Global Courant
HANOI – Vietnam’s once thriving real estate sector is under pressure as developers fail to pay their bonds, a market slump triggered last year by a government crackdown on dubious real estate deals. This in turn puts new pressure on the banking sector.
With economic growth expected to decline from 8% in 2022 to 6.3% this year – a figure that could be optimistic given rising economic uncertainty in Vietnam’s key global export markets – problems in the real estate sector could worsen before improve them in the coming months.
The suppression of the real estate market was launched in part to curb land speculation and slow the rampant construction of luxury condominiums, where yields are higher for developers but largely out of reach for average Vietnamese investors and buyers.
The market turned last October when Ho Chi Minh City-based real estate mogul Truong My Lan, chairwoman of the Van Thinh Phat Holding Group, was arrested on charges of bond market fraud. Her arrest sparked a run at the Saigon Commercial Bank (SCB), where Truong is said to have a close credit relationship.
An intervention by the State Bank of Vietnam (SBV), which guaranteed to cover all SCB deposits, averted a possible system-wide run on banks. But the central bank’s intervention could not halt an eventual defeat in Vietnam’s burgeoning property-focused bond market.
The central bank reversed a run on deposits from Siam Commercial Bank. Image: Facebook
Truong was arrested for allegedly misusing a bond issue by her company, which bank sources say diverted money away from its intended purpose of raising capital for land speculation.
Truong was not the only high-profile victim of last year’s anti-corruption crackdown, which saw the firing of former state president Nguyen Xuan Phuc and two now-ex-deputy prime ministers.
The timing of the suppression could not have been worse. Shortly after Truong’s arrest, the SBV was forced to raise interest rates by 200 basis points, a monetary tightening aimed at containing galloping inflation, strengthening the declining dong currency and replenishing sagging foreign exchange reserves.
The interest rate hikes were an additional blow to property developers and buyers and put additional pressure on banks. Local bank sources say there was almost no credit growth in the first three months of 2023, reflecting ongoing problems in the real estate sector.
Faced with declining sales and uncertainties about the legal status of several projects (the corruption campaign targeted questionable titles to urban land where several luxury high-rise condominiums were built), real estate companies have defaulted on their bonds as cash flows have dried up.
In February, Novaland Investment Group, Vietnam’s second-largest real estate group, defaulted on a 1 trillion dong ($43 million) bond issue.
As of March 17, 2023, at least 69 Vietnamese bond issuers were unable to meet their debt obligations as of March 17, 2023, with a total default value of 94.43 trillion dong, representing 8.15%, according to an S&P Global Ratings report of the outstanding value of the bonds. .
“By sector, 43 issuers are companies in the real estate sector with a total value of corporate bond defaults of 78.9 trillion dong, accounting for 83.6% of the total value of defaults,” the report said.
Unless the tide somehow turns in the real estate industry, many more defaults could be on the horizon. “The real estate sector has the largest outstanding bond value at 396.3 trillion dong, which accounts for 33.8% of the total outstanding bond value,” S&P noted.
The bond market slump – new bond issues fell more than 90% year-on-year in the first quarter and none were issued in May – has hit the Vietnamese stock market, which has underperformed the region. There are some 20 private real estate companies listed on the two exchanges, some of which are among Vietnam’s top companies.
Novaland Investment Group is one of the Vietnamese developers that has defaulted on their bonds. Image: Twitter
Certainly, credit rating analysts see the positive side of the government’s actions.
“Government policies were designed to discourage real estate speculation and support the affordable segment of the market,” said Fiona Chan, assistant director at S&P Global Ratings.
“This approach can help the Vietnam real estate market progress towards more sustainable long-term growth, but the market will have to endure some short-term pain. For pre-sales, we estimate total sales will be down 15-20% this year,” Chan told us during a recent webinar
The wave of defaults also reflects regulatory shortcomings in the bond market, which has only taken off in the past five years, largely driven by the burgeoning real estate sector. All bonds are sold domestically in dong currency to mainly private investors and local banks.
“I think the bond market was a bit ahead of the regulators,” said Barry Weisblatt, an investment strategist at SSI Asset Management Company. “They hadn’t really developed the rules, so people played the system,” he said.
Realizing they had been too lax with bond issuance, authorities issued Decree #65 last September, which suddenly tightened regulations and required more disclosure for private placements of corporate bonds.
The result was dramatic with a more than 90% reduction in bond issues afterward. In March of this year, authorities essentially repealed Decree #65 and replaced it with Decree #8, delaying more stringent regulations for at least a year.
While the delay was welcome, longer-term authorities will need to be more vigilant in regulating the bond market, analysts say.
“The government has responded in a way that I believe is conducive to the long-term development of the bond market,” said Xavier Jean, senior director/corporate sector for S&P Global Ratings. “It’s a process that could take years, but I think it’s a necessary first step,” he added.
Meanwhile, over time, Vietnam’s corporate and small and medium-sized enterprises (SMEs) have become even more dependent on banks, which are suffering from their own constraints this year.
Vietnamese banks have grown their assets by 15-30% over the past decade, with a high percentage of the system’s loans going to real estate – one of the few business sectors in which the local private sector has taken off in a still largely communist-controlled economy.
“State banks’ exposure to real estate is about 27% of their books, compared to 37% for private banks – developers, construction companies and residential mortgages,” said Tamma Pebrian, an analyst for Fitch Credit Ratings in Singapore.
Vietnam’s four largest state-owned banks, representing more than 40-45% of the banking system’s assets, have the advantage of being the exclusive source of funding for the country’s still numerous and powerful state-owned enterprises (SOEs).
Many of the more successful private banks have maintained close ties with private property developers over the years, helping them to grow their books and profits in tandem with the real estate boom.
As developers sought more funding, and as banks face strict single-client lending limits, banks and their affiliated security firms helped many developers issue debt in the bond market, acting as both buyer and agent for the sale of emissions to the public. There are no institutional investors such as endowments, funds or insurance companies in communist-led Vietnam.
The banks then helped real estate companies by providing mortgages to investors interested in buying their condominiums and other real estate developments. This bank-customer relationship was a win-win until the government intervened last year.
In March, Moody’s Credit Ratings downgraded the outlook for Techcombank, one of Vietnam’s most profitable private banks, from stable to negative. Moody’s said the downgrade reflected expectations that negative effects from the real estate market will affect the bank’s “independent credit rating”.
Vietnamese banks are highly exposed to the real estate sector. Image: Facebook
Techcombank is one of the main creditors of VinGroup, whose subsidiary Vinhomes is the largest real estate group in Vietnam with projects in more than 40 cities across the country. VinGroup has not yet defaulted on any of its bonds.
Instead of forcing issuers of defaulting bonds to pay or go bankrupt, leaving the public without paying a penny and leaving the banks with massive non-performing loans in the form of bad bonds on their books, SBV has a softer approach chosen.
Issuers and holders have been encouraged to restructure bond repayment periods, or in some cases accept condominium units in lieu of payment.
Earlier this year, the central bank also allowed banks to cut their interest rates by 100 basis points while raising the system’s credit growth ceiling to 16%, which is still low by Vietnam’s historical standards.
After years of rapid growth and impressive profits, this year is expected to be a comedown for Vietnamese banks. That said, most analysts don’t foresee a systemic collapse of the charts.
“Vietnam’s domestic banks benefit from their net external asset position, with still limited ties to global markets,” S&P said in a May press release.
“But thin capital buffers, high levels of debt in the economy, cross-ownership, linked loans and the current real estate market, including the broader impact on upstream construction and downstream services, can affect banks’ asset quality,” S&P said.
Many of the better-run private banks have raised their solvency ratios during the boom, and while the big state banks have yet to do so, they are in little to no danger of going under, analysts say.
“Last year the banks saw 30% profit growth, so it was a real boom,” says Fitch’s banking analyst Pebrian. “This year, we expect earnings growth of about 13% for the industry,” he said – a pullback, admittedly, but not a collapse.
Similar:
Loading…
