Securities companies in Vietnam have thrived in the last 3 years thanks to the strong participation of individual investors. To meet the capital needs of investors, securities companies have increased their equity and debt through both bank credit loans and domestic and international bond issuance.
The long-term prospects of Vietnam’s securities service sector remain robust thanks to the economic growth, the ratio of investors’ participation in the total population being fairly low, and the capital market size is expected to increase strongly.
Nevertheless, the current market is facing unfavourable factors, including sideways movements of the VN-Index, declining liquidity as well as policies to control credit for securities business and related activities, such as margin lending.
FiinRatings has rated and announced the credit ratings of two securities companies, MBS (A-, Stable Outlook) and recently VCI (A-, Stable outlook). To provide the market and institutions with financing capital for securities companies, FiinRatings organized the webinar "Credit Insights for Vietnam Securities Service Sector" on 28/09/2022 for representatives from commercial banks, insurance companies, investment funds, and financial institutions domestically and internationally.
The webinar was attended by Mr. Paul Coughlin - Committee Chairman at FiinRatings; Ex-Global Head of Analytical at S&P Global Ratings; Mr. Nguyen Quang Thuan – CEO of FiinRatings; Mr. Nguyen Anh Quan – Assistant Manager, Financial Institutions Ratings; Mr. Nguyen Nhat Hoang – Assistant Manager, Corporate Sector Ratings; Representatives from Viet Capital Securities Joint Stock Company (VCI), and over 150 specialists and investors from Banks, Funds, and Securities Companies in Vietnam.
Some key takeaways from the Webinar:
- Total assets of the 68 operating securities companies reached VND 383 trillion, with their equity size reaching VND 178 trillion as of 30/6/2022. The equity has grown at 3.17x to the end of 2017 and their leverage (Total Assets/Equity) by mid-2022 is now 2.2x y-o-y. Although margin lending has decreased significantly in the first half of 2022, FiinRatings assesses securities companies’ level of leverage as relatively safe from an industry-wide perspective, despite there being many companies with higher levels.
- This is thanks to the diversified business model of securities companies, which now includes proprietary trading/investment, brokerage, margin lending, and financial/issuance advisory. See the chart below:
- However, the proprietary trading activities, which contribute 44-50% to the income structure or operating profit of the industry, are performing poorly. This shows that some companies with a large proportion (over 60%) of income from proprietary trading, will be greatly affected by the recent decline of the VN-Index.
- The 5 key risk factors we are currently monitoring are:
- Liquidity risk: The average daily liquidity on the Vietnam stock market is about 60% compared to 2021. Therefore, this will affect the growth rate of income from securities brokerage as well as the credit risk of the margin lending portfolio. This may also have a larger impact on securities companies that focus on margin lending for small or speculative stocks.
- Proprietary portfolio risk: due to the decline of the VN-Index since the beginning of 2022. Companies with large revenues from the proprietary portfolio will be affected, especially those with the contribution from proprietary trading accounts for more than 50% of the total revenue. Furthermore, FiinRatings also recorded several securities companies have increased their ownership of corporate bonds, especially bonds from unlisted enterprises with low credit quality. Therefore, we recommend investors evaluate the quality of specific portfolios of each securities company when monitoring and managing credit risk.
- Risks from credit risk control: which are implemented by the SBV and credit institutions that currently provide credit lines for securities companies. This is due to most of the debt of securities companies being short-term and very short-term. Long-term debt including bonds accounts for only about 3% of the total capital (including debt and equity) of securities companies. The current measures to limit cash flow into the financial asset channel will put considerable pressure on the liquidity of some weak securities companies.
- Interest rate and exchange rate risks: input interest rates are increasing, while credit lines from banks for securities companies are often floating. Therefore, this will reduce the securities companies’ profit from margin lending and overall their profit in 2022.
- Policy risks: for example, due to the new Decree 65that has just come into effect, securities companies with significant income from bond issuance consulting, bond distribution, and bond term trading will need time to revive these activities, while their bond investment will also become riskier. This is partly from the stricter regulation for qualified investors that can buy corporate bonds (who would need to keep their NAV at VND 2 billion on average for the last 180-day).
FiinRatings also shared the credit rating result of Viet Capital Securities Company (VCI) at A- and Stable outlook. Please see details HERE.
Please see the evaluation framework and methodology for Credit Rating of Securities Companies of FiinRatings HERE.