Formulating business strategies for retail banking business of joint stock commercial bank for investment and development of Vietnam in the period of 2013 – 2017

CAPSTONE PROJECT REPORT FORMULATING BUSINESS STRATEGIES FOR RETAIL BANKING BUSINESS OF JOINT STOCK COMMERCIAL BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM IN THE PERIOD OF 2013 - 201

CAPSTONE PROJECT REPORT

FORMULATING BUSINESS STRATEGIES FOR RETAIL BANKING BUSINESS OF JOINT STOCK COMMERCIAL BANK FOR INVESTMENT

AND DEVELOPMENT OF VIETNAM

IN THE PERIOD OF 2013 - 2017

Class: GaMBA.M0111 Group 5:

1 Pham Viet Anh

2 Nguyen Hoai An

3 Le Thi Bich Hanh

4 Nguyen Chien Thang

November 2012

STATEMENT OF AUTHORSHIP

& ACKNOWLEDGEMENT

After a period of research and synthesis, with the hard work and efforts of the group members, we have completed this Capstone Project Report The group affirms that this is the research of our group The data published in this report which is taken from research, reports and articles of organizations and individuals, is quoted and used appropriately in accordance to the academic regulations The results presented

in this report are valid and have not been published in any other research

We would like to express our deepest thanks to Griggs University, ETC – Vietnam National University – Hanoi and our lecturers for giving us valuable guidance and advice Sincere thanks should also go to the staff of ETC for providing

us with dedicated support during the course

Finally, the group would like to thank Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) for helping us in the process of doing this research by providing us with useful data and information, enabling us to complete this Capstone Project

Hanoi, November 15 th , 2012

GROUP OF AUTHORS

LIST OF TABLES

Table 1.1 SWOT Matrix

Table 1.2 Quantitative Strategic Planning Matrix (QSPM)

Table 2.1 Account outstanding of different banks

Table 2.2 Mobilizing capital from individual deposit

Table 2.3 Position of banks in domestic debit card

Table 2.4 Position of banks in international credit card

Table 2.5 Position of banks in POS

Table 2.6 Insurance exploitation of banks

Table 2.7 Remittance activities of banks

Table 2.8 External Factor Evaluation - EFE Matrix

Table 2.9 Consolidated Balance Sheet

Table 2.10 Income Statement for Business Divisions

Table 2.11 The capital adequacy ratio(CAR) of other banks

Table 2.12 Internal Factor Evaluation – IFE Matrix

Table 2.13 Competitive Profile Matrix (CPM)

Table 2.14 SWOT analysis

Table 3.1 Comparison of alternative strategies using QSPM

Table 3.2

Strategy implementation plan for retail banking business of BIDV in the period of 2013-2017

LISTS OF FIGURES

Figure 1.1 Business strategic management process

Figure 1.2 The Five Forces Model of Michel E Porter

Figure 2.1 The organizational structure of BIDV

Figure 2.2 Vietnam’s GDP growth rate from 2005-2011

Figure 2.3 CPI growth of Viet nam from 2005–2011

Figure 2.4 Total assets scale of BIDV compared to other banks

Figure 2.5 Total equity scale of the BIDV compared to other banks

Figure 2.6 Gross profit of BIDV compared with other banks

Figure 2.7 The distribution channel systems of branches

Figure 2.8 The ATM and POS distribution channel systems

Figure 2.9 The credit rating options (BEINorm)

CONTENTS

INTRODUCTION 6

CHAPTER I: THEORETICAL FRAMEWORK FOR BUSINESS STRATEGY FORMULATION 9

1.1 Basic concepts of strategy and business strategy: 9

1.1.1 Definition of strategy: 9

1.1.2 Business strategy: 9

1.1.3 The roles of business strategy 10

1.2 The process of strategy formation 10

1.2.1 Strategic vision and mission statements 11

1.2.2 Strategic objectives 11

1.2.3 Analysis of external environment 11

1.2.4 Internal environment analysis 15

1.2.5 Formulating alternative strategies and selecting appropriate strategies 16

1.2.6 Developing an action plan and implementation solutions 17

1.2.7 Review and adjustment 17

1.2.8 SWOT Matrix 17

1.3 Business strategy selection 19

1.3.1 Generic competitive strategies 19

1.3.2 Quantitative strategic planning matrix (QSPM) 19

CHAPTER II: ANALYSIS OF STRATEGIC BUILDING FOUNDATION FOR RETAILING ACTIVITIES OF BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM JSC 21

2.1 Introduction of BIDV 21

Fields of operation 21

History of establishment and development 22

Organizational structure 22

2.2 Analysis of BIDV business environment 24

2.2.1 Analysis of macro environment influence on BIDV’s performance 24

2.2.2 Analysis of industry influence on retail activities of BIDV 30

2.2.3 Analysis of BIDV's internal environment of BIDV 38

2.2.4 Competitive Profile Matrix (CPM) 56

2.3 The summarization of SWOT analysis of BIDV’s retail operation 58

CHAPTER III: STRATEGY SELECTION AND IMPLEMENTATION SOLUTIONSTO DEVELOP RETAIL BANKINGBUSINESS OF BIDV 61

3.1 BIDV’s vision, mission and strategic goals 61

3.2 Strategy selection for the development of retail banking of BIDV in the

period of 2013 - 2017 62

3.2.1 Summarization of the strategies from SWOT analysis 62

3.2.2 Selecting business strategies for retail banking of BIDV – using QSPM matrix 62

3.3 Strategic solutions 65

3.3.1 Solutions of investing in equipment and IT system 65

3.3.2 Product and service solutions 66

3.3.3 Customer solutions 69

3.3.4 Distribution channel solutions 70

3.3.5 Solutions in terms of supporting policies 72

3.3.6 Developing and reinforcing the human resources, building BIDV corporate culture 72

3.3.7.Enhancing the marketing programs for retail activities 74

3.4 Implementation Plan 75

CONCLUSIONS 81

REFERENCES 82

INTRODUCTION

1 The necessity of the research topic:

The focus of expansion and development of the retail sector will be the decisive factor affecting the leading role of commercial banks in the future This is an inevitable trend of the banking sector in Vietnam when the international economic integration is more intensive and competitive, the utility needs of people are the increasingly diverse, and commercial banks are trying to expand their market share, access to a large amount of people who still do not know the banking products and services Further, retail banking services bring higher revenue and less risky for banks In fact, the commercial banks in Vietnam have initially focused on exploiting the retail markets through the expansion of the network activity in order to provide banking products and services to individuals and households; promoting applications

in banking technology, developing of new services, multi-utilities such as internet banking, home banking, mobile banking, etc

This is considered as one of the trend in choosing the long-term growth if banks want to continue maintaining and expanding market share in the future Retail development helps banks with larger market, higher economic efficiency because products are offered in bulk to large number of customers, which generates more sales and distributes business risks

Vietnam is considered to be a market with a lot of potential retail banking development The attraction of retail banking operations has been confirmed Therefore, not only domestic commercial banks but also foreign banks are looking for ways to penetrate deeper into Vietnam market Potential business market with increasing competition force banks to have effective business strategy, and the Bank for Investment and Development of Vietnam (BIDV) is not an exception

BIDV has been known as a bank operating mainly in the field of wholesale and retail operations have accounted for only a small percentage and have-not been focused for the development BIDV takes many advantages for retail development but so far this activity has not developed commensurate with the potential and advantages

With the goal of becoming a universal bank with large scale in the region, BIDV must diversify its business areas, maintain the strength of a wholesale bank, the bank should also promote effective strategies for retail operations From this

necessity, our team has selected the theme: “Formulating strategies for retail

banking business of Joint Stock Commercial Bank for Investment and Development of Vietnam during the period 2013 - 2017” with the desire to apply

our knowledge to contribute to the overall development of the bank

3 Subject and scope of the research:

- Subject: Retail Activities at the Bank for Investment and Development of Vietnam

- Scope of research: the entire system of the Bank for Investment and Development of Vietnam

Retail banking can be considered as a strategic business unit (SBU) of BIDV because of the following reasons:

 Retail banking department (“Department”) is an independent and fully functional department operated as both cost and profit center of the branch

 BIDV has fully delegated authority and responsibility to a director of the department who reports directly to the Management Board of BIDV

 The Department has its own budget, marketing plan, competitors as well as manpower The contribution in terms of money of the department is clearly calculated and monitored by BIDV

BIDV implement retail banking activities since 2009 and has independent parts management and implementation of retail banking activities However, the retail banking activities are spontaneous and haven’t a clear strategy

4 Research methodology:

The data were collected and compiled from the annual reports, financial statements, from the website of BIDV and other banks, the published information from the State Bank and other reference materials, books, magazines, specialized teaching materials

We have consulted BIDV experts in the assessment of weight in the process of analyzing the matrix

Our group mainly base on statistical method, method of analysis, comparison, and synthesis to conduct the research

5 Structure:

In addition to the introduction, conclusion, references, the project consists of three chapters:

Chapter 1: Theoretical framework for business strategy formulation

Chapter 2: Analysis of the foundation for formulating business strategies for

retail activities of Joint Stock Commercial Bank for Investment and Development of Vietnam

Chapter 3: Strategy selection and implementation solutions to develop

retail-banking activities of BIDV in the period 2013 - 2017

Hanoi, November 15 th , 2012

CHAPTER I:

THEORETICAL FRAMEWORK FOR BUSINESS

STRATEGY FORMULATION 1.1 Basic concepts of strategy and business strategy:

1.1.1 Definition of strategy:

There are many different definitions of strategy; opinions of approach have steadily converged to create a relative united definition of strategy: strategy can be

understood as “a coordinated series of actions which involve the deployment of

resources to which one has access for the achievement of a given purpose”

Whatever approach we apply in each perspective and definition, there are three common characteristics of strategy:

- Establishment of an overall course of actions to wards the long-term goals in the future;

- Key policies and measures to implement the program;

- Establishment of action sequences, ways to proceed and allocate resources to achieve the goals

1.1.2 Business strategy:

1.1.2.1 Definition of business strategy

Business strategy is business-orientation with goals in a long time period along with policy systems, measures and ways to allocate resources to achieve the objective

of the business in the corresponding period of time

Thus, the business strategy of an enterprise must be goal-oriented, long-term and must be done as a deliberate process

1.1.2.2 Classification of business strategy

There are many ways to classify business strategy, which creates diversity in the methods of implementing business strategy

Classification of business strategy by levels:

1.1.3 The roles of business strategy

Business strategy is increasingly becoming a tool to orientate the business development with goals that are in accordance with objective conditions of the business environment

Business strategy helps enterprises understand and take advantage of the business opportunities from the business environment; more over, it can capture the most profitable opportunities to achieve its goals

1.2 The process of strategy formation

In order to create a strategy, it is necessary to have a strategic mindset and have

answers to three questions: "Where are we now? Where do we need to go? And how

do we get there?” through the following steps

Figure 1.1: Business strategic management process

Source: Strategic management Textbook–Griggs University

Internal enviroment

Strategic Intent Strategic Mission External

enviroment

Strategy formulation

Business - level strategy

Competivity Dynamics

Corporate - Level Strategy

Acquisitions and Restructuring

International Strategy

Cooperative Strategy

Strategy implementation Corporate

Covernance

Structure & Control

Strategic Leadership

Enterpreneurship Inovation

Strategic Competitiveness Above Average Return

1.2.1 Strategic vision and mission statements

Mission is a concept describing the highest purpose, the meaning of the establishment and survival of the business However, in the each period, strategy must be specified in strategic objectives appropriate to each stage

Vision means a statement about the position where the company desires It is an outline of the company's objectives and goals in the future

- Strategic objectives(the desire of business)

- Business Environment(the external constraints of the enterprise)

- Enterprise Competencies(the internal constraints)

1.2.3 Analysis of external environment

The objective of the analyzing the external environment is to identify opportunities and challenges for enterprises, to find ways to deploy and capture opportunities from the environment, and to avoid the necessary challenges for the enterprises

The scope and content of the environment analysis include: analysis of the macro environment and micro environment, also known as environmental sector

1.2.3.1 Macro environment analysis – PEST model

The analysis and synthesis of elements exist outside the enterprise affect the survival and development of enterprises Enterprises need to realize the opportunities and challenges from objective environment, they also need to adapt, and promote environmental changes The macro-environmental factors:

 Analysis of legal and political factors (P)

Politics are political factors and circumstances in which their operations affect

the enterprises These factors include: the political regime, the regime of political parties, political organizations, the motto of the Party and State's policies, socio-political atmosphere

Law is the legal system relating to business, including the State's legal, legal

awareness of the judiciary, law enforcement agencies and businesses

The impacts of political and legal environment on business activities of the enterprises are extensive, sometimes are decisive factors In general, if a country is

stable in terms of politics with clear and consistent policies, good political atmosphere, strict law, enterprises can develop a healthy and stable business environment

 Analysis of economic factors (E)

Economic factors are the socio-economic situation and economic policy of the country where the enterprise establish and develop Macroeconomic environment includes: socio-economic structure, level of economic development, the economic regime and macro-economic policies

 Analysis of socio – cultural factors (S)

Social factors: including the formation and changes of the social class, the

population size, age structure, geographic distribution, population structure, the movement of the population, the power structure, living and working methods of the people Present situation and the volatility of these factors can affect the business operations of the enterprises

Cultural factors: including elements of philosophy, religion, language, literature

and arts The impact of these factors on the business of the enterprise is mainly indirect effects and they cannot be overlooked

 Analysis of technological factors (T)

Factors of engineering science and technology are all social phenomena directly related to the engineering science and technology factors where the enterprises establish and develop, including four factors: qualifications, forces, regimes of the State; policies and the laws of science and technology

 Analysis of natural factors (+)

Geographical location, climate, topography, etc are very important factors that directly affect the business of the enterprise The climate changes are not predictable and sometimes become threats to businesses that produce their seasonal services Existing infrastructure is also considered as a part of the natural elements that has an important influence on the organization of activities, cost calculation of the business

1.2.3.2 Analysis of industry environment

In any industry, each business is subject to competitive pressures from 5 forces Analysis of Michel E Porter’s Five Forces Model, helps the strategists analyze the above forces - structure of the industry, which is summarized in the following figure:

Figure 1.2: The Five Forces Model of Michel E.Porter

Competitive forces

(Michael E Porter, 1980s)

Existing Competitors

Rivalry within the industry

Potential competitors

Threat of new entrants

Substitutes

Threat of Substitutes

Source: Strategic management Textbook–Griggs University

- Competitive pressure from existing competitors: The competition among firms

in the same industry reveals the patterns of competition, the nature of competition Competition relates to the elements of an industry’s characteristics, structure of business scale in an industry, the number of firms in an industry, and the market structure of the industry

- Threat of potential competitors: a new entrant can be a business that has just

been established or an enterprise that produced other products in the past, and now produce many products These businesses bring new production capacity, and also require a certain market share

- Bargaining power of buyers: Customers of enterprises could be direct and end

consumers of goods When consumers require cheaper prices, better quality and better after-sales services, they put a pressure on that industry Customers could be a distributor, or dealer The most importance is: who are the main customers with strong bargaining power that business must pay special attention to

- Bargaining power of suppliers: Suppliers of raw materials, equipments have

the ability to increase prices or lower the quality of products or both Enterprises should negotiate with suppliers to resolve and achieve the main requirements: standard, quality; ability of quantity providing; price, ability of capital, and return on capital

- Threat of substitute products and services: substitute products are products of

similar use If the profits of substitute products are high, competitive pressure

(pressure on production costs and selling prices) is also high and the business is put

on the passive and defensive position If the manufacturer of substitute products rapidly develops its products, that industry will be strongly affected If consumers comfortably accept the substitutes in terms of economic as well as psychological matter, that influence is greater

In summary, analysis of the business environment is extremely important for

enterprises Business environment includes macro economic environment and industry environment The goal of this analysis is to identify opportunities and threats Based on this, managers will make rational management decisions

1.2.3.3 External factor evaluation matrix – EFE

The external factor evaluation matrix helps strategists summarize and evaluate the information of economic, social, cultural, demographic, geographic, political, governmental, legal and technological factors There are five steps to develop an EFE Matrix

- Step 1: Make a list of 10 to 20 factors of opportunities and threats that

influence the success of the business in the industry as identified in the process of external environment analysis

- Step 2: Each factor will be given a weight of importance from 0.0 (not

important) to 1.0 (very important) This classification shows the respective importance of each factor to the success of the business The total value of the weight for all factor’s level of importance must be 1.0

- Step 3: Assign a rating between 1 and 4 to each factor that decides the

business success to evaluate how the current business strategy responds to that factor:

4 = the response is superior, 3 = the response is above average, 2 = the response is average and 1 = the response is poor These ratings are given based on the effectiveness of the current business strategy Thus the ratings in this step bases on firm size, while the second step bases on the industry

- Step 4: Multiply each factor’s weight with its rating to calculate the weighted

score for each factor

- Step 5: Add all weighted score of all factors to identify the total weighted

score for the company

The total score of the matrix does not depend on the number of factors in the matrix, the highest score is 4 and the lowest is 1 If the total weighted score is 4, the business response well to opportunities and threats, if the total weighted score is 2.5, the business has average ability to response to opportunities and threats If the total

weighted score is 1, the enterprise response poorly to external opportunities and threats

1.2.4 Internal environment analysis

In addition to the analysis of the external environment that helps businesses identify opportunities and threats from the external environment, strategic planners should understand the internal environment in order to have a comprehensive and overall viewpoint about the strengths and weaknesses of their organization

1.2.4.2 Research and Development capability (R&D)

Research and development can help businesses keep the leading position in the industry or vice versa, make the enterprises lag behind the leading ones Therefore, enterprises must regularly change and innovate technology, products and materials

When analyzing the factors of production are, we should pay attention to: the price and the level of material supply, inventory turnover levels, allocation of means

of production, productivity and cost of the equipments, cost and technological capabilities compared to the industry and the competitors, etc

1.2.4.4 Financial potentials

When analyzing the financial and accounting factors, managers should focus on: the ability to mobilize short-term and long-term capital; total capital of the enterprise; the flexibility of capital investment structure; utilization of financial strategies; ability to control cost reduction; effective accounting system, cost planning, financial planning and profit, etc

1.2.4.5 Marketing capability

Marketing can be described as a process of identifying, forecasting, setting and meeting the desired demands of the consumers towards products and services Marketing includes 9 basic functions (1) customer analysis; (2) buying; (3) selling; (4) products and services planning; (5) pricing; (6) distribution; (7) market research; (8) opportunity analysis; (9) social responsibility The successful implementation of the marketing function will help us to identify and assess the strengths and weaknesses of marketing activities

1.2.4.6 Internal factor evaluation matrix – IFE

This strategy formulation tool summarizes and reviews the important strengths and weaknesses of a business unit, and it also provides the basis for identifying and assessing the relationships among these units An IFE Matrix can be developed in five steps:

- Step 1: Make a list of 10 to 20 elements including the strengths and

weaknesses that affect the development of the business

- Step 2: Assign a weight of importance that ranges from 0.0 (not important)

and 1.0 (all- important) to each factor The weight indicates the relative importance

of that factor to being successful in the industry Regardless of whether it is an internal strength or weakness, the factor is considered the most influential to the performance of the organization must be the most important ones Total value of all weights is 1.0

- Step 3: Assign a 1-to-4 rating to each factor to indicate whether that factor

represents a major weakness (rating =1), a minor weakness (rating – 2), a minor strength (rating = 3), or a major strength (rating = 4) Thus, this evaluation bases on the business, while the evaluation of weights in step 2 bases on the industry

- Step 4: Multiply each factor’s weight by its rating to determine a weighted

score for each factor;

- Step 5: Add all the weighted scores of all factors to identify the total weighted

score for the organization

Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from 1.0 to 4.0 The total weighted score below 2.5 indicates that the business is weak internally The total weighted score above 2.5

characterizes that the business is strong internally

1.2.5 Formulating alternative strategies and selecting appropriate strategies

Strategic analysis and selection mean making subjective decisions on the basis

of objective information Strategic analysis and selection are to determine the activity

options that help the company fulfill the responsibilities and objectives Strategies, objectives and mission of the company with the internal and external information will provide the basis for the formation and evaluation of feasible strategies

1.2.6 Developing an action plan and implementation solutions

The implementation of strategy should focus mainly on the following management issues:

- Establishing annual goals

- Establishing policies

- Allocation of resources is the center management activity in the strategy implementation process

- Conflict management

- Aligning structure with strategy

- Aligning compensation with strategy

- Change management - managing the anti-change thoughts

- Creating corporate culture supporting strategies

1.2.7 Review and adjustment

A rigid and inflexible strategy will not be suitable when the external or internal environment of the business changes So the strategists need to review, evaluate and adjust the strategy implementation The criteria to evaluate strategies:

1.2.8 SWOT Matrix

1.2.8.1 General theory of SWOT

While PEST analysis is a tool related to external factors, SWOT analysis focuses on the internal changes related to the external factors

SWOT is an extremely useful tool that helps us understand the problems or make decisions related to the organization, management as well as business activities In other words, SWOT is a framework that helps us to review the strategies, determine the position and direction of a company, analyze business

proposals or any ideas related to the interests of the business SWOT analysis is a key

to strategic development, clarifying the internal strengths of the organization; weaknesses, opportunities as well as challenges from external environment

1.2.8.2 SWOT Matrix

SWOT Matrix is used to synthesize the research on external and internal environment of a business (or an industry) Analysis of the external environment helps to discover opportunities and threats to the business Internal environment analysis helps to identify the strengths and weaknesses of the business

On the basis of analyzing the factors in the matrix, the objectives, direction of business development and its resources, business can set up various combinations In principle, there are four types of combinations:

- Opportunities with strengths (OS);

- Opportunities with weaknesses (OW);

- Threats with strengths (TS);

- Threats with weaknesses (TW)

To develop strategies basing on the SWOT analysis, the company should establish a SWOT matrix (also known as TOWS matrix) as shown below:

Table 1.1: SWOT Matrix SWOT Matrix Opportunities (O)

ST Strategies

Strategies to use the business’s strengths to cope with or avoid external threats

WT Strategies

Strategies to overcome weaknesses of the business

to avoid external threats

In the current context of globalization, economic and cultural exchanges with other countries are inevitable and enterprises also face risks in the market SWOT

analysis will help businesses measure and evaluate accurately before deciding to enter the international market

1.3 Business strategy selection

1.3.1 Generic competitive strategies

Enterprises pursuing corporate-level strategies try to achieve competitive advantage, better performance and above average return They often choose from three generic strategies: Cost-leadership, Product differentiation and Focus

1.3.1.1 Cost-leadership strategy

The goal of the cost-leadership company is to create competitive advantage by creating products with the lowest cost

1.3.1.2 Product differentiation strategy

The goal of the company with product differentiation strategy is to achieve competitive advantage through the creation of special and unique products, satisfying customer needs in the ways that competitors cannot perform

1.3.1.3 Focus strategy

Focus strategy meets the demand of a particular market segment through geography, customer or product nature

1.3.2 Quantitative strategic planning matrix (QSPM)

This method will choose one strategy among a wide range of options given on the basis of evaluation criteria such as business value, revenue, profits, investment levels, competitive advantage, suitability with the current culture of the business, time to find the best strategy in the given strategies This method involves 5 steps: Step 1: Select some of the most important factors (including internal and external factors), in accordance with the characteristics of business to assess the competitive strategies such as enterprise value, revenue, profit, risk level, investment level, competitive advantage This is a subjective step of the selector

Step 2: Assign weights to each key external and internal factor to determine the importance of these factors on the final decision

Step 3: Determine the Attractiveness Scores (AS) for each factor The range for

AS is: 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, 4 = highly attractive

Step 4: Calculate the Total Attractiveness Scores by multiplying the weights by the Attractiveness Score in each row

Step 5: Calculate the Sum Total Attractiveness Score by adding Total Attractiveness Scores in each strategy column of the QSPM The strategy with the highest Sum Total Attractiveness Score will be selected

Table 1.2: Quantitative Strategic Planning Matrix (QSPM)

Alternative strategies

Strategy

1

Strategy

2

Strategy

3

AS TAS AS TAS AS TAS

External factors

1

2

…

Internal factors

1

2

…

Total

CHAPTER II:

ANALYSIS OF STRATEGIC BUILDING FOUNDATION

FOR RETAILING ACTIVITIES OF BANK FOR INVESTMENT AND

DEVELOPMENT OF VIETNAM JSC

2.1 Introduction of BIDV

- Registered name: Bank for Investment and Development of Vietnam Jsc

- English name: Joint Stock Commercial Bank for Investment and Development

 Certificate of business registration No 0100150619, first registered on April

2nd 1993, changed the thirteenth time on April 27th2012, issued by Hanoi Department of planning and investment

 The structure of charter capital of Joint Stock Commercial Bank for Investment and Development of Vietnam was approved by the Prime Minister,

in decision No 278/QDD-TTg, dated March 7th 2012

BIDV is a joint stock commercial bank with different fields of operations:

 Commercial bank activities: include financial activities such as capital raising, credit facilities, payment and budget processing and other business and commercial banking activities;

 Retailing banking activities: provide and the develop products and services of capital raising, lending and payment processing which satisfy all personal needs for financial service; develop various card options

 Investment bank activities: perform the service of an investment bank under direct or indirect methods through securities companies, trust funds, financial companies or other forms of company that BIDV has share representation or stock subscription according to the laws

 Insurance: BIDV perform insurance service under by means of establishing relevant companies or agents for other insurance companies according to the laws

History of establishment and development

- Joint Stock Commercial Bank for Investment and Development of Vietnam, formerly Bank of Construction of Vietnam, was established according to decision No 177/TTg by the Prime Minister, dated April 26th 1957, with the primary functions of distributing and managing the capital from state budget for basic construction plans in all economic and social fields

- On September 11th 1994, the Prime Minister issued decision no 654/QĐ-TTg about transferring the responsibility of state budget and credit distributing from BIDV to the Central board (belongs to Ministry of finance); on November 18th 1994 the Governor of State Bank of Vietnam issued decision

No 293/QĐ-NH9, which allowed BIDV to diversify its functions as a commercial bank BIDV has conducted critical stages of structure reorganizing and business direction to become a multifunctional commercial bank, aiming at gaining high profit

- After 55 years of development, BIDV has become one of the biggest four commercial banks in Vietnam, organizing activities in the format of a joint stock commercial bank where the state budget controls the largest share

Organizational structure

The current organizational structure of BIDV is displayed in the following figure:

Figure 2.1: Organizational Structure of BIDV

Source: BIDV Annual Report 2011

Board of Directors Board of Shareholders

Branch Management Dept Card Center

Treasury Dept Credit Risk

Management Dept

Market & Operation Risk Management Dept

Payment Center Customer Services Center

Accting Dept

Finance Dept

Mis&ALCO Dept

Administraion Office

Human resource Dept

Corporate Planing & Development Dept Legal Affair Dept Brand & PR Managememt Dept Premis es & Facility Managememt Dep Northern Contruction Project Management Dept Southern Contruction Project Management Dept Technology Dept Trade Union Office Party Office

Credit Management Dept

Trade Finance Operation Center

Equitization Project Management Dept Representative

in Myanmar Representative

Supervisory Board

IT Commitee

Council/Commitee Credit Commitee

Whole Owner Subsidiaries

Administrative Units

Branches and Transaction Center

Joint Ventures

Besides the representative system, BIDV has a system of member companies, professional units and partner companies Until September 30 2011, BIDV has a network of banks including the head quarter and 118 representative office over 63 cities and provinces in the country, 379 transaction offices, 157 saving funds, 1,295 ATM stations and more than 6000 POS machines, one BIDV training institution, one information technology center, one transaction center and representative in foreign countries such as Cambodia, Myanmar, Laos and Czech Republic

2.2 Analysis of BIDV business environment

Before going into the analysis, it is necessary to mention the perspective and definition of BIDV for retailing activities Each organization has its own definition of retailing However, BIDV considers that retail banking service includes all the activities related to the products and services that BIDV offers to the individual customers or households These products and services are directly distributed through the electrical communication and information technology system

2.2.1 Analysis of macro environment influence on BIDV’s performance

* Political – Legal Factors

Political Factors

Vietnam is one the countries that is considered to have stable security, political theme and gradually improved position in the world This is an important factor in attracting the foreign direct and indirect investment and it is also the foundation for the development in manufacturing, commerce and infrastructure

Vietnam has specified policies to advocate trade liberalization, free trade and the application of market economy principle in banking industry since 2011 Also in

2007, Vietnam opened the gates for foreign banks after the country join WTO, which opens a new playground for all banks Foreign banks are able to libertize their activities in finance sector while the domestic ones are bound to continuously improve their products and services to compete in the open market

impact on all the banks’ activities Examples of those are Resolution 11 of the Government regarding the major solution to control inflation, stabilize the macro economy and social security; requirement of ceiling interest rate for credit institutions; requirement of the maximum proportion for credit growth and required reserve, etc

There are some decisions that support the development of the banking system, such as: proposal for payment with cash, requirement of salary payment through banking account, legal codes on electronic transactions, electronic signature, electronic crime, and high technology crime Those policies reduce the technological crime and serve as the framework for the expansion of electronic banking, as well as the well being of banking activities in general

Although there are many significant improvements in completing the system of legal documents, the framework for banking activities has yet uniform and completed Most of the policies are bureaucracy heavy, trifling and incoherent, impeding the performance of commercial banks The period of 2009–2012 observes many changes monetary policies and commercial bank controlling by the Government and State Bank Within a very short period of time, the Government and State Bank continuously launched directions which changed from the finance tighten stage to control inflation and credit growth in 2009, to credit relaxation stage to boost the economy in 2010, and then again back to finance tighten stage, restructure the economy in 2011, which lasts until the middle November 2011 and the beginning of

2012, when the economy struggles and interest rates fluctuated unpredictably The State Bank twice conducted interest modification This was considered a positive move of the State Bank when inflation tended to slow down and the economy, as well as the enterprises has to face many difficulties In a broader viewpoint, the lowering of interest rate helps loosen the finance market, which was severely compressed by the monetary policies in 2011

* Economic factors

The world economy is in an unstable stage Banking activities are very sensitive

to the unexpected occurrence in the world, from the unstable political system in Middle East, natural disaster in Japan, public debt in European countries to the increased public debt ceiling in the US The possibility of a second world recession has been still threatening Therefore, the global environment for the activities of finance and banking sector has to face many risks and volatilities To pursue secure operation, banks should restrict development and shield itself from the negative influence of external factors Meanwhile they should also improve internal

performance to reduce cost, research to avoid potential risks, advocate secure activities and carefully consider risky endeavors

Under the influence of the world economic crisis, the GDP growth of Vietnam

in the recent years falls short of expectation The GDP growth rate in 2012 is expected to be 5.1% only This is a low growth rate in comparison with previous years and needs consideration for improvement

However, considering the long period of economic revolution, Vietnam has achieved remarkable results with average GDP growth rate of 7% a year for a decade

Figure 2.2: Vietnam’s GDP Growth rate from 2005 to 2011

(Source: General Statistics Office)

According to the release of General Statistics Office on December 31st 2010, GDP per capita in USD amount of Vietnam was at USD 1,168 Vietnam officially moved from the threshold of poor countries to below medium income countries

The economy grows fast, leading to the higher living standard and the formation of a potential market with supportive features for domestic commercial banks

However, the current weaknesses of the domestic economy, which indirectly resulted from the unstable economic and political world situation, have caused an unsustainable growth, with the high economic growth at the expense of high

(Source: General Statistics Office)

Due to the monetary tighten policy of the Government, the CPI of the first 6 months

of 2012 decreased (though increased 6.9% in comparison with the same period of the previous year) This figure is more optimistic than the predicted one at 7.1% The forecast inflation rate for 2012 is about 8,1% That inflation slows down is an encouraging signal that brings two advantages: Firstly, low inflation rate is a positive signal for macroeconomic stability, balance of payment and opportunities for increasing foreign currency reserve Secondly, low CPI helps the Government to have more room for loosening monetary policies and boosting economic growth Two bottlenecks of the economy are bad debts and inventory, which are still problematic to companies, due to constrain in resource, management and differing opinions A great number of businesses still report closure and bankruptcy

* Cultural – Social factors

Vietnam is under the influence of the Oriental culture The economy was depleted after the wars Most of the citizens were originally deprived farmers and workers who are familiar with working hard, accumulating and saving into properties such as gold or real estate Saving properties at home rather than at banks is a conventional habit, so is using cash in transactions The statistics from Visa International reveals that the cash supply in developed countries only accounts for 10-25%, while the figure in developing countries is 75 – 90% In case of Vietnam, according to Visa chief representative Gordon Cooper, the cash is still the primary payment method, with more than 99% of personal spending conducted with this means From a more positive viewpoint, the higher number of people using cash, the more market for retailing banking service available This is particularly applicable to electronic banking market

Vietnam is also in the middle of global exchange, when the citizens are getting access to the international culture, especially to those from developed countries such

as America, European countries, Japan, Korea, etc This means people are likely to follow the spending, thinking habit and technology level of those countries The amenities and development in banking service is one of these model factors

The population of Vietnam is estimated to be more than 87 million people, with

22 million households This ranks Vietnam at 13th in the world and 3rd in ASEAN in terms of population The percentage of people with bank accounts is 20% The proportion of people in the working age accounts for 55% to 60% In recent years, the average income per capita keeps increasing, from USD 639 to USD 1024 per year The current level at USD 1200 has potential to increase to USD 2000 in 2015 and USD 4000 in 2020, according to Mr Ayumi Konishi, Country director of Asian Development Bank

The forecast shows that the cash free spending habit will become popular at a fast rate in the time to come (after 2012 the percentage of citizen who has access to banking service can amount to more than 25%), especially within the youngsters, office works and administrative officers

* Technology factors

The technological level in Vietnam is low Products with technology advance are mostly bought or transferred from overseas, while the quality of training in this area has yet satisfy the market demand The number of labors who can take over and master the high technology products is low, and technological transfer often requires retraining from scratch

However, Vietnamese are considered technology strong advocates, and are willing to absorb advancement in this field, especially in high tech area This behavior pattern enhances the development of technology in Vietnam

While the application of technology in banking is commonplace in the world, it just has a fresh start in domestic banks in Vietnam Banks have enthusiastically invested into Core Banking software However, due to limit in financial capability and knowledge, the investment from each bank is independent and inconsistent The investment is also at the primary stages, so there is limited connection among banks and restriction in resource and information sharing The application of technology in management has yet caught up with the growth rate The products and services assisted by high technology are still rare

Another factor is the limited infrastructure The national broadband of Internet connection is unstable, slow and costly, which severely affects the quality of banking service and leads to higher risks to customers when conducting transactions with technological assistance

The technological ability of banks is inadequate, so the security and protection

in banking service is not guaranteed, causing distrust from users Hacking for personal information and account value tends to become more and more complicated and commonplace

Despite those difficulties, banks have realized the benefits of applying high technology into business management and service diversification, which brings higher level of customer satisfaction and follow modern global trends, as well as reach out to foreign market Therefore, although starting late, banks are in a fierce competition for more advanced technology, helping spread and develop technology in banking industry

The current infrastructure and development of technology in Vietnam indicate the potential for retail banking service:

1 The rate of development in technology, 2010 86/154

2 Ranking for Digital Government application, 2010 90/192

3 Proportion of technology users

(The world average if 30.2%)

(Source: Report of Vietnam E-Commerce and Information Technology Agency at the

Vietnam-Japan E-Commerce Laws Conference on 24 th Nov 2011)

When digital commerce emerges, the number of consumers through this means also increases with the practice of online shopping (for flight ticket, digital products, fashion and cosmetics) More and more households are paying utility fees (for example, when paying for electricity fee, cable TV subscription, telephone fee, etc.) through electronic payment (such as phone or electronic banking, etc.)

* Natural factors

Vietnam is located at a special geographic area - the center of South East Asian, which is considered to be the most dynamic area of development Therefore, Vietnam has many potential to become the trading intersection of the world

Vietnam has the signature temperature of tropical monsoon, high humidity and continuous facing of diseases Being one of the countries bearing most severe effect

of climate change, Vietnam has to experience consequences of natural disasters such

as flood, drought, extreme sun, etc According to the estimate of Ministry of Agriculture and Rural Development, the annual damage by climate change takes up 1.5% of total GDP This is a challenge for the economic development of Vietnam

The infrastructure of Vietnam has been built upon heavy investment, though it

is still behind the development requirement The problem of traffic jam, electricity shortage in manufacturing and daily life, overloaded in education and medical system, etc impede the growth of Vietnam and lead to high production cost Consequently, Vietnam becomes less competitive to other countries in the area and less attractive for foreign investment

2.2.2 Analysis of industry influence on retail activities of BIDV

2.2.2.1 Analysis of competitive pressure from current rivals

The easier it is for new companies to enter the market, the more intense the competition will be In finance and banking sector in general and retail banks in particular, although the new entrants needs to satisfy rigid requirements of charter capital, management, risk management system, etc, they have great motivation to enter, considering the trend of globalization and the Government’s commitment to open financial market

Some factors can be considered as challenges for new entrants to retail banking Domestic banks can take advantage of these factors to shield themselves

- Customer loyalty for major brand name: brand name is utilized as a barrier for new entrants However, in retail banking, there are few domestic banks that can benefit from their brand name and maintain customer loyalty

- Fix cost and capital requirement: the investment into new technology and equipment, which serve as foundation for retail activities, calls for great amount of capital However, this is only the barrier to new domestic entrants To foreign banks with strong financial capacity, this does not necessarily make any difference

- The ability of incumbents to launch initiatives to block a newcomer’s entry: current banks may take action to avoid reduction in market share and profit due to the new entrants Domestic commercial banks do not have diversified and attractive approach to attract customers Financial capacity is another concern that challenges the price-cutting or promotion budget Domestic banks therefore have trouble catching up with their foreign counterparts

- The restriction of law and public policy: this barrier is no longer impenertratable but loosened when globalization becomes widespread Therefore, domestic banks cannot rely on the Government protection to avoid international competition

The operation scope of BIDV is mainly on domestic market, therefore the major rivals comes from domestic banks or financial institutions The rival profile includes

5 state owned banks, 1 bank for policy support, 37 joint stock commercial banks, 48

representative of foreign banks, 5 joint venture banks, 5 banks that have 100% foreign investment, 17 financial companies, 13 lending institutions and nearly 1,000 trust funds The above figures reveal the formidable number of rivals to BIDV, as well as the fierce competition in the industry

In recent years, the strong growth of domestic commercial banks is undeniable This group of rivals is the biggest competitors to BIDV, thanks to their compact operation principles and similar target market in retail banking Examples of those banks are ACB, Techcombank, Sacombank, MB, and Eximbank, Dong A The advancement of these banks in a short period of time fragments the share over the market These banks create solid position and enhance their strength by maintaining professional staff members who specialized in retail practice and customer care, a flexible procedure of operation, diversified offerings From now to 2015, these banks will still remain the biggest competitor of BIDV

However, in terms of retail banking practice, each bank has its own advantage Some banks are strong at card service; others excel at capital rising while others are good at lending In order to identify the rivals, BIDV needs to understand that the most formidable competitors base their advantage of their major product offerings Some specific products from retail banking service are taken to illustrate:

Table 2.1: Account outstanding of different banks

Unit: Billion VND, %

Banks

Total outstanding

Customer’s net debt balance

outstanding

Customer's net debt balance

Source: State Bank, July 2012

Although having the largest size, BIDV’s total account outstanding ranks after that of CTG (14 thousand billion lower compare to 2011) and is the lowest among all

the banks (BIDV and CTG do not have the lowest rate) However, from 2006 to

2011, account outstanding from retailing of BIDV grew at high rate (33.3% per year)

In 2011, BIDV is the only bank among the illustrated banks to have the increasing proportion of account outstanding from retailing over total account outstanding, which reflects BIDV’s dynamic operation in this field

Table 2.2: Capital Mobilizing from individual deposit

Unit: Billion VND, %

Banks

Total deposit

Individual

Total deposit

Source: State Bank, July 2012

Similar to lending to individual customers, capital raising through individual deposit at three commercial banks, namely ACB, EIB and TCB may take up to more than 65% of the bank’s total capital, while at other commercial bank, this proportion

is about 50% From 2009 to 2011, BIDV has the highest growth in individual deposit, compared to other banks mentioned above (at 30.5%/ year) This growth significantly contributed to the goal of expanding capital base at the bank

Table 2.3: Position of banks in domestic debit card

Turnover (Billion VND)

Source: State Bank, July 2012

The number of credit cards available domestically of BIDV is low, nearly ranking the bank at the bottom among the sample group of banks It is only above that of Techcombank, and nearly equals a half of Vietinbank and Agribank’s figure However, the turnover on each card is high, ranking at second place like Techcombank and only after VCB

Table 2.4: Position of banks in international credit card

Turnover (Billion VND)

Table 2.5: Position of banks in POS

Turnover (Billion VND)

BIDV has the number of POS ranking at the third place in the system, but the turnover is next to the last place, while the average turnover is the lowest among all the banks (only equals a half of the nearest banks’ and a tenth of the highest ranking bank) This shows that BIDV has yet taken full advantage of its POS system

Table 2.6: Insurance exploitation of banks

Source: Ministry of Finance July 2012

Insurance revenue of BIDV ranks at the first in the commercial banking system, proving that BIDV is effectively partnering with other insurance companies in cross selling products However, the proportion of commission over revenue only ranks at third place

Bank Insurance

Revenue

Insurance Commission

Commission over Revenue

Table 2.7: Performance in overseas remittance Bank Turnover on

overseas remittance (Billions)

Currently employed overseas remittance channels

Money remitted through Swift system, quick overseas remittance channel WU and other channel cooperated with KEB, Hanabank (Korea), VID (Malaysia), Metrobank, Tachongbank (Taiwan)

Vietinbank 1.3

Money remitted through Swift system, quick overseas remittance channel WU and other partnership channels with Britain partner (Standard Chartered Bank), Taiwanese partners (Cathay United Bank and Ta Chong Bank), German partner (Vietinbank representative in Germany), Korean partners (Kookmin Bank, Woori Bank, Korea Exchange Bank), Malaysian (Maybank), American (Wells Fargo Bank), Russian (RusslavBank)

Channel the overseas remittance through Swift system, quick remittance Money Gram channel and other partnered channels: In America market: Bank

of New York Mellon, TN Monex In other markets: Uniteller

Channel the overseas remittance through Swift system, quick remittance channel WU and other partnered channels of Maybank (Malaysia) anf The

Bank of New York Mellon branch in Taiwan

ACB 0.3 Mainly through quick remittance channel WU

Dong A Bank 1.6

Dong A bank is the agent of 27 remittance companies with head quarter in America, Australia, Germany, Canada, etc

Sacombank 1.65 Remittance through Money Gram channel and other

banks/ overseas remittance in different markets

Source: State Bank, July 2012

The market share in overseas remittance of BIDV ranks at 5th place over seven banks, while the operation network of BIDV ranks at the third place BIDV therefore has yet fully exploited its potential in this area

2.2.2.2 Analysis of competitive pressure from new entrants

Complying with the commitment when joining World Trade Organization, from January 1st 2011 Vietnam allows foreign banks to offer services and products similar

to domestic banks Therefore after 2011, there is only one common ground for both foreign and domestic banks, encouraging the fair competition between two groups Foreign banks have huge advantage of solid establishment, strong brand name, healthy financial ability, competent human resource, advanced technology and expertise in retail banking in terms of network and product development The operation of foreign bank in retail banking sector will create many challenges to domestic commercial banks in general, and to BIDV in particular This is the potential and formidable group of rivals to BIDV in the future

By June 2012, there are 5 banks with 100% foreign investment operating in Vietnam They are leading international banks such as HSBC, Standard Chartered, ANZ, Shinhan and Hong Leong They are strong competitors who operate worldwide and promise to create challenges for BIDV’s retail activities in the time to come This

is only the beginning stage It is forecast by experts that more strong banks in the world will enter Vietnam in the future Therefore, the competitive force from these entrants is huge

2.2.2.3 Analysis of competitive pressure from customers

In retail banking service, BIDV identify its target customers as individuals and households This group’s nature is diverse in terms of education level, income, age, geographic settlement, etc Each specific product of retail banking will approach a different customer group In general, these offerings aim to attract customers in big cities, who have a certain level of education and medium income onward

There are a wide variety of customers on retail banking and a huge potential to exploit, given that the income level is improving This group of customer however is sensitive and volatile, easy to be appealed and change service supplier Customer loyalty therefore depends on customer service from servicing staff, as well as customer’s benefit in the transactions They particularly care for price, fee, credit terms, the diversity and convenience of the product, etc This is a difficulty, as well

as an opportunity for BIDV in developing retail banking The bank needs to put efforts in retaining customers On the other hand, it is able to create attractive

products and services to draw customers from competitors

2.2.2.4 Analysis of competitive force from suppliers

The biggest group of supplier to BIDV includes individuals and corporate customers who deposit their money Besides, they are also customers of the bank’s products and services In the mean time, this supplier group plays an important role

in the bank’s success or failure The competition to seek and retain these suppliers is the fiercest among domestic banks State bank requires that all financial institutions

no raising capital at the rate higher than 9% per year However, in the competition to retain these suppliers as well as attract new ones, the unhealthy competition among banks becomes prevalent, when banks try to offer negotiated interest rate or use promotion as solution to overcome barriers Consider these efforts from the banks, the supplier – the customers who deposit their money have stronger bargaining power

Besides, in order to enhance the retail banking business, BIDV also needs to partner with other suppliers such as telephone operator, ATM machine provider, payment card chip providers, system operators and Vietnam Electricity Corporation (for electricity bill payment online), game card providers, electronic purse providers, etc These partnerships are crucial for BIDV to diversify its offerings

BIDV can also outsource professional and experience providers overseas to research, supply and consult on its retail products

2.2.2.5 Analysis the competitive pressure from substitutes

Despite the diversity of retail banking services, there is a pressure from substitutes for products related to capital raising and credit products

About the products related to fund or capital rasing, the depositor can choose to invest into properties such as real estate, gold, or securities instead of saving account, which directly affects the bank’s operation However, when the formerly mentioned channels are inefficient, people tend to deposit money into saving account The threat

of those substitutes therefore is minimal to the banking offerings

About the credit products, borrowers can access other source of loan such as nonprofit organizations, welfare societies such as Women associations and Veteran associations or even from the free market The general evaluation, however, indicates that these substitutes have minor influence on the products that the bank offers

Most of the products and services that banks offer are similar without any outstanding feature However, it is considered that the retail banking products are limitless, depending on the advancement in technology and changes in customer’s demand The time and context decides whether a customer prefer a specific bank product When a product is no longer satisfactory, the bank will launch a new one, except in the case of very unique product, or product that requires extreme technology that the bank cannot pursue The flexible nature of retail products enables convenient replacement of a product when demanded, without seriously affecting the bank’s operation

2.2.2.6 Evaluation of effects from external factors – EFE Matrix

After analyzing external factors, a matrix to evaluate the reaction of BIDV’s retail banking activities to the external environment can be drawn EFE Matrix is employed to illustrate

Table 2.8: External Factor Evaluation - EFE Matrix

No External Strategic factors Weight Rating

Weighted Score

5 Rapid growth of technology 0.09 3 0.27

6 Advantageous geographical location 0.06 3 0.18

2.2.3 Analysis of BIDV's internal environment of BIDV

2.2.3.1 Analysis of resources

Financial capacity:

Table 2.9: Consolidated Balance Sheet

30 June 2012

Unit: Billion VND

Ending Balance

Beginning Balance (30/6/2012) (31/12/2011)

II Balances with the State Bank of Vietnam 6,793 7,240

III Current accounts, term deposits with, and loans to

other banks

38,373 57,580

1 Cash and placements with credit institutions 26,928 43,015

2 Cash and placements with credit institutions 2,852 9,276

3 Cash and placements with credit institutions 24,077 33,739

5 Provisions for credit losses of loans to other banks (361) (297)

2 Provisions for impairment of trading securities (117) (223)

V Derivative financial intruments and other financial

assets

VI Loans and advances to customers, net of allowance

for impairment losses

318,210 288,080

VIII Investment in associates and joint - ventures 4,164 3,677

4 Provisions for impairment of long - term investment (248) (299)

15,182

9,159

No Items Ending

Balance

Beginning Balance (30/6/2012) (31/12/2011)

B Liabitities and owner's equity

I Borrowings from the State Bank of Vietnam and

the Government

14,240 26,799

II Deposits and borrowings from other banks 32,798 35,705

III Customer deposits and other amounts due to

3 Other provisions (Provisions for contingent liabilities

and off - balance sheet commitments)

Financial statements showed total assets continued to increase compared with the end

of 2011.Deposits growth rate higher than the growth rate of loans has helped

significantly improve the liquidity of BIDV, growth comes from retail customers