Completing corporate financial analysis in lending activities of lpbank dong do branch

Improving the quality of corporate financial analysis is an effective andfundamental solution to improve the efficiency of credit appraisal at commercial banks.Financial analysis of corp

MINISTRY OF FINANCE ACADEMY OF FINANCE

-

 -NGUYEN NGOC SANG

CQ58/09.03

GRADUATION THESIS

“COMPLETING CORPORATE FINANCIAL ANALYSIS IN

LENDING ACTIVITIES OF LPBANK

DONG DO BRANCH.”

Student code: 2073402011396

Major : Financial Analysis

Supervisor: Dr Vu Duc Kien

HA NOI – 2024

I declare that this thesis is composed of my independent research and has not beensubmitted anywhere I also declare that all the data are honesty, every effort is made toindicate this clearly, with due reference to the literature, and acknowledgement ofcollaborative research and discussions

Signature of the thesis's author

my internship My appreciation also goes out to my family and friends for theirencouragement and support all through my studies.

In the process of researching and writing the thesis, due to the limited amount ofprofessional knowledge, the content of the work cannot avoid shortcomings, I hope toreceive your suggestions to complete the thesis better

Once again, I would like to send my sincere and best thanks to all of you, wish yougood health and success in your career

1 The importance of the topic

Vietnam's banking system has made great progress in all aspects, in terms ofquantity, scale, content and quality It has made worthy contributions to theindustrialization and modernization of the economy in general and the process ofinnovation and development of economic sectors, enterprises and business households inparticular, being a pioneer in the process of renovating economic mechanisms Inparticular, in recent years, banking activities in our country have actively contributed toworking capital, expanding investment capital for the development of the productionsector, creating conditions to attract foreign capital to increase the domestic economy.The banking sector has always been an effective tool to support the State in curbing andrepelling inflation and stabilizing prices

For commercial banks in Vietnam, credit is still the most important operation,especially corporate credit activities often account for a large proportion of banks' creditbalances The effective granting of credit by the bank will positively affect the businessactivities of the enterprise, while bringing profit to the bank and being a source ofmotivation for the development of the economy as a whole

However, credit operations, including financial analysis of corporate at manycommercial banks, are still incomplete, leading to the risk of not being able to collectdebts for banks If the credit appraisal process is carried out smoothly, in accordance withthe order and measures, the Bank's funding decision will ensure safety and bring highprofits to the Bank, avoiding the risk of losing capital Therefore, improving the quality

of credit appraisal plays an extremely important role for the development and survival ofbanks

Improving the quality of corporate financial analysis is an effective andfundamental solution to improve the efficiency of credit appraisal at commercial banks.Financial analysis of corporates provides banks with information on capital structure,asset structure, business performance as well as loan repayment capacity, of thebusiness Based on this information, the bank has a basis to decide whether to grant credit

or refuse

Recognizing the importance of corporate financial analysis activities in creditappraisal at commercial banks, with the knowledge learned combined with practicalinsights during the internship at Lien Viet Post Joint Stock Commercial Bank – Dong DoBranch, I decided to choose the topic: "Completing corporate financial analysis in

lending activities of Lien Viet Post Joint Stock Commercial Bank – Dong Do Branch" for

Based on the analysis and assessment of the implementation of financial analysis of enterprises applying for credit at branches, the thesis proposes a number of solutions and recommendations to improve the efficiency of this work during the next period

3 Objects and research scope of the topic

- Object of study: Financial analysis of corporate customers in credit appraisal atcommercial banks

- Scope of research: The project focuses on examining and researching financialanalysis in the appraisal of credit borrowing enterprises at Lien Viet Post Joint StockCommercial Bank - Dong Do branch in two years 2022 and 2023

4 Research Methodology

- Primary research methodology: Collect, compare and analyze information related

to the implementation of corporate financial analysis in credit appraisal at Lien Viet PostJoint Stock Commercial Bank Dong Do branch through relevant documents andinterview credit officers at branches

- Secondary research methodology: The topic studies the general theoreticalfoundations and existing studies on corporate financial analysis and credit appraisalprocess at banks

5 Main structure of the thesis

In addition to the introduction and conclusion, the thesis is divided into three chapters:

Chapter 1: Theory of corporate financial analysis in lending activities at commercialbank

Chapter 2: Current status of financial analysis in lending activities at Lien Viet PostJoint Stock Commercial Bank - Dong Do Branch

Chapter 3: Solutions to complete corporate financial analysis in lending activities atLien Viet Post Joint Stock Commercial Bank - Dong Do Branch

CHAPTER 1: THEORY OF CORPORATE FINANCIAL ANALYSIS IN LENDING

ACTIVITIES AT COMMERCIAL BANK 1.1 Commercial banks and lending activities of commercial banks

1.1.1 Concept and functions of commercial banks

1.1.1.1 The concept of commercial banks

The commercial banks (CB) have formed, existed and developed for hundreds ofyears associated with the development of the commodity economy The development ofthe CB system has had a great and important impact on the development process of thecommodity economy, on the contrary, the commodity economy has developed strongly tothe highest stage as the market economy, CB are also increasingly perfected and become

an indispensable financial institution Up to the present time, there are many conceptualapproaches to CB:

According to the U.S Banking Act: "A commercial bank is a currency tradingcompany, specializing in providing financial services and operating in the financialservices industry."

The French Banking Act (1941) also defined: "Commercial banks are corporates orestablishments whose regular occupation is often to receive money from the public in theform of deposits or in other forms and to use those resources for themselves indiscounting operations, credit and finance"

In Vietnam, the definition of CB is specified in Clause 23, Article 3, Law on CreditInstitutions, Law No 32/2024/QH15 Accordingly, CB is understood as follows:

"Commercial bank means a type of bank which may conduct all banking operations andother business activities under this Law for the purpose of profit."

To sum up, CB can be defined as one of the financial institutions that is characterized by providing a variety of financial services with the basic business of receiving deposits, lending and providing payment services.

1.1.1.2 The function of commercial banks

a, Credit Intermediary Function

Firstly, commercial banks raise idle capital of economic entities in society, from

businesses, households, individuals, state agencies, central banks, commercial banks andother credit institutions… to form lending capital

Secondly, commercial banks use the capital raised to lend to the economic entities

that need additional capital, deposits into required reserve accounts or current accounts atthe Central Bank, commercial banks or other credit institutions

Thus, the operation of the commercial banks is "borrowing to lend", which is

"bridge" between people with excess capital and the person in need of capital Theseactivities are business in nature, because when lending, commercial banks set an interestrate higher than the capital raising rate The difference between the two interest rates is tooffset the cost of credit operations and the bank's share of profits

The function of credit intermediary comes from the characteristics of capitalcirculation in the process of social reproduction Moreover, the commercial bank is acurrency - credit business organization, capable of grasping the situation of credit supplyand demand Attracting deposits in large volumes, commercial banks can solve therelationship between credit supply and demand both in terms of loan volume and loanterm

From the above, it can be concluded that the credit intermediary function is the mostbasic and important function of commercial banks

b, Payment Intermediary Function

Commercial banks act as payment intermediaries on the basis of borrowingactivities to lend Receiving deposits and tracking expenditures on customers' depositaccounts is a prerequisite for the bank to perform this function On the other hand, directcash payments between economic entities have many limitations such as: insecurity, largecosts have created the demand for payment through banks

As a payment intermediary, the commercial banks conduct operations such as:opening deposit accounts, receiving deposits into accounts and paying at the request ofcustomers In particular, payment at the request of the customer is the result afterperforming the above two jobs The bank deducts money from the customer's depositaccount to pay for goods and services or enters into the deposit account, sales proceedsand other receipts at the customer's order With the advent and development ofcommercial banks, most payments for goods and services of society are made throughbanks with advanced forms of payment and increasingly simple procedures This functionhas generally promoted the circulation of goods, accelerated the speed of payment, thespeed of capital flow, thereby contributing to economic development

c, Money Creation Function

Creating money is an important function, which clearly reflects the essence of CB.With the goal of seeking profit as a main requirement for its existence and development,the CB with its peculiar business operations have invisibly performed the function ofcreating money for the economy The money creation function is implemented based ontwo other functions of CB: the credit intermediary function and the payment intermediaryfunction Through the credit intermediary function, the bank uses the raised capital tolend, the loan amount is used by the customer to buy goods and pay for services while thebalance on the customer's current deposit account is still considered a part of thetransaction money, which is used by them to buy goods, pay for services

1.1.1.3 The role of commercial banks in the market economy

Commercial bank are the places that provide capital to the economy CB was born

as an inevitability of commodity production Production of goods develops, thecirculation of goods is expanding, in society appear people with idle capital, people needcapital to conduct production and business activities This is solved by the CB standing

up to raise temporary idle capital from businesses and residents who will then provideback to where capital is needed to conduct production and investment activities Themore a society develops, the more the capital needs for the economy increase, the more

no organization can meet Only banks - financial intermediaries can regulate anddistribute capital to help economic sectors develop together

Commercial banks are the bridge between businesses and the market CB plays therole as a bridge between businesses and the market from two angles Firstly, capital is afundamental and important input factor of production and business When own capital isnot enough to operate, businesses have to look to other sources of capital CB will helpbusinesses solve with credit capital Thus, CB is the bridge to bring businesses to themarket by credit methods Secondly, CB acts as a payment intermediary betweenbusinesses and partners and customers Thus, CB helps businesses and markets closertogether in space and time

Commercial banks are tools for macro-regulating the economy of the State Whenthe State wants to encourage the development of a certain sector, region or economicsector, along with the use of mechanisms and policies, commercial banks are always used

by the Central Bank requesting commercial banks to implement preferential policies ininvestment, use of capital such as preferential interest rates, extension of loan terms,reduction of loan conditions or through the system of The Central Bank to fundpreferential funds for certain sectors When the economy grows excessively, the State

through The Central Bank implements monetary policies such as: increasing the requiredreserve ratio to reduce the ability to create money, thereby reducing the ability to creditthe economy

Commercial banks are the bridge between national finance with internationalfinance Currently, the trend of globalization of the world economy with the formation of

a series of economic organizations, free-trade areas, makes trade relations and goodscirculation between countries around the world increasingly expanded, in which outwardinvestment is an important and profitable investment direction At the same time,countries need to export goods for which they have comparative advantages and importgoods Commercial banks with business operations such as receiving deposits, loans,guarantees, international payment operations, have contributed to facilitating andpromoting international economic relations between countries around the world

1.1.2 Lending activities of commercial banks

1.1.2.1 The concept of lending activities

According to Article 4, Section 4 of the Law on Credit Institutions No.32/2024/QH15: "Credit extension means an agreement allowing an organization orindividual to use a sum of money or a commitment allowing the use of an amount ofmoney on the repayment principle by such professional operations as lending, discount,financial leasing, factoring, bank guarantee and other credit extension operations" and inSection 7 of the Law on Credit Institutions No 32/2024/QH15: "Lending means a form

of credit extension under which the lender gives or commits to give to the borrower asum of money for use for a specific purpose in a certain period as agreed upon on theprinciple of payment of both principal and interest."

According to Article 2 of Circular No 39/2016/QĐNHNN dated 30/12/2016 of theGovernor of the bank on the promulgation of lending regulations of credit institutions tocustomers: "Lending is a form of credit extension, whereby the bank lends a sum ofmoney to a customer to use for specific purpose and certain period as agreed upon on theprinciple of payment of both principal and interest."

From the above concepts: Lending can be defined as the activity that one party (the lender) provides financing to another party (the borrower), in which the borrower will refund financing to the lender within an agreed period and usually accompanied by interest This activity incurs debts between the borrower and the lender Thus, credit (in a

narrow sense) reflects the relationship between the lender (creditor) and the borrower(debtor) and that relationship is governed by credit mechanisms, agreements on timing,

interest rates payable The above definition is applied by banks and other creditinstitutions as a basic premise for their lending activities In a market economy, CB'slending activities are diverse and rich with many different types of credit The application

of any form of lending depends on the economic characteristics of credit capital users inorder to use and manage credit capital effectively and in accordance with the differentmovements and economic characteristics of the credit object

1.1.2.2 Classification of lending activities

There are many criteria for classifying loans, however in practice, it is common toclassify loans according to the following criteria:

- By loan term: According to this basis, loans are divided into 3 types:

+ Short-term loans: This type of loan has a maximum term of less than 01 yearfor the purpose of compensating for the shortfall of working capital of corporates andshort-term spending needs of individuals

+ Medium-term loans: According to regulations of the State Bank of Vietnam,medium-term loans have terms from 1 year and up to 5 years Medium-term loans aremainly used to invest in the procurement of fixed assets, improvement or renewal ofequipment, expansion of production and business, construction of new small-scaleprojects

+ Long-term loans: are loans with a term of more than 5 years (in many countriesaround the world, the loan term is over 7 years)

- By purpose of using capital: Based on the purpose of borrowing, loans aredivided into:

+ Business loan: This is a type of loan to meet the business capital needs ofbusinesses and individuals With this type of loan, the most important condition thatthe bank will care about is the effectiveness of the business plan because this is thefactor that generates revenue to repay bank

+ Consumer loan: A type of loan to meet the consumption needs of individuals.The source of debt collection with consumer loans is the borrower's income, so whenlending the bank must verify the level of the borrower’s income

- By reimbursement method

+ Installment loan: A form of loan that when borrowing from a credit institutionand the customer determines and agrees on the amount of interest the borrower mustpay plus the principal amount divided to pay in many terms during the loan period.This type of loan applies to loans of large value, or the borrower's income is not

enough to repay the loan in one period Typically, installment loans can follow thefollowing methods: The method of paying the principal equally, and paying interestaccording to the balance at the end of each periodical; The method of equal payment ofprincipal and payment of interest calculated on the return of the principal; The method

of paying principal and interest is equal in all periods

+ Non-Installment loan: A type of loan that is paid once according to the agreedterm On-demand repayment loans (applicable in the case of overdraft loans)

- By credit origin: Based on this basis, loans are divided into:

+ Direct loan: This is a form of loan that the bank provides capital directly to theperson in need, and the borrower directly repays the loan to the bank

+ Indirect loan: is a loan made through the acquisition of indentures or debtdocuments that have arisen and are still in the payment period

- By loan security includes:

+ Asset-secured loan: is a type of loan that the bank provides on condition thatthe borrowers must have collateral, pledge or guarantee of a third party

+ Non-asset-secured loans: is a type of loan without collateral, pledge orguarantee of a third party, the loan is only based on the reputation of the customerhimself This type is usually applied to traditional customers, having long-termrelationships, having a healthy financial situation, having a reputation with banks such

as full repayment, on time both principal and interest, having feasible businessprojects,

1.1.2.3 Major methods of lending activities

Circular 39/2016/TT-NHNN recently issued by the State Bank has added many newlending methods in accordance with reality, amending the content of lending methods toensure a clear distinction between methods Specifically, 9 lending methods underCircular 39/2016/TT-NHNN include:

- One-shot loan: The credit institution and its customer implement lendingprocedures and conclude a loan agreement in each time when a loan is needed

- Syndicated loan: At least two credit institutions are together offering a loan to acustomer for the purpose of implementing one fund borrowing plan or project

- Loan for crop season interval: The credit institution extends a loan to a customer

in order to cultivate or raise seasonal plants or livestock used in the next production cyclewithin a given year, or plants of which roots are retained and industrial crops which areannually harvested Accordingly, the credit institution and its customer shall agree that

the outstanding amount of debt existing in the previous production cycle can be used forthe following production cycle, but shall not be allowed to exceed the time length of 02consecutive production cycles.

- Line of credit loan: The credit institution determines and agrees with its customer

on the maximum outstanding amount of debt maintained during a specified time period.Within a credit line, the credit institution will extend a one-shot loan At least once a year,the credit institution will consider redefining the maximum outstanding amount of debtand duration of maintenance thereof

- Provisional line of credit loan: The credit institution undertakes that fund isavailable to be lent to the customer and amount of that fund is restricted to the agreedamount of provisional credit The credit institution and its customer shall agree on theeffective period of provisional line of credit which is not allowed to exceed 01 (one) year

- Current account overdraft facility: The credit institution approves an overdraftlimit within which the customer is allowed to spend more money than the amountavailable in the current account in order to render payment services on that currentaccount The overdraft limit is maintained within the maximum period of 01 (one) year

- Revolving loan: The credit institution and its customer agree to extend a loan tomeet the demand for fund used in the business cycle which is less than 01 (one) monthand the customer is allowed to use the outstanding amount of principal incurred in theprevious business cycle for the following one provided that the loan term remains fewerthan 03 (three) months

- Rollover loan: The credit institution and its customer agree on a short-term loanunder the following conditions:

+ On the payment due date, the customer is entitled to repay debt or extend theperiod of repayment of part or whole of the outstanding amount of loan principal foranother specified time period;

+ Total loan term is not allowed to exceed 12 months from the initial disbursementdate and one business cycle;

+ On the date when a loan application is considered, the customer does not incurany bad debt owed to credit institutions;

+ In the process of a rollover loan, the customer owing any bad debt to creditinstitutions shall not be given any extension of the agreed period of repayment

- Other lending methods not mentioned above shall be combined with those referred

to in Clause 1, 2, 3, 4, 5, 6, 7 and 8 of this Article as appropriate to business conditions ofthe credit institution and loan features

1.2 Corporate financial analysis in lending activities of commercial banks

1.2.1 The concept of corporate financial analysis in lending activities of commercial banks

Financial analysis is considered as a process of processing and evaluating data byappropriate technical methods to help users of information know the current financialsituation of corporates Through the analysis of the financial situation, users ofinformation can assess the potential, business results as well as risks or prospects ofcustomers, thereby making the right decision to meet their needs or satisfy their interests.Financial analysis provides accurate, truthful and timely information so that those whouse this information can assess a customer's financial strength, operability, and futurepredictions of customers

Thus, it can be said that: Corporate financial analysis is a totality of methods that allow assessing past and present financial positions, predicting the future financial situation of the corporate, helping managers make effective management decisions, in accordance with the goals they care about

Corporate financial analysis is the process of deeply studying the content, structure,interrelationship of the criteria on financial statements and applying analytical methods toassess the financial situation of the corporate, compare with the proposed business plan,compared to businesses in the same industry, compared to industry averages to determinethe position of their corporates in the market For credit institutions interested in short-term solvency, long-term solvency, profitability of capital, predicting the prospects ofcorporates

Corporate financial analysis in lending activities of commercial banks can be interpreted as the use of a system of methods, tools and analytical techniques to help credit officers both evaluate comprehensively and review in detail the financial activities

of corporates to identify, assess, forecast, and make appropriate investment decisions.

Corporate financial analysis in lending activities aims to answer the questions: Is thecorporate doing well, efficiently and profitably? Does the corporate have the ability toimplement its business plan? Can the corporate pay off its future debts? From there, thebank makes lending decisions, while minimizing the risk of losing the bank's capital

1.2.2 The purpose and significance of corporate financial analysis in lending activities of commercial banks

The general target of all subjects using information when analyzing financial is toassess the financial situation of the corporate at the present time, predict the financialresults in the future to serve business decision-making However, as mentioned above, thesubjects using financial information are quite diverse, so the purpose of financial analysis

of these subjects is also different Clearly defining the object and purpose of its analysis

is essential to be able to build an appropriate analysis process, including the selection ofthe scope of analysis, analysis indicators, and appropriate analysis methods

For commercial banks, lending is the most risky activity, so limiting risks inlending activities is an urgent issue that banks are always concerned about As an investor

- as a creditor: The benefit that a commercial bank gains in a customer is expressed in theform of interest and loan principal This loan can be short-term or long-term

For short-term and long-term loans with relatively different financial analysis,short-term loans usually focus only on the business's ability to pay interest and pay loanprincipal on maturity, these analyses are limited to a specific time frame Long-termcreditors have a more thorough assessment and consideration of the solvency of thebusiness, they need to consider the ability to maintain the existence and profitability ofthe business over a relatively long period of time Thus, some short-term fluctuations ofthe business may be a big concern for banks when lending short-term, but those eventsare not necessarily taken into account when lending long-term The bank cares not onlyabout the current financial situation of its customers but also about their future ability togrow

Corporate financial analysis helps the bank to comprehensively view the financialsituation of customers in the past period objectively and relatively honestly In addition,the analysis also helps the bank understand the causes of fluctuations in indicators anditems; identify the factors affecting the items, so that there is an appropriate investmentdirection for customers

Corporate financial analysis helps banks identify and predict in advance the risksand future potential of customers Because risks are jeopardies that can always beencountered and cause serious consequences, so recognizing the risks helps banks haveappropriate investment directions, financial decisions, and future financial drafts such asinvestment plans, budget plan to advise customers In contrast to risks, the potentials andopportunities will bring commercial banks customers with financial strength

Recognizing that is a successful first step of the bank on the path of development withcustomers.

Corporate financial analysis as a basis for assessing credit ratings helps banks takereasonable provisioning measures The bank's business activities are always accompanied

by credit risks, making reasonable provisions to ensure that the bank's business activitiesensure safety, stability and long-term development of the bank

Corporate financial analysis is also an effective support tool of the bank to controlmanagement activities of customer in terms of its efficiency as well as adequacy tosupport the making of credit decisions on the basis of analysis of business efficiency,current financial situation of the corporate; and to forecast the financial situation of thecorporate in the future and analyze the debt security of the corporate at the time ofassessment

1.2.3 Data in corporate financial analysis

a Balance Sheet (BS)

Balance sheet is a general financial statement that reflects the overall situation ofassets and sources of asset formation of the corporate in monetary form at a certain time.That time is usually the end of the month, the end of the quarter, or the end of the year

BS reflects two basic contents: Capital and Assets The capital reflects capitalraised into production and business Legally, the capital shows the responsibility of thecorporate for the total amount of capital registered for business with the State, the amount

of assets formed by bank loans, loans to other objects, as well as the responsibility to pay

to employees, shareholders, suppliers, bondholders, The assets reflects the scale andstructure of existing assets up to the time of making the report under the management anduse of the corporate, capacity and level of asset use Legally, the assets showing thepotential that the corporate has the right to manage and use for a long time, close to thepurpose of obtaining profits BS is the most important document to help analysts research

to evaluate in general the situation and results of business, financial balance, level ofcapital use and economic and financial prospects of corporates

b Income Statement (P&L)

Income statement is a general financial statement, reflecting in general the businesssituation and results of an corporate in a period (quarterly, annually) detailed according tothe types of activities, the performance of obligations of corporates to the State on taxesand other payable amounts

Based on data on P&L, information users can check, analyze, and evaluate theresults of business activities of corporates in that period, compare with the previousperiod and with other corporates to identify the general performance in the period andtrends in the coming time.

c Cash Flow Statement (CF)

Cash flow statement is a general financial statement reflecting the formation anduse of the amount of money generated according to different activities in the reportingperiod of the corporate CF was designed to answer questions related to cash flow in andout of the corporate, debt repayment situation, cash investment of the corporate in eachperiod

CF provides information about the inflows and outflows of money and suchamounts as cash, short-term investments that are highly liquidity, can be quickly andreadily converted into a amount of money that is less susceptible to the risk of loss invalue due to changes in interest rates The inflows and outflows of money and thoseconsidered to be cash are complied into three groups: cash flows from operatingactivities, cash flows from investing activities, cash flows from financing activities anddrawn up in two direct and indirect methods

d Notes to Financial Statements

When analyzing corporate finance, analysts need to use more detailed data fromnotes to financial statements or internal accounting reports to make the system ofanalytical indicators more complete, while also correcting the synthesis of the data shown

on the balance sheet and the profit and loss statement

Financial statements in corporates are closely related to each other, each change ofone indicator in this report directly or indirectly affects the other reports, the sequence ofreading and understanding financial statements, through which they identify and focus onthe main indicators directly related to their analysis goals

e Other sources of information

Internal information of corporates: This information is obtained from in-personinterview surveys This information is necessary to add to the financial analysis, because

it helps credit officers to check the data on the FS, in addition to helping credit officershave a more objective and realistic view of the operation of the business with or partiallynot reflected in the FS

External information of corporates: Collected from outside the corporate such asmarket information, data by economic, political, social organizations…

In today's practice, the most important source of information used is corporates’ FS.The corporate is obliged to provide the FS to many different subjects, not only CBs Inorder for corporate financial analysis to achieve high results, credit officers, in addition totheir professional skills in analyzing the FS, must also combine external informationsources and their actual observations, from which credit officers can exclude dishonestinformation to make accurate assessments of the basic financial situation of the business,assessing the strengths and weaknesses of the business in the most honest way.

f, Appraisal of the reliability of financial statement

Financial statements include balance sheet, income statement, cash flow statementand notes to financial statements Therefore, when corporates borrow at banks, banksusually only require balance sheets, income statements and notes to financial statements

of the two periods closest to the time of borrowing

The financial statements that corporates send to banks are information providedexternally, for the purpose of borrowing capital, so the goal of preparing financialstatements may be different from the goal of preparing financial statements for internalcorporates Therefore, the reliability of the data of the financial statements provided bycustomers is not guaranteed Therefore, the appraisal of the reliability of financialstatements is necessary for a credit officer However, the problem is how to assess thereliability of financial statements is not an easy problem for banks

For high-value loans by large corporates, because of the important nature of theloans, banks may require businesses to provide audited financial statements At that time,the auditing company will help the bank evaluate and take responsibility for thereliability of the data in the financial statements

However, in fact, it is difficult to request customers to provide audited reportsbecause currently in our country there is no regulation obliging businesses to conductaudits Therefore, appraising the reliability of the financial statements of the corporate is

a necessary and regular job of credit officers before conducting the analysis of corporatefinancial statements To assess the reliability of financial statements, credit officers maytake the following steps:

- Study data of financial statements

- Use financial accounting knowledge and analytical skills to detect suspiciouspoints or inconsistencies in financial statements

- Review the notes to better understand the suspicious points in the financialstatements

- You can meet directly with customers to discuss suspicious points detected bycredit officers.

- Visit the corporate to observe and if necessary personally review accountingdocuments and original documents as a basis for preparing financial statements

- The final conclusion about the reliability of the financial statements provided bythe corporate

A note when appraising the reliability of financial statements is that credit officersoften face difficulties to work and deal with the chief accountant or a good accountant.Therefore, giving credit officers with knowledge of financial accounting is essential Inaddition, credit officers are improving their practical expertise to accurate assessments

In addition, credit officers use the financial fraud assessment model published to thepublic by Messod Beneish This model is based on 8 financial indicators to find motivesand signs that may indicate financial fraud in order to beautify financial statements Theeight-variable formula of the Beneish Model:

M-score =  – 4.84 + 0.920 (DSRI) + 0.528 (GMI) + 0.404 (AQI) + 0.892 (SGI) + 0.115

(DEPI) – 0.172 (SGAI) + 4.679 (TATA) – 0.327 (LEVI)Where:

Days’ Sales in Receivables Index (DSRI): index of change in the average collectionperiod According to the author, an unusual increase in accounts receivable will reflectpossible deviations in the way the corporate recognizes revenue Increasing receivableswill help improve the revenue of the corporate, so that the corporate manager can achievethe revenue target set for the year

DSRI = (Current year Account Receivables)/(Curent year Net revenue) (Prior year Account Receivables)/(Prior year Net revenue)Gross Margin Index (GMI): The index assesses the decline in a corporate's profitmargin over time When a company is witnessing a downward trend in gross margin,managers are more motivated to implement some tricks to improve reported businessresults

GMI = Current yearGross Margin Prior year Gross MarginAsset Quality Index (AQI): The asset quality index assesses the increase in long-term assets except for fixed assets The increase in long-term assets except for fixedassets that are important to the corporate's business may assess the excessivecapitalization of the corporate’s expenses It can be seen that if the company does not

include these expenses in the current business period, but capitalizes them into long-termassets and then depreciates them for many years to come, it will significantly reduce thecompany's expenses in that year And the company's profitability will improve, even if itdoesn't stem from the performance of its core business.

AQI = 1−(Current year current Assets+PPE)/(Current yeartotal assets)1

−(Prior year current Assets+PPE)/(Prior year totalassets)

PPE = Tangible Fixed Assets+ Fixed Asset of Finance leasing + Long term assets in

progress + Investment propertiesSales Growth Index (SGI): The index assesses the growth rate of revenue Although

a corporate's rapid growth does not equate to the possibility of financial fraud However,the rapidly growing position and very high capital raising needs of these companies willput a significant amount of pressure on the manager Therefore, the head will be underpressure to maintain attractive growth rate, and this in practice is not easy

SGI = Current year Net Revenue Prior year Net RevenueDepreciation (DEPI): This index assesses the decrease in the depreciation of thecompany The company may seek to extend the depreciation period or some otherfinancial trick to record a reduction in depreciation expense during the business period.When depreciation expense decreases, the company's profitability will be improved

DEPI = Current year Depreciation Prior year Depreciation /(Prior year PPE+ Depreciation)

/(Current year PPE+Depreciation)

Sales, General and Administration Expenses (SGAI): This index assesses thechange in the proportion of sales and management expenses over net revenue Similar tothe impact of declining gross margins, increasing sales expenses and adminitrativeexpenses can create a negative growth outlook for investors Therefore, the manager will

be motivated to engage in financial fraud

SGAI =

(Current year Sales expense+ Administrative expense)/(Current year Net Revenue)

(Prior year Sales expense+ Administrative expense)/(Prior year Net Revenue)

Accruals (TATA): With the accrual nature of current accounting, the timing ofrecognizing revenue and expense will be different from when the actual cash flow returns

to the business The significant discrepancy between earning before tax and net cash flowfrom operating activities will raise many suspicions for investors about the corporate'sability to use some unreasonable accounting policies

TATA = Net income −Cash¿Operations Total Asset¿Leverage Index (LEVI): This index compares total corporate loans with total assets.

An increase in debt relative to total assets will worsen some financial ratios of thecorporate The corporate may be motivated to engage in financial statements fraud toensure that credit rating of corporate are measured at a good level

LEVI = (Current year Current Liabilities+Long term Debt)/(Current year Total Asset ) (Prior year Current Liabilities+Long term Debt)/(Prior year Total Asset )Interpret the M-score value as follows:

M-Score value below -2.22: Indicates that the company is unlikely to be in volved

in manipulation of financial statements and profits

M-Score value greater than -2.22 and less than -1.78: Signals that the company may

be a subject of manupulation

M-Score value greater than -1.78: Signals that there is a high probability orlikelihood of the company actively manipulating financial statements and profits

1.2.4 Methodology in corporate financial analysis

Methods used to assess the financial situation of corporates include a system oftools and measures to approach and study events, phenomena, internal and externalrelationships, the flow of displacement and change in the situation of corporate financialsituation, specific criteria and characteristics in order to assess the current state offinancial activities of the corporate

There are many evaluation methods such as: comparative method, ratio method,balancing method, distribution method, Dupont analysis method, comparative contactmethod, factor analysis method, graph method, chart method, However, there areseveral methods that are commonly used in corporate financial analysis, namely:Comparative method, factor analysis method, credit rating method

1.2.4.1 Comparative Method

Comparative is a commonly used method in analysis for assessing results,determining the position and trends in fluctuations of analytical indicators Comparativemethod is a method aimed at studying the volatility and the degree of volatility of theindicator that needs to be analyzed This is a method often used to determine performanceresults compared to set goals, determine trends and development rates of analyticalindicators When using this method, attention should be paid to the following basics:

* Comparative conditions:

- There must exist at least two quantities to compare

- Quantities must ensure comparability with each other, must be consistent ineconomic content, calculation methods and units,

- There must be a origin for comparison, the comparison content is the same origin.Determining the origin for comparison depends on the purpose of the analysis.Specifically, when determining the trend and development speed of an analyticalindicator, the comparative origin is the value of that indicator in the previous period.When assessing the performance of targets and tasks, the comparative origin is the value

of the plan of the analytical indicator When determining the position of the business, thecomparative origin is determined as the industry average, or the competitor's indicator

* Basic comparison techniques:

- Compare by absolute number: determine the difference between the value of theanalysis indicator and the value of the original period

- Compare by relative number: determine the percentage of increase or decreasebetween the actual increase and decrease compared to the original period

- Compare with the average number

* Three forms of the basic comparison method:

- Horizontal comparison: determine the degree of increase or decrease in the scale

of the analysis indicator and the degree of influence of each factor indicator on theanalysis indicator

- Vertical comparison: analysis of structural fluctuations or proportional relationsbetween indicators in the FS system of corporate

- Comparison determines the trend and relevance of indicators: separate indicators

or indicators reflect the general scale and they can be considered for several periods tobetter reflect the development trend of economic and financial phenomena of corporates.1.2.4.2 Factor analysis method

a, Dupont Analysis Method

This is a method of analysis based on the interrelationship between financialindicators, thereby transforming a synthetic indicator into a function of a series ofeconomically related variables It is thanks to the link between the indicators that one candetect the factors that affect the analysis criteria in a strict logical sequence, seeing moreclearly the financial activities of the corporate in relation to each other This is a highlyapplicable analysis method in financial analysis The Dupont analysis method is oftenused in business performance analysis

One of the most important indicators is the return on equity (ROE) Therefore,equity is part of the total capital that forms the asset, ROE will depend on the ratio ofreturn on total assets This relationship is expressed by the Dupont model as follows:

Net income Average Equity = Total Average Assets Net income x Total Average Assets Average Equity

Or, ROE = ROA x Financial Leverage

Thus, the Dupont model can continue to be implemented in detail into:

Net income

Average Equity = Net income Revenue x Total Average Assets Revenue x Total Average Assets Average Equity

(ROE = ROS x Sales to Total Assets x Financial Leverage)

The Dupont analysis method builds an initial composite indicator into an method ormodel consisting of many related indicators to each other as a option depending on thepurpose of research This method is built on the reciprocal relationship between financialindicators, thereby transforming some initial indicators into an equation of many differentand closely related coefficients

b, Methods determining factor influence

The method for determining the influence of factors typically involves a systematicapproach to assess and quantify the impact of various elements on a particular outcome orsituation Here are some common methods used to determine the influence of factors:

* Successive Substitution Method

- Application Conditions:

+ Used when the analysis indicator is related to the influencing factor expressed inthe form of product equations or quotients

+ The factors are arranged in order: the quantity factor precedes the quality factor,

in case where there are many quantity factors or many quality factors, the primary factorshould precede the secondary factor

* Differential method

This is a consequence of the successive substitution method applied on the basis ofadherence to the the arranged sequence of factors and by the technique of settingcommon factors to simplify the calculation process when the data is not too complicated

analytical indicator, by the balancing method, the difference between the actual periodand the original period of that factor is determined However, it is necessary to payattention to the positive and negative relationship between influencing factors andanalytical indicator.

c, Methods analyzing nature of factors

After determining the degree of influence of factors, in order to make reasonableassessments and predictions, on the basis of which decisions are made and how decisionsare implemented, it is necessary to conduct an analysis of the nature of the influence offactors The analysis is carried out by specifying and solving problems such as:Specifying the degree of influence, determining the subjective and objective nature ofeach influencing factor, specific assessment and prediction, and determining the meaning

of factors affecting the indicator being studied, consider

1.2.4.3 Method of reconciliation

Direct reconciliation method: used to compare between aggregate and detailedindicators Reconcile the balance at the beginning of this period with the balance at theend of the previous period, compare the balance of the aggregate indicator with thebalance of detailed indicators, compare the original documents with the bookkeepingdocuments

The logical reconciliation method is to compare the values of indicators related toeach other by a certain trend or a certain ratio In other words, this is the consideration ofthe corresponding fluctuation in the value of indicators that are directly economicallyrelated, but may have different levels of volatility and may be in different directions Thismethod is widely used in practice to generally consider economic-financial relations so as

to guide the assessment of fluctuation trends of relevant indicators

1.2.4.4 SWOT analysis

SWOT analysis is abbreviated from 4 words in English: Strengths, Weaknesses,Opportunities and Threats This is a popular method of strategic analysis used to assessthe competitive position of an corporate, project, product Through the analysis of yourSWOT model, it can help identify risks and detect factors that affect corporate businessperformance Through this, it is possible to determine the position of the corporate anddevelop an appropriate business strategy for each situation

1.2.4.5 Graph method

The graph method makes it possible for objects to use a vivid visual view of theevolution of the objects studied over a certain long period as well as the scale of

components and structures in the whole, helping to quickly analyze the orientation offinancial indicators, thereby offering solutions to improve the efficiency of productionand business activities.

1.2.4.6 Credit Rating Method

Credit rating is an assessment of a customer's ability to fulfill financial obligations

to partners such as repayment of principal and interest on loans when maturity todetermine risks in a bank's credit extension activities The level of credit risk varies fromcustomer to customer and is assessed on a scale, based on the financial and non-financialinformation available to the customer at the time of scoring

The purpose of the credit rating is to assess current risks and forecast future risksabout the customer's ability to repay the loan However, the business activities ofcorporates are continuous and unpredictable, so the credit rating must be continuouslycarried out according to the financial statements of the corporate

Monitoring credit scoring and customer ratings before lending and throughout theloan process is necessary to help banks always be proactive in the process of monitoringand preliminary evaluation of customers' business activities to take timely handlingmeasures, minimize risks Credit scoring and customer ratings are conducted quarterlyand annually

Internal credit rating process:

Collect information  Industry classification, scale  Classification of indicatorsand scoring  Give credit rating results  Approve and use credit rating results

1.2.5 Contents of corporate financial analysis in lending activities of commercial banks

A healthy corporate financial situation is one of the conditions to consider lending

to businesses On the business side, due to knowing this, when making loan documents,corporates always show that their financial situation is healthy and have good financialability to ensure debt repayment However, whether the financial situation of thecorporate is really good or not needs to be analyzed and appraised to assess Forcorporate financial analysis need to focus on the following contents: appraisal of thereliability of financial statements, analysis of financial statements, financial ratios,general assessment of corporate financial situation

a, Analysis of financial position

*Analysis of assets

Business capital is expressed in the money of the property The business capital of

an corporate includes 2 types: Fixed capital and working capital Capital more or less,increase or decrease, allocation for each stage, each stage reasonable or not will greatlyaffect the business results and financial situation of the corporate Analyze the assetsituation to assess the size of assets of the corporate, the level of investment of thecorporate for business activities in general as well as each asset class in particular.Through the scale and fluctuation in investment level, business scale, business capacity,corporate financial capacity Through the asset structure of the corporate, we can see theinvestment policy of the corporate, the fluctuation in the asset structure indicates thechange in the investment policy of the corporate

When analyzing the asset situation of the corporate, consider the size of assets andasset structure through 2 groups of indicators:

- Items of the assets section on the balance sheet

- Proportion of each asset

Proportion of each asset = Value of each asset Total value asset x 100

Information about the size of assets, the ability to manage assets of customersaffects the bank's lending decisions; Because customers' assets are always considered aspart of the collateral for the loan, ensuring the ability to recover debts when customersbecome insolvent, specifically:

Cash and cash equivalents: Includes bank deposits, cash in safes, short-term, highlyliquid investments Deposits and cash are assets that can be used only for immediatepayment, but usually account for a small proportion of total assets

Accounts receivable (mainly cash for the sale of goods and services that have notyet been collected) are always capable of being converted into deposits or cash The bankshould carefully take account into consideration to exclude sales that are uncollected,difficult to obtain or have been resold to others Short-term loans are closely related to thecustomer's budget, especially the loan term can be calculated based on the number ofdays of the collection period

Priced securities: are financial assets of the corporate These assets can be soldwhen the need money to pay

Inventory: a lot of short-term loans with the goal of increasing stock of goods,meaning that part of the goods in the warehouse is formed from bank loans Therefore,banks are interested in quantity, quality, price, design, insurance, risks for goods in

warehouses In addition to reviewing on the books, the bank also requires borrowers toopen inspection warehouses to exclude poor goods, loss of quality, delayed consumption,detection of counterfeit goods, goods sent by others.

Fixed assets: including houses, yards, machinery, equipment, means oftransportation, office equipment usually medium and long-term assets

Analysis method used: Use a comparative method to analyze the asset situation ofthe corporate Compare total assets as well as each type of asset between the end of theperiod and the beginning of the period, determine absolute and relative differences,thereby seeing the fluctuation of the asset size of the corporate At the same time,compare the proportion of each asset class between the end of the period and thebeginning of the period to reflect the change in asset structure as well as investmentpolicies of corporates Based on the magnitude of the analytical indicators, the industryaverage value and the comparison results to assess the asset situation of the corporate

*Analysis of liabilities and owner’s equity

The capital situation of the corporate is reflected in the size, structure and volatility

of capital Analyze the capital situation of the corporate to see from which sources thecorporate has raised capital, the scale of the capital raised increased or decreased, thecapital structure of the corporate is autonomous or dependent To assess the current state

of capital of corporate, it is necessary to use 2 groups of indicators:

- Indicators reflecting the size and fluctuation of capital include: Total value ofcapital and each type of capital in the balance sheet

- Indicators reflecting the capital structure of the corporate are determined according

to the formula:

Proportion of each capital = Value each capital Total value capital x 100

The capital structure shows the funding policy of the corporate, analyzes thecapital structure of the corporate to have the most complete assessment of the financialsituation of the corporate The capital of the corporate consists of two departments:liabilities and equity The nature of these two types of capital is completely different interms of the liability of the corporate For borrowed funds (also known as liabilities),corporates must commit to pay creditors the principal amount and cost of capitalaccording to the prescribed time limit Equity represents the owner's funding of allassets in the business

The bank cares about all creditors of the customer, be it old debts, debts of otherbanks, debts owed to suppliers, debts to employees The position of the bank in the list

of creditors is always carefully studied The bank also considers preferential, securedand other debt The assets that have secured the old loan need to be recalculated at themarket price, they are taken as collateral for the new loan, the excess value compared

to the old loan needs to be calculated

Analysis method used: Use a comparative method to analyze the capital situation ofthe corporate Compare the total capital as well as each type of capital source between theend of the period and the beginning of the period, determine the absolute and relativedifference, thereby seeing the fluctuation in the size of capital sources of corporates Atthe same time, compare the proportion of each type of capital source between the end ofthe period and the beginning of the period to reflect the change in capital structure as well

as the level of financial independence of corporates Based on the magnitude of theanalytical indicators, the industry average value and the comparison results to assess thecapital situation of the corporate

*Analysis of Funding stability

Evaluating the capital structure of the corporate should take into account theindependence and stability of the capital of the corporate

Analysis of financial independence of the corporate: In terms of financialindependence, this capital demonstrates the inherent capacity of the owner in financingbusiness activities Financial independence is reflected in the following indicators:

Debt ratio = Total Liabilities Total Capital

The debt ratio reflects the capital structure of the corporate, thereby determiningfinancial stability and long-term solvency, reflecting the policy of rasing capital forcorporate business activities The debt ratio indicates the amount of debt of thecorporate compared to the total capital, showing the degree of dependence of theenterprise on creditors The lower the debt ratio, the stronger the equity foundation, theless dependent the corporate will depend on debt, the lower the financial risk of thecorporate

Self-financing ratio = TotalCapital Equity = 1 – Debts ratio

The self-financing ratio represents the financial independence of the corporate Thehigher this ratio proves that the corporate has high financial independence and is less

under pressure from creditors The corporate have many opportunities to receive creditsfrom outside.

When analyzing financial independence, it is necessary to use industry averages ornorm figures that banks stipulate for corporate These figures are the basis for banks tosolve corporate debt problems: whether to increase debt or equity and what is themaximum increase Once the debt ratio has exceeded the safe level, the business will be

in a situation that it is more likely not to receive external credits

The debts to equity ratio indicates the ratio between two basic sources of capital(liabilities and equity) that a corporate uses to finance its operations These two sources

of capital have distinct characteristics and the relationship between them is widely used

to assess the financial structure of the corporate or the use of financial leverage of thecorporate The larger this ratio, the more important the source of liabilities plays a role inthe operation of the corporate Typically, this ratio is greater than 1, which means thatdebt accounts for a larger proportion than equity, the use of high financial leverage makesfinancial risks high, and vice versa

Debts to Equity (D/E) = Total Liabilities Equity

When the business is favorable, using financial leverage has the effect of increasingreturn on equity (ROE) many times When basic earning power (BEP) generated by thebusiness is greater than the cost of debt capital, it increases the return on equity (ROE)and vice versa

Financial stability analysis has shown the relationship between equity and borrowedcapital The stability of funding should be taken into account when assessing the capitalstructure of corporates According to that requirement, the capital of the corporate isdivided into regular capital and temporary capital

Regular capital is a source of capital that an enterprise uses regularly and long-term

in business activities, with a duration of more than one year According to thisclassification, regular sources of capital at a time include equity and medium and long-term liabilities Long-term loans due to repayment are not considered a regular source ofcapital Temporary capital is capital that an corporate temporarily uses for businessactivities for a short period of time, usually for a year or in a business cycle

Net Working Capital = Current Assets – Current Liabilities

Regularly Funding ratio= Long Long −termCapital −term Assets

These two indicators reflect the financial balance of the corporate, which is thebalanced relationship between assets and capital that form assets over time Therefore, ifthe net working capital is greater than 0 and the regular funding ratio is greater than 1, thecorporate always has enough long-term capital to finance long-term assets, ensuringfinancial balance to help the corporate avoid payment risks On the contrary, corporateshave financial imbalances, corporate liquidity risks increase.

b Analysis of business results

Income statement is a general financial and accounting statement that generallyreflects the results of business activities, the performance of obligations to the State of ancorporate in an accounting period In order to control the business activities and businessefficiency of the corporate, the credit officer should consider fluctuations in the items ofthe income statement When analyzing, it is necessary to calculate and compare the leveland rate of fluctuation between the analysis periods compared to the original period oneach indicator Besides, it is necessary to compare the fluctuations of each indicator withnet revenue Specific:

- The indicators on the income statement reflect the scale of income, expenses andbusiness results of the corporate in the period according to the total and each field ofoperation Typically, analyze the revenue indicators of sales and service provision, netrevenue from sales of service provision, net profit from business activities, profit beforetax and profit after tax

- Indicators reflecting the costs management

Cost Ratio = Totalexpenses Total Revenue

This indicator indicates that in order to generate 1 dong of revenue in the period, thebusiness must spend how much expenses

Cost of Goods Sold Ratio = Cost of Goods Sold Net Sales

This indicator indicates that in order to generate 1 dong of revenue in the period, thebusiness must spend how much cost of goods sold

Selling Expense Ratio = Selling Expenses Net Sales

This indicator indicates that in order to generate 1 dong of revenue in the period, thebusiness must spend how much sales expenses

Administrative Expenses Ratio = Administrative Expenses Net Sales

This indicator indicates that in order to generate 1 dong of revenue in the period, thebusiness must spend how much administrative expenses.

- Indicators reflecting the business performance

Return on Sales = Total Revenue Net income

This indicator indicates how much profit corporate generates on 1 dong of revenue

Profit Before Tax margin = Earningbefore tax Total Revenue

This indicator indicates how much profit before tax corporate generates on 1 dong

of revenue

Profit margin from operating activities =

Net profit¿operating activities ¿

Net Revenue +Revenue¿financing activity¿

Profit margin from sales = Net profit¿sales activities Net revenue¿ ¿sales activities¿

Current asset turnover = Average Current Asset TotalrevenueThis indicator shows the turnover of working capital in the analysis period or howmuch a working capital involved in the production and business process generates netrevenue The greater the value of this indicator, the faster the working capital turns It isthe result of proper management of capital in reserves, consumption and payment,creating conditions for a healthy financial situation

- Inventory turnovers: Inventory is a reserve asset with the purpose of ensuringthat the business process is conducted regularly, continuously and meets the needs ofthe market High or low inventory levels depend on many factors such as: type ofbusiness, input market, output Inventory is a type of current asset, it is always moving,

in order to speed up the turnover of working capital, each period that the workingcapital must be shortened, the inventory must be stored reasonably To solve theproblem raised, inventory turnover must be studied

Inventory Turnover = Cost of Goods Sold Average InventoryThis indicator reflects the relationship between the value of goods sold andinventory in stock This indicator indicates the average inventory turnove during theperiod The larger this indicator, the faster the inventory turnover, the fewer days theinventory is in stock and the efficiency of capital use is improved, and vice versa.

Average Age of Inventory (AAI) = Inventory Turnover360This indicator reflects the length of the period of stockpiling goods

- Account receivables turnover: Receivables are a portion of working capital thatremains during the payment period If this process is shortened, it will not only speed upthe flow of working capital but also reduce risks in the payment stage

Account Receivables (AR) Turnover = Average AR Net SalesThis indicator indicates the speed of conversion of receivables into cash The largerthis indicator is, the faster the proceeds to the fund, the shorter the collection period andvice versa

Average Collection Period (ACP) = AR Turnover360This indicator reflects the average time that corporates have to wait to recoverdebts The average collection period depends on the trade credit policy of the corporate aswell as the characteristics and production characteristics of each different business line.The high average collection period proves that the corporate is misappropriating capital

in payment, the ability to recover capital slowly

d Analysis of profitability (BEP, ROA, ROE, EPS)

- Basic earning power (BEP): This indicator demonstrates the relationship betweenprofitablity of asset when not take into account the original formation of capital andincome tax The higher the value of the indicator, the greater the efficiency of thecorporate

BEP = Total Average Asset EBITThis indicator shows how much profit before taxes and interests is generated forevery 1 dong of asset in the period

- Return on Assets (ROA): This indicator represents the relationship betweenprofitability and average assets The higher the value of the indicator, reflecting thegreater the profitability of assets.

ROA = Average Assets Net IncomeThis indicator shows how much profit after tax is generated by 1 dong of assetsinvolved in the business process

- Return on Equity (ROE): This indicator represents the relationship between theprofitability of the corporate and the equity and real capital of the corporate The higherthe value of the indicator, the greater the profitability of equity

ROE = Average Equity Net IncomeThis indicator shows how much profit after tax is generated by 1 dong of equityinvolved in the business process

For joint-stock companies listed on the stock exchange, credit officers need tofurther analyze the market value of the company to evaluate and use EPS indicators foranalysis This indicator, which measures the ability of an corporate to pay interest toshareholders, is often the basis for determining the added value of share capital Investorscompare the earning per shares with other investment areas to make a decision to investmore or withdraw investment capital in the business The higher this ratio, the better itwill be evaluated because then the earnings per share will be higher In calculating EPS, it

is more accurate to use the average number of shares outstanding during the period tocalculate because the number of shares frequently changes over time However, inpractice, people often simplify the calculation by using the number of outstanding shares

at the end of the period

EPS = Net income Shares Outstanding −Preferred Dividend

e Analysis of cash flows

From a banking perspective, when considering the effectiveness of corporatemanagement, banks need to analyze the statement of cash flows in relation to otherfinancial statements

The results of the analysis of the cash flow statement will show the movement ofcash flows in production and business activities, financial investment of corporates, theaverage amount of cash in the period This facilitates the bank to make a forecast of cash

flow, helping the bank calculate the time when corporates need to borrow capital andwhen corporates can repay debts

Analysis of the cash flows statement according to the indicators:

- Cash flow from operating activities: Reflects all cash inflows or outflows related

to the operating activities of the corporate

Cash flows from

Net cash flow from operating activities < 0: due to the opposite cause

Cash flows arising from operating activities are cash flows that are related to theactivities that generate the main revenue of the corporate It provides basic information toassess a business's ability to generate cash from its operations to cover debts, maintaindividend-paying activities, and conduct new investments without the need for externalfinancing The information from cash flows from operating activities, when used incombination with other information, will help users predict future cash flows fromoperating activities in the future

- Cash flow from investing activity

Reflecting all cash inflows or cash outflows related to investing activities of thecorporate

Cash flows from

Net cash flow from investment activities < 0 due to the reasons that new corporatesinvest in assets or invest outside the corporate, banks must consider the source of fund toinvest, if not from equity or long-term capital, it proves that the corporate invests withshort-term capital and thus has a lot of credit risks

In addition, it is necessary to assess the level of investment in fixed assets to see theexpansion strategy and future development potential of the corporate In addition, theassessment of the level of investment in financial assets and corporate capital

contribution also sees the potential of income from financial investment and corporatecapital contribution in the future of the corporate In addition, the correlation between thelevel of investment in fixed assets and financial investment also shows the investmentcapital allocation policy of corporates, the trend of shifting investment capital from themain production sector of corporates to the field of financial investment and vice versa.

- Cash flows from financing activities

Reflecting all cash inflows or cash outflows related to financing activities of thecorporate

Cash flows from

Net cash flow from financing activities > 0: due to increased loans, additionalcapital contribution

This cash flow relates to equity, borrowing, multiplying venture capital, issuingshares Assessing the correlation between cash inflows and cash outflows of each itemhelps credit officers identify how corporates tend to attract capital or repay loans and howthe capital structure of corporates changes

After assessing the cash flows in each activity of the corporate, the credit officerconducts an overall review of three cash flows:

Net cash flow

for the period =

Net cash flowfrom operatingactivity

+

Net cash flowfrom investingactivity

+

Net cash flowfrom financingactivityNet cash flows reflect the increase in cash during the period from money-makingactivities A corporate may have a very large cash flow but the ability to generate cashstill cannot meet the demand for cash outflows, so the net cash flow is negative, when thenet cash flow is constantly negative is the sign of the recession in financial capacity ofcorporates that are operating normally Conversely, when the net cash flows is positivethat are too large and continuous means the ability to generate excess cash in each periodrelative to the demand for payments, increasing the end-of-period reserves is also a sign

of cash stagnation It is necessary to assess the net cash flow increase from whichactivities, whether there is a clear target of making cash or not to give specificassessments

f Analysis of solvency

- The general solvency ratio reflects the relationship between the assets that thecorporate currently manages to use and the total amount of liabilities If this indicator isgreater than 1, it proves that the solvency of the corporate is relatively good; If thiscoefficient is less than 1 and gradually moving towards zero, which is a signal of the risk

of non-payment of debts of the corporate, the equity of the corporate decreases andgradually disappears, which can lead to the risk of bankruptcy

Solvency ratio = Total Liabilities Total assets

- Current ratio is the relationship between current assets and current liabilities

Current ratio = Current Liabilities Current Assets

Current assets include cash and cash equivalents, short-term securities for transfer,accounts receivable and reserves Current liabilities usually include short-term loans tocommercial banks and other credit institutions, supplier payables, tax payables, unearnedrevenue and other payables

The current ratio reflects the convertibility of current assets into money in a shortperiod of time (< 1 year) to secure the payment of current liabilities (with a period of < 1year) This indicator shows whether the corporate's ability to meet the short-term debts ishigh or low

The larger the current ratio, the better the solvency of the corporate, but the worsethe profitability of the business because the corporate has to trade off between solvencyand profitability At the same time, if the ratio is maintained too high, it will be judged asnot properly managing existing assets, if the corporate maintains this ratio too low, itbecomes the cause of cash flow problems Usually, the current solvency indicator of 2 isconsidered reasonable and accepted by the majority of creditors

- Cash ratio to more closely assess the payment situation of the corporate This ratioindicates the ability of the corporate to use cash and cash equivalents to pay off short-term debts This indicator is especially useful when assessing the liquidity of an corporateduring a period of economic crisis (when inventories are not consumed, accountsreceivable are difficult to recover) However, in a stable economy, using this coefficient

to assess the liquidity of a business can occur errors; because a corporate has a largeamount of unused financial resources, it means that the corporate uses capitalinefficiently

Cash ratio = Cash Current Liabilities ∧cash equivalents

- The times interest earned ratio (TIE) measures the degree of profitability fromusing capital to ensure interest payments to creditors Interest is a fixed expense, thesource to pay interest is gross profit after deducting selling expenses and administrativeexpenses Compare the source of interest payment and interest payable to know howmuch the corporate is ready to pay interest This indicator greatly affects the credit rating

as well as the interest rate on loans of the corporate

TIE ratio = Interest expense EBIT

- Cash affordability ratio:

CA ratio = Average Current Liabilities Net Cash Flow

This indicator reflects: By net cash flow generated in the period of the corporate,how many times the total average short-term liabilities can be repaid Net cash flowsreflect cash flows fluctuating in each period of the business through the difference of cashinflows with cash outflows If in each period of positive net cash flow, there will be anincrease in cash reserves for the next period, this increase is enough to repay the averagetotal short-term balance, ie the real solvency of the corporate is very high and safe forcreditors, whereas if the net cash flow is negative, it will cause great difficulties forcorporates when responding to demand for short-term payments due to the decline inend-of-period reserves, negative net cash flow is a bad sign for solvency

g Analysis of loan guarantee

General analysis for all debts of corporates including loans of credit institutions,financial institutions and other objects On the basis of the balance between capital, assets

in the balance sheet are analyzed, assessed and determined to qualify or disqualify ascollateral for loans both in terms of portfolio and value

When an corporate's loan debt is undersecured in combination with financialanalysis, credit officers must analyze and assess the safety and ability to recover debtsand analyze the following main contents:

Is the debt used by the corporate for the purpose of applying for loans or according

to the approved production plan or loan project?

Examine and compare in detail the assets and supplies and goods subject to whichthe bank has lent with outstanding balance loans under each credit contract andaccommodation bill

Analyze the assets and capital formed from the bank's debts, which assets of thecorporate, the actual use of asset, the circulation of these materials and goods and balancewith the outstanding debt, determine the balance that no longer has materials andcollaterals.

Collateral and pledge to secure bank loans The ability to secure loans secured byassets

In case the loan is not secured by assets, it is necessary to analyze and assesswhether the corporate still meets the conditions for borrowing under the creditmechanism

Analysis of the overdue debt situation, the borrower's ability to repay, the level ofrisk of loans

h Model of bankruptcy risk assessment of corporate

In various situations, when a corporate is in a state of financial distress, it can lead

to deteriorating events in the solvency of the corporate Especially for corporates that arehaving credit relationships with commercial banks, the possibility of corporatesbecoming insolvent with due debts is very large There are many types of risks that cancause corporates to fall into difficulties and financial distress such as: exchange rate risk,interest rate risk, credit risk, liquidity risk, investment risk The worst outcome isbankruptcy When an corporate goes bankrupt, it not only directly affects the corporateowner but also affects many other objects, of which commercial banks are the ones thatcan suffer the most So, how to detect early risks of corporates and detect early warningsigns of credit risks so that commercial banks can take timely risk management measures.Finding a tool to detect signs that foreshadow the risk of bankruptcy of corporates hasalways been a top concern of many management entities, including commercial banks.Many tools have been developed to do this, including Altman's Z-Score, which iswidely used around the world The Altman Z-Score was developed in 1968 by ProfessorEdward I Altman of New York University This model is considered to be a relativelyaccurate predictor of corporates that will go bankrupt within 2 years by considering theZ-Score value

Z-Score is an index that combines 5 different financial ratios with different weightsbased on MDA discriminant analysis Initially, Altman used 22 different financialindicators to calculate the Z-Score, then he further developed and shortened to use 5indicators Specifically, Z-Score is calculated with 5 financial indicators denoted fromX1, X2, X3, X4, X5 including:

X1 = Working Capitals/Total Assets (WC/TA)

X2 = Retain Earnings/Total Asset (RE/TA)

X3 = Earning before Interest and Taxes/Total Asset (EBIT/TA)

X4 = Market Value of Total Equity/Book Value of Total Liabilitites (MVE/TL)X5 = Sales/Total Asset (S/TA)

In addition, from an initial Z-index, Professor Atlman developed Z’ and Z’’ to beapplicable to each type and industry of the corporate

* For equitized corporates, manufacturing industry, Z-Score is calculated asfollows:

Z = 1,21X1 + 1,4X2 + 3,3X3 + 0,64X4 + 0,999X5

- If Z > 2,99: The corporate is in a safe zone, not yet at risk of bankruptcy

- If 1,8 < Z < 2,99: The corporate in the warning zone may be at risk of bankruptcy

- If Z < 1,8: The corporate is in a danger zone, the risk of bankruptcy is high

* By 1983, the Z-model had been modified by researcher Altman to Z’ and applied

to unequitized corporates, manufacturing industry

Z’ = 0,717X1 + 0,847X2 + 3,107X3 + 0,420X4 + 0,998X5

In particular, variables X are mostly kept the same as the Z model but variable X4 ismodified to suit the business characteristics of the corporate, X4 uses the book value ofequity, which is replaced by:

X4 = Book Value of Total Equity/Book Value of Total Liabilitites (BVC/TL)

- If Z’ > 2,9: The corporate is in a safe zone, there is no risk of bankruptcy

- If 1,23 < Z’ < 2,9: The corporate is in the warning zone, there may be a risk ofbankruptcy

- If Z’ < 1,23: The corporate is in the danger zone, the risk of bankruptcy is high

* By 1993, the Z model was further modified by Altman to Z’’ and applied to mosttypes of corporates In particular, variables X are mostly kept the same as the Z’ model,but variable X5 is not considered in the Z’ model to suit the business characteristics ofcorporates At this point, the coefficients of the variables from X1 to X4 all change fromZ'

The Z'' model is modified by Altman as follows:

Z’’ = 6,56X1 + 3,26X2 + 6,72X3 + 1,05X4

- If Z’’ > 2,6: The corporate is in a safe zone, there is no risk of bankruptcy

- If 1,1 < Z’’ < 2,6: The corporate is in the warning zone, there may be a risk ofbankruptcy

- If Z’’ < 1,1: The corporate is in the danger zone, the risk of bankruptcy is high

1.3 Factors affecting the corporate financial analysis in lending activities of commercial banks

1.3.4 Business factors

Business factors can come from objective or subjective In the process of the creditproposal, if the corporate does not cooperate, the bank will encounter difficulties inanalyzing and evaluating the FS of the corporate The difficulties that banks often faceare:

The FS provided by corporates is the first and very important factor determining theaccuracy of the analysis of borrowers’ FS These reports are not truthful, which will makethe FS analysis inaccurate with the existing reality, leading to wrong decisions in thegranting of credit by banks

The data and business situation of the corporate in the past and present are veryimportant for the bank, as it is one of the bases for considering the decision to grant credit

to the corporate If the corporate does not cooperate in providing information, the FSanalysis of the borrower at CB is no longer valid

Corporates that propose credit are different types of corporates, different businesssectors, different scale of operation These aspects all affect how the organizationanalysis the FS of corporates in credit activities at CB

The duration of loans proposed by corporates also affects the FS analysis ofborrowers Depending on the term of the loans classified as short-term or medium term,long-term, the bank will focus on different aspects of the financial situation of thebusiness, thereby focusing on the analysis of appropriate financial indicators Forexample, for short-term loans, credit officers will focus on solvency indicators, sourcesthat can repay loans in the short term For medium and long-term loans, credit officerswill focus on the profitability and operational efficiency of the corporate because thefactors that ensure the fulfillment of the corporate's debt repayment obligations to thebank are profitability and financial stability

Form of security for loans of corporates at banks: Loans secured by highly liquidassets, part of the appraisal, analysis and assessment of credit officers will be sorter incertain contents If the collaterals are low liquidity or the loans do not have collaterals,credit officers must comply with very strict regulations, make detailed assessments ofasset value, to minimize risks in the credit granting process

1.3.5 Banking factors