A study on enhancing the competitiveness of Vietnam bank for Agriculture and rural development

The report pointed out that the competitiveness o f Agribank, as other State- owned Commercial Banks SOCBs in comparision with joint stock commercial banks and foreign banks is weak.. 1.

ABSTRACT ii

TÓM T Ắ T iv

TABLE OF CONTENTS vi

MS I OF FIGURES AND TABLES viii

IN PRODUCTION .1

1 The thesis title 1

2 The thesis necessity 1

3 Objectives 2

4 Method 2

5 Data sources 2

6 Significance .3

7 Limitations .3

8 The thesis structure 3

INTRODUCTION 1

CHAPTER 1 THEORETICAL FOUNDATION OF COMPETITIVENESS OF AGRIBANK 4

1.1 Competition of Commercial banks 4

1.1.1 The concept of competition 4

1.1.2 Characteristics in competition of commercial banks 5

1.1.3 Elements affect competition of commercial banks 6

1.1.4 Competition instruments of commercial banks 9

1.2 Competitiveness of commercial bank 12

1.2.1 The concept of competitiveness 12

1.1.2.1 The concept of competitiveness of businesses 12

1.1.2.2 The concept of competitiveness of a commercial bank 12

T A B L E O F C O N T E N T S ACKNOWLEDGMENTS i

1.3 Value chain and the process to identify competitive advantage 13

1.3.1 Value chain 13

1.3.2 Process to identify sustainable competitive advantages 14

1.4 C'riteria and indicators for evaluation of a commercial bank' competitiveness 16

1.4.1 Financial capacity 16

1.4.2 I luman resources 18

1.4.3 Technological capacity 20

1.4.4 Products and serv ices 21

1.4.5 Marketing and Sales 22

CHAPTER SUMMARY 23

CHAPTER 2 THE COMPETITIVENESS OF AGRIBANK 24

2.1 The development of the Vietnamese banking industry 24

2.1.1 Banking system in Vietnam 24

2.1.1.1 State Bank of Vietnam (Central Bank) 24

2.1.1.2 State-Owned Commercial Banks (SOCBs) 25

2.1.1.3 Joint Stock Commercial Banks (JSCBs) 26

2.1.1.4 Foreign Owned Banks (FBs) 28

2.1.2 The competition of banking system in Vietnam 28

2.1.3 The local commercial bank system and the issue of international integration 30

2.1.3.1 The schedule of integration of the local banking system 30

2.1.3.2 Commitments on the opening of the banking sector in integration process 31

2.1.3.3 Achievements of and challenges facing the banking sector 32

2.2 The competitiveness of Agribank 36

2.2.1 An overview of the incorporation and development of Agribank 36

2.2.1.1 Commencement 36

2.2.1.2 Milestones 37

2.2.2 The status of activitiesof Agribank 39

2.2.2.1 Major products of Agribank 39

2.2.2.2 Business performance in 2008 40

2.2.3 The competitiveness of Agribank 47

2.2.3.1 Agribank "s SWOT analysis 47

CHAPTER SUMMARY 67

CHAPTER 3 RECOMMENDATIONS FOR ENHANCING THE COMPETITIVENESS OF AGRIBANK 68

3.2 Agrihank's development orientations until 2015 70

3.2.1 Agribank's development targets until 2010 and the vision for 2020Error! Bookmark not dcf 3.2.2 Application of the SWOT model for enhance of competitiveness 72

3.2.2.1 Promotion of strengths 72

3.2.2.2 Mitigating weaknesses 72

3.2.2.3 Seizure of opportunities 73

3.2.2.4 Warding off threats 74

3.3 Recommendations for enhancing Agribank's competitiveness 75

3.3.1 Strengthening of financial power 75

3.3.2 Completion and synchronous development of Information Technology for the whole system 75

3.3.3 Continued consolidation and promotion of HR 76

3.3.4 Diversification of traditional products and development of new ones 77

3.3.5 Improvement of service quality 78

3.3.6 Completion of distribution channel system 79

3.3.7 Improvement of Promotion and Advertisement 80

3.3.8 Additional recommendations to the Government and the SB V 81

CHAPTER SUMMARY 82

CONCLUSION 83

BIBLIOGRAPHY 84

APPENDIX 85

G L O S S A R Y O F A B B R E V I A T I O N S

Agribank Vietnam Bank for Agriculture and Rural Development

BIDV Bank for Investment and Development o f Vietnam

SCB : Saigon Thuong tin Joint Stock Commercial Bank

Sacombank

Techcombank Technology and Commerce Joint Stock Commercial Bank

VIETINBANK Industrial and Commercial Bank o f Vietnam

Figure 2 The basic model of Micheál Porter's value chain 13 Figure 3 Overview of Opportunities and Threats 14

F igure 4 Overview of The competitiveness of Agribank 47

LIST OF FIGURES

Figure 1 Elements affect competitiveness of commercial banks 8

LIST OF T A B L E S

Table 2 -1 Market share of SOCBs 26

Table 2-2 Customer segments served by types of banks 29

fable 2-3 Agribank' financial status in the years 2004-2008 40

fable 2-4 Agribank's structure of deposits in the years 2004-2008 41

Table 2-5 Agribank's break-down of deposits by economic sectors 42

fable 2-6 Status of lending by economic sectors in the years 2004-2008 44

Table 2-7 Owners' equity and total assets of CBs as at Dec 31st 2008 53

Table 2-8 Owner ‘s equity scale of some Commercial banks in the region 54

Table 2-9 ROA, ROE of CBs in 2008 55

fable 2-10 CAR and ratios of NPLs of CBs in 2008 55

Table 2-11 Local CBs with foreign-held stakes 57

Table 21 2 Changes in the market share of capital mobilization of local CBs in the 2004 -2008 period 57

fable 2-1 3 Changes in the market share of credits of local CBs in the 2004 -2008 period58 Table 2-14 Market share of Vietnam's major banks in 2008 58

fable 2-15 Sustainable competitive advantage of AGRIBANK 63

Table 2-1 6 The competitiveness of AGRIBANK in comparision with other banks 64

Table 3-1 Factors to be adopted by CBs in the new trend o f com petition 69

T A B L E S Table 1-1 Owner's equity of some of the world' leading banks in 2008 16

LIST O F C H A R T S

Chart 1 Agribank's break-down of deposits in the year 2008 by economic sectors 43Chart 2 The break-down of Agribank's loans by economic sectors in the years 2004-2008 44Chart 3: International Settlement throughput in the years 2004-2008 46

I N T R O D U C T I O N

1 The thesis necessity

Finance and banking arc always considered to be the bone o f one country ‘s economy The rapid development o f banking in Vietnam has demonstrated that banking is still a "fertile land" It has great potential and creates many opportunities and challenges as well to investors In the intergration process, all o f the Vietnamese banks have to exploit their intrinsic power and develop to compete with many and many huge competitors in conformity with international standards

The report pointed out that the competitiveness o f Agribank, as other State- owned Commercial Banks (SOCBs) in comparision with joint stock commercial banks and foreign banks is weak Agribank is one o f the banks with largest total assests but gains only a small market share, irrelative with its potential

To enlarge market share and win the higher market position, Agribank is required to implement growth strategy by restructuring and investing in strengthening o f financial power, completion and synchronous development of Information Technology for the whole system, continued consolidation and promotion o f HR and diversification o f traditional products and development of new ones

Finally, many graduation thesis on Agribank have been made but they are focus only on one problem and not too well schooled So, the author want to provide an overall picture o f the competitiveness o f the Vietnamese State Owned Commercial Banks in general and Agribank in particular

2 Objectives

The main objectives o f the thesis are to (a) review the theory o f competition, (b) provide an overv iew o f the Vietnamese SOCBs and the competition in banking industry, (c) present Agribank and analyze its business environment to point out Agribank's current strengths along with weaknesses, and (d) select the most

appropriate solutions to enhance the competitiveness o f Agrihank in the integration process.

3 M ethod

Case study method has applied in the thesis to enhance the competitiveness of Agribank The thesis has been finished hv combining literature and pratice through three major steps:

First, the theories o f competition are reviewed The study focuses on strategic analysis process and criteria for evaluation o f CBs' competitiveness

Second, based on the research o f banking industry in Vietnam, key factors that influent to a bank's activities and are identified

Finally, the case study of' Agribank is analyzed, which combined at desk research, interviews with some key managers This analysis is the basis o f suggesting recommendations to enhance competitiveness o f Agribank

4 Data so u r ce s

The main sources which theoretical issues and secondary data collected are books, newspapers, internal and external reports and internet The primary data was collected by interviewing both Agribank managers and operational officiers Finally, my personal experience in banking industry, especially in Agribank Hanoi plays an important role in performing this thesis It provides me a throughly understanding o f part icular issues in the Vietnamese banking industry

Providing the theory of competition, competitiveness and a throughly understanding o f the impacts o f business environment to banking industry, the thesis is significant in enhancing the competitiveness for Agribank This theoretical approach and can be applied in cases o f other SOCBs

I he major competitors of Agribank considered in the thesis are other SOCBs, JCBs Although VCB and Vietinbank has equiti/ied but the state still gains more than a half o f share Thus, they can be considered as SOCBs Among JCBs, four banks - ACB Techcombank, Eximbank and Sacombank - had been chosen to compare with four largest SOCBs (Agribank VCB Vietinbank and BIDV) because

o f their largest total assets and maket share Finally, the operation o f these banks is retail banking, not investment banking and other financial services

The thesis is presented into three chapters, not including the introduction part and the conclusion part

Chapter 1 deals with the theoretical framework for competition and competitiveness o f a commercial bank

Chapter 2 provides a general overview o f Vietnamese banking sector, and status o f Agribank ‘s competitiveness in the integration process The chapter also presents Agribank and analyzes the environment, industry to works out opportunities and threats Agribank might face along with its strengths and weaknesses

Chapter 3 Solutions and recommendations to enhance the competitiveness o f Agribank are also suggested in this chapter

Business environment or influencing factors changes more and more rapidly Technological advances, customer's lifestyle, macroeconomic policies and the international economical integration.etc creates both opportunities and challenges to the banking sector in general and Agribank in particular The thesis could be more throughly if further research with more competitors such as other joint stock commercial banks and foreign banks be undertaken

CHAPTER 1.

THEORETICAL F O U N D A T IO N OF THE COMPETITIVENESS OF COMMERCIAL

BANKS

1.1 CO MP ETITION OF C O M M E R C I A L BANKS

1.1.1 The concept of competition

Competition is a symbol attached to market economy; it only appears in conditions o f market economy Nowadays, most nations recognize that competition

is a market force to promote production and business development and increase labor productivity, effectiveness o f organizations; it is also an important element to clean up social relations Results o f competition will define position, and decide firm existence and development o f each organization Therefore, both organizations try their best to find out a suitable strategy to win the competition

In the 20th century, many competition theories were introduced, including those by Michael Porter, J.B Barney, P Krugman, etc Out of those, Michael Porter's "competitive advantage" and “comparative advantage'’ theories were notable ones He argued that competitive advantage was the intrinsic power o f a business or a nation while comparative advantage was represented by natural resources, labor and environmental conditions which facilitated the business or nation in production as well as trade Michael held that competitive advantage and comparative advantage were closely linked and mutually supportive with competitive advantage developing on the basis o f comparative advantage and comparative advantage being promoted thanks to competitive advantage 1

As a result o f competition, actors identify their strengths, weaknesses as well opportunities and threats at present and in the future, thereby adoting an appropriate course of action when taking part in competition

1 Micheál Porter (1996), "Competitive strategypage 30-3 1

Competition is thus a rivalry between individuals, groups and economic entities with similar functions via actions, efforts and measures designed to prevail

in a race and to achieve their targets These targets may include market share, profit, safety, or reputation, etc

However, not all acts o f competition are healthy, perfect and help actors acquire their desired outcome In practice, in order to gain an upper hand in their business, actors have gone to unhealthy lengths to harm their opponents Competition itself is not a mutual destruction but its outcome is totally opposite

1.1.2 Characteristics in competition of commercial banks

The same as any kind o f unit in the market economy, commercial banks always face keen competition, not only from other commercial banks, but also from all credit organizations operating in the market with their aims is to contend for customers, increase credit market share, as well as supply the economy with more banking service However, in comparison w ith other competition o f other economic organizations, competition among commercial banks has specific characteristics as follows:

CB is a special type o f business that trades in money with the ultimate goal o f seeking profits A CB also attempts to take all possible measures to provide high- quality products and services to customers at the most competitive pricing and expenses while striving to ensure the utmost accuracy, reliability and convenience

to attract customers and expand market share Therefore, competition in commercial banking is also a rivalry to win customers, backed by the ability o f CBs to meet customers' demands CBs seek to create competitive advantages, increase profitability, promote reputation and strengthen their standing by offering high- quality and differentiated products and services

Given the specificity o f the banking industry, competition in this area contains certain unique features:

- First, as the banking industry is directly linked to all sectors and areas o f the

as well as an extensive and inter-connected network of outlets in order to serve customers in various areas.

- Second, as a money-related business, banking operations require:

+ The qualifications o f banking staff, represented by knowledge, professionalism, operational expertise, advisory ability and communicative skills; these are the most important factors that determine the quality o f banking products and services

+ Prompt, accurate, convenient, confidential and highly secure services; this is impossible without a solid infrastructure and a modern technological system In addition, due to the huge amount o f customer data, CBs are supposed to have an adequate information storage and management system while ensuring convenience

in retrieval

CBs are at the same time supposed to attach importance to the promotion o f reputation and brand

- Third, in order to earn out monetary business, a CB is to act as a capital-raising

intermediary The bulk o f a bank's capital resources come from deposits and only a minimal portion is contribution from equity As such, a bank is required to possess managerial professionalism and powerful financial capacity as well as an ability to effectively control and prevent risks if it wishes to be profitable

- Last, the business material o f a bank is money, a tool employed by the

Government for the purpose o f macro-economic governance That’s why the operations of CBs are under a tight control o f the Government In addition to general provisions o f the law, CBs' business activities are also governed by a separate legislation applicable to CBs and as well as the SBV’s monetary policy

1.1.3 Elements affect competition of commercial banks

■ Objective elements: There are four elements affect competitive capacity o f a commercial bank, these are objective elements and they can be described in below figure 1

S Factors fro m commercial hanks, which have just participated

in the market: Commercial banks have just entered in the market with important advantages such as: (i) open new potential; (ii) have motive and desire to take over

market share: (iii) refer to experience o f current commercial banks; (iv) have full statistics and forecasts about the market, etc Like this, regardless o f strength o f a new commercial bank, current commercial banks have seen risk o f shared market share; besides, new commercial banks have strategies and strengths that current commercial banks cannot have information and strategies to tackle.

S Factors are rivals o f current commercial bank These are

standing worries of commercial banks in doing business Competitors affect business strategies o f commercial banks in the future Additionally, present o f competitors promotes banks to pay attention to renew technology, upgrade quality

o f services to win the competition

S Pressure o f customers One o f important characters o f bank

industry is that all producing or consuming individuals and organizations, even if other banks both can be buyers o f banking services, both can be seller o f banking services for banks Sellers who use way o f consigning money, opening an account

or lending want to receive higher benefits; meanwhile, buyers (borrowers) want to pay smaller fees Therefore, banks have to face contradiction between effective operations and customers keeping as well as having capital as cheap as possible This causes many difficulties for banks in direction as well as operation mode in the future

S Appearance o f new services Appearance o f many intermediate

financial organizations threat advantages o f commercial banks when providing new financial services as well as traditional services These intermediaries provide customers different products and create more diversified choices for customers, more extensional bank market This will reduce development speed o f commercial banks, reduce market share Nowadays, people said that, when commercial banks are stronger due to practice in competing, commercial bank system would be stronger and have better rally after shocks o f the economy

co m m e rc ia l banks

v

Figure 1 Elements affect competitiv eness o f com m ercial banks

* Subjective elements Besides objective elements affecting competitive capacity o f commercial banks, in fact, inner elements o f commercial bank system also affect competitive capacity o f these banks 1'hey include: (i) management capacity o f executive board o f the bank: (ii) capital scale and financial situation o f commercial banks; (iii) banking services supply technology; (iv) quality o f bank officers; (v) organization structure; (vi) reputation and prestige o f commercial banks;

Besides, characteristic o f products and characteristic o f customers are elements o f commercial banks that rule competitive capacity in operating o f commercial banks

As follows:

S Characteristic o f the products As shown above, competition in operations o f commercial banks is ruled by characteristics o f their operations The main product used in operations o f commercial banks is money, that is social and high sensitive product, only a small change (interest change) can affect operations

o f commercial banks in particular and social activity in general This characteristic leads to keen competition among commercial banks Competition among commercial banks is synchronized drive o f banks in a field when supplying customers with high quality service in order to affirm position o f the bank in comparison with other banks in the same operation field This means that the high sensitive business product has upgraded competition in operations o f commercial banks

S Characteristics o f customers Customers o f commercial hanks are not loyally ones, they are easy to be attracted and to change dealing nexus Loyalty

o f customers depends on treatment o f commercial banks, and the most important element is direct interest gaining from dealing nexus with the bank Customers can immediately change nexus with the bank if they find out bigger benefit (to selling product) and lower interest (to buying product) Therefore, competition o f banks is also multiplied because customers are easy to change nexus w ith the bank

These above characteristics are considered elements o f commercial banks, which create high competition o f bank trading, since, contributes to create inner force for commercial banks If a bank can bring into play strength o f these above elements, and find out information about new rivals, be careful with current rivals, meet higher and higher demands, competition will be not concerned

1.1.4 Competition instruments o f commercial banks

■ Competing by quality

In the present modern economy, when science and technology develop very rapidly, products are more plentiful; it creates convenience for consumers to choose and put producers in front o f fierce competitive pressure and in order to win, producers have to research and apply many methods and different competitive instruments An important instrument, which is usually applied at present, is to upgrade quality o f services However, to some industries, “quality" has qualitative nature, not quantitative nature and it is defined by appreciation o f customers using that service Therefore, improving quality o f products means that gradually meet demands, requires o f customers

To commercial banks, in order to compete by quality, they have to build good technology strategies and human resource strategies, besides combining suitable market strategies and business strategics Only by doing so service products provided by commercial banks can meet right and full demands of customers

* Competing by price

Price reflects value o f the product; price plays an important role in decisions

o f customers To commercial banks, price is interest and fees applied to supply services In defining interest and fees, commercial banks always face paradox: if

commercial banks pay attention to competitive capacity to enlarge market share, they have to give out priority interest and fees for their customers; however, this will reduce income o f commercial banks, even if banks can make a loss 11' commercial banks only pay attention to income, they have to give out interest and fees which meet demands o f increasing income, however, this can lead to losing customers, reducing market share, because after all customers always pay attention

to supreme object in doing business in the market is to maximize benefits, to do so they need reduce input fees This means that competing by price is becoming poorest method, because it reduces benefits o f commercial banks From this paradox, assessing by market price will help commercial banks to keep customer, maintain and develop the market In fact, using price element to compete is only suitable when entering a new market and in order to well handle this instrument, commercial banks often introduce lower interest in comparison with interest o f rivals to attract customers and take over the market

Interest and fees are signal to reflect fluctuation o f the market, are parameter for commercial banks to catch liquidity o f customers as well as competitive capacity o f rivals in the market Therefore, defining interest in the market is very important, but inspecting feedback o f customers is very necessary for banks to introduce competitive interest and fees Sometimes, interest and fees o f commercial bank (inly bring about a small benefit, break-even, even if make a loss When they really scoop the market, it is the time for commercial banks to take back fees o f competition

■ Competing by distribution system

Consuming products is the last period o f business process Consuming products are non-price competition, and attracts customers Characteristics o f banking services are dying, they are hard to store, and so building distribution channel (sale network) becomes an important matter o f banks Distribution area is a direct mean to introduce services with customers, and helps banks to exactly understand demands of customer, in order to actively improve, complete their

se n ices, to create favorable conditions for providing sen ices to customers

In order to enlarge retail market share, banks develop distribution methods

w ith many se n ices:

* Traditional media distribution Including: (1) System o f branches; (2) Agency Banks (applied to commercial banks without branches).

* Modern distribution area Since 1980 modern distribution areas with many advantages are become common tendency Including:

(1) Branches are fully automated I his distribution area is fully implemented

by machines, under control o f electronic devices It has big advantages o f dealing fees and operational speed, to meet diversified demands o f customers

(2) Branches with little officers Branches with little officers have an important position in banking system, especially with mobile branches Advantages

o f those branches are low fees, flexible operation

(3) Electronic banking This distribution area uses telephone line or computers It supplies customers with many advantages, saving fees and time, operates at any time, in any place Dealings are implemented by electronic means including: (i) payment machines at sale places (EFTPOS), customers can rapidly pay by cards at sale places; (ii) Automated telling machine (ATM), operating 24/24 hour, provide customers services such as cash drawing, credit transfer, balance research and many other services;(iii) Tel Banking, by switchboard operators or voicemails, customers can easily operate with the bank

(4) Banks via internet It is divided into two types: (i) Banks via I.AN (local area network) Operation principle of this system is that customers have accounts at the bank, have computer connecting with the bank and registering with the bank in order to be provided access code and password Customers can use their computer

to access to file server o f the bank to do dealings, find information; (ii) Banks via internet This is higher level banking model Customers only have computer connected to internet and they can do dealings with the banks without coming to the bank Besides function o f account checking, customers can use many online services such as borrowing, buying insurance contracts, investing securities, transferring, open L/C, open guaranteed letters, etc

Besides competing by quality instrument, price instrument and well organizing service distribution network, commercial banks also apply non-price instruments to improve competitive capacity by promoting sale support (advertisement, promotion)

1.2 CO MP ET IT IV EN E SS OF C O M M E R C I A L BANK

1.2.1 The concept of competitiveness

According to the WEF’s report on global competitiveness (1997) competitiveness was understood as the ability o f a business to maintain its position permanently and willfully on the competitive market, ensuring a rate o f return which is required to finance the business's objectives while meeting its own additional goals.2 Competitiveness can be divided into three levels:

- National competitiveness: the capacity o f an economy to secure sustainable growth, magnetize investment, maintain socio-economic stability and improve people's living standards

- Corporate competitiveness: the capacity o f a business to maintain and expand its market share in both local and foreign competitive market Corporate competitiveness is indicated by a business's efficiency, profitability and acquired market share

- Product and service competitiveness: measured by the market share o f a product/service on the market The competitiveness o f a product/service depends on its competitive advantages including quality, uniqueness and technological content

L 1.2.2 The concept of competitiveness of a commercial bank

A commercial bank is also a corporate, thus the competitiveness of a commercial bank is the capacity o f a business to maintain and expand its market share in both local and foreign competitive market The competitiveness o f a commercial bank is indicated by a business's efficiency, profitability and acquired market share

http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness%20Report/index.htm

1.3 VALUE CHAIN AND THE PROCESS TO IDENTIFY COMPET ITIV E

A DV AN T AG E

1.3.1 Value chain

The term 'Value Chain" was used by Michael Porter in his book "Competitive Advantage: Creating and Sustaining superior Performance" (1985) The value chain analysis describes the activities the organization performs and links them to the organizations competitive position '

Value chain analysis describes the activities within and around an organization, and relates them to an analysis o f the competitive strength o f the organization Therefore, it evaluates which value each particular activity adds to the organizations products or services This idea was built upon the insight that an organization is more than a random compilation o f machinery, equipment, people and money

Primary Activities

ftvte- 1%5

Figure 2 The basic model o f Porter’s Value chain

’ http://w\vw.themanager.org/models/valuechain.htm

Only if these things are arranged into systems and systematic activates it will become possible to produce something for which customers are willing to pay a price Porter argues that the ability to perform particular activities and to manage the linkages between these activities is a source o f competitive advantage.

He distinguishes between primary' activities and support activities Primary activities are directly concerned with the creation or delivery of a product or service They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service Kach of these primary activities is linked to support activities which help to improve their effectiveness or efficiency There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.) The advantage of value chain is this model allows the firm to understand the parts o f its operations that create value and those that do not

1.3.2 Process to identify sustainable competitive advantages

P r o c e s s t o Id en tify S u s ta in a b le C o m p e titiv e A d v a n ta g e s

Figure 3 Process to identify sustainable competitive advantages 4

4 Robert K Hoskisson,Michael A Ilitt.R Duane Ireland, (2008), "Competing for Advantage", page 105-107

First Resources are a firm's assets, including people and the value o f its brand

name They represent inputs into a firm's production process, such as capital equipment, skills of employees, brand names, financial resources, etc

Resources can be devided into 2 types, tangible and intangible resources Tangible resources can be mentioned such as financial resources, technological resources, etc while intangible resources includes human resources, innovation resources, reputation resources

Second Capabilities are the firm’s capacity to deploy resources that have been

purposely integrated to achieve a desired end state Capabilities emerge over time through complex interactions among tangible and intangible resources and often are based on developing, earn ing and exchanging information and knowledge through the firm's human capital

Third, Core competencies are resources and capabilities that serve as a source o f a

firm's competitive advantage to distinguish a company competitively and reflect its personality They emerge over time through an organizational process o f accumulating and learning how to deploy different resources and capabilities Core competencies activities that a firm performs especially well compared to competitors and activities through which the firm adds unique value to its goods or services over a long period o f time Operationally, for a capability to be a core competency, it must be valuable and big gap or nonsubstituable from a customer’s point o f view; unique and inimitable from a competitor's point o f view Valuable capabilities help a firm neutralize threats or exploit opportunities Rare capabilities are not possessed by many others Costly-to-Imitate capabilities may be historical such as a unique and a valuable organizational culture or brand name It also may be social complexity such as nterpersonal relationships, trust, and friendship among managers, suppliers, and customers

Finally, a sustainable competitive advantage is achieved only when competitiors

1.4 CRITERIA AND INDICATORS FOR EVALUATION OF A

C O M M E R C I A L B A N K ’ CO M P ET IT IV EN E S S

1.4.1 Financial capacity

CBs' financial capacity is indicated by the following criteria

Charter capital

In theory, charter capital and owner's equity play a very important role in banking activities A large charter capital and owner's equity enables a bank to establish its market reputation and win public confidence Low charter capital means poor financial strength and inadequate resistance to risks

S Owner's equity

- Owner's equity scale

Statistic shows that, owner 's equity o f Vietnamese CBs is too low Vietnam Agriculture and Rural Development Bank with owner ‘s equity is considered the biggest one, but only about 400 millions USD, lower than CBs o f other countries (see Table 1 -1)

T able 1-1 O w n er’s equity o f som e o f the world' leading hanks in 2008

Unit: mil USD

Source: websites o f banks

- The ratio o f O wner's Equity/ Total assets

A bank's equity is also measured using the ratio o f Owner's Equity/ Total assets This ratio o f the Vietnamese banking industry is approximately 8.9% in 2008 and being accelerative

In accordance with international standards, a bank's liquidity is measured by the ratio of currents assets to current liabilities This criterion gauges a bank's ability to meet customers' demand for cash As depositors' demand is limited, the bank's reputation will suffer remarkably and may end up in bankruptcy

A bank's liquidity is usually measured using the following ratios:

S Loan/Capital The lower this ratio should be the better liquidation o f

the bank and vice versa According to Report on Analysis o f Banking

Industry o f Vietnam, this ratio should be 70% to 80%.

S Liquid assest/ Total assest The higher this ratio should be, the better

liquidation o f the bank and vice versa According to Report on Analysis o f Banking Industry o f Vietnam, this ratio should be 30 to 40%

Profitability is a measure o f a C B 's business performance It is analyzed using the following parameters:

ROE (portion o f profit per capital) demonstrates the ratio o f return to a single dollar

o f equity This index o f CBs o f other countries is always over 15 %

ROA indicates the rate o f return on total assets and provide an indicator o f the bank's governance and its ability to convert assets into net income

- ROA index o f banks o f Asia-Pacific region (including 52 commercial banks o f 10 countries) is 0.94%

S R O E = After tax income/ Equity (Return on Equity)

S ROA = After tax income/ Total assets (Return on Assets)

- ROA index of'banks of new-developed countries (including 14 banks o f Thailand Indonesia Malaysia and Philippines) is 0.77 %.

A bank's exposure is usually measured using the following two indicators:

•S CAR capital adequacy ratio

CAR is according to the Basel Credit Monitoring Committee, the ratio of equity capital to risk-weighted assets The CAR by international standard o f BASHL 1 must he at least 8% and o f BASEL II 12% The higher CAR the greater the trust placed by customers in the bank That is a condition designed to ensure safety for banks' operations

According to Basel standard, most o f commercial banks in Vietnam do not meet (CAR index only gain approximately 5%) meanwhile, this index o f most o f commercial banks in the region is over 12% For example: Average CAR index o f banks in ASIA- Pacific region (including 52 banks o f 10 countries) is 13.1%; o f banks of new developed Asian countries (including 14 banks o f Thailand, Indonesia Malaysia and Philippines) is 12.3%

S Credit quality (ratio ofN P L s)

Credit quality is chiefly demonstrated by the ratio of pastdue debts to total loan amount A low ratio o fN P L s shows that a bank's credit quality is satisfactory with robust financial health, and vice versa

The ratio o fN P L s is considered good if it is lower than 1%

1.4.2 Human resources

In a service business like CBs, human resources play an important role in determining product and service quality A bank’s employees are the conveyor o f the feelings o f its products and serv ices to customers and create confidence in them That is also an important requirement for bank staff in securing market share and increasing business performance for the purpose o f competitiveness improvement Competitiveness with respect to human resources must be considered both in terms

* HR quality

I he quality o f human resources is demonstrated by such norms as

^ Employees' qualifications include education and soft skills such as

language proficiency computer literacy communication, presentation, decision-making and trouble-shooting skills These qualifications are important as it demonstrates employees' ability to learn and understand their job in order to do it properly

The table below shows labor structure o f commercial banks in both developed anddeveloping countries

Table 1-2 Labor structure of banks o f some countries in 2008

UK Japan Germany Malaysia Thailand VietnamPercent of university level

in total labor forces

S Executives' governance skill and employees’ operational skills: these

are the key factors that determine service quality and help banks win customers CBs need a team o f talented governors to operate efficiently together with qualified staff in order to win customers'confidence and create a good impression on them

The leadership o f a CBs can be considered on some major aspects

S The top bank managers have vision and business strategy for theirbanks in both short - term and long - term

S Corporate governance is good or bad Year-on-year growth and the

ability to overcome obstacles are evidence o f a bank's governance capacity

S Top management and BoD members tend to have broad political and

business relationship networks or not

^ Appointment of management and BoD based on professional

qualification or not etc

If a bank has good HR policies, its will attract and maintain talent people and vice versa In a competitive business environemnt, especially in banking industry, brain drain is very popular Banking officers wil work for the bank has better HR policies (recruiment, education & training, promotion, etc) HR policies and employee loyalty has closely relationship and determine the stability o f each organisation

Thus, the quality o f human resources play a decisively important role in determining the competitiveness of a CB Possessing a qualified team o f officers who are creative and capable o f implementing strategy enables a bank to operate sustainably and stably A quantitatively sufficient and qualitatively adequate staff is

w ithout doubt an indicator o f a CB's competitiveness

1.4.3 Technological capacity

I he application o f technologies is one o f the determinants o f a CB's competitive power Today, CBs are developing technology-intensive products and using technologically advanced products as a measure for competition, especially in settlement and other e-banking products

According to account and experience of foreign banks, information can reduce 76% o f banking fees Development o f information, communication, net technology and digital technology create basis for development o f electronic, automatic banking services such as: Home banking, internet banking, payment cards, electronic dealings, etc, and contribute to modernize banking operations However, this field require a big investment, for example, in order to build a system of management information for a State-own commercial bank, it has to pay 500-600 billions VND This is insufficiency o f Vietnam banking system because o f low charter capital

^ Connectivity among banks about technology solution is high or not Whether

banking services arc plentiful, convenient and attractive; business size coincides with advantages o f foreign banks (international payment, trade finance, project investment, etc) or not

^ Whether management mechanism and banking observation system are suitable with international practice, in active to strictly obey the law in banking operations and safety o f banking system, especially early warning system o f risks o f banking operations

^ Security in banking operations.

At the forum "Banking Vietnam”, it was asserted that the employment o f information technology was a principal tool to determine the competitiveness of CBs The development o f E-banking products and services is a fashionable trend and technology presents the differentiating point in the business o f CBs As ACB has demonstrated, good information technology is a key competitive advantage in the Vietnamese bank sector It provides the platform for offering and managing a wider array o f products and services to customers (VinaCapital, 2008)

1.4.4 Products and services

* The diversity o f products and services

Banking products and services are generally without differences and can be easily imitated Therefore, CBs promote their competitiveness not only with traditional products and services but also w ith unique and tailored ones

A bank that can differentiate its products on the basis o f traditional ones will diversify its portfolio and meet a wide variety o f customer demands, thus easily occupying market share and enhancing competitiveness

In addition CBs also offer supplementary products and services to attract customers: these may include periodical account statements, financial advisory, etc

■ Fees

Fee o f products and services is higher or lower than those o f competitiors

1.4.5 Marketing and Sales

■ Distribution Network

• Reputation

A C B ’s activities arc closely associated with its reputation and consumers' confidence is a factor that determines the survival o f CBs due to the chain effect of consumer morale

Therefore, the reputation and prestige o f a CB are an extremely great internal strength which may lead the CB either to success or failure A C B ’s growth of market share, expansion o f market share and increase o f income depend significantly on its reputation

The reputation o f a CB, however, is only established after a relatively long period o f time via the form o f ownership, staff, the application o f high-tech products, the satisfactory and sufficient accommodation o f consumers' demands Thus, in order to establish its reputation on the marketplace, CBs must make efforts and constantly improve products and services to meet customers' increasing demands

• C 'ustomer services

• Promotion and Advertising

CHAPTER SUMMARY

Chapter I provides an overview o f the competitiveness o f businesses in general and CBs in particular, the criteria and indicators to assess the com petitiveness o fC B s

on the basis o f their characteristics and the factors affecting competitiveness

Besides, Chapter 1 also contains a look back on the local fin a n cia l market a fter one year after WTO entry.

This theoretical rationale is a premise to analyze the competitiveness of Agribank in Chapter2, followed by a number of proposals to enhance the institution's competitiveness

in Chapter 3

CHAPTER 2.

T H E C O M P E T I T I V E N E S S O F A G R I B A N K

2.1 T H E D E V E L O P M E N T O F T H E VI ET N AM ES E B A N K IN G I N DUS TRY

After over a decade o f financial sector reforms, the Vietnamese banking sector

is perceived as still weak and inefficient by global standards Legislative issues are ambiguous and regulations poorly enforced The bank sector still suffers from a substantial amount o f non-performing loans However, on a more positive note, recent developments suggest that the reform process may be accelerating and will,

in the foreseeable future, achieve harmonization with global standards

The Vietnamese banking industry can currently be divided into four categories: 7 state-owned commercial banks (SOCBs), 39 joint stock commercial banks (JSCBs), 40 foreign owned banks (FBs), and 6 joint venture banks (JVBs) Because JVBs have a market share in terms o f lending or deposit o f below 2 percent and because they exhibit the characteristics o f both partnering banks, it was decided to focus the research on the Vietnamese (SOCBs and JSCBs) and foreign owned bank (I Bs)

2.1.1 Banking system in Vietnam

2.I.I.1 State Hank of Vietnam (Central Bank)

The first wave o f reform and liberalization o f the financial sector in Vietnam took place between 1988-90 One o f the most important developments that emerged was the creation of a two-tiered banking system consisting o f the State Bank o f Vietnam (SBV) as the central bank and supervisory institution (tierl) and

an operating system (tier 2) Similar to central banks in other markets, the SBV is responsible for monetary policy and the regulation o f the banking system While legislation is in place to guarantee the independence o f the central bank from political influence, according to many multi-national agencies (i.e.World Bank, IMF etc.) the central bank has little if any independence The general view is that

the SBV is politically and operationally dependent on support from government agencies.

I he government still exerts strong control over the banking sector in two ways, f irstly, directly through various regulations and restrictions which govern how they conduct business and secondly by strictly licensing the type of businesses they can enter Also indirectly, through the interference o f a myriad o f agencies and ministries, both local and national, who want to have a say in how scarce credit resources are allocated

2.1.1.2 State-Owned Commercial Banks (SOCBs)

In Vietnam there are seven state-owned commercial banks (SOCBs) Prior to the reforms o f 1988-90, the SOCBs were departments o f SBV, and thus primary vehicles o f government policy lending decisions

These institutions dominate banking in Vietnam (estimated 70-75% share o f the bank sector assets), with over 1,200 branches across the country

They act as an oligopoly at the top o f the Vietnamese banking industry In

1988 all o f these banks which have been departments o f the central bank, broke away to form independent banking entities Despite this "paper'’ separation, in practice they remain tightly controlled by the central bank

In addition to the four main policy lenders, the Vietnam Bank for Social Policies (VBSP) previously know as the Vietnam Bank for the Poor, was established to provide loans to poor households especially in rural areas The rural sector is als o serviced by the People’s Credit Funds (PCFs) These lending institutions were established in the early 1990s by the SBV following the collapse

o f a raft o f rural credit co-operatives There arc approximately 1.000 PCFs operating in Vietnam now and they control around 1-2% o f the total bank sector loans and deposits (Source: SBV 2008)

As their names suggest, these four banks were focused on specific segments o f the economy While these sector constraints have been abolished, each

No Type of bank Market share

(Source: SBV, Report on activities o f commercial banks in 2008)

Historically the state-owned hank sector was used as an instrument o f public policy and to promote social and political objectives as opposed to commercial objectives The four large SOCBs slowly began evolving from specialized policy lending vehicles to more commercially orientated financial intermediaries over the last 10-15 years Their policy lending past has burdened them with high levels o f non-performing loans Although official numbers suggest

a system NPL ratio in the mid-teens, it is widely believed that the level is closer to 30%, with the vast majority o f the bad loans concentrated in the SOCBs (VinaCapital, 2008)

2.1.1.3 Joint Slock Commercial Banks (JSCBs)

The establishment o f JSCBs is another important development that accompanied the initial liberalization o f the financial sector There are about 40 such banks at present

S Wide range o f products and services

.ISCBs offer the full range o f banking products and services to corporate and retail customers.

S Mixed ownership structure

Hie ownership structure o f JSBs is mixed, ranging f rom purely private organizations to being jointly owned by state owned enterprises (SOEs), private groups and individuals

S Low N P is

None o f JSCB s are saddled w ith hiah levels o f bad debts

S Low capital base

Average capital is about US$ 20 million per bank so they cannot provide large loans In the past two years JSCBs have made a concerted effort to increase their chartered capital by issuing shares

S No specific positioning

The private sector banks are competing fiercely and many o f them are choosing identical strategies Resources are spread too thinly as they try to compete across the broadest range o f businesses

The result is thin margins and meagre returns

S Poor IT infrastructure

There is a great need for spending on IT to build core banking system, risk management and ATM software

'S Weak operational and management controls

It is worth mentioning that there is a big difference in term o f chartered capital, market penetration, service quality, etc between the top tier (Asia Commercial Bank Sacombank) and the rest

The top tier are expanding their branch networks and loan portfolios aggressively, boast good management and have a clear product strategy to differentiate them from the competition The second tier, which includes banks such

recent shift o f strategy towards the retail market is seen as a significant positive move while EAB is leaning in the direction o f SME lending.

Smaller JSCBs such as VIB deserve an honorable mention because of their pursuit o f niche strategies with strength in SMI: lending and retail loans respectively (VinaCapital 2008) Other smaller JSCBs are mainly limited to retail banking services such as remittances and collection/spending under customer authorisation They are largely locked out of the commercial lending market due to lack o f capital

Despite a round o f restructurings and mergers in 1999-2001 JSCBs are still very fragmented The number o f JSCBs was reduced from 51 to a total o f 36 banks currently in operation

2.1.1.4 Foreign Owned Bunks (FBs)

2.1.2 The competition of banking system in Vietnam

Compared to other banking markets around the Asia Pacific region, the level

o f competition within the Vietnamese banking sector is relatively low This situation is largely attributable to the dominance o f the four large SOCBs which, between them, control 75 - 80% o f total bank sector assets (2008)

While the growth o f the jointstock banks since the beginning o f the 1990s has been rapid, their growth has been constrained by the segmentation o f the market - the markets for SOCBs and JSCBs are apparently separated in terms o f deposits and borrowers

Another factor contributing to the lack o f competition amongst financial institutions has been the difficultly in introducing new products and services because the approval process o f new products by the central bank can take from 3 months to over a year

companies

empoyed

self-customers

1customers

Corporate customers Traditiona customers

Customer segments

Table 2-2 Customer segments served by types of banks 5

Tran Bao Toan, 2008, “Analysis of the Vietnamese banking sectors with special reference to

Corporate Governance ", page 20-21

Constraints placed on the level o f access and scope o f operations o f foreign banks has also impeded the level o f financial sector competition

I he recent investments made and technical assistance agreements signed by StanChart, A N / and HSBC in joint-stock banks between 2007 and 2008 should also accelerate the level o f competition in the banking sector, although at a comparatively modest pace.

One area where reforms designed to improve competition are unlikely to change in the intermediate term is the Vietnamese rural financial sector - a key area given that approximately 80% o f the population lives in rural areas

The absence o f competition to Agribank is primarily due to the very low profitability o f this market as a result o f the substantial state subsidies given to these banks to cover their operating and financial costs In light o f a quasi-monopoly and very thin margins o f these banks, there is little incentive for innovation or for Agribank to improve their performance

The banking sector faces several key challenges until the market opening in

2010 The most important o f these is the ability to compete with the “ foreign invasion" expected after 2010 Much needs to be done to improve the competitive strength o f the state-owned and private sector banks in the meantime

2.1.3 The local commercial bank system and the issue of international integration

The country is to proceed with the opening o f the banking sector as well as legal forms to IJS financial intermediaries, working toward virtually equal treatment for US and local financial intermediaries by 2010 Concretely, by 2010, the local financial market will basically meet the requirements o f the Vietnam-US Bilateral

I rade Agreement (BTA)

- No cap on the number o f banking service providers;

- No cap on the total value o f banking service transactions;

- No cap on the total number o f operations or total number o f banking services;

- No cap on the number o f recruitments by foreign financial institutions;

- No cap on the percentage o f foreign shareholding;

- 1 he commencement o f local banking institutions on the international financial market;

In this stage, the SBV will continue the formulation and completion o f the legal environment for banking activities to ensure compatibility with international standards and practices As for local Cls the SBV will monitor and promote their growth in terms of:

- Capital structure and risk provisions;

- Organizational structure;

- Expertise;

- Equipment, technology;

- Inspection and monitoring as per Basel principles;

- Improved operational efficiency;

Local Cls are required to have a plan to increase legal capital in accordance with Decision N° 141/2006/ND- CP o f Nov 22nd 2006 by the Government

2.1.3.2 Commitments on the opening o f the hanking sector in integration process

- Foreign credit institutions are allowed to establish their commercial presence in

Vietnam in such forms as representative office, foreign bank's branch, joint-venture and 100% foreign-owned bank and finance leasing company From April 1st 2007, 100% foreign-owned are allowed in Vietnam

- Foreign credit institutions operating in Vietnam are allowed to provide most o f the banking services covered by the appendix on banking and financial services to GATS including credits, deposits, finance lease, forex trading, money market instruments, derivatives, monetary brokerage, asset management, settlement, financial advisory and information services

- Branches o f foreign banks are entitled to receive unlimited VND deposits from legal entities The raising o f VND deposits from Vietnam natural persons will be eased within 5 years along the following schedule:

Jan P 1 2008: 800% o f granted legal capital

Jan I "1 2009: 900% o f granted legal capital

Jan 1sl 2010: 1.000% o f granted legal capital

Jan 1st 201 1 : Full national treatment

- Branches o f foreign hanks are not allowed to open outlets outside their head office but will be entitled to full national and most-favored nation treatment in the establishment and operation o f ATMs;

- Foreign credit institutions will be allowed to issue credit cards on the basis o f national treatment from the date o f Vietnam's entry into the WTO;

- A foreign commercial bank may at the same time open a 100% foreign-owned bank on the basis o f safety rules and the meeting o f such requirements as CAR liquidity and corporate governance In addition, criteria for branches o f foreign banks and 100% foreign-owned banks will be applied together with a management mechanism applicable to branches o f foreign banks including requirements on CAR

in accordance with international generally accepted practices;

- Foreign banks may enter into joint ventures with local partners but their shareholding shall not exceed 50% o f the charter capital o f the joint-venture bank; the total shareholding o f foreign institutions and individuals in each local joint stock commercial bank shall not exceed 30% of' the charter capital o f such local bank, unless otherwise provided for by Vietnamese law or authorized by the competent authority;

- In order to attract major and reputable banking institutions into the local market, the commitments also cover requirements o f total assets applicable to foreign credit institutions wishing to establish commercial presence in Vietnam (this commitment has also been institutionalized under Decree 22/ND-CP issued on Feb 28th 2006)

2.1.3.3 Achievements of and challenges facing the hanking sector

a Achievements

On Nov.7th2006, Vietnam officially became a member o f the WTO Both opportunities and challenges are being expected for the local banking sector in