Ho Chi Minh City. This asset was pledged to BIDV, MSB, and PVCombank, of which BIDV held 58% of the value. In May, the BIDV Gia Dinh branch announced sale of 55 apartments in the Ky Nguyen apartment building in Era Town in District 7. However, sales saw a 5% decrease compared to previous offers.
The State Bank of Vietnam has recently issued a draft circular regulating the purchase and sale of corporate bonds by credit institutions, in an effort to contain risks when commercial banks invest heavily in corporate bonds. This circular only allows credit institutions to buy corporate bonds when they have a bad debt ratio of less than 3%. Purchase of bonds will not be allowed from issuing companies with bad debts owed in last twelve months since purchase. Credit institutions are also not allowed to buy corporate bonds issued for the purpose of restructuring debts of issuing companies. These provide many potential risks, especially when bond issuers continue to have difficulties in production and business activities, and are unable to pay principal and interest, leading to the issuance of more bonds and further debts.
One financial expert explained that when buying real estate corporate bonds, regulations require that credit institutions must add this amount to the loans already on the books. However, banks still maintain separate books and list such loans as investment securities, which excludes them from credit balance. This dubious trick has a very bad effect on controlling source of capital in the real estate sector.
The financial expert is also concerned that due to the ongoing pandemic, the State Bank of Vietnam has had to loosen a number of targets, such as giving more room for credit growth for some banks, and extending the roadmap to reduce ratio of short-term capital for medium and long-term loans. These two factors will make credit more abundant and even though it will be highly profitable, banks will face risks unless they maintain a careful control and limit capital flow into in risky areas like the real estate business.