STATUS OF NON-INTEREST INCOME OF JOINT STOCK COMMERCIAL BANKS IN VIETNAM.. Non-interest income of Joint Stock Commercial Banks m Vietnam.... 15 Figure 5: Non-interest income of Joint S
Banks in the modern econom vol 1.1.2 Types of Commercial bank
The Vietnamese banking system is crucial for the development and promotion of the national economy As Vietnam integrates into the global economy, commercial banks must secure adequate capital, diversify their service offerings, and maintain a balanced structure to enhance competitiveness and strengthen their market position.
According to Article 4, Clause 21 of the 2024 Law on Credit Institutions in Vietnam, a bank is defined as a credit institution authorized to conduct all banking activities outlined by the law The classification of banks is based on their operational nature and objectives, which include commercial banks, policy banks, and cooperative banks.
According to clause 23, Article 4 of the 2024 Law on Credit Institutions in Vietnam, a commercial bank is defined as a financial institution authorized to engage in all banking and business activities outlined in the law for profit generation Essentially, commercial banks offer a range of services, including accepting deposits, providing loans, and facilitating payment services.
A commercial bank functions as a specialized economic unit and enterprise, requiring organization akin to that of a typical business within a specific economic sector Its operations are fundamentally business-oriented, necessitating essential resources and strategies to effectively conduct its financial activities.
= The ultimate financial goal is to generate profits
Commercial banks engage in a wide range of currency and banking services that impact various industries and all facets of life, economy, and society Consequently, it is crucial for these banks to exercise caution and skill in managing their operations to effectively minimize risks and prevent significant losses to the community.
Currently, commercial banks in Vietnam are classified as follows: ô Based on the form of charter capital ownership: oO oO
State-owned Commercial bank: A commercial bank in which the State owns more than 50% of the charter capital (Agribank, GPBank, OceanBank, CBBank)
Joint-stock Commercial bank: A commercial bank organized in the form of a joint-stock company (Vietinbank, BIDV, VCB, ACB, MBBank, Techcombank, etc )
A wholly foreign-owned commercial bank in Vietnam is defined as a financial institution that operates with 100% foreign-owned charter capital, requiring that a foreign bank holds more than 50% of this capital Examples of such banks include ANZVL, HLBVN, HSBC, and SHBVN.
A Joint Venture Commercial Bank in Vietnam is established through capital contributions from both Vietnamese banks and foreign banks, operating under a joint venture contract These banks primarily serve as wholesale banks, offering financial products and services tailored to the needs of businesses, organizations, and large enterprises Notable examples of such banks include Vietcombank, Agribank, Vietinbank, BIDV, MBBank, Techcombank, and ACB.
Retail banks focus on delivering financial products and services to small and medium enterprises, households, and individuals, exemplified by institutions like VietinBank, VPBank, TPBank, and MB In contrast, wholesale and retail banks cater to a wider customer base, with the majority of commercial banks in Vietnam falling into this category.
According to Section 2 of the Law on Credit Institutions 2024, the activities of commercial banks are categorized into various business functions, primarily focusing on capital mobilization and asset turnover.
Deposits play a crucial role in the capital mobilization efforts of commercial banks, as they gather funds from businesses, social organizations, and individuals through various forms such as term deposits and non-term deposits While these deposits typically have low mobilization costs, they are characterized by high volatility, complexity, and substantial associated risks.
Commercial banks enhance their competitiveness in the financial market by issuing valuable documents such as certificates of deposit, securities, bonds, and promissory notes This diverse range of capital-raising methods allows them to attract a broader investor base and improve their overall market position.
In business operations, cash flow shortages can occur due to heightened financial demands, making it necessary for commercial banks to borrow from other banks or credit institutions to manage these shortfalls effectively.
Owner's equity: This is the initial source of capital and is supplemented during operations, including charter capital, reserve funds, and other assets Although
Owner's equity, although a small part of total capital, is crucial for assessing a bank's financial capacity and risk management Key capital use activities include credit, which is essential for generating income for commercial banks, and investment, which diversifies the use of mobilized capital to maximize its potential Investments not only enhance income but also bolster the ability of commercial banks to maintain reserves effectively.
Commercial banks enhance their offerings by providing a variety of services, including payment solutions, guarantees, trusts, and foreign currency trading These diverse activities not only broaden the scope of banking operations but also serve as a crucial source of revenue for these institutions.
In addition, with the development of the Digital Age, commercial banks also offer new services such as Internet Banking, Phone Banking, and SMS Banking, ect
Vietnamese commercial banks are vital to the nation's financial system, offering essential services that foster economic growth and development Their organizational structure is strategically designed to promote efficient management, ensure regulatory compliance, and facilitate effective service delivery.
Banking cv .SẲ
Board of Directors (BOD)
The Board of Directors (BOD) serves as the highest governing authority in a commercial bank, tasked with establishing strategic direction, overseeing management, and safeguarding the interests of shareholders To enhance governance, the BOD is usually composed of several committees that focus on specific areas of oversight.
+ Risk Management Committee: This committee 1s tasked with identifying, assessing, and mitigating risks It develops risk policies and ensures that the bank’s nsk exposure is within acceptable limits
+ Human Resources Committee: Responsible for overseeing the bank’s human resources policies, including recruitment, training, and employee welfare
+ Audit Committee: Ensures the integrity of financial reporting and compliance with regulatory requirements It oversees imternal and external audits and monitors the effectiveness of internal controls.
Executive Management
The executive management team, headed by the CEO, oversees the daily operations of the bank, executing the strategies established by the Board of Directors (BOD) and managing multiple departments to ensure efficient functioning Key roles within this team are crucial for maintaining operational effectiveness and alignment with the bank's strategic objectives.
+ Chief Financial Officer (CFO): Manages the bank’s financial planning, reporting, and investment activities
+ Chief Risk Officer (CRO): Oversees the risk management framework and ensures that all risks are adequately managed
+ Chief Operating Officer (COO): Responsible for the bank’s operational efficiency and effectiveness
Vietnamese commercial banks are divided into several departments and divisions, each specializing in different aspects of banking services:
Retail banking focuses on serving individual customers by providing essential financial services, including savings accounts, personal loans, mortgages, and credit cards This sector plays a vital role in attracting and retaining personal clients, ensuring their financial needs are met effectively.
+ Corporate Banking Focuses on providing financial services to businesses, including loans, credit facilities, treasury services, and trade finance Corporate banking 1s essential for supporting the growth and expansion of businesses
+ Investment Banking: Deals with capital markets, mergers and acquisitions, and advisory services Investment banking helps companies raise capital and navigate complex financial transactions
+ Risk Management: Identifies, assesses, and mitigates various risks, including credit risk, market risk, and operational risk This department ensures that the bank’s risk exposure is managed effectively
The Compliance and Legal department is essential for ensuring that the bank adheres to all applicable laws and regulations This department is responsible for managing legal matters and guarantees that the bank operates within the established legal framework.
+ Human Resources: Manages recruitment, training, employee relations, and performance management HR 1s vital for maintaining a motivated and skilled workforce
+ IT and Operations: Supports the bank’s technological infrastructure and operational processes This department ensures that the bank’s IT systems are secure, efficient, and up- to-date
Vietnamese commercial banks expand their services to a wider customer base through a network of strategically located branches and subsidiaries For instance, Vietcombank, a prominent bank in Vietnam, has established representative offices in Singapore and the USA, along with subsidiaries in Laos, to effectively serve diverse regions and customer segments.
Example: VietinBank, one of the leading banks in Vietnam, follows a similar organizational structure with a comprehensive governance framework and specialized committees to ensure effective management
X Policy Committee aw cme Crete aU te ay ities Managemen Committee
Treasury Risk HR Division Decling ord | |Management Copital DMelen Mofket Í muauen poration
S Legaland | Finonee Đidsien Cemplaree Diviston Ddslon
Oftce Carporme Pưựchesin ofthe BeD || Banking 6 Assets
Figure 1: Organization chart for a commercial bank in Vietnam
Risk in banking operations
Vietnamese commercial banks, similar to banks worldwide, encounter numerous risks that can affect their stability and profitability Implementing effective risk management strategies is essential for protecting their operations and achieving long-term success.
Credit risk refers to the likelihood of borrowers failing to repay their loans, which can result in financial losses for banks This risk is especially pronounced for Vietnamese banks, given the substantial number of loans they extend to individuals, businesses, and various financial institutions.
During economic downturns, small and medium-sized enterprises (SMEs) often struggle to meet loan obligations, leading to a rise in non-performing loans (NPLs) For example, in 2020, Vietnamese banks experienced a surge in NPLs as businesses were adversely affected by the COVID-19 pandemic In response, banks such as Vietcombank adopted more rigorous credit assessment procedures and heightened their loan loss provisions to mitigate risks.
Market risk refers to the potential losses banks face due to fluctuations in interest rates, foreign exchange rates, and stock prices Adverse movements in these markets can significantly impact their investment portfolios and trading activities.
A Vietnamese bank faces significant losses when the Vietnamese Dong sharply depreciates against the US Dollar, as it holds a substantial portfolio of foreign currency-denominated bonds that lose value To mitigate this risk, the bank employs currency hedging strategies to protect its investments.
Operational Risk: Operational risk stems from failures in internal processes, systems, or human errors This includes risks related to fraud, technology failures, and madequate controls
An internal fraud incident arises when an employee embezzles funds by manipulating the bank's accounting system, leading to significant financial losses and reputational damage In response, the bank enhances its internal controls and implements regular audits to mitigate the risk of future fraud.
Liquidity risk arises when a bank is unable to fulfill its short-term obligations due to a lack of cash or liquid assets, impacting its capability to process withdrawals and complete transactions effectively.
In times of financial crisis, banks often face a rapid increase in withdrawal requests from depositors, which can lead to challenges in fulfilling these demands due to a lack of liquid assets To address this risk, banks are required to maintain a liquidity buffer and have access to emergency funding from the central bank.
Compliance risk stems from failing to adhere to laws, regulations, and industry standards, while legal risk pertains to potential lawsuits against financial institutions Violations can lead to severe penalties, fines, and harm to a bank's reputation For instance, if a bank is penalized by regulatory authorities for not complying with non-performing loans (NPLs) regulations, it faces both financial repercussions and reputational damage To mitigate these risks, banks should establish strong anti-money laundering (AML) policies and provide ongoing compliance training for their employees.
Reputational Risk: Reputational risk affects a bank’s image and public perception Negative publicity, scandals, or unethical behavior can harm a bank’s reputation, leading to a loss of customer trust and business opportunities
A bank faces a scandal due to allegations of unethical lending practices, resulting in damaging media exposure and diminished customer trust In response, the bank initiates a thorough evaluation of its lending policies and strengthens its corporate social responsibility efforts to restore its reputation.
Development trends in modern banks 8 1.2.5 cá 3, AIIŨ
1.2.4.1 Changes in Traditional Services: Modern banks have evolved their traditional services to better meet customer needs:
+ Drive-up windows: Convenient for customers to conduct transactions without leaving their cars
+ Extended hours: Banks are open longer to accommodate customers’ schedules
+ Branch locations: Increased number of branches to provide easier access
+ Variety of checking accounts: Offering different types of accounts to suit various customer needs
+ Savings options: Diverse savings products to attract different types of savers
+ Personal service: Emphasis on personalized customer service to enhance customer satisfaction
1.2.4.2 New Services: Banks have introduced several new services to stay competitive and meet modern demands:
+ Credit cards: Providing customers with convenient credit options
+ Innovative lending New lending products tailored to specific customer needs
+ Technology tools: Utilizing advanced technology to improve service delivery
+ Automated Teller Machines (ATMs): Allowing customers to perform transactions 24/7 + Smart cards: Enhanced security and functionality for card transactions
+ Payroll cards: Simplifying payroll processes for employers and employees
+ Online banking: Enabling customers to manage their accounts and perform transactions online
+ Mobile banking: Offering banking services through mobile apps for on-the-go access 1.2.4.3 Banking Today
+ Mergers: Banks are consolidating to increase their market share and operational efficiency For example, the number of banks decreased from 56 in 1997 to 34 in 2016 due to mergers
+ Technology: Growth of computers and telecommunication: Banks have automated many operations, including:
+ Accounting: Streamlining financial record-keeping
+ Auditing Enhancing accuracy and efficiency in audits
+ Examining functions: Improving oversight and compliance
+ Instantaneous transactions: Enabling real-time transactions
+ Funds transfer: Facilitating quick and secure transfers
+ Record keeping: Maintaining accurate and accessible records
+ Financial analysis: Using, advanced tools for better financial insights
Deregulation has heightened competition in the banking sector, as banks now face rivalry not only from one another but also from fintech companies and various businesses that provide financial services.
==>These trends reflect the dynamic nature of the banking industry, driven by technological advancements, regulatory changes, and evolving customer expectations
To ensure that banks remain "safe and sound," regulatory measures are implemented, including capital requirements, risk controls, and public disclosure These strategies aim to prevent bank failures and mitigate systemic risks within the financial system.
The Basel III framework establishes global standards for bank capital adequacy, stress testing, and market liquidity risk, mandating that banks maintain sufficient capital levels to absorb potential losses and mitigate the risk of bank failures.
Regulations ensure fair practices and transparency while protecting customer rights, specifically addressing key areas such as fees, disclosures, and complaint handling.
The Truth in Lending Act (TILA) in the United States requires lenders to provide transparent disclosure of loan terms and associated costs, ensuring consumers fully comprehend their financial responsibilities before committing to a loan.
Supervision plays a crucial role in ensuring that banks adhere to AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) regulations, effectively preventing illicit funds from infiltrating the financial system.
Example: The USA PATRIOT Act, which requires financial institutions to implement robust AML programs, including customer due diligence, monitoring transactions for suspicious activity, and reporting to authorities
Protects depositors by guaranteeing a certain amount of their deposits in case of bank failure
Example: The Federal Deposit Insurance Corporation (FDIC) in the United States insures deposits up to $250,000 per depositor, per insured bank, providing confidence and stability in the banking system
Plans for orderly bank resolution 1f needed, minimizing disruptions to the financial system
The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Orderly Liquidation Authority (OLA) to enable the U.S government to manage the dissolution of failing financial institutions systematically, thereby mitigating systemic risk.
Chortareas, Garza-Garcia, and Girardone (2011) identify two primary approaches to Market Power Theory: the Structure-Conduct-Performance (SCP) theory and the Relative Market Power (RMP) theory The SCP theory, initially introduced by Chamberlin, emphasizes the relationship between market structure, firm behavior, and overall performance.
The Structure-Conduct-Performance (SCP) theory, developed by Bain in 1951, indicates that high concentration among banks leads to reduced competition, fostering cooperation that can manipulate market conditions, such as imposing low deposit rates and high lending rates (Chortareas et al., 2011; Van Hoose, 2010) Conversely, the Resource Market Power (RMP) theory posits that banks with significant market shares and differentiated products operate more efficiently, resulting in higher profits (Chortareas et al., 2011) Ultimately, the Market Power Theory suggests that banks with larger market shares enhance their operational efficiency, contributing to greater stability in the banking sector.
Diversification, as defined by the Oxford Dictionary, involves developing various products, interests, and skills to enhance success and mitigate risk Wan et al (2016) emphasize that income diversification entails increasing income sources or achieving a balanced distribution among them In the banking sector, this is evident through the changing proportion of non-interest income within total bank income (Rose & Hudgins, 2013) Banks primarily focus on generating additional revenue through diversification activities that include fees, commissions, and commercial operations This perspective is further supported by the findings of Elsas, Hackethal, and Holzhauser.
(2010) argue that commercial banks often shift from traditional business services to fee-generating
To enhance non-interest income, banks are diversifying their activities beyond traditional lending and capital mobilization By focusing on various revenue streams such as fees, commissions, and trading, they aim to increase the proportion of non-interest income in their total operating income This strategic shift allows banks to stabilize their income from fees while exploring non-traditional avenues for growth.
The theory applies to all agency contracts, particularly in the context of businesses, where it examines employment contracts between employees and enterprises It specifically analyzes the unique contractual relationship between business owners, or shareholders, and the managers of joint-stock companies.
The agency theory, introduced by Ross (1973) and further developed by Jensen and Meckling (1976), explores the conflicting relationship between shareholders (principals) and managers (agents) within a company Shareholders delegate authority to managers to operate and manage the business in their best interests This relationship is defined as one where the agent acts on behalf of the principal in specific decision-making scenarios Essentially, an agency relationship arises whenever there is a transfer of decision-making authority from the principal to the agent.
An agency relationship is defined as a contract where one or more individuals hire another person to perform specific tasks on their behalf, involving the delegation of decision-making authority (1976, p 308).
Regarding the structure of non-interest income, Rogers & Sinkey (1999), Stiroh (2004), and Huang
According to Chen (2006), bank income is categorized into two primary areas: traditional and non-traditional activities Traditional activities primarily generate interest income, while non-traditional activities focus on fee-based revenue Examples of non-traditional activities include underwriting services, cash management, and custodial services Non-interest income, which is diverse in nature, consists of various components such as trust income, service fees, transaction volumes, charges, and other revenues (Stiroh, 2004; Huang & Chen, 2006).
Theory of Income ẽDiversification .à 2 212211111121 1111111111121211111111 21111111 111011111111 1111115111010 2c 11 I6
According to Hoang Ngoc Tien and Vo Thi Hien (2010), income from non-credit activities, also known as non-interest income, is generated by commercial banks through services outside of traditional credit operations This revenue is calculated by subtracting the costs associated with providing these services from the income earned Non-credit income encompasses earnings from various service activities, including foreign exchange trading, gold and precious stones trading, and securities trading, after accounting for the relevant expenses.
A study by Ho Thi Hong Minh and Nguyen Thi Canh (2014) revealed a positive correlation between bank size, credit risk, and income diversification in Vietnamese commercial banks The research indicates that larger banks typically earn more from fees and commissions compared to their smaller counterparts Additionally, banks with higher capital ratios and greater credit risk are more inclined to diversify their income sources, leading to an increased share of non-interest income.
STATUS OF NON-INTEREST INCOME OF JOINT STOCK COMMERCIAL
Scale of Assets of Joint Stock Commercial Banks in Vietnaim -à 2 2 - 2212211121111 11121121 12111131112 xe, 15 2.1.3 Scale of Charter Capital of Joint Stock Commercial Banks in Vietnam
As of June 30, 2024, the total assets of Vietnam's credit institution system reached VND 21,070,762 billion, reflecting a growth of 4.97% compared to the end of 2023, according to the latest data from the State Bank of Vietnam (SBV).
In this, the group of state-owned commercial banks (Agribank, VietinBank, Vietcombank, BIDV,
As of the end of 2023, CB, GPBank, and Oceanbank collectively reported total assets nearing VND 8.75 trillion, marking a 5.05% increase and representing over 41% of the entire banking system's assets In comparison, joint-stock commercial banks achieved total assets exceeding VND 9.43 trillion, reflecting a 5% growth year-on-year Additionally, joint-venture and foreign banks reported total assets of over VND 1.9 trillion, up by 4.26%, while finance and leasing companies saw a modest increase, with total assets reaching VND 302,329 billion, a rise of 0.16% compared to the previous year.
BIDV VietinBank Agribank Vietcombank MB Techcombank VPBank Acsg Sacombank
Những ngân hàng trong nhóm đầu về tổng tài sản nửa đầu năm 2024 mam Tinh đến 30/6/2024 (nghìn tỷ đồng) —Ty lé tang so với cuối năm 2023 (%)
Figure 4: Banks in the top group in terms of total assets in the first half of 2024
2.1.3 Scale of Charter Capital of Joint Stock Commercial Banks in Vietnam
Table 1: LIST OF JOINT-STOCK COMMERCIAL BANKS IN VIETNAM (As of June 30, 2024, unit: billion VND)
1 Vietnam Joint Stock Commercial Bank of Industry and Trade 53.699,9
2 Joint Stock Commercial Bank for Investment and Development of 57.0043
3 Joint Stock Commercial Bank for Foreign Trade of Vietnam - VCB 55.980,9
4 Asia Commercial Joint Stock Bank - ACB 44 667,0
5 An Binh Commercial Joint Stock Bank - ABB 10.350
6 Bao Viet Joint Stock Commercial Bank 3.150,0
7 Viet Capital Commercial Joint Stock Bank - Viet Capital Bank 5.017,0
8 BAC A Commercial Joint Stock Bank - Bac A Bank 8.959
9 LienViet Commercial Joint Stock Bank — Lienviet Post Bank - LPB 25.576,0
11 DONG A Commercial Joint Stock Bank - EAB 5.000,0
12 Southeast Asia Commercial Joint Stock Bank - Seabank 24.957,0
13 The Maritime Commercial Joint Stock Bank - MSB 20.000
14 Kien Long Commercial Joint Stock Bank - KLB 3.653
15 Viet Nam Technological and Commercial Joint Stock Bank - 35.225
16 Nam A Commercial Joint Stock Bank - NAM A BANK 10.580,0
17 Orient Commercial Joint Stock Bank - OCB 20.548,0
18 Military Commercial Jomt Stock Bank - MB 52.140,0
19 Vietnam International Commercial Jomt Stock Bank - VIB 25.368,0
21 Sai Gon Commercial Joint Stock Bank - SCB 15.231,7
22 Saigon Bank for Industry & Trade - SGB 3.388,0
23 Saigon-Hanoi Commercial Jomt Stock Bank - SHB 36.629
24 Saigon Thuong Tin Commercial Joint Stock Bank - Sacombank 18.852,2
25 TienPhong Commercial Jomt Stock Bank - TPB 22.016,0
26 Viet A Commercial Joint Stock Bank - VIETA Bank 5.3996
27 Vietnam Commercial Joint Stock Bank for Private Enterprise - VPBank 79.339,0
28 Viet Nam Thuong Tin Commercial Joint Stock Bank - Vietbank 4.776,8
29 Prosperity and Growth Commercial Joint Stock Bank - PGBank 3.000,0
30 Viet nam Export Import Commercial Joint Stock - Eximbank 17.470,0
31 Ho Chi Minh city Development Joint Stock Commercial Bank - HDBank 29.076,0
(STATE BANK, 2024) 2.1.4 Characteristics of Vietnam’s Joint Stock Commercial Banks
A credit institution is a specialized legal entity governed by the Enterprise Law and the Law on Credit Institutions, focusing on profit-driven monetary business activities It operates under a defined legal framework and is established specifically to engage in banking activities, requiring a license from the central bank Notably, this type of institution is prohibited from mobilizing capital for periods shorter than one year and does not perform payment functions, distinguishing it from finance and leasing companies.
2.2 Non-interest income of Joint Stock Commercial Banks in Vietnam
Non-interest income (NII) is a multifaceted revenue stream that includes trust income, service fees, commissions, and other income sources, as outlined by Stiroh (2004) Huang and Chen (2006) emphasize that the key contributors to NII are derived from non-credit activities and fee-based income, highlighting its significance in the financial sector.
Net Interest Income (NII) is defined as the income generated by commercial banks from the difference between revenues earned through non-credit services, business operations, and investments, and the associated costs of delivering these services A higher NII indicates a greater diversification of non-credit services and enhanced efficiency in these operations In essence, NII encompasses net income from service activities, business and investment income, along with other miscellaneous earnings.
In recent years, banks of all sizes have seen a notable rise in income from non-credit activities For example, Vietcombank's net service income soared to 694 billion VND in Q2 2022, representing a remarkable 62.1% increase compared to the previous year Likewise, VietinBank reported service income surpassing 1,560 billion VND in the same quarter, reflecting a 15% year-on-year growth.
Non-interest income has become a significant focus in the performance of commercial banks, with HDBank reporting a remarkable 32.6% increase in this area during the first half of the year The bancassurance segment and cashless payment services have shown exceptional growth, with net income from these sectors doubling compared to the previous year Additionally, VIB has achieved non-interest income surpassing 1,500.
19 billion VND, contributing over 18% to its total operating income, while SeABank reported impressive growth in non-interest income, reaching 1,736 billion VND, a staggering 226% increase compared to the same period in 2021
A recent survey by Vietnam Report indicates that non-interest income for banks is projected to grow significantly in late 2022, largely driven by the bancassurance sector, which is expected to enhance profitability However, experts warn that banks will encounter increased challenges in profitability due to stricter risk management policies Despite these challenges, non-interest income is anticipated to rise in the short to medium term Key sources of non-interest income for banks include payment service fees from international transactions and electronic bill payments, credit and debit card fees from issuance and usage, profits from foreign exchange trading, investment advisory fees from financial consulting services, and insurance commissions from distributing partner insurance products through bancassurance channels.
Non-interest income (NII) is becoming increasingly crucial for commercial banks in Vietnam, as it enables them to diversify their income sources and lessen reliance on interest income This diversification is essential in light of the fluctuating lending rates influenced by the State Bank of Vietnam's monetary policy and other economic factors By developing a variety of financial products and services, banks can enhance their financial stability and reduce the risks associated with lending activities.
The Vietnamese banking sector is experiencing heightened competition due to the influx of both domestic and international banks By expanding non-credit services like insurance, investment advisory, and electronic banking, banks can boost their income while simultaneously improving customer experience, thereby gaining a significant competitive advantage.
Improving operational efficiency is essential for banks to enhance profitability without increasing credit risk By optimizing income from non-interest activities, banks can maintain strong profits even in economically challenging times Additionally, sustainable development is supported through the establishment of a diversified portfolio of services, which not only meets customer needs but also fosters loyalty and trust This approach is vital for building the bank's brand and reputation over the long term.
2.3 Jomt Stock Commercial Bank for Foreign Trade of Vietnam
2.3.1 Overview of Joint Stock Commercial Bank for Foreign Trade of Vietnam The Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) was founded on April 1, 1963, evolving from the Foreign Exchange Bureau of the State Bank of Vietnam It officially became listed on the Ho Chi Minh Stock Exchange on June 30, 2009 Initially established as a specialized bank for foreign trade, Vietcombank has transformed into a leading institution that offers a comprehensive range of financial services in international trade Its offerings include traditional services such as capital trading, mobilization, credit, and project financing, as well as modern banking solutions like foreign exchange trading, derivatives, card services, and e-banking Committed to meeting international standards, Vietcombank has consistently been recognized as the "Best Bank in Vietnam" by reputable global organizations Additionally, it is the first and only bank in Vietnam to be ranked among the top 500 leading banks worldwide by The Banker With strategic vision and strong commitment, Vietcombank aims to become the top bank in Vietnam by 2020 and to be included among the 300 largest banking financial groups operating under the best international practices
2.3.2 Sources of non-interest income
Non-interest income (NIJ) is vital for banks like Vietcombank, enhancing profitability and financial stability beyond traditional interest earnings Key sources of NIJ include service fees from account maintenance and transaction processing, foreign exchange income from currency trading and conversions, and investment banking fees for advisory services in mergers and acquisitions Additionally, asset management fees are significant, particularly for banks serving high-net-worth individuals, while insurance commissions from bancassurance partnerships provide a steady income stream Trading and derivatives income varies with market conditions, and leasing services for equipment and real estate contribute further to NIJ Lastly, penalties and late fees from loans and overdrafts also bolster this revenue category.
Vietcombank BAO CAO THUONG NIEN 2021
THU NHẬP NGOÀI LÃI THUẦN
Figure 5: Non-interest income of Joint Stock Commercial Bank for Foreign Trade of Vietnam in recent years 2.3.3 Data analysis and result
Here’s a detailed analysis of the sources of non-interest income (NII) for the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), including specific examples and numerical data
Vietcombank generates a significant portion of its non-interest income from various service fees associated with account maintenance, transaction processing, and other banking services
In Q2 2022, Vietcombank's net income from service activities reached around 694 billion VND, marking a significant 62.1% year-on-year increase This growth is primarily due to elevated fees for services such as wire transfers, ATM transactions, and monthly account maintenance, highlighting a rising trend in consumer banking services.
Income from foreign exchange activities is crucial for Vietcombank, stemming from currency trading and conversion services offered to clients
In 2022, Vietcombank experienced substantial growth, with its foreign exchange trading profit reaching 1,400 billion VND, significantly bolstering its overall income The bank's strong performance in foreign exchange revenue played a crucial role in driving its financial success.
23 non-interest income This profit comes from the spread between buying and selling prices of currencies, alongside transaction fees for international trades
Jomt Stock Commercial Bank for Foreiegn Trade of Vietnaim só c2 21221111121212151111111111101212121112 112121156 21 1 Overview of Joint Stock Commercial Bank for Foreign Trade of Vietnam
The following section will delve into the factors affecting the financial investment activities of commercial banks, including factors inside and outside the bank
The bank's investment activities are guided by its business goals and strategies, which can be categorized as either short-term or long-term The establishment of these goals significantly influences the scale and structure of the bank's portfolio.
When a bank's primary objective is to acquire safe assets while maintaining liquidity and minimizing concentrated risks, it will prioritize financial investment activities over credit activities The bank's portfolio will emphasize business securities and highly liquid, low-risk instruments like government bonds and treasury bills, which can be easily sold in the market to enhance liquidity as needed Additionally, the portfolio structure should be strategically designed to achieve expected profits while keeping risks at a minimal level.
3.1.1.2 State Legal Regulations and Bank Supervisory Agencies
Investment activities, like credit activities, involve inherent risks, prompting countries to implement strict regulations These laws are designed to safeguard both individual banks and the overall banking system, ensuring the safety of investment practices.
In developed nations, securities investment regulation varies, with British and American systems prohibiting banks from investing in company stocks and restricting corporate bond investments to high-ranking bonds as assessed by independent credit rating agencies In the United States, regulations are particularly stringent, forbidding banks from engaging in speculative trading of securities rated below the third tier in public rankings.
Moody's categorizes securities rated below BBB by Standard & Poor's, while U.S banks are restricted to purchasing "qualified securities" rated Baa, BBB, or higher In contrast, investment banks in countries like Germany and Japan are permitted to invest in stocks across various economic sectors, exemplified by Deutsche Bank's practices.
FACTORS AFFECTING INVESTMENT ACTIVITIES OF COMMERCIAL BANKS
The following section will delve into the factors affecting the financial investment activities of commercial banks, including factors inside and outside the bank
The bank's activities, particularly its investment strategies, are aligned with its business goals, which can be categorized as short-term or long-term The establishment of these objectives significantly influences the size and composition of the bank's portfolio.
When the primary objective is acquiring safe assets while maintaining liquidity and minimizing concentrated risks, the bank will emphasize financial investment activities over credit activities Its portfolio will concentrate on high-security business securities and easily transferable instruments like government bonds and treasury bills, which present low credit risk and can quickly enhance liquidity when needed Additionally, the portfolio structure must be strategically designed to achieve expected profits while keeping risks at a minimal level.
3.1.1.2 State Legal Regulations and Bank Supervisory Agencies
Investment activities, like credit activities, involve inherent risks, prompting countries to establish clear regulations that safeguard both individual banks and the overall banking system.
In developed countries, securities investment regulation varies significantly In the UK and the US, banks are prohibited from investing in company stocks, and their investment in corporate bonds is restricted to those with high credit ratings from independent agencies Particularly in the United States, banks are explicitly barred from engaging in speculative trading of securities, which includes those rated below the third tier in public rankings.
Moody's categorizes securities with ratings lower than BBB by Standard & Poor's, and U.S banks are restricted to purchasing "qualified securities" rated Baa or BBB and above In contrast, countries like Germany and Japan allow investment banks the flexibility to invest in stocks across various economic sectors, exemplified by Deutsche Bank's diverse investment strategies.
(Germany) can hold shares of several large companies in sectors such as construction and motorcycles
Since 2006, Vietnam's banking sector has experienced significant and challenging fluctuations, leading to the enactment of the Law on Credit Institutions in 2010 This law establishes stringent regulations on eligible investment fields and industries, specifies the types of market-traded certificates, outlines permissible capital sources, and sets maximum investment limits for various forms of investment.
Only banks are permitted to invest capital and acquire shares in financial and banking sector organizations, while any investments outside this sector require specific permission from the State Bank The regulations permit the trading of corporate and government bonds, but only allow banks to purchase shares from other credit institutions, with no provisions for shares from private companies These stipulations were not part of the 1997 Law on Credit Institutions or its 2004 amendments As mandatory regulations, all banks must adhere to these rules and incorporate them into their investment policies.
3.1.1.3 The Development of the Financial Market
The evolution of the financial market greatly influences banks' investment activities, particularly when comparing developed countries like the United States, the United Kingdom, and Germany with Vietnam In these developed nations, the financial market, especially the stock market, has matured over time, leading to widespread popularity in stock trading.
In Vietnam, banks have historically engaged in limited financial investment activities, primarily focusing on contributing capital and purchasing shares in businesses rather than investing in securities Before the stock market's establishment in 2000, their investments mainly consisted of government bonds and treasury bills, aimed at meeting liquidity needs, resulting in minimal securities on their balance sheets However, the significant growth of the Vietnamese stock market between 2006 and 2007 revitalized banks' investment activities, leading to a more dynamic approach to securities trading, with income from these activities becoming increasingly important.
Since 2010, banks have faced challenges in the financial and stock markets, leading to a decline in income from investment activities Despite a previous increase in the diversity of investment items and their share of total assets, many banks are now reporting losses from financial investments.
3.1.1.4 Bank's Own Capital and Other Internal Factors
Equity capital plays a vital role in a bank's investment strategies, acting as a necessary foundation for capital contributions when acquiring shares Legally, banks are restricted to utilizing only their own capital and reserve funds for direct investment activities.
The level of investment for banks must adhere to a safe limit, determined by a percentage of their own capital, due to the inherent risks involved Consequently, the size of a bank's own capital plays a crucial role in shaping its investment activities.
The qualifications of investment staff and technology systems are crucial for the success of banking activities Implementing technical and fundamental analysis to select securities and construct an investment portfolio that aligns with the bank's profit and risk goals is a complex endeavor This process necessitates a team of well-trained, experienced professionals with strong forecasting skills.
Modern technology systems, including advanced information technology and investment analysis tools, enable banks to perform both technical and fundamental analyses, which are essential for constructing effective investment portfolios Additionally, the bank's risk management policies and procedures play a crucial role in its capacity to identify and mitigate risks linked to investment activities.
The organizational structure of a bank, encompassing its various departments and decision-making processes, plays a crucial role in shaping the effectiveness of its investment activities Additionally, the corporate culture and the bank's approach to risk significantly influence its investment decisions.
Market Conditions Fluctuations in the financial and economic markets can impact the bank's investment decisions