At its annual general meeting, National Citizen Bank approved a plan to increase its chartered capital by issuing bonds worth 1 trillion dong (Bt1.6 billion) with covered warrants.

The bonds will have a three-year tenor and a coupon rate of 9.5 per cent.

Covered warrants are issued by financial institutions rather than companies, so no new stock is issued when covered warrants are exercised.

Rather, the warrants are “covered” in that the issuing institution already owns the underlying shares or can somehow acquire them.

Recently Asia Commercial Bank also divulged plans to issue 2 trillion dong worth of bonds for a tenor of five years and floating interest rates matching Vietcombank’s interest rate for 12-month dong deposits.

Vietcombank itself has already outlined a plan to issue bonds together with a private placement of shares to foreign investors.

The banking industry has been facing risks, with many lenders having to struggle with bad debts.

As a result, many lenders find it difficult to persuade people to buy their shares, especially after the central bank prohibited cross-ownership by banks.

Their problems are compounded by the fact that the major shareholders of many banks are state-owned firms, which have been ordered by the government to sell off their stakes to focus on their core businesses.

Analysts said in this scenario the lenders would benefit by issuing bonds since it would prevent their shares from being diluted.

Bond issuance would also help the banks increase their Tier 2 capital, or even Tier 1 capital in the future if they are convertible or bonds with warrants.

Increasing core capital would help the banks expand without falling foul of the Basel norms that mandate the capital adequacy ratio for lenders globally.

Obvious benefit

Another obvious benefit is that the banks can retain the amount raised from a bond issue for a fixed period unlike any deposit and at interest rates not much higher than on deposits.

Most banks now offer interest rates of 6.5-7.5 per cent for 12-month deposits, while bonds usually carry a coupon rate of 8.5-9.5 per cent for terms of three to five years.

But the nature of bond investors has changed somewhat in the last few years.

In the past those who bought banks’ bonds were mainly other banks that wanted to help each other increase their assets and capital. So this was contrived and quite risky.

However, now the buyers are more diverse, and likely include domestic and foreign individuals and organisations.

According to a report from the State Bank of Vietnam’s Credit Department, bank loans grew by 6.8 per cent as of late last month, slightly higher than the 6.4 per cent a year earlier.

Lending in dong increased by 8.1 per cent and accounted for 90.8 per cent of total loans. Loans in foreign currencies declined by 4.6 per cent.

Many analysts blamed the slowdown in foreign currency credit growth on exchange rate risks and low demand.