Current situation of retail banking at military bank

Thus, retail banking is a high competitive market amongbanks both domestic and foreign banks.The military bank sets up a strategy to be a MB group in 2015 and reforms structure modelwith

TABLE OF CONTENTS

LIST OF TABLES iii

LIST OF CHARTS iii

ACKNOWLEDGEMENTS iv

CHAPTER 1: INTRODUCTION 1

1.1 Background and Relevance of the study 1

1.1.1.Background 1

1.1.2.Research objectives 3

1.1.3.The scope of the study 3

1.1.4.Research Questions 3

1.1.5 Research Methodology 3

1.2 Structure of study 4

CHAPTER 2: RETAIL BANKING OPERATIONS OF COMMERCIAL BANKS 5

2.1 Commercial banks and retail banking of commercial bank 5

2.1.1 Commercial Banks 5

2.1.2 Commercial bank operations 5

2.2 Retail banking of commercial bank 7

2.2.1 The Concept of retail banking 7

2.2.2 The Services of Retail banking 7

2.2.2.1 Mobilizing capital 7

2.2.2.2 Lending activities 8

2.2.2.3 Other services 10

2.3 Factors affecting Retail Banking 11

2.3.1 Internal Factors 11

2.3.2 External Factors 13

CHAPTER 3: CURRENT SITUATION OF RETAIL BANKING AT MILITARY BANK 18

3.1 Overview of Military bank 18

3.1.1 Introduction 18

3.1.2 Major operations and achievements 21

3.2 Factors driving the development of retail banking at MB 28

3.2.1 Internal factors 28

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3.2.2 External factors 32

3.3 Situation of Retail banking activities at MB 34

3.3.1 Banking Capacity in supplying retail banking services 35

3.3.2 Products and Services 38

3.3.3 Customers and Market 43

3.3.4 Distribution network 45

3.4 Assessment of Retail banking at Military Bank 48

3.4.1 Achievements: 48

3.4.2.Constraints 51

3.4.3 Causes of constraints 54

CHAPTER 4: PROPOSED SOLUTION TO FURTHER DEVELOP RETAIL BANKING AT MB 56

4.1 Strategic orientation of MB in developing retail banking services 56

4.1.1 The economic – banking and financial trends 56

4.1.2 Strategic orientation of MB in developing retail banking services 57

4.2 Proposed solutions to further develop retail banking at MB 59

4.2.1 Improving management capacity 59

4.2.2 Diversifying and improving traditional Services and Products 64

4.2.3 Developing modern services and products 67

4.2.4 Developing Distribution channels 69

4.2.5 Developing Human Resource 73

4.2.6 Improving banking technology 77

CONCLUSION 80

BIBLIOGRAPHY 81

APPENDIX 82

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LIST OF TABLES

Table 3.1: Total charter capital (2005- 2008) 21

Table 3.2: Total owned capital (2005- 2008) 22

Table 3.3: Total mobilized fund (2005- 2008) 23

Table 3.4: Total loans in a period (2004 – 2008) 24

Table 3.5: Loan Portfolio by industry sectors 25

Table 3.6: ROE, ROA of MB (2005- 2008) 27

Table 3.7: Total employees and branches of MB (2005- 2008) 27

Table 3.8: Human Resource Quantities in a period (2005 – 2008) 37

Table 3.9: Total funds mobilisation 39

Table 3.10: Total branch network in 2006 – 2008 46

LIST OF CHARTS Chart 3.1: Organization of MB 20

Chart 3.2: Total assets in a period (2005 – 2008) 24

Chart 3.3: Total profit before tax (2005- 2008) 26

Chart 3.4: Structure of retail banking loans 42

Chart 3.5: Structure of customers of Retail banking 44

My thanks are also given to my friends and teachers in Business School They have helped

me so much during this course in Business School

I am particularly grateful to my colleagues in Military Bank for their kindness, constructivesuggestions for my thesis

Lastly, I would like to thanks to the encouragement and tolerance of my friends, myfamily, especially my brother who contributed lots of valuable ideas that helped mecompleted this thesis

Hanoi, December 2009

as well as power of customers and various segments.

Generally, the banks are also characterized 2 kinds, including corporate banking and retailbanking The corporate banking aims to provide services to large enterprises On thecontrary, the retail banking considers individuals, small companies, and household as themain its customers

In Vietnam, the banking industry has seen the powerful development since Vietnam hasintroduced “Doi Moi” in 1986 Thanks to fast economic growth (average ratio of 8% peryear), the Vietnamese banking system has enlarged huge amount of bank and bankingquality Recently, there have been 53 domestic banks, 34 branches of foreign banks inVietnam Almost banks entry both corporate banking, retail banking, and have a universalpolicy to manage both of them Basically, it is necessary to build strategies to separatebetween corporate banking and retail banking because the customer segment of 2 kind ofbanks are different in terms of power, demand, service… Each type needs a model anddissimilar management in order to satisfy its customers

Under the fierce competition, especially when Vietnam has been official member of WTO,some banks in Vietnam found a new trend for them by building retail banking parallel withcorporate banking At present, Almost banks attach special importance to retail bankingbecause retail banking in Vietnam is expected to be a potential market with the growth of

30 to 40 percent during next 10 years Moreover, Personal income in Vietnam has beenalso rising thanks to stable economic growth, economic reforms of Vietnamesegovernment and Vietnam has a young popular structure with a main large people are

laborers (over 52 million people) Thus, retail banking is a high competitive market amongbanks both domestic and foreign banks.

The military bank sets up a strategy to be a MB group in 2015 and reforms structure modelwith a division between corporate banking and retail banking based on an assessment onfuture prospect of banking industry in Vietnam In this roadmap, MB focuses ondeveloping retail banking, consolidating operation of retail and corporate banking andcompleting operational process and mechanism

MB issued the regulation of operation mechanism for retail banking unit for these servicedivision at branches as well as regulation on function and duties of its developmentdepartment at head quarter The retail banking also issued lending processes to client,standardized credit dossier, other relevant and operational processes at one-stop transactionpoints MB also marketed its new products to individual customers such as securitiesinvestment, studying abroad…

In fact, The Retail banking at MB has contributed more and more profit to total its profitand removed structure following the trend from reducing from ratio of corporate banking

to increasing more ratio of retail banking in order to reduce high risk from customers ofcorporate banking The Retail banking has achieved some significant success in area ofcustomers, credit growth, capital mobilization…However; retail banking occupies smallpercentage compared to corporate banking The retail banking is poor, no attachment tocustomers and no diversification to various segments

On the other hand, Retail banking at MB also faces many difficulties and they block MBaccess deeply retail market, especially competitive challenges Almost domestic andforeign banks in Vietnam has jointed in retail market The competition will be fiercer after

2010 when Vietnam allow officially foreign bank to establish in Vietnam

To resolve mentioned problems, MB must push strategies to expand retail banking andcompete with other banks in Vietnam What are the appropriate strategies, which MB canapply? It is also research purpose of this thesis The study will research and offer somelesson and strategies for MB based on analyzing current situation and its competence

I.1.2 Research objectives

The objectives of the research are:

- To study and summary theoretical issues of retail banking

- To analyze current situation of Retail banking at MB

- To analyze factors driving the development of Retail banking at MB

- To propose solutions to develop Retail Banking at MB

I.1.3 The scope of the study

Studying Retail Banking at Military Joint Stock Bank with the specifies:

- The time research is a period from 2004 – 2009

- The space scope: Researching factors that affect development of retail banking in wholesystem of MB The Retail Banking will be studied independently, the thesis does notconsider the relation between Retail Banking and Corporate Banking in Military Bank

I.1.4 Research Questions

This thesis focuses on studying factors that driving the development of retail banking atMilitary Bank and proposes some solutions to further develop retail banking at MilitaryBank Thus, the thesis will try to answer the following central research questions:

- What is retail banking how is it important to a commercial bank?

- How is the retail banking operating at the MB, what are its strengths and weaknesses?

- What are driving factors that affect development of retail banking at Military Bank?

- What are solutions to develop retail banking at Military Bank?

1.1.5 Research Methodology

This thesis mainly adopts compare methodology to analyze secondary data and interviewmethodology All secondary data collected will be compared to find all matters relating toretail banking Besides, with interview methodology, the thesis will have real data and we

will have a new look about retail banking at Military Bank The interview methodologywill be conducted with participation of specialists, customers, executive officers ofMilitary Bank…

1.2 Structure of study

Chapter 1: Introduction

Chapter 2: Retail banking operations of commercial banks

Chapter 3: Current situation of Retail Banking at Military Bank

Chapter 4: Proposed solutions to further develop Retail Banking at Military Bank

CHAPTER 2: RETAIL BANKING OPERATIONS OF COMMERCIAL BANKS 2.1 Commercial banks and retail banking of commercial bank

2.1.1 Commercial Banks

- Definition

“Commercial bank is a financial organization that operates in monetary market.

Commercial bank supplies main financial services for all sectors in the economy such as individuals, households, companies…”

The services of commercial bank are lending to the economy, raising capital, deliveryother payment means…

2.1.2 Commercial bank operations

Commercial banks supply many services to the economy Some main operations ofcommercial bank are:

- Fund Mobilization

- Lending and investing activities

- Supplying other services

Fund Mobilization, fund mobilization is a traditional service of any bank The commercial

bank mobilizes free capital from the economy, including individuals, organizations,companies… Fund mobilization is a basic activity for other activities of bank like lendingand investing activities, supplying services Through mobilization activity, the bank canhave enough fund to develop services, implement lending activities… The bank will keepprofit from business activities to invest in developing technology With high technology,the bank can create more services for customers

For the economy, through fund mobilization of banks, the government of countries canmobilize funds from all sectors to develop the economy as well as social programs.Besides, with this mobilization any country can promote the economy and economicsectors (Individuals, households, companies…) through reasonable monetary policy.Therefore, the government can implement many economic and social objectives from thecommercial bank For each term of the economy, the government will have reasonable

policy to adjust the economy as well as situation of society

Lending and investing activities, this is main activity of any bank Lending and investing

activities are understood as the bank use fund mobilization in order to lend for all sectors inthe economy or invest in project of individuals, organizations or companies Lending andinvesting activities supplies for demands of objectives of customers like consumer,business development, automobile purchasing… This activity brings main profit for thebank Through lending activities and supplying services for customers, the bank gainsprofit from interest and fee of services With this profit, the bank will use to reinvest inbusiness activities such as technology, branches, and services… to enhance position inbanking market as well as develop business activities of bank

At present, this activity is diversified and all banks focus on providing more lending andinvesting products to meet many demands of customers The bank often focuses on types

of lending and investing activities:

- Loan products for individuals, households

- Loan products for organizations, companies

Through fund mobilization, the bank uses this fund to lend and invest more projects ofeconomic sectors Thanks to this activity, the bank receives much profit and this profit will

be used to invest more other activities to invest more services and technology as well asbusiness activities

For the economy, through lending and investing activities of bank, all countries candevelop the economy and approach many objectives in the society Besides, lending andinvesting activities help the government control economic development through manymonetary policies and other many policies such as securities policies, real - estatepolicies… The government also implements many social objectives like improving livingstandard…

Supplying other services, the bank also supplies more services to meet many demands of

individuals; organizations … These products are ATM card, Visa card, western union,financial advice… These services contribute to product diversification of bank At present,many banks have competition in supplying these services Thus, the bank can earn muchprofit from providing these services The competition of many banks will help all banks

improve quality for their services These services improve more living standard and manydemands of customers are supplies

2.2 Retail banking of commercial bank

2.2.1 The Concept of retail banking

There are many definitions of retail banking but “Retail banking is defined as a financial

organization that operates in a financial market Retail banking supplies mainly financial services for individuals, households and small companies in the economy”

In this thesis, the author researches mainly retail banking sector relating to individual andhousehold customers In addition, the author gives attention to all services, solution as well

as determinants that affect direct of directly to development of retail banking in term ofindividual and household customers

2.2.2 The Services of Retail banking

In Retail banking, the services are main factors that determine business activities and profit

of any retail banking The typical service offered in Vietnamese retail banking segment arehousing loans, cards, educational loans…Generally, the services comprise some maingroups as follows:

2.2.2.1 Mobilizing capital

Mobilizing capital is a basic activity of any banks Naturally, mobilizing capital betweencorporate bank and retail banking is the same However, mobilizing capital has adifference in a source of mobilization Depending on the type of bank, the bank mobilizescapital from many different sources For retail banking, retail banking mobilizes capitalfrom free capital of individuals, households, SMEs in the economy Retail bankingdevelops many types of mobilization with different time and interest to meet manydemands of customers for example: non – time account, deposits for 1 month, 2 months, 3months, 6 months…Besides, retail banking mobilizes capital from many currencies such asUSD, VND, EUR… Mobilizing capital of retail banking displays through, banking bonds,accounts of customers, certificate of deposits The source of this mobilization is small butstable Therefore, all retail banking focus on the number of customers to increase capital

In the contrary, corporate banking mobilizes capital from organizations, companies in theeconomy The bank mobilizes through account and deposit contract of organizations andcompanies This mobilization is large but unstable It depends much on some largeorganization and companies

In near years, mobilizing capital from individuals has sharply contributed for increasingcapital for almost banks Moreover, mobilizing capital has also added to move capitalstructure Therefore, almost banks, especially retail banks concentrate on rising capitalbased on diversifying and developing saving deposit services

For retail banking, Saving deposits are developing both quality and quantity, consisting ofbasic saving deposit service such as term or non - term saving deposit by VND, USD, andEUR… Gold-denominated deposit, Savings for lottery Nowadays, Retail banks investmore and more in technology in order to enhance and expand many types of saving depositservices as well as high quality for its services

In future, Vietnamese banks have also researched and supplied many types of savingdeposits based on high technology for individuals; these products will be more attractiveand comfortable and higher benefit for customers

2.2.2.2 Lending activities

Lending activity is main basic activities for all banks and delivers larger profit of anybanks Generally, Lending products are many types, focusing on many kinds of customersand they have differentiation among banks

The same as capital mobilization, lending activities of corporate banking and retail bankinghave no differences But it has a difference about the sources of capital For corporatebanking, lending activities focus on financing for projects, working capital, businesscapital for organizations and companies to develop business activities of organizations andcompanies as well as social purpose For this mobilization, the type of mobilizationdiversifies with many types of customers However, retail banking focuses on lendingactivities for individuals, households, SMEs to satisfy demands of consumers Some ofthese lending products that supply for individuals are:

- Commercial papers mortgage loan

- Installment loan for home, home-base purchasing, home construction and renovation

- Installment loan for automobile purchasing

- Consumption loans and consumer installment loans

- Loans for developing business activities

- Securities and value paper loans

- Loans for overseas study

For corporate banking, lending activities consists of many risk compare to retail banking.Because corporate banking often finances for many big project or business capital and italso concentrates on some of customers, especially big companies or organizations Forretail banking, the amount of money for financing project of customers is often smallerthan the amount of money for organizations and companies Therefore, the risk of lendingactivities for retail banking is smaller than corporate banking

Besides, retail banking can diversify lending activities by financing capital for many types

of customers So, retail banking can share risk with customers by increasing morecustomers Nowadays, the bank focuses on retail banking and because of high risk ofcorporate banking and corporate banking market is saturated with high competitiveness ofmany banks

Naturally, the customers of lending activities are also various, who come from manydifferent jobs, ages, class, position, educational level… lending products are poor and notattractive to almost people, especially in Vietnamese banks In portfolio, installment loanfor home and automobile purchasing are more attractive to many people, it accounts forbig percentage of lending products Besides, the consumption installment loans also aredeveloping and these loans will be main activities of retail banks in near future

2.2.2.3 Other services

Other services focus on supplying services for individuals, households This is a differencebetween retail banking and corporate banking Corporate banking concentrates onproviding services for organizations, companies but this type of bank cannot providesservices for individuals and households The characteristics of these services are usedmodern technology and information technology At present, many banks use hightechnology to satisfy increasing demands of customers and these services also brings muchprofit for the bank These services consist of services of payment, financial consultant,ATM, Post, Visa card…

In these services, card market is facing high competition of other banks Card service is amodern banking service for individuals and it is a fierce competitive field among banks.Card portfolio includes domestic credit card, international credit card, domestic debit card,ATM (automatic tellers machine) Some banks, which have developed technology, theysupply payment card, global card that used in the world Besides, almost banks focus onresearching new features for its cards, improving card as the versatile card that helpspeople execute many services, such as checking money balance, fund transfer, paymentbills…

In recent years, the Vietnamese Government has encouraged development of non – cashpayment to reduce using cash in public The Government has had many environment andpolicies in order to enhance growth of non – cash payment, especially card products.Therefore, Retail banks have invested more in expanding card produces parallel withempowering infrastructure and card alliance among banks

Besides, above services mentioned, retail banking also provides numerous other services,such as remittance service (including overseas, outward, inward remittance), westernUnion… Some modern services consist of home banking, mobile; Internet banking,expanding with high investment in technology

2.3 Factors affecting Retail Banking

Retail Banking is only one entity in national economy So, Retail Banking is affected bymany factors in business environment Each factor has both good and bad affection tobusiness activities of retail banking Studying these factors will help managers marketpower, demands, customers…as well as objectives orientations and right strategies.Studying factors that affect business activities of retail banking, businessperson focus ontwo factor groups including internal factors and external factors of retail banking

2.3.1 Internal Factors

Internal factors are defined as factors of its retail banking Internal factors relates tostrengths and weakness of each retail banking, including chapter capital, technology,human resource, distribution network…These factors implement both two functions such

as necessary factors to develop business activities of retail banking and factors that pushcompetitive position of retail banking In internal factors, some main factors are as follows:

- Financial capacity: Capital in retail banking is the most important factor in business

activities of any banks Large capital will help retail banking expand business activities;develop more services as well as banking products, distribution network Besides, largecapital also aids retail-banking focus on quality of services as well as implementingmodern technology into business activities

On the contrary, small capital affects so much on business activities of retail banking.Retail banking will have more difficulties in developing services as well as enhancingmore competition with other banks

At present, Capital is one of main demand of all retail banking in Vietnam For commercialbanks, not including State Owned Banks such as Vietcombank, Agricultural bank,Vietinbank, BIDV bank, they nearly have small capital, especially chapter capital only

from 1.500 billion VND to 3.000 billion VND This chapter capital is very small comparedwith other banks, foreign banks in Vietnam as well as in foreign countries This matter isalso mentioned more in banking business in Vietnam Vietnam is an official member ofWTO that means the competion pressure will be fiercer in business activities, includingbanking business Thus, retail banking must enhance more capital; mobilize more allsources to push more competition.

- Business capacity and business management

This factor determines largely successes or failure of any retail banking Each bank hasdifficult strategies in managing banking business However, one bank that combinesstrengths and weakness and target right business plan, this bank will develop morebusiness activities as well as reduction its weakness

Business capacity and business management relate development strategies, market share,orientation objectives… All elements will affect all business of retail banking In moderneconomy, applying modern business management will help retail banking develop moreactivities and bring more profit On the other hands, business capacity and businessmanagement also must balance benefit of customers and bank because customers are thepeople that bring profit for bank

- Human Resource

This factor is one key that brings success for retail banking Human resource is a face ofany retail banking and to be a potential factor for any banks For banks, all banks need bigemployees for their all branches and transaction office, especially human resource has highqualification and high capacity High quality human resource will access high technology

as well as modern business management and the competition of bank will be higher

- Technology

Technology enables bank to be closely with customers thought delivering new products,developing distribution channels to satisfy demands of people Thanks to the development

of banking technology, banking services is diversifying with the high technology products,for example: ATM, credit cards, internet banking…

Banking technology helps banks in saving expense, time and enlarges potential customergroups Therefore, modernizing and investing banking technology is a strategy and vitalkey to exist in competitive environment

- Distribution network

Distribution is a factor of marketing strategy of retail banking A large distribution networkwill help retail banking develop and delivery services and products to customers A largedistribution will be diversified, including modern and traditional distribution Traditionaldistribution focus on developing more branches, transaction offices On the other hands,Modern distribution will concentrate on technology, ATM, POS, Mobile Banking, HomeBanking…In modern trends, modern distribution will expand more than traditionaldistribution

One bank cannot develop without distribution network because services and productscannot deliver to customers Besides, the bank also cannot develop more potential market

to satisfy demands of customers in different market

- Other factors

Besides above factors, some invisible factors also affect so much business activities ofretail banking at MB, including corporate culture, trademark, knowledge about retailbanking …If these factors are good, strong, these factors will attract more customersbecause of MB`s good image These factors help MB integrate strength into domesticmarket and create many advantages compared to other banks

- The socio - cultural factors

- Political and legal system

- Development of supportable and related business fields

- The socio - economic factors

The banking industry is be related closely to socio - economic development, especially inretail banking The socio - economic situation affects largely customer group of retailbanking because retail banking often focuses on individuals, households, small companies.The socio - economic factors consists of demographic factors, geographic factors andeconomic factors Each factor influences differently on retail banking but they also havemutual influences

- Demographic factors

The demographic environment contains population, demographic structure, demographicmigration, demographic policies… Total population, demographic structure decides marketpower of retail banking because the features of retail banking often orientate youngdemographic structure, which have a large power Demographic factor creates demand andmarket framework about banking services Furthermore, it is also a basic background tobuild distribution channels of retail banking

- Geographic factors

Geographic relates to national territory, village, province, cities of nation Each area hasdifferent characteristics, including demand, demographic structure, and income, economicdevelopment…Geographic environment takes shape trade center, manufacturabilitynter,shopping center… Base on geographic factors, retail banking defines potential marketabout banking services Geographic factors contribute on founding distribution channels of

retail banking as well as demographic factors

- Economic factors

Referring about economic environment, people mention on economic factors as averageincome, payment demand, GDP, GNP, economic growth…Almost factors of economicenvironment impact largely on market power of retail banking Researching economicenvironment, retail banking marketing must understand changing of some main factors asfollows:

- Average income

- Export – Import Ratio

- National economic development, economic growth

- Inflation Ratio

- Stableness of national economy

- Investment policies, monetary policies

- Economic factor impacts mostly banking demands and banking services It governsmany banking activities as mobilization, loan activities, payment demand, and otherfinance activities The changing of economic factors affects power business activities ofretail banking, creating both opportunities as well as challenges for retail bankingactivities Furthermore, the success or fail of retail banking is based on the prosperity ordepression of domestic, regional, world economy

When domestic economy is in recession, it reduces income of people, business expansion

of companies Therefore, the demand of people and companies about retail banking alsodecrease, the banking services will not enlarge On the other hand, domestic economy hashigh economic growth, increasing business expansion of companies The demand of retailbanking expands because the income of people is improved It is an opportunity to extendretail-banking activities both quality and quantity banking services

The banking activities depend largely on the world economy The globalization andintegration trends deliveries market as well as the increase of competitors In the future,banking finance will be more competitive when foreign banks joint deeply in domesticmarket according to commitment road of Vietnam on opening finance - banking market.Retail banking market will be affected as the first market because retail banking is

considered as a highest potential market in Vietnam Therefore, each retail bank must set

up strategies to cope with this situation

- The socio - cultural factors

Customers are considered as a vital factor to the success of retail banking Therefore, thecustomer behavior research has an important sense to banking business activities Oneretail banking wants to success in business activities, it must understand customer behaviorand satisfy demands of customers However, customer behavior is ruled by culture factors,culture factors also affect demand about banking services of people

The socio - culture factor is formed from many organizations and many forces, it hasseveral influences on cultural level living style, awareness… The cultural level, consuminghabits influence on customer behavior, demands for banking services For example:Vietnamese people have a cash consuming habit, so the development of non - cashpayment products have many difficulties in Vietnam In developed countries, people haveshopping habit in supermarket and use many non - cash payment kinds; card market isdeveloped strongly in these countries

Psychological matter governs demand of people for banking services, for example, ifpeople have no confidence on banking services, people will keep cash, gold instead ofdepositing money in bank Researching the socio - culture environment helps retailbanking to build appropriate strategies, structure model with characteristics of each region

- Political and legal system

Banking activities are governed by government through functional department;governmental policies affect directly business activities of banks Banking activities arealso ruled by many regulations of laws, consisting credit organization law, state bank law,civil law Moreover, regulations of international finance organizations affect businessactivities of banks, such as AFTA, WTO…Briefly, legal environment is a legal tie basis,and it affects the foundation, development of each bank Therefore, each bank mustunderstand legal framework to do well business activities

Beside above - mentioned factors, retail banking is impacted by competitors and itsinternal forces, such as charter capital, human resource, distribution channels… Theseforces are term for development of any bank Retail banking must enforce its internalforces to compete with other banks

Nowadays, banking industry has witnessed a high competitive pressure because ofparticipating both domestic and foreign banks, especially retail banking Therefore, retailbanking must understand competitors and enhance its activities according to core valuesare customers

- Development of supportable and related business fields

The development of supportable and related business fields brings many chances as well aschallenges for retail banking activities In some past years, Vietnam has witnessed thedevelopment of supported fields, including securities market, insurance market, andfinance market when related fields develop, and customers have many chances to invest infinance - banking market Therefore, it reduces demands about banking services andincreases competition in monetary market Retail bank must invest more to improveservices to satisfy demands of customers

However, the development of this field creates many chances to cooperate to provide morenew services and products for customers Other supported fields help banks to improveservices as well as provide new products with low expenses as telecommunication,information technology…

CHAPTER 3: CURRENT SITUATION OF RETAIL BANKING AT MILITARY BANK 3.1 Overview of Military bank

3.1.1 Introduction

Military Commercial Joint Stock Bank (MB) was established in 1994, following Decision

No 00374/GP - UB of people committee of Hanoi and Decision 0054/NH - GP of TheState Bank of Vietnam Creation Shareholders of Military bank consist of prestigecompany of Department of national defense (including Than An construction corporation,Truong Son construction corporation, Tan Cang company ) and a part fund of Viet Namforeign trade bank(VCB)

Following 12 years of operations, The Military bank has formed a firm foothold in themarket and become a trusted address for financial activities of clients at home and abroad.Chasing safe business and complying with international practices, which made the bank’soperation stable, transparent, efficient - boasting continuous growth

Military Bank separated into Retail Banking and Corporate Banking:

- Retail Banking:

Executing business activities related to individual customers, household, smallbusinesses Department of Research and Development Product of Retail Banking alsobuilds plan to expand products and services to individual customers Retail Bankingproposes network expansion along with call center and remittance service development

The bank also executed several programs and solutions in preparation for its newdevelopment stage The programs and solutions focused on improving managementcapability, risk management, deposits and loan asset management as well as technologyinnovation Military set up its Hanoi Fund Management Company, Thanglong SecuritiesCompany and Asset Management Company in a plan to become a finance group.

MB has opened new branches, sub - branches, transaction offices in order to access deeplybanking market in Vietnam As of 31 December 2007, MB had 65 branches andtransaction offices, set up relationship with over 500 correspondent banks all over theworld

Retail Banking is one of two main groups of Military bank In the structure organization,the board of management of Military bank has one general director and six Vice GeneralDirectors Ms Cao Thi Thuy Nga - Vice General Director manages all business activitiesand has all responsibilities to business activities of retail banking (see MB’s organizationchart)

Chart 3.1: Organization of MB

Treasury Retail Banking Corporate Banking

Board of supervisor

Board of supervisor Board of supervisor Board of supervisor

Board of supervisor Board of supervisor

Transaction offices & Branches

Retail Banking consists of retail Department in head quarter, Product Research andDevelop department, card center… Retail Department develops kinds of loans forindividuals, issues process loan and manage risks relating to loans of individuals ProductResearch and Develop Department is responsible for researching and launching newproducts for retail customers (loans, deposit products, card products, payment products…).Card center is in charge of card products, it also helps customers for all problems relating

Table 3.1: Total charter capital (2005- 2008)

(Source: Annual report of Military Bank )

With large charter capital, Military Bank has entered the list of the large number of banks that have more than VND 1 trillion of chartered capital In near future, Military Bank will increase charter capital to meet demands of its business development as well as raising more competition capacity Besides, the large charter capital will help Military Bank develop more banking services as well as implementing more business activities to developmore banking activities

Besides, Military Bank also focuses on developing owned capital along with increase of charter capital In 2004, Military Bank has remarked many achievements in 10 years to

build and develop During near 15 years, Military Bank has have many achievements in business activities Military Bank also has assess as one of the most commercial bank in Vietnam The scale of Military Bank increase with many times, total mobilized funds increase 511 times compared to 1994, total asset increase from 32 Billion VND to 7.000 Billion VND Total owned capital increases many times from 1994 At the end of 2008, Total owned capital is 4.026 Billion, increasing 11 times compared to 2004

Table 3.2: Total owned capital (2005- 2008)

(Source: Annual report of Military Bank )

MB always remains stable and power capital from individuals as well as business entities

in mobilized funds Total mobilized funds also have increases rapidly in recent years In

2008, banking system has a difficulty in mobilizing capital from individuals, corporations,this difficulty push mobilized interest in banking system, and it creates a competitivecampaign on mobilized interest

However, Military Bank has a stable in mobilizing funds and has a prize of state bank forits contribution to Vietnamese bank In 2008, almost domestic Banks must raise highinterest rate of Vietnam Dong, even borrow from federal banks with the average interestrate from 20% to 30% per year to face the shortage of Vietnam Dong, However, MBremains middle interest rate and right loan policies Thus, MB never shorts VND capitaland achieves 40 % plan on profit compared to last year In 2008, total mobilized fundincreases over 150% compared to 2007 (See Table: Total mobilized fund)

Table 3.3: Total mobilized fund (2005- 2008)

Chart 3.2: Total assets in a period (2005 – 2008)

(Unit: Million VND)

(Source: Annual report of Military Bank )

In total assets, Military Bank remarks many achievements in lending activities Total loans

of Military Bank develops with many kinds and portfolio loan is diversified to meet manydemands of customers both individuals and corporations At the end of 2008, total loansreach 15.041,9 billion VND, increase over 5 times compared to 2004 (see : Table 3.4)

Table 3.4: Total loans in a period (2004 – 2008)

(Source: Annual report of Military Bank )

Structure of loans, Short-term loans counts large ratio (72%) in structure loans of Military

bank, the average credit growth increases from 27% to 40 % The total of loans and

advances to customers in 2006, 2007 is 5.999.065 billion VND, 11.466.742 billion VND, respectively

Loan portfolio focuses mainly on service and trading, construction, manufacturing andtextile industry Retail banking only counts small percentage of portfolio about 30 % ofportfolio (See Table 3.5)

Table 3.5: Loan Portfolio by industry sectors

in structure, retail banking makes confident image and solid position in retail banking inVietnam Besides, Military Bank always controls loans with ratio of overdue loans arecontrolled fewer than 2 percent Non – credit activities are developed and they bring moreprofit for Military Bank with average development of 67% per year Total profit frombanking services increases over 6.4 times compared to 2004, it also brings more profit forbank

c) Others

The total profits after tax is 750 billion VND, increasing nearly 1.5 times compared to

2007 The total profit is made from large ratio of loans activities and small ratio of fee and

services In 2008, Military bank plans to reach profit after tax from 750 million VND to

760 million VND and loan growth increases 30% in a comparison with 2007 (see chart3.2)

Chart 3.3: Total profit before tax (2005- 2008)

Total profit before tax

(Source: Annual report of Military Bank )

About effectiveness of fund, Military bank receives many achievement with high ROE andROA(see Table 3.6)

Table 3.6: ROE, ROA of MB (2005- 2008)

2007 24.7 2.82

(Source: Annual report of Military Bank )

Some other activities, Military bank sets up total 89 branches in 2008 with over 2000 employees in whole system

Table 3.7: Total employees and branches of MB (2005- 2008)

(Source: Annual report of Military Bank )

In 2009 – 2013, Military Bank sets up a plan to increase more all business activities with some targets

before tax

Overdue loans ratio

3.2 Factors driving the development of retail banking at MB

3.2.1 Internal factors

Established in 1994, MB has developed in 14 years, Business activities have opened bothquality as well as quantity The scale of the bank is expanded with many branches and

transaction offices around Vietnam With the target to be one of joint stock banks ofVietnam, MB focuses on developing retail banking A strategy for retail banking ispresented for 30 to 50 % of business activities and profit of bank Retail banking is pushingmore in whole MB Retail banking has marked much remarkableness in terms of customersand profit MB is leading in joint stock commercial bank in Vietnam The strengths and

weaknesses of MB are focused on some points:

Strengths

Firstly, MB is being Knowledgeable about Retail banking in Vietnam

Over 14 years, MB accumulated and research retail banking in domestic, MB is be wellinformal about behaviors, customers, demand of Retail customers This is a big strengthcompared to new bank or foreign bank in Vietnam With these strengths, MB will focusretail market through analyzing customers and feedback from customers

Secondly, Technology is invested and modernized strength

Because Service and product of retail banking are intimated easily and demand isincreasing from customers, Technology in MB must be always invested and modernized todevelop more Retail banking Therefore, MB puts information technology modernization

as the first attention Thanks to Technologies innovation, MB is opening more service andproducts to supply for increasing demands of customers Moreover, technology ismodernized; it helps to implement business activities rapidly and exactly

Thirdly, Retail banking is innovated in whole system

MB is building to innovate model retail banking, new model will target more retailcustomers, delivering retail banking to each branch and transaction office Retail bankingmust train employees Retail model will be effective if Retail Banking is invested more ininfrastructure, information technologies, and human resource The offices and department

of retail banking will operate effectively more such as retail department, cards…

Fourthly, MB has large active human resources

With over 1500 employees who work at MB and over 2000 employees in whole bank and

subsidiary company, MB has a large human resource Almost employees of MB are

enthusiastic, active and graduates from university Human Resource of MB is equippedexperience and knowledge with high specialist Besides, Human resource also hasnecessary skill in communicating with customers Employees are professionalized to retailemployees and corporate employees to each branch as well as transaction offices

Fifthly, other factors:

MB has built strong trademark in Vietnam For many years, MB received many prize fromprestige organization such as HSBC, Standard chartered bank…because of goodattainments of Business activities MB also received many prize in domestic for examplestrong trademark in finance – banking in Vietnam With these strengths, MB will buildgood image in customers and partners as well as foreign and domestic organization

For the society, MB always connect with community, participating with many socialactivities and sponsor for many social activities MB always put benefit of community asthe first attention in developing business activities For employees, MB creates the bestenvironment for employees through many activities and it is real house for all employees With above strengths, MB has an obvious step in business activities as well as society MBhas regarded highly by domestic organization as well as domestic organization on businessactivities and social activities The prestige of MB is increasing in domestic and the world

MB demonstrates the role in community and the competitive competence in finance banking in Vietnam

-Weaknesses

Besides, above strengths, MB exists many weaknesses compared with other banks,especially foreign banks MB must overcome shortcoming and obstacles as well asdifficulties to expand business activities Some weaknesses are:

Firstly, Small financial capacity

Although the charter capital of MB increased to 2,400 million VND at the end of 2007 andwill be, reach 3,000 million VND at the end of 2008 However, it is smaller compared to

other domestic banks and many foreign banks The small financial capacity will affectbusiness activities of bank and development of distribution of network, banking service,investment on technology and other service Besides, according to the process of WTO,there are more and more banks (foreign banks and joint venture banks) will form inVietnam, the competition will be fiercer Therefore, MB cannot expand more activities if

MB cannot increase more financial capacity

Secondly, Poor services and products

Services of MB are poor and not diversified, not attractive to customers With presentservices for retail banking, MB cannot open more market share in retail banking Presentservices focus services that are more traditional, for example deposits, loans… Card,internet banking, mobile banking and phone banking cannot developed at MB

The service and product for retail banking are the same situation, customers often explainabout monotonous and unattractiveness of products Therefore, to joint deeply retailbanking, Retail Banking at MB must renovate services and products, research products thatare more reasonable and more value and benefits for customers, especially individualcustomers

Thirdly, Inconsistent Business Strategies

The business strategies of Mb are inconsistent, business activities of corporate and retailbanking are related, not separated each other The investments on business strategy ofretail banking are not effective MB lacks of consistence between department amongMarketing and Research department, other departments Retail banking is still inactive indoing business when business environment has many fluctuations

Fourthly, Small distribution network

Distribution of MB are still small, only 70 branches and transaction offices aroundVietnam, set relation with over 600 respondent banks around the world Other banks injoint stock commercial banks, for example Sacombank, it has 90 branches and transactionsoffices in Vietnam, 9700 respondent banks of over 90 countries or Agricultural Bank hasover 1600 branches and transaction offices at all provinces in Vietnam

Modern distribution, Internet, phone banking, mobile banking development is restrained at

MB For retail banking, distribution is one of important factors that affects to market andpower of market as well as So, MB only expand and increase market share when MB has astrategy to enlarge more distribution network

Fifthly, Banking Technology is completing

Understanding useful of applying banking technology in bank, MB innovates bankingtechnology at May 2007 This solution is applied at many banks of many differentcountries However, this solution is trial and is completing at some modules Therefore, itexists some bug that affects business activities and customers MB cannot expand moreproducts based on high technology until technology is completed totally at all modules

Sixthly, Execution and management capacity

Execution and management capacity is still limited, especially in retail banking Instructure of MB, it has no separation between the business activities of corporate and retailbanking The function and tasks of two groups are cumbersome and retail management isstill weak Departments of retail banking are not doing effectively and these departmentscannot attract customers The reason for above problem is MB lacks consistentmanagement and execution Therefore, it reduces development and attraction of retailbanking Moreover, Retail banking at MB is short of managers who have deep knowledgeabout banking, vision as well as management In the future, Retail banking must enhancemanagement and execution to compare with other banks

3.2.2 External factors

Vietnam is jointing into world economy in many economic fields Economic penetration isaffecting all economic fields and all companies However, it also creates many chances foreconomic fields For Finance – Banking field, International integration brings many threatsand chances to supply more banking services but the competition will be fiercer indomestic market Therefore, Retail banking at MB takes advantage of internationalintegration and recurred actively in competition with other banks Some opportunities andthreats that MB should consider to develop retail banking:

- Vietnam is a potential market to develop retail banking With population of Vietnam isover 85 million people and almost people are young ages; Vietnam has a large market forretail banking In addition, the income of Vietnamese people is increasing and there aremore and more people who use banking services It is a chance to supply retail bankingservices and products

- Integration in economy, especially Finance – Banking market field, Vietnam has morebusiness chance for retail banking With international commitment, Vietnam will openmore and more Finance – Banking for foreign partners With these commitments, RetailBanking can diversify more its business activities Taking opportunities of internationaleconomy, retail banking can supply more services as well as products Retail Banking cancoordinate with economic partners to provide more services for customers based onbalance benefits for all parts Retail Banking can expand more and more benefits forcustomers and contribute more for national economy

- Opening Finance – Banking market will increase more competition in this field Withinternational commitment of Vietnam, Vietnam will open more Finance – banking forforeign partners, there are more and more banks opened in Vietnam, consisting of domesticand foreign banks Competition pressure will push the banks change business strategies aswell as services and product in order to satisfy demand of customers The banks mustinvest more in technology, services innovation, customer care…So; customer has morechance to use good services and products from banks

- Technologies in banking is developing rapidly, it creates more service and products forcustomers Almost banks use high technologies to expand largely banking services.Technologies can help banks increase more benefit for customers and reduce expense forbanks

- The coordination amongst banks will reduce expense including salary, machine… MBshould push to collaborate with other banks to maximize its internal and external capacity

Threats

Finance - Banking is developing with many kinds of business In Finance – Bankingmarket has a participation of many organizations, including banks (commercial joint stockbanks, state - owned banks, joint - venture banks, foreign banks), credit organizations andfinance organizations such as insurance companies, securities companies, investmentfunds Therefore, it increases the competition and threats in this field There are somethreats as follows:

- The increase of banks in Vietnam affects business activities of all banks The pressurecompetition will be rising when Vietnam open officially Finance – Banking marketfollowing WTO commitment For Retail Banking, most banks must compete severelyamong commercial banks foreign banks, joint - venture banks… Therefore, to competewith other banks, Retail Banking must consider customers as the first key and change,investment more in technology, services, customer services…The development of Financeorganization limits business activities as well as services of banks

- All state - Owned banks have a big market in corporate banking At present, thismarket is saturated and retail banking is a potential market with the growth of 10 to 20percent for year Therefore, these banks change strategies to target retail banking and retailbanking will be a market with high competition of all banks in domestic as well as foreignbanks Moreover, many non – finance organizations also penetrate into retail banking withmany competitive services supplying to individuals, households…Thus, to develop in retailbanking, Military Bank faces many difficulties with many competitors

- Retail Banking at MB lacks of consistent customer policies for individuals Customermanagement and service development is dispersed and diversified according to eachbranch

- Retail Banking at MB limits network and experiences in retail market, Retail Banking

at MB only supplies banking services for a small number of customers A large number ofcustomers are still potential market for other banks

- Retail banking lacks the professional employees The customer management focuses

on credit office, the behavior of employees often attend more services and products for

companies than services for individuals as well as retail banking Employees are fearful ofsmall job, not attentive to individuals Therefore, employees are passive to market services

to individuals

- The function and mission in retail banking must be executed The job and function will

be divided balance for all executive people It reduces management following to serviceand product ranges

3.3 Situation of Retail banking activities at MB

At present, Military bank opens largely business activities in corporate banking as well asretail banking to compete competitive pressure and reduce high risks from corporatebanking The business ratio will move from corporate banking to retail banking Atpresent, the structure is 70 percent for corporate banking, 30 percent to 40 percent forRetail banking in total business activities and profit

Retail Banking is organized separately with corporate banking Thus, Retail banking hasinvested more and more in areas of human resources, technology, products, marketing,etc., to have general objective looks about retail banking at MB, this thesis mentions someterms of retail activities as follows:

- Banking Capacity in supplying retail banking services

- Products and Services

- Customers and Market

- Distribution network

3.3.1 Banking Capacity in supplying retail banking services

Banking capacity in supplying retail-banking services is assessed by some criteria thatrelate internal capacity in supplying services These criteria are also used to comparebanking capacity among banks Internal capacity is financial capacity of bank in businessmanagement and execution Besides, basing on developing services to supplying retailcustomers, the retail banking can develop more However, to develop these services, theretail banking must develop high technology and human resource Thus, technology and

human resource are also criteria to assess banking capacity in supplying retail - bankingservices among banks.

a) Financial - Management capacity

Military Bank understands that the importance of financial capacity for development ofbank A strong finance will helps MB develop more services, distribution network…Forretail Banking, the characteristics of customers are very complex, retail banking needsmany different strategies for many kinds of customers However, diversifying services andproducts will expense many funds to invest more in technology and service

Thus, Military is improving more financial capacity to develop more banking activities forretail banking In this way, financial capacity will be enhance in terms of many ways, such

as raising more capital, increasing more profit, reducing overdue loans…In recent years,Capital has increased more and more, including owned capital The Owned capital of MBreaches 3.000 billion Vietnam Dong at the end of 2008 In 2009, MB has a strategy toincrease this capital at 4.000 billion Vietnam Dong However, this capital is still very smallcompared to other banks, especially foreign banks in Vietnam…This is also a strain offinancial situation of Military Bank

About Management capacity, Military Bank is applying modern management system.Retail banking and corporate banking are separated in a solid entity For retail, bankingalways defines customers as the most objective in business activities Retail bankingcombines a balance between benefit of customers and benefit of Military Bank Therefore,business management will concentrate on benefit of customer; it means that Military Bankwill create the best conditions for customers From business slogan, Military Bank ispreparing quality management according to Is system Military Bank is approaching inmany areas:

- Risk Management: Building internal credit system according to Vietnam andinternational This system reduces many risks for credit activities

b) Technology