Analysis of joint stock commercial bank for investment and development of vietnam

HANOI UNIVERSITY FACULTY OF MANAGEMENT AND TOURISMTREASURY MANAGEMENT REPORT Analysis of Joint Stock Commercial Bank for Investment and Development of Vietnam Instructor: Prof... In this

HANOI UNIVERSITY FACULTY OF MANAGEMENT AND TOURISM

TREASURY MANAGEMENT

REPORT

Analysis of Joint Stock Commercial Bank for

Investment and Development of Vietnam

Instructor: Prof Dao Thi Thanh Binh Tutor: MBA Nguyen Thi Minh Hang Class TRM TUT 2 – Group 4

Students:

Nguyễn Thu Huyền – 1704040047 Ngô Thị Thanh Hương – 1704040050 Nguyễn Thị Ngọc Diễm – 1704040020 Phạm Hương Quỳnh – 1804040096

GROUP CONTRIBUTION

TABLE OF CONTENTS Page

ABSTRACT 4

1 Introduction 5

1.1 Overview of BIDV 5

1.2 Main services 6

1.3 BIDV’s ALCO 6

2 Current Conditions 6

2.1 Macroeconomics conditions 6

2.2 Banking industry 7

3 Liquidity Risk Management 8

3.1 Loan-to-deposit ratio 9

3.2 Liquidity Ratio 10

4 Credit Risk Management 11

4.1. Indicators of credit risk 11

4.2 Credit Risk Management 12

5 Capital Management 13

5.1 Basel I 13

5.2 Basel II 15

6 Scenario Analysis 16

6.1 Changing in interest rate 16

6.2 Changing in liquidity position 17

7 Hedging Proposal 18

7.1. Forward contracts 18

7.2. Future contracts 19

7.3 Forward rate agreement (FRA) 20

7.4 Options 20

7.5 Swap 21

8 Conclusion 22

REFERENCES 23

Banks and other financial institutions are the core of the credit intermediation route between savers and investors They provide services to individuals, enterprises and large corporate firms in order to run their business in both domestic and international channels However, as well as any companies in the current competitive business world, banks face risks In fact, these risks that banks incur are not only in terms of the banks' money and reputation but are also various types of financial and non-financial risks that are taken by the economy as a whole Therefore, Risk Analysis and Risk Management has become the foundation for banks' sustainable operation Understanding and managing the risk means foreseeing and being able to deal with the challenges and threats that banks confront in the future In this paper, we provide an analysis and evaluation of BIDV’s risk management based on many criteria such as current conditions, credit risk, interest rate risk, liquidity risk These information are gathered from the annual report and official website of the bank, alongside with calculations and other related techniques

to gain better insights and conclusions Our analysis witnessed BIDV as an outstanding bank although sometimes it fell into minor troubles because of changes in management methods This report is restricted due to the limitation of public information, thus there may be some parts that are not consistent with the actual situation of the bank.

After more than 62 years of development, BIDV has become one of the “Big four” banks inVietnam and continued to be assigned high credit ratings by international rating firms, taking aplace in the top 100 Asia’s banks By the end of 2020, BIDV has been the largest lender in Vietnam with total assets hitting over 1.49 million VND, which is 1.5 times higher than 2016, the average growth rate of 10.4% per year in the 2016-2020 period (Le Phuong, 2021) These achievementsshow BIDV’s significant position in the Vietnam financial market.

1.2 Main services

BIDV is an investment and development bank in all fields, with great successes In each field, BIDV always tries to create and launch services and products with many features to meet the needs

of customers BIDV’s main services are banking, insurance, securities, and financial investment.

In terms of financial investment services, this is the outstanding field of activity of BIDV and has built

a brand name in the investment market in Vietnam BIDV has set up many businesses based on capital contribution to invest in projects, demonstrating its leading and coordinating role Some national projects can be mentioned as Expressway Development Company - BEDC; Aviation rental Joint Stock Company - VALC, investment in the construction of Long Thanh International Airport,… Regarding

banking services, BIDV is a leading experienced bank providing a full range of modern banking

products and services such as Card Services, Personal Loans, Deposit Services, Foreign Exchange and

Capital markets, Treasury, Digital banking, Payment and transfer About insurance services, the bank provides life insurance and non-life insurance products that are suitably designed in the overall package

of BIDV products to customers BIDV operates in the securities sector and provides products to

promptly meet the financial needs of customers such as

Stockbroker; Securities services include customer transaction services, financial services, depository services, and bond settlement services; Securities transactions; Derivative securities.

1.3 BIDV’s ALCO

The Asset-Liability Committee, also known as ALCO, is a bank committee whose primarygoal is to maximize benefit while minimizing risk; it promotes and handles financial and creditmetrics in accordance with SBV's requirements ALCO maintains the asset-liability balance toensure that the bank has enough assets to cover its liabilities; additionally, ALCO manages theasset-liability balance to ensure that the bank has enough assets to cover its liabilities ALCOalso assists in the monitoring of liquidity, liquidity risks, and market risk in the face ofexchange rate and interest rate volatility by designing appropriate risk management profilesand risk strategies ALCO is undeniably essential in ensuring owner equity effectiveness ratiosand the long-term viability of BIDV

ALCO councils have been managing liquidity and interest rate risk since 2004, and ALCO's operational structure has strengthened dramatically Controlling asset and liability is always a major challenge for any bank when establishing Basel, according to Mr Phan Duc Tu – BIDV Board of management Being aware of this problem, BIDV has built a group to evaluate debt asset and asset management (ALM) In order to build modern credit risk measuring tools, the project has helped BIDV improve the efficiency

of the entire credit process chain following advanced practices from the pre-lending evaluation stage to the post loan management in order to credit approval time This is also a basis for determining interest rates and fees collected from customers correctly based on risks and characteristics of customers, thereby increasing profits for banks.

2 Current conditions

2.1 Macroeconomic Conditions

In general, the 2016-2020 period is the convergence of Vietnam's highest and most comprehensive socio-economic development achievements Overall, Vietnam's economy was still on the way to maintain good expansion by receiving positive signs from macroeconomics indicators.

Vietnam has created a myth in poverty reduction Average GDP in the period 2016 - 2020 is about 5.9% per year and the total factor productivity (TFP) will increase from 33.6% in the 2011-2015

period to 45.2% in the 2020 period The average growth rate of labor productivity, in the

2016-2020 period, is 5.8% per year The ICOR coefficient drops to about 6.1 By 2016-2020, Vietnam's economy will be the 40th in the world, 4th in ASEAN, and 6th in average per person in ASEAN.

The export market is expanded and diversified; many enterprises deeply participate in theregional and global value chains; In particular, the continuous trade surplus from 2016-2020and by 2020 reached more than 19.1 billion USD The proportion of high-tech product exports

to the total merchandise export value will increase to about 50% by 2020

Moreover, Vietnam's Consumer Index Price (CPI) recorded an all-time high of 118.09 points

in January 2020, meanwhile, Vietnam witnessed the lowest inflation rate of 4.87% in March

2020 since November 2019.In particular, in 2020, the outbreak of the coronavirus and Africanswine fever is expected to slow down the global economic growth, Vietnam is still among thefew countries that still maintain the growth rate 2, 91% of GDP; considered one of the 16 mostsuccessful emerging economies in the world and rapid V-shaped economic recovery, withforecast growth from more than 6% to 11.2% in 2021

In general, by 2020, Vietnam will emerge as a remarkable and proud spot for self-control, resilience, and success in controlling the spread of Covid-19; flexibility and efficiency in policy response and market response to support businesses; actively participating in bilateral and multilateral trade agreements; exploit opportunities from shifting and repositioning regional and international supply chains, promoting organizational and technology restructuring, digital transformation, paradigm shifts, and deeper engagement global value chains and towards rapid and sustainable growth In terms of prospects, Vietnam still maintains macroeconomic stability and is in a V-shaped recovery trend; is one

of the fastest growing economies in the region and the world.

2.2 Banking industry

According to the State Bank of Vietnam, inflation rate and credit growth is projected at 4% and 14%, respectively, in order to stabilize macroeconomics condition, ensure the stability of both monetary and foreign exchange markets However, it is expected that 2020 will be a challenging year for the banking industry since this is the transition period for achieving Basel II requirements and preparing for Basel III Meanwhile, only a half of 35 banks in Vietnam have met Basel II standards Specifically, it is forecasted that capital demand in 2020 will increase significantly as

Basel II requirements will raise risky assets by 60% in comparison with 2017, equalingVND463 trillion for Vietnam’s banking system.

As of December 31, 2020, total bank assets reached VND 1.49 million, 1.5 times higher than

2016, average growth of 10.4% / year for the 2016-2020 period, continuing to affirm itsposition as a joint stock commercial bank with the largest total assets in Vietnam

Total outstanding credit and investment reached 1.43 million billion, up 9% compared to 2019;

of which credit balance reached 1.19 million billion VND, 1.92 times higher than 2016, up8.8% compared to 2019, accounting for an average of 13.5% of the credit market share of thewhole industry, leading the market share of credit as well as the size of outstanding loans toeconomic organizations and individuals

In 2020, BIDV recorded a decrease in profit compared to 2019 Specifically, consolidatedprofit before tax reached VND 9,017 billion, down about 16%, individual profit reached VND8,515 billion, down 17.3% BIDV's leaders said that the reason for the decline in profits wasbecause the bank actively reduced income by more than 6,400 billion dong to implement debtstructure, lower interest rates and exempt interest and fees to support businesses and peopleunder the direction of the State Bank of Vietnam

In 2021, BIDV sets a target of 9% growth in total assets at the end of the period, 12% increase

in credit balance, 12-14.8% increase in capital mobilization, and a guaranteed bad debt ratio ofless than 1.6%

3 Liquidity risk management

Liquidity risk is the risk that arises when the bank is unable to fulfill its obligations to pay debts when due or can fulfill debt obligations when due but must pay higher costs than average costs market according to the internal regulations of the commercial bank BIDV has fully implemented the contents

to manage liquidity risks in accordance with the current regulations of the State Bank, at the same time studied and applied appropriate advanced practices Document system was issued synchronously including policies, regulations, guiding documents BIDV also identifies, measures, monitors, controls risks, and reports following the State Bank's regulations, and meets internal governance requirements In addition to ensuring liquidity safety ratios and ratios under the State

Bank's regulations, BIDV also develops internal liquidity risk management indicators, a set of indicators

to identify liquidity stress, building customer behavior models Liquidity tolerance tests are also

periodically carried out to determine the bank's resilience against liquidity stress conditions, from which

there are preventive measures fit In 2020, although it is affected by Covid-19, the liquidity situation of

BIDV is still stable, the payment obligations to customers are always guaranteed on time BIDV always

follows market developments, customers' payment needs and anticipates unfavorable situations to

prepare appropriate capital balance management scenarios.

3.1 Loan-to-deposit ratio:

The loan-to-deposit ratio (LDR) is used to assess a bank's liability by comparing a bank's total

loans to its total deposits for the same period The LDR is expressed as a percentage If the

ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen

fund requirements Conversely, if the ratio is too low, the bank may not be earning as much as

it could be To calculate the loan-to-deposit ratio, we divide a bank's total amount of loans by

the total amount of deposits for the same period You can find the figures on a bank's balance

sheet Loans are listed as assets while deposits are listed as liabilities

=

From the above formula, we can calculate the Loan-to-deposit ratio of BIDV as the following table:

Figure 1: Loan-to-deposit ratio of BIDV from 2018 to 2020

Looking at the table, we can see that the loan-to-deposit ratio increased slightly in 3 years from

2018 to 2020 and peaked at 87.40 percent in 2020 The figure 87.40 percent was higher than

the State Bank of Vietnam's (SBV) limit of 70 percent and in the range of ideal ratio

(80%-90%), which means BIDV had enough liquidity to cover any unforeseen fund requirements

3.2 Liquidity ratio

Liquidity ratios are an important class of financial metrics used to determine a debtor's ability

to pay off current debt obligations without raising external capital Liquidity ratios measure a

company's ability to pay debt obligations and its margin of safety through the calculation of

metrics including the current ratio and also loan to deposit ratio:

=

Based on BIDV’s balance sheet in 2018, 2019, 2020 we have the following current ratio:

Figure 2: Current ratio of BIDV from 2018 to 2020

Looking at the table, we can see that the current ratio of BIDV peaked at 1.1143 in 2020, which is

higher than the previous years (1.0859 and 1.0100 respectively) However, this ratio was quite low

because BIDV has focused on liquidity for long-term It should reserve more liquid assets to satisfy the

demand of customer’s withdrawal in the short-term As one of 10 commercial banks selected by the

State Bank to implement Basel II advanced management model, over the past time, BIDV has

continuously strived to make fundamental changes to shape its construction Asset management

framework, liquidity risk management (liquidity risk) as usual, striving to apply Basel II according to

the schedule of the State Bank Liquidity risk is centrally managed by BIDV at the Head Office With

the full participation of all components (protection layers, implementing units, advisors) to ensure the

management of Liabilities - Assets in general and management of liquidity risk at BIDV is

implemented BIDV operates liquidity risk on the first priority principle to ensure liquidity safety,

comply with the regulations of the State Bank, towards international practices, balancing capital to

increase the bank's operational efficiency At BIDV, the Board of Directors implemented strategic

direction of risk management, including liquidity risk and approved overall risk management strategy,

including risk tolerance or risk appetite.

4 Credit risk management

Credit risk is the possibility of loss due to a borrower defaulting on a loan or not meeting

contractual obligations, this risk drives from the lending, investing activities and in case the

bank acts as intermediary or issue guarantees The possible consequences can be an

interruption of cash flows and the increase in costs for collection Therefore, one of the most

important goals for bank managers is how to manage credit risk

4.1 Indicators of credit risk

4.1.1 Non-performing loans ratio

Non-performing loan ratio of BIDV and banking industry (2018)

Non-performing ratio is one of the most important indicators of credit risk management in a

financial institution It measures income-generating assets, including loans, which are past

due for 90 days or more Therefore, high NPL ratio depicts poor bank performance In 2015,

the bad debt rate of the whole industry was 2.9%, BIDV was 1.68%, in 2016, the bad debt

rate of the whole banking sector decreased slightly to 2.8%, the debt ratio of BIDV was at

1.95% in 2018, in 2019 it was 1.75%, the industry rate decreased to 2.4%, BIDV's debt ratio

was 1.9% and the last 3 years were always within the allowable limit (less than 2%)

However, BIDV's bad debt is not stable This is a worrying signal in the problem of credit

risk management of the bank in terms of controlling credit sources for lending

4.1.2 Provision for loan loss ratio

Provision for loan loss ratio 12.54% 34.67% 12.68% 9.69% 12.72%

Source: Vietstock Figure 4: Provision for loan loss ratio of BIDV

A loan loss provision is an income statement expense set aside as an allowance for uncollectedloans and loan payments This provision is used to cover different kinds of loan losses such asnon-performing loans, customer bankruptcy, and renegotiated loans that incur lower-than-previously-estimated payments Loan loss provisions are then added to the loan loss reserve, abalance sheet item that represents the total amount of loan losses subtracted a company's loans

As can be seen from the table, there was a significant increase in this ratio from 12.54% to34.67% between 2015 and 2016, followed by sharp decrease to 12.68% and 9.69% in 2017 and

2018 respectively, 2019 respectively increased to 12.72 percent

4.2 Credit risk management

There are some suggestions to help manage credit risk for BIDV:

Firstly, complete the credit risk early warning system, in which the early warning indicatorsneed to cover the main causes of default for corporate customers such as: Business prospects,collateral and credit profiles, managerial or strategic changes At the same time, increase theuse of automatically computable indicators such as the rate of use of the limit, the number ofoverdue dates, fluctuations in cash in and out in order to increase efficiency, ensure data isupdated in real time

Secondly, BIDV should improve the quality of credit appraisal, in which, besides the traditional methods, credit analysis and appraisal should be applied using cash flow simulation This method is very suitable for evaluating credit appraisal for transactions where the creditworthiness of the customer

is based mainly on the future cash flow that the sponsored asset brings.