A swot analysis of vietnamese commercial banks,graduation thesis

Pham Van Anh 1 ATC C – K13 BANKING ACADEMY Foreign Language Faculty --- GRADUATION THESIS A SWOT ANALYSIS OF VIETNAMESE COMMERCIAL BANKS Student : Pham Van Anh Class : ATCC_K13 Supe

Pham Van Anh 1 ATC C – K13

BANKING ACADEMY Foreign Language Faculty -

GRADUATION THESIS

A SWOT ANALYSIS OF VIETNAMESE COMMERCIAL BANKS

Student : Pham Van Anh Class : ATCC_K13 Supervisor : Ngo Tung Anh ( MA)

Hanoi, 2014

Pham Van Anh 2 ATC C – K13

TABLE OF CONTENTS

Page LIST OF TABLES

LIST OF FIGURES

LIST OF ABBREVIATIONS

A INTRODUCTION

1.1 Rationale

1.2 Aims of the study

1.3 Methodologies of the study

1.4 The scope of the study

1.5 The organization of the study

CHAPTER 2: SWOT ANALYSIS OF VIETNAMESE COMMERCIAL BANKS

Overview of Vietnam’s banking system

SWOT analysis of Vietnamese commercial banks

2.1 Strengths

Pham Van Anh 3 ATC C – K13

2.1.1 Rapidly widened branch network and significantly growing charter

capital

2.1.2 A large number of traditional customers

2.1.3 Increasingly modern technology

2.1.4 Lower banking service fees

2.2 Weaknesses

2.2.1 Weak financial capacity

2.2.2 Narrow range of products and services

2.2.3 Inferior quality of human resource in accordance with international

2.4.1 Decreasing aggregate demand – an obstacle to capital absorption

2.4.2.Slow structural reformation of state-owned enterprises (SOEs), producing

negative effects on banking business

2.4.3 Foreign banks’ penetration of Vietnam’s market

2.4.4 Inadequate legal environment

2.5 Summary

CHAPTER 3: RECOMMENDATIONS

3.1 To the State Bank of Vietnam

3.2 To Vietnamese commercial banks

Pham Van Anh 4 ATC C – K13

3.3 Summary

C CONCLUSION

BIBILOGRAPHIES

Pham Van Anh 5 ATC C – K13

LIST OF TABLES

TABLE 1: The number of branches and transaction offices of some Vietnamese

commercial banks in 2005-2013

TABLE 2: Software system applied in Vietnamese commercial banks

TABLE 3: Service fees and charges of transactions conducted to individual customers

of Vietcombank and Standard Chartered Bank

TABLE 4: L/C fees of Vietcombank and Standard Chartered Bank

TABLE 5: ROE ratio of some banking systems in 2013

TABLE 6: Own equity of some national and regional commercial banks

TABLE 7: The number of correspondent bank of some Vietnamese commercial banks

TABLE 8: Foreign stakes in Vietnamese commercial banks

TABLE 9: SWOT analysis of Vietnamese commercial banks

Pham Van Anh 6 ATC C – K13

LIST OF FIGURES

FIGURE 1: The CAR of financial institutions in Vietnam as of 31/01/2014

FIGURE 2: The ROE ratio of financial institutions in Vietnam as of 31/01/2014

FIGURE 3: The Non-performing loan ratio of Vietnamese commercial banks

at 31/12/2012 and 30/9/2013

FIGURE 4: The ratio of short-term capital source to be used for medium-term

and long-term loan

FIGURE 5: Structure of Vietnam’s population by age

FIGURE 6: Customer type – lending of Vietnamese commercial bank in 2013

Pham Van Anh 7 ATC C – K13

LIST OF ABBREVIATIONS

SWOT : Strengths, Weaknesses, Opportunities and Threats

WTO : World Trade Organization

SBV : the State Bank of Vietnam

GSO : General Statistics Office of Vietnam

E-banking : Electronic banking

VNBA : Vietnam Banks Association

GDP : Gross Domestic Product

CAR : Capital Adequacy Ratio

ROE : Returns On Equity

NPL : Non-performing Loan

CB : Commercial Bank

L/C : Letter of Credit

Pham Van Anh 8 ATC C – K13

A INTRODUCTION 1.1 Rationale

The banking system is considered the backbone of any economy all over the world A

well-developed banking system is essential for the economic growth Over the past ten

years, Vietnam’s banking system has rapidly developed, which makes great

contributions to the country’s economic development However, it is undeniable that in

comparison with commercial banks in other countries around the world, the

commercial banks in Vietnam still suffer from many drawbacks that should be

overcome

Vietnam officially became WTO’s 150th member since 11 January 2007, which not

only gives the Vietnam’s economy in general and the banking sector in particular

enormous advantages but also imposes serious challenges That the banking system has

been more and more widely opened with the regulations being loosened and the

authorities committed to further liberalization creates favorable conditions for foreign

banks to expand business activities in Vietnam

Foreign banks have more advantages than Vietnam’s ones in terms of capital,

technology, management skills and especially excellent international banking products

and services Moreover, along with international services, overseas banks also offer

highly competitive domestic products and services, which helps them to attract more

customers and increase their market share This situation requires Vietnamese

commercial banks to work out long-term strategies to beat off this intense competition

Therefore, the SWOT analysis about the business environment of Vietnamese

commercial banks is very essential; it is the foundation for domestic banks to develop

their potentials and overcome the shortcomings in order to become modern banks

Pham Van Anh 9 ATC C – K13

1.2 Aims of the study

The study primarily aims to identify the strengths, weaknesses, opportunities and

threats of the banking system in Vietnam The analysis and the findings in the study

will make practical contributions to the strategic planning work of Vietnamese

commercial banks

1.3 Methodologies of the study

For the accomplishment of this study, the following methodologies are employed

- Statistical method: Secondary data which is collected from the published

reports, articles, and documents relevant to Vietnam’s commercial banks, which

are available online or in print is generalized to tables and charts

- Analytical method: A SWOT analysis is used to evaluate the business

environment of Vietnamese commercial banks

- Comparative method: Based on the data collected, the researcher compares the

figures for banking activities of Vietnam’s banks with those of foreign banks

1.4 The scope of the study

The thesis covers the real situation of Vietnamese commercial banks’ operation in

terms of strengths, weaknesses, opportunities and threats

1.5 The organization of the study

The thesis is divided into three main chapters:

- Chapter 1 : Introduction

- Chapter 2: Theoretical framework

- Chapter 3: SWOT analysis of Vietnamese Commercial Banks

Pham Van Anh 10 ATC C – K13

- Chapter 4: Recommendations to improve the Vietnam’s banking system

B DEVELOPMENT

Pham Van Anh 11 ATC C – K13

Chapter 1: Theoretical framework 1.1 Commercial Banks

Definition

Commercial banks are financial institutions whose core business is accepting deposits,

making loans to individuals and organizations and conducting other related business

operations

Roles of commercial banks

Commercial banks play an important role in the financial system and the entire

economy As key component of the financial system, banks allocate funds from savers

to borrowers in an efficient manner They provide specialized financial services that

reduce the cost of obtaining information about both savings and borrowing

opportunities These financial services help to make the overall economy more

effective

In case of developing countries like Vietnam, commercial banks can contribute to

the economic development in the following ways:

- Accelerating the rate of capital formation

- Provision of finance and credit

- Monetization of economy

- Innovations

- Implementation of monetary policy

- Development of agriculture

- Promote industrial development

- Fulfillment of socio-economic objectives

Pham Van Anh 12 ATC C – K13

1.2 SWOT Analysis

Definition

A SWOT analysis is a structured planning method used to evaluate the strengths,

weaknesses, opportunities and threats involved in a project or in a business venture A

SWOT analysis can be carried out for a product, place, industry or person

Content of SWOT analysis

The following diagram shows the process of conducting a SWOT analysis:

The SWOT analysis classifies the internal aspects of the company as strengths or

weaknesses and the external factors as opportunities or threats

 Internal analysis:

- Strengths: positive internal attributes to the organization or situation that are

within your control

- Weaknesses : internal factors within your control that may impede your ability

to meet your objectives

Situation

analysis

Internal analysis

Strengthes

Weaknesses

External analysis

Opportunities

Threats

SWOT Profile

Pham Van Anh 13 ATC C – K13

When the analysis has been completed, a SWOT profile can be generated and used as

the basis of goal setting, strategy formulation and implementation The completed

SWOT profile can be arranged as follows:

Table 2.1 : SWOT profile

The purpose of the present chapter is to shed light on the theoretical background for the

thesis This chapter starts by discussing the overview of commercial banks,

Pham Van Anh 14 ATC C – K13

emphasizing their important role in the financial system as well as the entire economy

After that, the thesis provides some basic information about the theory of SWOT

analysis model and its contents Because of the essential role of commercial banks, it is

essential to carry out a SWOT analysis of Vietnamese commercial banks in order to get

an insight into their internal characteristics as well as external conditions influencing

their operation, aiming at timely formulating effective strategies for long-term

development of Vietnam’s banking system

Pham Van Anh 15 ATC C – K13

Chapter 2: SWOT analysis of Vietnamese commercial banks

In this section, the thesis focuses on the SWOT analysis of Vietnamese commercial

banks to identify the strengths, weaknesses, opportunities and threats involved in the

operation of the banking system

Overview of Vietnam’s banking system

Vietnam’s banking sector has so far undergone a 63-year-period of construction and

development ( 1951-2014) with lots of difficulties and challenges, but it remains stable

and well-developed Vietnamese commercial bank system was officially formed since

1990, and since then it has kept growing in terms of size ( constantly increasing charter

capital, widely expanded branch network,…) and business’s quality and effectiveness

By the end of 2013, Vietnam’s commercial bank network has already remarkably

developed throughout the country It comprises 5 State-owned commercial banks (

Vietcombank, Vietinbank, Agribank, BIDV, Housing Bank of Mekong Delta), 35

joint stock commercial banks, 50 foreign bank branches, 4 joint venture banks and

five 100% foreign capital banks (SBV, 2013) In particular, Agribank is the biggest

commercial bank which has the largest operating network spreading all over the

country with more than 2300 branches/ transaction offices (Agribank, 2013)

It can be said that Vietnam has gradually integrated into the global economic arena

after officially becoming a member of the World Trade Organization (WTO) at the end

of 2006 Along with advantages and opportunities, there are still many challenges that

Vietnam has to overcome In recent years, commercial banks have made significant

contributions to the stability and sustainable development of Vietnam’s economy

Banks not only perform the role of funds allocation, but also help stabilize the money

Pham Van Anh 16 ATC C – K13

purchasing power Along with the reform and innovation process, the number of

commercial bank has risen rapidly, gradually turning into a compatible system with the

newly emerging economies like Vietnam The growth of Vietnam’s banking system

has been reflected in the increase in equity, total assets, the diversification of services

provided and the contribution to annual GDP The total assets of Vietnam’s banking

system as of 31 December 2013 was 5.755,87 trillion dong, grew by 3,4 times

compared with that figure in 2008 of 1.700 trillion dong In addition, the total charter

capital by the end of 2013 attained 423,98 trillion dong, four times larger than that of

2008 (BizLIVE, 2014) At present, the source of capital for business in the economy is

primarily provided by commercial banks whose total assets reach 155% of Vietnam’s

Over the past few years, Vietnamese commercial banks have made greater efforts not

only to expand the branch network throughout the country but also to increase the

charter capital

The dramatic increase of the charter capital not only makes banks’ reputation grow but

also provides an important basis for Vietnamese commercial banks to develop and

enlarge the business scale in a safe and effective way Dr Nguyen Tri Hieu, an

economic analyst supposed that it is very important to increase the charter capital if

banks’ owners want to develop their banks

Pham Van Anh 17 ATC C – K13

Firstly, all credit operations are based on the charter capital According to Vietnam’s

Law on Credit Institution 2010, the total outstanding credit of a commercial bank

extended to a single client must not exceed 15% of its own capital, and the total

outstanding credit extended to a single client and affiliated persons must not exceed

25% of its own capital Therefore, if banks want to make a large loan, they need a

massive amount of charter capital Secondly, charter capital is the “cushion” of

protection against risks such as non-performing loans or unexpected shocks Thirdly, if

banks have a large amount of capital, they can ensure the organization’s growth and the

development of new services and facilities In addition, capital also promotes public

confidence and reassures creditors concerning banks’ financial strength Recently,

there have been many commercial banks having a rapid level of capital growth such as

Sacombank ( the charter capital in 2013 was 12.425,5 billion dong, increased by 17%

compared to that in 2012) (Sacombank, 2013), Vietinbank ( the charter capital as of 30

June 2013 was 32.661 billion dong, increased by 24,6% compared to that figure in

2012 of 26.218 billion dong) (Vietinbank, 2013)

Besides, the speed of operating network expansion is also relatively high, which eases

banks to approach customers nationwide

TABLE 1: The number of branches and transaction offices of some Vietnamese

Pham Van Anh 18 ATC C – K13

BIDV is a state-owned credit institution that has a wide branch network The number

of branch has soared in recent years with the average growth rate of around 20% per

year, which proves that BIDV has spared no efforts widen its operation network

AB Bank is a pretty small commercial bank, but its number of branches and transaction

offices has so far risen significantly, from 8 branches in 2005 to … in 2013, increased

by … times

“That the branch networks have been widened dramatically has met the increasing

requirements of residents and enterprises in all regions of the country”, said the

Representative of Techcombank The banks have been doing this in order to

consolidate their market shares, reinforce their brand, develop services and strengthen

their financial capability

2.1.2 A large number of traditional customers

Vietnamese commercial banks deeply understanding national customers Most

domestic commercial banks especially the state-owned ones have had a nationwide

branch network with a large number of traditional customers for years Moreover, with

a long history of operation, these banks have got insight into Vietnamese customers’

traditions and psychology, which is a considerable advantage to home banks in the

context of increasing number of foreign banks entering Vietnam’s market, especially

Pham Van Anh 19 ATC C – K13

since 1/1/2011 when overseas banks were entitled to full national treatment in

accordance with the commitments of Vietnam’s government after joining WTO

2.1.3 Increasingly modern technology

Vietnamese commercial banks are gradually modernizing and applying new

technology in bank management as well as in banking transactions Currently, many

commercial banks like Techcombank, VP Bank, Millitary Bank,…are paying attention

and investing heavily in banking technology Over the past 2 years, VP Bank has

invested nearly 10 million USD in banking technology including upgrading and using

Core Banking System T24 of Temenos ( a brand in Switzerland), which is currently the

highliest appreciated among the banking software system (VP Bank, 2013) These

investments help banks satisfy the diversified demands of customers, enhancing

Vietnamese commercial banks’ competitive ability in banking transactions, especially

international ones

TABLE 2 : Software system applied in Vietnamese commercial banks

Commercial banks Software system applied Ranked from 2007-2013

BIDV, VCB, Vietinbank,

MSB

SIBS (Silverlake Integrated Banking Solutions)

Habubank, LienViet Post

Bank, Tien Phong Bank

Symbol System Access 12,10,9,10,9,10

(Source : http://www.inntron.com/core banking.html)

Pham Van Anh 20 ATC C – K13

Besides, today Vietnamese commercial banks are boosting the development of

electronic banking ( e-banking) with outstanding benefits This beneficial and safe

service helps customers save time and costs That commercial banks provide e-banking

services makes great contributions to the banks’ customer attraction and income

growth strategies Some e-banking services widely used are making payment through

POS, Home banking, Internet banking, Mobile banking, Kiosk banking and so on

"With the number of Internet users account for 25% of the population, the VN is the

potential market for the application of electronic payment instruments integrated

application of information technology in the banking system" said Mr Pham Hong

Hai, Director General of Telecommunications Department, Ministry of Information

and Communications

Banking utilities in Vietnam has never been vibrant as today with the participation of

many banks, from local to foreign banks In recent years, electronic payment market

has undergone a dramatic growth According to the research of IDG-BIU ( Business

Intelligent Unit), in the third quarter of 2013, the number of Internet banking users

grew by 35% compared to that in 2010 40 commercial banks have declared that they

have offered Internet banking services, and the number of commercial banks providing

Mobile banking services has totaled 18

One of the e-banking services that are being developed is online deposit Vietnam

Thuong Tin Commercial Joint Stock Bank ( Vietbank) has just launched the online

deposit service for those individual customers having account at Vietbank

Furthermore, “Online Investment” is a new service of Sai Gon Commercial Bank (

SCB), which helps customers maximum the effectiveness of idle funds and make use

of beneficial and modern services offered by the bank With “Online Investment”,

customers can deposit money into their accounts at anytime and anywhere, saving time

Pham Van Anh 21 ATC C – K13

and transaction costs Besides online deposit service, commercial banks has provided “

Online Loan Application”

Another example of e-banking services is the electronic payment service of Orient

Commercial Joint Stock Bank ( OCB) that allows customers to recharge their prepaid

mobile phone for all mobile networks and to pay the phone bills for postpaid

subscribers

The Interbank money transfer service via Internet banking has also been launched to

individual customer by Dai A Commercial Joint Stock Bank ( DaiA Bank), which

allows them to transfer money to 18 other banks outside DaiA Bank’s system or

recharge prepaid mobile phone or pay postpaid mobile bills or make other electronic

payments

2.1.4 Lower banking service fees

Banking service charges in Vietnamese commercial banks are lower than those of

foreign peers

TABLE 3 : Service fees and charges of transactions conducted to individual

customers of Vietcombank and Standard Chartered Bank

- Free for 1 checkbook per year

- From the second checkbook :20,000

VND/ chequebook

Cancel cheque

Pham Van Anh 22 ATC C – K13

200.000 VND + telex fee + incurred fees from overseas

bank ( If any) (Source : http://www.vietcombank.com.vn , https://www.sc.com/vn/)

It can be seen from the table that the service fees charged by Vietnamese commercial

banks are relatively low in comparison with those of overseas banks operating in

Vietnam’s market Not only services provide for individual customers but also those

offered to business customers are charged less than foreign competitors’ products,

which is a big competitive advantage of domestic banks This helps Vietnamese

commercial banks attract more customers when the average income of Vietnamese

people is comparatively low, and reasonable transaction fee is still one of the top

Issue L/C

Margin deposit 100%

0.05% L/C’s total value Min:50 USD; Max:500 USD

0.1% L/C’s total value Min 45 USD + telex fee

Pham Van Anh 23 ATC C – K13

Export L/C

L/C

Confirm L/C 0.15%/month/ L/C’s total value

Min: 50 USD

Quotation for each transaction

(Source : http://www.vietcombank.com.vn , https://www.sc.com/vn/)

According to the fees of international payment by Letter of Credit, Vietcombank’s fees

are merely 70% compared to those of Standard Chartered Bank, which implies that

Vietnam’s commercial banks have cost advantage over foreign banks

2.2 Weaknesses

2.2.1 Weak financial capacity

As of June 2013, except for foreign banks, Vietnam’s banking system had 40

commercial banks, including 5 state-owned ones and 35 joint-stock commercial banks

5 state-owned banks account for more than 50% of the market share ( SBV, 2013)

However, the financial capacity of domestic banks is relatively low, which is reflected

in following points:

a The capital adequacy ratios of Vietnamese commercial banks are relatively low

The capital adequacy ratio ( CAR) is one of the important criteria used to assess the

safety of banking business According to Circular 13 issued by the State Bank of

Vietnam on 20 August 2010, commercial banks must maintain the minimum CAR of

9% This index is calculated by the following formula:

Individual capital adequacy ratio =

Pham Van Anh 24 ATC C – K13

In fact, the CARs of many Vietnamese commercial banks have exceeded 9%

FIGURE 1: The CAR of financial institutions in Vietnam as of 31/01/2014

( Unit : %)

(Source: The State Bank of Vietnam)

However, that Vietnamese financial institutions have met the requirement of minimum

CAR regulated in Circular 13 does not mean that they have enhanced the safety in

organizational or managerial structure since that required minimum CAR is based on

the content of Basel I According to Basel II, it is necessary to add market and

operational risks to the denominator of the formula as follows:

Meanwhile, according to Circular 13, the denominator consists of merely risk-weighted

assets, which means that only credit risk is considered This has not reflected the level

State-owned CBS Joint-stock CBs Joint venture CBs

and Foreign banks

Financial companies and financial leasing companies

Cooperative bank

of VN

CAR as of 31/01/2014

Pham Van Anh 25 ATC C – K13

of risk in banking business Besides, it is evident from the figure that domestic banks

have not managed risks as well as foreign ones operating in Vietnam The minimum

CAR of joint-venture commercial banks and foreign commercial banks stood at

29,28% by the end of January 2014, much higher than those of home banks, which are

10,93% and 12,47% respectively

b Return on equity ( ROE) ratio is still low and unstable

In banking sector :

ROE < 10% the profit-generating capacity is limited

10% < ROE < 20% the profit-generating capacity is normal

ROE > 20% banks make huge profits when using own capital

By the end of 2013, ROE ratio of the whole banking system attained 5,15%, decreasing

by 1,13% in comparison with that in the beginning of the year ( SBV, 2013) ROE ratio

of state-owned commercial bank group declined from 10,34% to 7,93% That of

joint-stock commercial bank group fell from 5,1% to 3,6% Only the figure of joint venture

and foreign commercial bank group increased from 4,5% to 4,64%

FIGURE 2: The ROE ratio of financial institutions in Vietnam as of 31/01/2014

( Unit : %)

Pham Van Anh 26 ATC C – K13

(Source : The State bank of Vietnam)

Meanwhile, at the end of 2013, the average ROE ratio of China’s banking system was

19.2%, and those of Thailand, Korea, Malaysia, Singapore and Indonesia’s banking

systems were 9.5% , 8.7%, 16.8%, 13.9% and 24.4% respectively This means that

Vietnamese commercial banks made significantly smaller profits compared to their

counterparts in the world

TABLE 5: ROE ratio of some banking systems in 2013

Country Thailand Korea Malaysia Singapore Indonesia Vietnam

ROE ratio of

banking system

(Source : website of above country’s central bank)

c Banks’ own capital are still small in comparison with regional peers

Financial companies and financial leasing companies

Cooperative bank of VN

ROE as of 31/01/2014