operational risk management Lien Viet Post Bank

The dissertation focuses on operational risk management in the world as well as in commercial banks in Vietnam such as the LienvietPostBank. The basic contents are the theories of operational risks, the role of this work, the effects of operational risk on the operations of a bank; the standard measuring for risk management and the taken steps. Also, this research carries out a study of the operational risk management at LienVietPostBank in order to have a practical point of view about these activities at the Vietnamese banks. By the applied research methods, the dissertation has showed the overall of advantages and disadvantages of the operational risk management in commercial banks. Moreover, this research fully applies the regulations of the Basel II agreement in the assessment of credit risk at Lien Viet Postbank. From that, this can be drawn out the practical measures on theory to improve the operations at the banks. 1. Research contributions This research has some important contributions. Theoretically, the dissertation has constituted a theoretical framework for examining and evaluating operational risk and its management. The dissertation also points out the underlying causes of these operations, and shows how to deal in terms of theory. More importantly, a part of the theory in the dissertation system is built on the basis of Basel II agreement on operational risk management at the banks. The dissertation provides a comprehensive overview about the operations of operational risk management as well as the views on these operations of the scholars in Vietnam and in the world. The most positive contribution of theoretical dissertation is that it considers and collects the processes and regulations as well as the measurement of operational risk management at the banks. The theoretical basis of the dissertation shall contribute to the banks to have useful facilities in the implementation of the risk management operations. In practice, during the implementation of this dissertation, we mainly use the actual data at LienVietPostBank that is one of the commercial banks that have implemented the operational risk management at their banks. Although they had many efforts, studied and learnt experience from other banks in the process of applying the operational risk management, they have not finished. In the research process, the dissertation evaluated the performance of operational risk management at the bank, indicating gained points as well as the existing points of the bank. Especially, through the study of Basel II regulations, the dissertation measured and quantified specifically the operational risk of Lien Viet Postbank by the underlying index methodology and standardized method. This is an important basis for banks to review their performance, to find out more effective measures of operational risk management in the future. In addition to analyzing the operating situation as well as quantifying a number of operational risks in the bank, this dissertation also offers practical solutions for risk management operations at LienVietPostBank, specifically, in which it is required to establish the budget for precautions of operational risk at the bank. In resume, this research has contributed to the theoretical as well as the practical aspects for the operations of operational risk management in LienvietPostBank. To be able to build a procedure as well as a fully worked-out operational risk management system, it takes a lot of time, effort and the special concern from bank leadership on this issue. 2. Research limits and perspectives The main limit of this research is that the dissertation has not quantified the operational risk at LienVietPostBank according to the AMA advanced methods. The reason is that the bank did not meet the requirements of this method to quantify. In addition, the solutions of the dissertation are mainly oriented and theoretical, although there are evident as well as specific models for improving risk management; the dissertation has not provided the specific methods for solving this problem. Also, this dissertation has not showed the relationship between the operational risk and the other factors of the risk in the banking system. Finally, the research was limited in a research field of LienVietPostBank. In the future, researching on risk management in general and operational risk management in particular will be an issue that has many matters to be dealt with. The issue that researches need to focus on is to quantify specific operational risk in banks under the Basel II methodology (including the AMA method). In addition, the analysis of the actual relationship between the operational risk and other types of risks in the banking system is still an issue that needs more research to clarify. It is necessary to indicate the influence as well as the impact of operational risk on other types of risk, and vice versa. Another important part that future studies should focus on is to draw out specific solutions for operational risk management, which can be quantified. Although this is still a relatively new issue in the banking sector, operational risk management is very important. Researching on the trends and effects of operational risk management will be the basis for improving risk management at banks in the future.

I would like to express my thanks to the teachers of the Vietnam University of Commerce, for their kind assistance and creating every favourable condition for me to finalize this report

Particularly, I owe to much Mr Dr Vu Manh Chien – my tutor at University for spending much time and energy in guiding me through the research and helping me complete this report

It is a great pleasure to thank all collogues at LienVietPostBank who helped me write my dissertation successfully, who created favourable conditions for me to complete this internship

Many thanks to my close friends for their true care and assistance in sharing knowledge during the education and implementation of this dissertation

Finally, I would like to show my gratitude to my family for so much care, worry about

me all the three years studying at the university

Table of contents

ACKNOWLEDGEMENTS ii

List of tables v

INTRODUCTION 1

1 Research context 1

2 Reasons of subject choice 1

3 Research objectives 2

4 Research object and limits 3

5 Dissertation structure 3

CHAPTER 1: THEORETICAL FRAMEWORK ON OPERATIONAL RISK MANAGEMENT IN BANKING 4

1 Operational risk in banking sector 4

1.1 Definition of operational risk 4

1.2 Classification of operational risks 4

1.3 Consequences of operation risk 6

2 Operational risk management in the bank 6

2.1 Operational risk management 6

2.1.1 Conception of risk management 6

2.1.2 Conception of operational risk management 8

2.2 Role of operational risk management 8

2.3 Literature review on operational risk management 10

2.4 Operational risk measurement according Basel II 12

2.5 Operational risk management according Basel II 14

3 Content of operational risk management in commercial banks 16

3.1 Identifying operational risk 16

3.2 Operational risk measurement 17

3.3 Developing and implementing operational risk management 18

3.4 Reporting operational risks 18

3.5 Controlling operational risks 18

3.6 Allocating capital to operational risk management 19

CHAPTER 2: RESEARCH METHODOLOGY 20

1 Introduction of research field of LienVietPostBank 20

1.1 Brief outline and history 20

1.2 Scope of business 20

1.3 Key indicators 21

1.4 Bank’s strategic position: SWOT Analysis 22

2 Collecting and processing data 25

2.1 Phases of research 25

2.2 Secondary data collection method 25

2.3 Primary data collection method: 26

2.4 Processing data 26

CHAPTER 3: OPERATIONAL RISK MANAGEMENT AT LIENVIETPOSTBANK 27

1 Identifying the factors resulting operational risks 27

1.1 Cause related to personnel 27

1.2 Cause of IT errors 27

1.3 Cause by procedures, regulations 28

1.4 Other factors 28

2 Quantifying operational risk of LienvietPostBank according to Basel II 28

2.1 Quantifying by the basic approach 28

2.2 Quantifying by the standardized approach 30

3 Analyzing the operational risk management at LienvietPostBank 32

3.1 Legal framework for operational risk management 32

3.2 Actual operational risk management at LienvietPostBank 35

3.2.1 Applied method 35

3.2.2 Actual operational risk management at Lien Viet Postbank 37

4 Recommendations for LienvietPostBank’s operational risk management 41

CONCLUSION 45

1 Research contributions 45

2 Research limits and perspectives 46

BIBLIOGRAPHY 47

List of tables

Table 1: Key financial indicators of Lien Viet Postbank 21

Figure 1: Phases of research 25

Table 2: Financial report of LienVietPostBank from 2010- 2012 29

Table 3: Profit by each field of the LienVietPostBank 31

Table 4: Provision for operational risks according to the standardized approach 32

1 Research context

International integration opens opportunities for the Vietnamese banking sector to approach the international financial level and standards However, these tendencies that imply global competitions, demand that Vietnamese banks must meet the requirements of business management in general and of risk management in particular at international standards Recently, since more importance has been attached by Vietnamese commercial banks on risk management, including credit risk, liquidation risk, interest rate risk, etc., up to now a fairly good foundation in terms of both knowledge and resources has been built in this topic Nevertheless, operational risk management has only been being cared for, studied, and carried out over the past few years in our country

In general, operational risks are related to many elements such as human beings, internal systems, procedures and external events These are very diverse and constantly changeable, hence operational risks usually occur in almost all important banking operations Researchers in several advanced nations have calculated that the effect of operational risks from normal banks accounts for 10% of operating profit In addition, operational risks also have considerable impact

on the bank’s reputation In the current development trend, operational risks are a big problem due to the operating environment is becoming more and more complex, ever-growing illegal acts under the conditions of international integration and work pressure, which entail higher and higher performance as well as the loyalty of employees and the whole-heartedness of the management; the more and more dependence on technology, along with the ever-increasing rate and volume of transactions are also the elements that bring an increase in operational risks

So, in reality, operational risk management is ever more pressing under the conditions for international integration of Vietnamese commercial banks

2 Reasons of subject choice

I choose the subject on operational risk management is for a number of reasons:

Firstly, business operations are becoming more and more complex; the competition

pressures between banks are growing, together with the increasing criticality of risks Subject to each specific way of approaching, banking business risks can be divided into different types, however, under the most common classification, according to Basel Commission, banking risks involve three basic types: Credit risk; market credit; and operational risk Vietnam commercial banks are gradually approaching such concepts and have step by step managed these types of risks according to normal banking practice

Secondly, there have been not many research on operational risk at commercial banks

published in Vietnam qualified for application to or serving as grounds for formulating or completing the commercial bank management procedures One of the very few most recent relevant works as such was the Master’s Dissertation on “Operational risk management at Vietnam commercial banks” by author Nguyen Hoai Linh, Economics University, Vietnam National University, Hanoi, which provides an overview of operational risk management at Vietnam commercial banks, some assessments on the advantages, shortcomings of the operation

risk management that the author has conducted researches on the banking industry as a whole, from that to propose a number of solutions and suggestions thereof.

Thirdly, studies in Vietnamese on this subject are often characterized by some

orientations, recommendations at macro level, rather than going down into detail on the situation

of Vietnamese commercial banks Specifically, the solutions as proposed by the work above include: To improve the effectiveness, performance of the legal framework, financial institution

in operational risk management at Vietnam commercial banks; to enhance the internal management capacity of commercial banks; to restrict the banking organizational structure’; to strengthen the financial ability…, are the targets every bank wishes to achieve Nonetheless, the contents for implementing industrial have not yet been detailed by the author to reach such targets This is also the general situation of research works at the present time, when there are too many solutions served as “guidelines” whilst lacking the detailed contents which can enable the researching entity to carry out the solutions Thus, the author has realized that there should be further research works which are more practical and associated with specific commercial banks

Fourthly, from many years’ experience practicing at LienvietBank, I have had the chance

of working in Risk Management Division of the bank, in specifying on the operational risk I have found that the operational risk management there needs to be further improved in such contents as the procedure for operating risk management for credit, capital trading, fund operations, etc Therefore, it is not only the actual situation of theoretical studies on this matter that is lacking a lot of important contents and should be elucidated but also even Vietnam commercial banks in general and Lien Viet Joint-Stock Bank in particular still need to have studies or researches which are practical and immediately applicable to the management process

Under such practical conditions and wishing to apply the theories his has learned from the postgraduate program at Vietnam University of Commerce, I have decided to choose

“Operational risk management at Lien Viet Joint-Stock Bank” as the subject of this dissertation.

The research questions are formulated as following:

- How can a bank quantify its operational risk based?

- Which causes lead to operational risk in the bank?

- Which factors affect the operational risk management activities of the bank?

- Which methods to measure and evaluate operational risks in the bank? And what are their performances?

3 Research objectives

This research aims at the following specific objectives:

- Complete the basic theoretical system of risk management and operational risk management based on meta-analysis of local and international researches;

- In-depth research on the theory system and the theories of operational risk management at commercial banks based on analysis of the theoretical research specialized in banking – finance and actual operations of Vietnamese commercial banks

- Synthesis and presentation of operational risk management models at commercial banks which have been developed and applied globally; assessment of applicability at Vietnamese commercial banks;

- Research on operational risk management applied at Lien Viet Commercial Joint Stock Bank including: define responsibilities and authorities of individuals and units related to operational risk management ; identify the costs, losses that can occur from the operation

- Evaluate the effectiveness, advantages and limitations of the operational risk management at Lien Viet Commercial Joint Stock Bank in recent years;

- Propose solutions to complete the operational risk management at Lien Viet Commercial Joint Stock Bank

- Change the perceptions of bank leaders in a positive way about the role of operational risk management at commercial banks

4 Research object and limits

- Research object: operational risk management in banking

- Research field: Lien Viet Commercial Joint Stock Bank

- Documental research: document on operational risk management in Lien Viet Commercial Joint Stock Bank from 2010 to 2013; annual reports, thematic reports on operational risk

- Practical limit: observation and practical work at the bank

- Interview: interview with manager, staff in the risk management department, the people directly involved in operational risk management

5 Dissertation structure

This dissertation is structured in three chapters as follows:

• Chapter 1: Theoretical framework on operational risk management in banking

• Chapter 2: Research methodology

• Chapter 3: Operational risk management at LienVietPostBank

CHAPTER 1: THEORETICAL FRAMEWORK ON OPERATIONAL RISK

MANAGEMENT IN BANKING

1 Operational risk in banking sector

1.1 Definition of operational risk

The most popular definition of operational risk appeared for the first time in Robert Morris Associates et al (1999), where operational risks were defined as direct or indirect damages from the insufficient or unsuccessful internal procedures by human and system, or external events Initially, this definition was adopted by Basel Committee; nevertheless reference

of indirect damages was excluded as measurement was very difficult Therefore, operational risks were defined by Basel (2004) as consequences likely to occur from the insufficient or unsuccessful internal procedures by human and system, or external events However, this definition described the definition as “broadly as completely useless” or ignored basic business risks (Herring, 2002; Turing, 2003)

Vinella and Jin (2005) gave another definition of operational risks They defined operational risks as “risks in which operation cannot meet one or more objects of operation performance, the causes may be personnel, technology, procedures, information and support for infrastructure business activities” They believed that the definition by Basel was a special case

of their definition when the failure to meet the operation performance object constituted a loss of money Once more time, there was no specific reference to the role of the external elements in this definition To date, however, the definition by Basel has still been applied at major banks or credit institutions as a standard definition of operational risks

Operational risks arise from ineffectiveness of information systems, from technical errors, from internal control errors, from unintended events or other operational issues that can lead to unexpected loss or reputation issues The scope and duration of operational risk is very large, the risk can occur at any time during the operation of the bank According to Basel II, operational risk is the risk of direct or indirect loss due to inadequacy or failure of the processes, people and internal systems, or from external events Operational risk includes legal risk, but excludes strategic risk and reputation risk

Thus, the operational risk is caused by following factors: processes, people, systems, external events and other issues These factors are shown as follows: processes, people, systems, and external factors These factors affect all business operations of the bank Therefore operational risk exists in all of the services and business operations of the bank, which is why there are a lot of issues related to operational risks such as: business strategy, policies, operational procedures, organization, operations, operational support, human resources, infrastructure, information technology, control measures and the audit work

1.2 Classification of operational risks

In 2006, Basel Committee for banking supervision announced a literature revue of internal tools for measuring capital and capital standards, known as Basel II Capital Accord, herein under referred to as Basel II (2006) Basel II was intended to introduce a new approach to

risks in the banking industry The new regulations combined requirements for minimum capital with market assessment, supervision and standards to pose a procedure for better managing risks

in order to minimize the overall risks of organization

Basel II employs to a larger extent the risk assessments provided by banks’ internal systems Basel II definitions of kinds of risks together with core business areas as found in a banking organization as follows (Unchiaşu, 2009):

• Credit risk is defined as risks related to contact with customer as individual borrower or partners and level of investment portfolio;

• Operation risks are damage risks resulted from insufficient or unsuccessful internal procedures for the reasons of personnel and systems or external events Operation risks involve legal risks, referred to as legal loss or damage resulted from wrong action by the bank or its employees, equivocal with regard to requirements and legal effects, ineffective in relation with the national legal system;

• Market risks is defined as risks of losing potential finance as a result from any adverse change of the market such as interest rates, exchange rates;

• Interest rate risks involve all interest rate values of banks and refer to all adjustments of relevant due interest rate data;

• Liquidation risks are risks in which: banks won’t receive assets that meet all borrowers’ obligations at reasonable expenses;

• Reputation risks: reputation is an invaluable, invisible asset but of high value; negative public opinions constitute considerable risks which result in the loss of supporting resources or customers;

• Strategy risks are possible negative effect on the revenue and capital of banks resulted from erroneous, inadequate decisions on business and development strategies and insufficient human resources to meet strategic objectives and with changes in the industry

Also, based on the factors affecting operational risk or in other words, based on the causes of operational risk, operational risk can be divided into the following types:

- Risk caused by internal issues

o Risk caused by bank employees

o Risk caused by regulations, business process:

o Risk from support system

o Risk from other support systems

- Risk caused by external issues:

o Risk caused by fraud, theft or crime of external objects such as: theft, robbery, forgery of papers, forgery of checks

o Risks caused by external events or natural disaster (earthquakes, floods, hurricanes, etc.) causing damage to the business operations of the bank

o Risk caused by changes in documents, government regulations and relevant

departments or new regulations affecting business operations of the bank

1.3 Consequences of operation risk

Operational risks exist in every area of the economy and in every effort made by human beings Operational risks can be found in the health sector, in means of transport, in energy industry, banking, education, and almost all activities In some areas, in order to increase sensitivity to risks, due to governmental regulations, advanced procedures have been carried out

to identify special risks to their activities Nevertheless, operational risks exist when activities take place, despite the fact that they are under our control or not This truth has been aware of by managers in a series of activities (Doebli et al., 2003)

On March 14, 2010, the Sunday Times published a summary of a 2200-page report following up the collapse of Lehman Brothers in Wall Street (Sunday Times, 2010) The 158-year-old bank went bankrupt in September 2010 The court-designated appraiser realized that Lehman had exaggerated property values and ignored or rejected the control over risks of the company on a regular basis So, one can imagine how heavy is the effect of the consequences of operational risks on banks and credit institutions Operational risks not only cause damages to banks in terms of finance but also exert great effect on the prestige, trade names of banks Some frequent consequences caused by operational risks include:

✓ For marketing and sales activities: Operational risks may drive banks to the state that when launching new products the infrastructure is unsuitable as resulted from improper application of new product approval processes

✓ For payment activities: The consequences banks have to increase may include failure

to make payment as per customer request or payments to the wrong beneficiaries

✓ For IT: The consequences banks have to increase may be the state of losing control over the system or the database stops functioning

✓ For financial operations: The consequences of operational risks may involve erroneous asset evaluation, incomplete statements of profit and loss, non-compared accounting items

✓ For personnel management: The consequences of operational risks may involve acts of breaching laws in the issue relating to labour contract termination…

✓ For bank prestige: Bad treatment towards customers will result in loss of customers or bad bank prestige and the consequences are loss of capital or decrease in profit of the bank

2 Operational risk management in the bank

2.1 Operational risk management

2.1.1 Conception of risk management

According to Basel (2004), risk management is a continuous process needs to be carried out at all levels of a financial institution and mandatory requirements for financial institutions to achieve the set goals and maintain the ability to exist and financial transparency Basel (2004) also stressed on different risks would lead to failures of banks in a mature economy While experiences of each country are characterized by their uniqueness, research on history of banking crises in different countries over the world has shown that poor management of the risk

categories that have been concretized in banking catalyst has failed in most cases Further, the report also pointed out that risk management in most banks in the world was restricted to compliance with the regulations imposed by supervision agencies It was also revealed that many banks did not have the idea how to go in implementing risk management procedures, notwithstanding the existing detailed instructions for the same countries among many others.

Risk management can be described as optimizing risk management expenses carried out not to damage any management area, including business philosophy, organizational culture, as well as some business functions of financial institutions It represents the central part of strategic management and business management of any commercial organization (Barjaktarović, 2009)

The focus of effective risk management is to determine and minimize risks The goal of risk management involves:

• The entity’s ability to achieve profit growth and optimization;

• Effective operation within a dangerous environment;

• Combination of activities within a legal framework

Risk management is a continuous and ever-growing process, is part of organizational strategy and the implementation of this strategy All business entities develop their instructions for risk management Risk management process involves the following steps (Barjaktarović, 2009):

• Defining risk management process goals so as to decide what banks expect from the

program The primary goal is to protect the performance of organizations The second goal is to protect the legitimate rights of employees

• Determining risk – risk management must reveal the risks that firms are exposed to

Determining risks is a period of the risk management process, in which risks within the system are screened and classified Basic risk classification in relation with operations of business organizations involves:

- An important threat that leads to the bankruptcy of economic organizations

- An important threat that threats liquidation of business entity, with negative effects (or

by loans from commercial banks or by increasing efforts to collect debtors’ overdue bad debts)

- Inconsiderable risks, without affecting important operations, in practical examples, they

do not pose a threat to liquidation and solvency of entity

• Assessing risks involves the entire process of analyzing and assessing risks Potential

loss and possible loss are determined by experts Analysis involves determining, describing, and assessing risks Risk analysis results can be used for collecting risk documentation to evaluate the importance of each risk and to provide a series of tools for determining priorities for risk regulations and make it possible to classify; each risk is determined by its relative importance Risk assessment is important for the decision-making process Furthermore, banks need to build their internal and external risk systems for reporting the existence of risks

• Considering options, replacements and selecting resources for risk management,

including the two solutions: financial risks and the link of available assets included for regulations of losses arising from the remaining risks after the use of techniques for controlling risks

There are some methods of controlling risks (Barjaktarović, 2009): risk control approach, risk avoidance approach, risk reduce approach, financial risk approach, risk maintenance approach, and risk transfer approach.

Assessing and reviewing are a continuous function of risk management, including assessing and adjusting activities related to risk management Changes of risks are by time, i.e they would disappear or the new ones will appear

2.1.2 Conception of operational risk management Operational risk management is the process in which financial institutions conduct

activities affecting operational risk, including the establishment of the organizational structure, the construction of policies system and methods of operational risk management Thereby they can deploy the process of risk management including identifying, measuring, assessing, monitoring and controlling operational risks in order to ensure the minimization of risks

Effective operational risk management does not mean the total elimination of risks Risks can still occur but only in the predicted levels that the banks can control

The purpose of operational risk management is to understand the level of operational risk

of the system, the organization, to find the cause of the risk, to distribute the resources to support and identify external and internal trend, thereby it helps to predict and limit risk The operational risk management enables banks to prevent fraud, minimize errors in the transaction process, maintain the integrity of internal control

2.2 Role of operational risk management

The separate supervision systems for financial institutions in different states would reduce the reliance of the global financial domain since, as Davies (2001) and Merton (1993) pointed out, the separate supervision approach for the financial domain cannot guarantee the supervision over a sole area without integrating into a global supervision network

Out of the negative aspects of the supervision approach of the financial sector as mentioned above, there should be uniform rules of supervision for the financial system It would help to strengthen the supervision of the personal finance sector, in close relations with the global financial system Basel Committee for Banking Supervision, International Payment Bank, provided a uniform means for the function above Apart from national requirements for supervision in the financial domain, it provides suggestions related to the formation of a supervision system and its components for the financial sector

In analyzing the effects of supervision organizations, it should be noted that assessment

of effects as such may contain contradictions First and foremost, it should be stressed that the most important reason for setting up supervision organizations is to guarantee stability for the financial sector Stability is beneficial to all members of the financial sector Nevertheless, the negative effects of agencies supervising the operations of financial institutions should be taken into consideration The supervision of financial institution, such elements as instructions and punishments would create a certain environment for financial institution Environment has the meaning of restrictions on the freedom of banking operations, since financial institutions are the object of economics Such restrictions are presented through the frameworks gathering operations for financial institution as imposed by supervision agencies The frameworks as established are mandatory to all members of the financial sector operating in the same area (e.g commercial banks, life insurance companies…), without subject to the details of their activities

(size, strategy…)

The existing environment of the members in the financial domain determines the growing interest of banks in the performance of internal procedures Stein (2000) noted that the increasing complexity of banking and internal procedures was the cause of the increasing number of errors inside the bank system This might discontinue the banking operations and might lead to a banking crisis The above mentioned causes have forced banking managers to pay more and more attention to operational risk management According to Kuhn (2003), operational risk management performance exerted great effects on competitive capacity and success in the banking market

Besides the efforts made by banking managers to control overall operational risks, more and more attention is being paid by financial institution to posing requirements for operational risk management The heaviest damages related to operational risks amounted to USD 2.6 billion (the Japanese financial institution Sumitomo)

The data collected has shown that the threat from operational risks and their serious consequences made the supervision agencies of financial institution acknowledge that operational risks among the most important risks in the banking domain Supervision agencies thus should consider that as the threats generated from reality of operational risks were underestimated, thus damages in connection with lack of care for risk management in operations

of banks are likely to occur

The necessity to increase attention in managing operational risks management and supervision management has ground from a statement by Schmitz (2001) He said that operational damages were unacceptable in a weak economic environment This statement reflects the nature of the appearance of operational risks Not subject to economic environment, operational risks are avoidable by adhering to banking procedures

Based on analysis of the nature and operational risk management, Schmitz (2001) made a list of issues relating to the growing interest in the requirement for operational risk management

He also differentiated the strengths of operational risk management, with the importance of operational risk management: the attention to paying money for operational risk management is not enough, thus supervision of operational risk management should be deeper examined in the way of posing specific requirements for operational risk management in the banking domain Fulfilling supervision of operational risk management may constitute a substantial tool for protection in the financial domain against the crisis caused by sources of operational risks

As observed from researches in some developing countries, operational risks might have caused damage to 10% of the operating profit of banks According to a survey of CEOs of American banks in 2010, 63% of them answered that one of the important causes leading to crisis was the poor management of operational risks

A research in Australia quantified operational risks, which represented about 20 - 23% of the general risk total In Vietnam, there has been to date no researches or data with quantified nature concerning the damages caused by operational risks Anyway, as to some experts, the rate

of damage caused by ORs might have been even higher than that of Australia

Some opined that, only after a long time could quite a few commercial banks in the home country care about credit risks, then market risks whereas very few paid attention to operational risks The occurrence of this risks not only causes damages to banks in terms of material and

human resources but also affects their prestige, hence the role played by operational risk management more and more necessary and significant.

2.3 Literature review on operational risk management

Generally there are not many studies on operational risk management The case study should include: Basel (Basel, 2003) which has identified the basic operation of operational risk management Crouhy et al (2001) and Alexander (2003) which have developed a classification system of problems in operational risk management; Hoffman (2002) that has introduced the optimal method for operational risk management based on the analysis of 20 large enterprises; Jorion (2003) that has analyzed actual operational risk management of several banks

• Alexander (2003), in his book of Operational Risk: Regulation, Analysis and Management, brings together contributions from the world’s leading experts to identify today’s

best practices for measuring and managing operational risks, and assessing them in the broader context of all risk

• Basel (1998, 2003, 2004): Basel I explicitly covered only two types of risks in the definition of risk weighed assets: credit risk and market risk Other risks were presumed to be covered implicitly in the treatments of these two major risks In Basel II the definition of risk-weighed assets is modified Basel II approach for calculating risk-weighed assets provides improved bank assessments of risk making, resulting more meaningful capital ratios The pillar one is modifying the definition of risk-weighed assets in Basel II and has two primary elements: substantive changes to the treatment of credit risk relative to Basel I and the introduction of an explicit treatment of operational risk resulting in a capital measure of operational risk

• Chapelle et al (2004), in their article on “Basel II and Operational Risk: Implications for risk measurement and management in the financial sector”, analyze the implications of the Advanced Measurement Approach (AMA) for the assessment of operational risk put forward by the Basel II Accord Their results suggest that substantial savings can be achieved through active management techniques, although the estimated effect of a reduction of the number, frequency or severity of operational losses crucially depends on the calibration of the aggregate loss distributions

• Chorafas (2003), in the book of Operational Risk Control with Basel II: Basic Principles and Capital Requirement, provides a sound methodology for operational risk control

He explains why and how information technology is a major operational risk and shows how to integrate cost control in the operational risk perspective Details analytical approaches to operational risk control, to help with scorecard developments are also presented

• Colnanba and Giudici (2004)’s article Statistical models for operational risk management is an overview research on some of the operational risk management model, with

calculation of some necessary indicators about capital and factors of safety based on Basel II standards applied to all types of banks, especially the banks that have operations network in many countries This research has shown that operational risk management at banks in recent years is more and more interested by experts and banking supervisors due to the explosion of e-commerce, business merger and acquisition (M & A) in large scale and heavy reliance of banking activities in the automation technology This leads to a variety of derivatives in banking operation and an increasing demand of more active and more effective risk management system

• Hoffman (2002)’s book of Managing Operational Risk: 20 Firmwide Best Practices Strategies can be considered as a definitive guide to managing operational risk in financial

institutions It covers all the bases from the basics of what operational risk is to how to design and implement sophisticated operational risk management systems

• King (2001)’ book of Operational Risk, Measurement and Modelling concentrates on

measurement of risk in order to provide the needed feedback for managing and mitigating it Using both theoretical and practical material, the author lays out a foundation theory that can be applied and refined for application in the financial sector and beyond which includes a new technique called Delta-EVT (trademark)

• Samad-Khan (2006)’s research Stress Testing Operational Risk began by an

observation: the banks always face with three major types of risk: credit risk, operational risk, market risk and credit risk; people always think credit risk is the biggest concern of the banks Then, the author pointed out: 80% of the credit risks are actually operational risks In fact, an effective operational risk management system can even helps the bank to save more than the profits it generates The author launched an operational risk measurement model based on annual statistics losses due to operational risk model using Monte Carlo calculations formula

In Vietnam, a few years ago, operational risk management was still a relatively new

problem for commercial banks Despite many efforts, nowadays Vietnam has not yet established

a formal framework for operational risk management State Bank of Vietnam has issued a circular No 13/2010/TT-NHNN dated 20/05/2010 and Circular No 19/2010/TT-NHNN 27/09/2010, Circular No 22/2011 / TT-SB dated 30/08/2011 amending and supplementing Circular No 13 regulating prudential ratio of credit institutions on the basis of Basel II However, commercial banks still expect the State Bank to promulgate specific regulations guiding the implementation of risk management on all aspects, from setting policies, regulations and procedures to measurement approaches, minimum capital requirements for operational risk and provisioning mechanism of operational risk

• Nguyen Hoai Linh (2012), “Operational risk management at commercial banks in Vietnam”, Dissertation for Master in Economics, Department of Banking and Finance, University of Economics Da Nang This dissertation has presented general issues related to operational risk management In the research, MA Nguyen Hoai Linh has given a basic theoretical background on operational risk management in the commercial banking system with the method of determining the operational risk under the agreements Basel II

• Nguyen Thi Thuy Hang (2012) on “Operational Risk Management for Commercial Banks in Vietnam” This scientific article published at Banking magazine, has pointed out the

essential contents to be implemented when conducting Operational risk management at commercial banks in Vietnam The contents include: (i) Establish and improve Operational risk management framework including Operational risk management policies according to international standards; (ii) the application of Operational risk management framework that has been developed with gradual stages, strictly compliance with the regulations on quality

• Pham Huy Hung, Chairman of Vietnam Joint Stock Commercial Bank For Industry And Trade (2010) with “Approaches of market risk management at commercial banks in

Vietnam”, Scientific Research This research has shown the current status of market risk

management at commercial banks in Vietnam in general and at the Vietnam Joint Stock

Commercial Bank For Industry And Trade in particular.

• Pham Thi Trung (2008), in the Dissertation for Master entitled “Improve risk management systems at Military Commercial Joint Stock Bank”, has generally presented the international practices of risk management in the operation of commercial banks

In practice, managing operational risks have been applied by many banks in the world management AMA (Advanced Measurement Approach) has been used in many banks in USA, Europe, Japan and Australia Results of research conducted by Basel Committee on 121 banks in

17 countries until the end of 2009 concluded that capital operational risks of 28 banks using AMA were at a lower level than that of banks without using AMA (10.8% against 12- 18%)

Over 50% of Spanish banks has renovated their operations and organization for the aim

of operational risk management by setting up a separate section specializing in operational risk, renovated their reporting system and applied up-to-date technology

Some banks make full use of resources from outside for operational risk management, e.g ING Group hired IBM for operational risk management, and Citibank used the CLS (continuous linked settlement) software Citibank implemented operational risk management as per the standards and policies on risks and control on the basis of self-assessment of risks Operations of departments, sections were regularly determined, assessed to arrive at decisions to adjust and alter operations to minimize operational risks Activities as such were documented and announced at banks Main risk measurement indexes were thoroughly and detailly determined, and this was good condition for Citibank to carry on operational risk management

The framework of operational risk management has also been flexibly employed to accommodate to the specific conditions of each country, each bank The above management framework was concretized by DBS (Singapore) as follows:

Operational risks were analyzed from two angles: frequency of occurrence and extent of effect From that, DBS determined the way of organizing and formulating programs for minimizing operational risks such as international audit, international insurance At DBS, the tools and techniques for operational risk management were used for self-assessing, managing events, analyzing risks and reporting

2.4 Operational risk measurement according Basel II

According to the Basel Committee, there are three approaches to calculate capital requirements for operational risk, correspond to gradual the level of complexity and risk sensitivity: (i) The Basic index approach; (ii) Standardization approach; and (iii) Advanced measurement approach (AMA)

• The basic index approach

The banks that use Basic index approach must maintain equity capital for operational risk

so that it corresponds with a certain fixed ratio (symbol: α) of the average annual gross profit, within 3 years The capital is calculated by the following formula:

K BIA = GI x α

In which:

KBIA: capital requirements in the Basic Index method

GI: average annual gross profit of the three previous years.

α = 15% This rate is set by the Basel Committee, which reflects the relationship between the amount of capital required by the entire sector with the overall index

Gross profit is calculated as net interest income plus net fee income

New Basel Agreement does not set out specific required conditions to apply The Basic Index Approach for the bank However, banks using this method are encouraged to follow the guidance of the Basel Committee on Good Practices for Operational Risk Management and Supervision, February 2003

• Standardization Approach

According to Standardization Approach, banking operations are divided into eight service segments: corporate finance, trading & sales, retail banking, commercial banking, payment, agent service, assets management and retail brokerage

In each service segment, gross profit includes several indexes reflecting the operational scale of that service segment Therefore, they also reflect the level of operational risk of each service segment Capital requirements for each service segment are calculated by multiplying the gross profit with a coefficient (β) applied to that service segment β coefficient reflects industry-wide correlation between the losses from operational risk recognized in the actual situation and the scale of the industry’s gross profit for each type of service It should be noted that, in the Standardization Approach, the gross profit is measured in each service segment, not in the whole bank, namely: in the segment of corporate finance, this index shows full Gross profit earned from corporate finance operations of the bank

Total capital requirement is calculated by summing the capital requirements of each service segment Total capital requirement can be expressed by the following formula:

K TSA = Σ (GI 1-8 x β 1-8 )

In which:

KTSA: Capital requirements according to Standardization Approach

GI1-8: Average gross annual profit of the last three years, determined as in the Basic index approach above, for each one of the 8 operational segments

β1-8: Fixed percentage prescribed by the Basel Committee, which reflects the relationship between the amount of capital required and gross profit of each operational segment Details of the value of β as follows:

β coefficient for each operation segment

Asset Management (β7) 12%

Retail brokerage (β8) 12%

• Advanced Measurement Approach (AMA)

According to Basel (2006), this eventual approach is for financial institution to set up a system for measuring internal operational risks with the use of a standard for quality evaluation,

in which cost of capital shall be calculated by the organization as total of the estimated losses (EL) and unexpected losses (UL) The banks can only apply the AMA after being approved by Banking Management Agencies

The following equation represents ways of calculating cost of capital as per AMA approach:

- Board of Management and Senior Executive of the bank, as the case may be, can play

an active role in supervising risk management activities

- The bank must have an operational risk management system based on a proper principle and implemented in a comprehensive and synchronized way

- The Bank must have adequate resources for the use of the selected approach in the main operational segments, as well as in the field of accounting and auditing

AMA model is very flexible, can be applied flexibly in all bank’s specific model, but the most popular AMA model is Loss Distribution Approach (or LDA)

2.5 Operational risk management according Basel II

Basel Committee is a banking supervision committee founded by the G10 central banks

in 1975 under the sponsorship of International Payment Bank Basel Committee is intended to set up general frameworks for controlling risks and supervising safety for international banks The important goal as set by Basel Committee is to narrow the gap in supervising safety for banking operations in the internal aspect, with the two main principles: “Don’t leave any bank unsupervised and supervision must ensure completeness”

Basel II Convention (2004), with the meaning of international framework, standard of risk management in business operations of commercial banks, has been applied and achieved high results Basel II Convention has touched upon a totally new content in banking risk management, namely “operational risks” The Convention covers three main issues: Demand for minimum capital; procedure for checking, supervising; rules for market

According to Basel II (2004), operational risks are threats of losses due to insufficient or

non operational internal procedures; due to personnel and systems; or due to external events This definition includes legal risks but excludes strategic risks and prestige risks At the same time, it proposes three key measures for operational risk: Basic criteria approach (1 criterion applied in a provision); Standardized approach (multiple criteria applied in a provision); Advanced internal measurement approach AMA (for banks applying internal models).

Also, the Convention also puts forward ten rules of operational risk management for commercial banks as follows:

• Board of Directors should be aware of the main aspects of banking operational risks as

a separate form of risk which must be managed, viewed on a periodical manner Within the framework, there should be a definition of operational risks and principles on what operational risk should be like so as to determine, assess, follow up and control/reduce

• Board of Directors must ensure that the bank’s risk management operations rely on the effectiveness and comprehensiveness of the internal audit system, employees are properly trained and capable of working independently Internal audit function is not responsibility for controlling operational risk directly

• Senior managers should be responsible for implementing rules for operational risk management with approval from the Directorate The rules above should be in a consistent manner throughout the bank’s organization, and all the levels and staff should be aware of their responsibility for operational risk management Senior managers should also have responsibility

to draw up policies, procedures for operational risk management in all the bank’s products

• Banks should determine and assess the operational risks inherent in all their products, operations, procedures and systems Banks should also ensure that before new products, operations, systems are introduced or carried out, the operational risks inherent in them must have been fully evaluated

• Banks should carry out a procedure on a regular basis for following up operational risks Should have periodical reports with necessary information for senior managers and Board

of Directors to support operational risk management

• Banks should have policies, procedures for controlling and minimizing operational risks Should consider reducing operational risks and strategies for controlling, adjusting their operations to conform to the overall risk strategy

• Banks should have provision and plans for continuous business to ensure their uninterrupted operations and to minimize damages in case of operational risk occur

• Bank supervisors should request all banks, irrespective of their sizes, to have an effective formwork for determining, assessing, following up and controlling/minimizing their operations as part of the overall approach towards risk management

• Supervisors should conduct, either directly or indirectly, regular independent assessments of policies, procedures and practices related to banking operations Should ensure that there are proper mechanisms available onsite which permit to strengthen the development of banks

• Banks should carry out properly and announce their ways of approaching operational risks so as to allow markets to participate in assessing such methodologies

The ten rules can be summarized focusing the following four principles:

• Principle 1 (rules 1 - 3): Commercial Bank should develop a process assessing the adequacy of minimum capital associated with their risk status, as well as a strategy to maintain that adequacy

• Principle 2 (rules 4 - 7): The authorities supervisory the safety of bank’s operations should monitor and evaluate regularly the accuracy, consistent with the mechanism of assessing the minimum capital adequacy of banks In the case Commercial banks failed to meet the minimum capital requirements, supervisor must carry out appropriate measures

• Principle 3 (rules 8 - 9): The supervisor must have adequate tools to force banks to maintain capital above the minimum capital adequacy

• Principle 4 (rule 10): The supervisor should have instant intervention in order to prevent inadequacy of commercial banks (with capital adequacy under 8%), as well as apply the mechanism to require immediately offset of banks in the deficit capital compared to capital adequacy

The application of the provisions of Basel II will bring practical benefits for commercial banks in the management of operational risk These regulations will become a basic guide for a commercial bank to build a risk management system, also for the supervisor of financial and monetary activities to perform these functions: Build and issue the legal framework; monitor and timely intervene to ensure the stability of the financial and monetary market on the basis of transparency, sustainable development

3 Content of operational risk management in commercial banks

3.1 Identifying operational risk

In commercial banks, all sections are responsible for carrying out assessment and definition of risks so as to identify early and timely signs of risks during their operational process, to analyze, determine the extent of effect and consequences that may increase Commercial banks identify operational risks in keeping with the contents: identifying possible risks, causes of risks, causers of risks, extent of risks Depending on their risk management method, each bank has different identification operational risk methods But generally the identification of operational risk in commercial banks is implemented through 7 groups of risk note as follows:

• Group of risks related to organizational structure, personnel and workplace safety Identifying of this group is carried out through:

+ Regular check, assessment of the model of organizational structure, with operational sections of the bank

+ Regular check, assessment of activities for recruiting, appointing personnel; assessing, analyzing causes of personnel giving up their work, terminating labour contracts; assessing the compliance with regulations, labour agreements, health and labour safety

+ Collecting, assessing personnel qualifications, professions trained, work experiences, work results, adherence to stipulations

By analysis, assessment, banks can find out signs of risks such as risks from personnel;

risks from policies on recruitment, arrangement, appointment of personnel; risks from improper compliance with laws on employees.

• Group of risks related to policies and internal regulations Any bank during its operation process also has to check its internal mechanism, policies, regulations in order to detect, identify signs of risks such as:

+ Lack of incomplete, loose, non-concrete regulations, thus leaving gaps for the wicked

to avail themselves and causes damages to the bank

+ There are overlapping or unviable, unreasonable provisions in documents, regulations, thereby creating difficulties for implementers

+ There are contents in documents, regulations not in line with current provisions of the law

• Group of risks related to internal fraud: In connection with this group, banks shall have

to identify signs of risks, for example, officers commit themselves or in collusion with customers

to commit illegal activities for the purposes of approaching assets, damaging the bank’s prestige

• Group of risks related to external fraud: In this group of signs, banks have to identify signs of risks caused by willful frauds, swindles of customers or other external people, for instance acts of providing misinformation, counterfeiting transaction documents

• Group of risk related to work process: Commercial banks carry out tasks of following

up, totaling up in a full, regular manner all errors occurring in the course of handling work of all sections, identifying signs of risks such as carrying out operations beyond the powers, authority; disobeying regulations, procedures; maintaining loose control…

• Group of risks related to information technology systems: this includes the bank’s following up operations of the system (including hardware, system of security, transmission lines, operational software…) to total up, follow up errors, defects, problems of the IT system that have effects on the bank’s operations

• Group of risks related to property damage: Identifying of this group includes the bank’s examining; assessing the possibility of risks occurring resulted from sabotage, terrorism, acts of gods, earthquakes, storms, floods, fire

3.2 Operational risk measurement

Measuring operational risk consist to determine the level of different types of operational risks Operational risk is difficult to recognize, so the measurement is also very difficult There are two measurement methods commonly used which are qualitative and quantitative methods:

• Qualitative methods: analysis of evaluation and subjective review of each commercial

bank about the level of good-bad, big-small, severity of identified risk notes Qualitative methods are used to measure the risk related to the organizational model and workplace safety; related to internal policies and procedures

• Quantitative measurement methods: evaluation through the specific statistical of the

level of risk (probability), through the loss of specific types of identified risk notes This method

is mainly based on the statistics of the Bank and is used to measure operational risk related to areas such as information systems; internal or external fraud

3.3 Developing and implementing operational risk management

Based on the results of the process to identify and measure risk, commercial banks need

to deploy effective management measures First at all, banks ought to determine their responsibility for operational risk management Operational risk management should not be construed as a task of a certain unit, but the assignment, responsibility of the banking system as a whole Particularly, employees will be those who need to be well aware of such kind of risk, and their irresponsibility would result in unforeseeable consequences

Once banks have determined their responsibility for risk management, risk managers of banks must divide risk management in a clear and transparent manner Operational risk management is divided into three levels: Strategic level, macro level, and micro level

The contents of operational risk prevention, minimizing approaches cover:

✓ Enacting, amending, supplementing to policies, regulations, operational procedures to make them suitable

✓ Strengthening inspection, control over the compliance

✓ Operational education or training for personnel

✓ Plan for repairing, rectifying errors

✓ Acts of preventing risks or suspending activities that would cause risks

✓ Compiling scenario and carrying out Stress Testing, scheme for minimizing risks before unexpected contingencies

✓ Checking, adjusting, promulgating, supplementing treatment sanctions against offences in the operational process

✓ Taking out insurance or taking other measures to minimize risks

✓ Plans for capital allocation in precaution against operational risks

3.4 Reporting operational risks

Operational risk management board must ensure that information about risk management will be presented through a system of reports, made by persons in charge and sent in on time according to a form or procedure that supports in monitoring and controlling assignment Report contents include the following information: serious operational risk encountered; incidents and consequences of risks along with intentions to remedy; performance of the actions as set out; detailed plan that is formed in preparation for recording any risk upon occurring; areas under pressure where operational risks are likely to occur and steps of controlling operational risks

3.5 Controlling operational risks

Banks need to be strengthened through risk control culture to promote efficient risk management Operational risk management is aimed at:

✓ improving the ability to identify early the risks that are not identified, controlled or

being disregarded;

✓ providing better assessment of the ability to accept the identified risks;

✓ formulating more effective replacement measures to control unacceptable risks;

✓ taking in an earlier and better manner actions to reduce risks and measures to avoid losses

3.6 Allocating capital to operational risk management

Moscadelli (2004), by using the data collected by RMGs in 2002 and handling the statistic data, realized the relationship between the total average revenue and cost of capital for each sector of operation This contribution enables the possibility to calculate expenses through the total average revenue for each sector of operation; nevertheless, it is still very difficult to have values through annual reports of a financial institution Both authors, Fontnouvelle et al (2003) and Moscadelli (2004) concluded that when analyzing, there are two obstacles: first, data quality might be unclear; second, there exist losses in the operations that have not been registered

✓ Banks operating on a globe scale and banks with high rates of risks (e.g banks specializing in payment operations) should apply the approaches so as to conform to the rates of risks and complexity of banks A bank will be permitted to apply Basic Indicator Approach or Standardized Approach to some sectors of operation and AMA to others, provided that this bank must meet the certain minimum criteria

✓ Banks must not select to revert to a simpler measuring approach when having been applying a more advanced approach, without approval from bank management bodies In addition, once it is determined by bank management bodies that a bank, that is applying an advanced approach, no more meets the criteria for such as an approach, the bank may be requested to revert to the application of simpler approaches to several or all areas of operation of the bank until the bank satisfies the conditions as laid down by bank management bodies for using any more advanced approaches

CHAPTER 2: RESEARCH METHODOLOGY

1 Introduction of research field of LienVietPostBank

1.1 Brief outline and history

Name: LienViet Joint Stock Commercial Bank

Abbreviated name: LienVietPostBank

Address: No 32 Nguyen Cong Tru, 1 Ward, Vi Thanh City, Hau Giang Province

President of Board of Directors: Mr Duong Cong Minh

General Director: Mr Le Hong Phong

Tel: 0711.627 0668 / 04.62 668 668 Fax: 0711.358 1737 / 04.62 669 669

Website: www.lienvietbank.net

License No.: 91/GP-NHNN issued by State Bank of Vietnam on 28/03/2009

LienViet Joint Stock Commercial Bank (LienVietPostBank), its forerunner: LienVietBank, was established under License for Establishment and Operation No 91/GP-NHNN dated 28/03/2009 of Governor of the State Bank of Vietnam

In 2012, with the investment of Vietnam Post and Telecom Corporation in LienVietPostBank by the value of Vietnam Postal Savings Services Company (VPSC) and cash, LienVietPostBank was permitted by the Prime Minister and Governor of the State Bank of Vietnam to rename LienViet Joint Stock Commercial Bank Along with this, Vietnam Post and Telecom Corporation became the biggest shareholder of LienVietPostBank

The shareholders as founders of LienVietPostBank include Him Lam Joint Stock Company, Saigon Trading Group (SATRA) and Southern Airport Services Company (SASCO) Currently, with its chartered capital of 6,460 billion dong, LienVietPostBank is one among the ten biggest commercial banks in Vietnam

Shareholders and strategic partners of LienVietPostBank include major financial-banking institutions operating in Vietnam and abroad such as Vietnam Bank for Agriculture and Rural Development (Agribank), Wells Fargo (USA), Credit Suisse (Switzerland), Oracle Financial Services Software Limited…

LienVietPostBank has oriented to build its strong trade name based on promoting internal forces, transparent and social-related operations

1.2 Scope of business

In banking sector, the LienVietPostBank’s activities cover:

+ Mobilizing capital from activities of receiving money, issuing deposit money certificates, bonds and valuable papers, borrowed capital from financial institutions, short-term borrowed capital from State Bank of Vietnam, and other forms of capital mobilization as stipulated;

+ Providing credit for organizations, individuals under the form of lending, deducting commercial papers and other valuable papers, guarantees, finance leasing and forms of providing credit as stipulated;

+ Services for payment and funds;

+ Other activities such as financing, buying shares of enterprises, participating in money markets, trading, setting up subsidiary companies, mandate operations, acting as agent in banking-related areas, providing issuance services

Also, apart from the trading services above, LienVietPostBank is also permitted by the State Bank of Vietnam to engage in: providing foreign exchange services (including international payment services; carrying out transactions for foreign exchange sales in foreign markets); investments in foreign markets

1.3 Key indicators

On 31/12/2012, total asset of LienVietPostBank reached 56,132 billion dong, increased

by 60%, equaling 22,147 billion dong compared with that one on 31/12/2011 After nearly 4 years in operation, in the total asset of LienVietPostBank there was an important growth, placing the bank in the group of banks with high growth rate of total asset To date, LienVietPostBank has been ready to accelerate to be in the Top Ten of major commercial banks in Vietnam

Table 1: Key financial indicators of Lien Viet Postbank

Unit: VND billion

Profit from Council of Business

Unit: %

Source: Financial Statement of Lien Viet Postbank

Equity: In its first year in operation of 2009, equity of LienVietPostBank was only 3,447

billion dong Over nearly 4 years, its equity in 2012 amounted to 6,594 billion dong in which chartered capital of 6,010 billion dong

So, the bank’s equity increased by 1.6 times compared with that in the end of 2011 Steady increase in equity in line with the growth of total asset proved the rapid and continual growth of LienVietPostBank

Profit before tax: In 2012, LienVietPostBank’s profit reached 1,086 billion dong

(increased by 43.08% compared with 2011) Accumulated profit from 2009 to 2012 reached 2,829 billion dong; this was a firm step for the future, an impressive figure of the banking industry in the current difficult period

Personnel: LienVietPostBank had the year 2012 seeing its impressive growth with

indicators of gigantic profit, total asset in the context the economy was still facing many difficulties Contributing to this important growth rate were, apart from the correct trading policies, orientations, the strenuous efforts of the staff throughout the system Up to 31/12/2012, the total personnel strength of LienVietPostBank across the system was 1,972 The rate of personnel of university and higher level was over 90% (in which doctors and masters accounted for roughly 7%) This indicates that the task of screening, recruiting the inputs was carried out systematically and stringently so as to ensure work quality

1.4 Bank’s strategic position: SWOT Analysis

• Strengths:

+ Strategic shareholders having financial potential, finance-banking experiences and commitment to have long-term strong attachments to the bank In the end of 2012, the bank’s chartered capital reached over 6000 billion dong All strategic shareholders have financial potential as well as experiences in finance-banking operations Moreover, that’s their commitment to have long-term strong attachments to the bank Shareholders as founders and strategic shareholder of Lien Viet Postbank include:

Main shareholders as founders of Lien Viet Postbank:

- Him Lam Group: Headquartered at 2A Nguyen Thi Minh Khai, Da Kao Ward, 1 District, Ho Chi Minh City, with real estate as the main line of business Him Lam Co., Ltd holds 18% of the chartered capital of LienVietPostBank

- Saigon Trading Group (SATRA): Headquartered at 275A Pham Ngu Lao, Pham Ngu Lao ward, 1 District, Ho Chi Minh City, with diversified lines of business services such as foods, handicraft art articles, construction materials, jewelry, petroleum, textiles and garments, pharmaceutical and agricultural products, stationery, etc SATRA holds 4.57% of the chartered capital of LienVietPostBank

- Southern Airport Services Company (SASCO: Headquartered at Tan Son Nhat Airport,

2 ward, Tan Binh District, Ho Chi Minh City, with the main lines of business to survey air passengers such as food catering, handicraft art articles, duty-free goods, hotels, tourism, transportation, air ticket booking, etc The Company holds 2.43% of the chartered capital of LienVietPostBank