The Compelling Reasons Behind Banks’ Interest Rate Hike and Bond Issuance

Per current regulations, credit institutions are allowed to use short-term capital for medium- and long-term lending, but they must adhere to the maximum ratio of 30%. Consequently, to comply with this regulation, a series of banks have recently increased deposit interest rates to attract more deposits for larger-scale lending as the economy rebounds. The spread between long-term and short-term deposits can reach up to 2%, depending on the tenor and the specific bank.

This trend of raising deposit rates started in March and has now entered its fifth month. The interest rate of 5% per annum for deposits with tenors of 18 months or longer is now being increased to 6% by banks.

Along with the rate hike, banks have also been issuing more bonds recently to meet the demand for long-term capital and ensure capital safety for business growth.

According to the Ministry of Finance’s update on corporate bond issuance as of July 5, a total of 41 enterprises have issued private placement bonds worth more than VND 110,000 billion in the first half of the year, 2.6 times higher than the same period in 2023. Of this, credit institutions’ issuance volume in the first half reached VND 69,600 billion, accounting for a dominant 63.2%.

According to VIS Rating’s statistics, banks issued a total of VND 196,000 billion worth of bonds in 2023, significantly higher than the VND 104,000 billion issued in 2019.

The data also shows that, as of the end of 2023, 72% of outstanding Tier 2 capital bonds were issued by state-owned banks, while 98% of non-secured corporate bonds were issued by private joint-stock banks.

So far this year, banks have issued nearly VND 80,000 billion worth of bonds, accounting for 64% of the total value of issued bonds.

According to FiinRatings analysts, credit demand is expected to increase in the second half of this year. To meet the borrowing needs of businesses, credit institutions will need to strengthen their medium- and long-term capital sources, including issuing bonds to increase Tier 2 capital.

Commenting on the market, VIS Ratings experts anticipate that the banking sector will issue more than VND 283,000 billion worth of Tier 2 capital bonds in the next three years. In the same period, nearly 55% of new Tier 2 capital bonds are expected to be issued by state-owned banks as their outstanding Tier 2 capital bonds are significantly reduced due to deductions.

“A few small private banks with weak profitability will issue Tier 2 capital bonds to support their capital adequacy ratio by 3-4%. Additionally, some medium-sized and large private banks will use Tier 2 capital bonds to support their high credit growth targets,” said VIS Ratings analysts.