CREDIT RISK MANAGEMENT OF MARITIME BANK VIETNAM EVALUATIONS AND RECOMMENDATIONS

CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS***************************** BACHELOR’S THESIS IN FINANCE CREDIT RISK MANAGEMENT OF MARITIME BANK VIETNAM: EVALUATIONS AND... Credit risk managem

CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS

*****************************

BACHELOR’S THESIS IN FINANCE

CREDIT RISK MANAGEMENT OF MARITIME

BANK VIETNAM: EVALUATIONS AND

ABBREVIATION

LIST OF TABLE

LIST OF FIGURES

INTRODUCTION 1

1 Rationale 1

2 Research objective and questions 1

3 Research methodology 2

4 Research scope 2

5 Research framework 2

CHAPTER I THEORETICAL FRAMEWORK 3

1 Credit risk at commercial banks 3

1.1 Fundamental understanding of commercial banks 3

1.1.1 Definition of commercial banks 3

1.1.2 Basis functions of commercial banks 3

1.1.3 Credit activity of commercial banks 4

1.2 Credit risk at commercial banks 5

1.2.1 Definition of credit risk 5

1.2.2 Classification of credit risk 6

1.2.3 The consequences of credit risk 7

1.2.4 The measurement of credit risk 8

2 Credit risk management at commercial banks 9

2.1 The definition of credit risk management 9

2.2 The necessity of credit risk management 9

2.3 The process of credit risk management 10

2.4 Principles of Sound Credit Risk Management (Basel principles) 12

2.4.1 Establishing an appropriate credit risk environment 13

2.4.2 Operating under a sound credit granting process 13

monitoring process 14

2.4.4 Ensuring adequate controls over credit risk 14

2.4.5 The roles of supervisor 15

CHAPTER II CURRENT SITUATION OF CREDIT RISK MANAGEMENT AT MARITIME BANK RETAIL BANKING 16

1 OVER VIEW OF MARITIMEBANK 16

1.1 General Introduction 16

1.2 MSB Organization Structure 18

1.3 Products and services 20

1.4 Recent achievements 20

1.5 Mission and Vision 21

1.6 Business performance 21

2 Current situation of credit risk management at Maritime Bank 27

2.1 Current situation of credit risk at Maritime Bank 27

2.1.1 Classification of outstanding loan by risk 27

2.1.2 Non-performing loan ratio 29

2.1.3 Over-due loan ratio of MSB 30

2.2 Credit risk management at MSB 31

2.2.1 Credit risk environment 31

2.2.2 Credit granting process 32

2.2.3 Credit rating system 34

2.2.4 Credit administration and monitoring process 39

3 Evaluations of credit risk management at MSB 40

3.1 Achievement 40

3.2 Limitation 41

3.3 Reasons of limitation 41

3.3.1 External reason 41

3.3.2 Internal causes 42

MANGEMENT OF MARITIME BANK VIETNAM 44

1 Solutions to improve credit risk management 44

1.1 Effectively utilize information in credit operations 44

1.2 Enhance the quality of collateral assessment and management 45

1.3 Improve the credit ratings: 45

1.4 Improve post-lending supervision 45

1.5 Improve the efficiency of internal supervision 46

1.6 Improve technical capacity and ethics quality of credit risk management department’s staff 46

1.7 Maintain current effectiveness credit risk management method 46

2 Petitions 47

2.1 Towards the Government 47

2.2 Towards SBV 48

CONCLUSION 49

REFERENCES 50

COMMENT 51

THESIS ASSESSMENT 52

Before starting my research, I would honored to express my grateful to myresearch supervisor, Associate Professor, MA Trần Minh Tuấn for his wise guidanceand useful advices during my process of making this report.

Moreover I would like to thank my internship guider, Mrs Tran Thi Lan Anh,for completely supportive with my internship as well as giving me useful informationwith her experiences to conduct this research

Last but not least, I would like to send my great thanks to Maritime BankOperation Center’s staff for giving me the warm environment to work and also theteam work spirit during my internship

Thank you,

Ngoc Diep

MSB Maritime Bank Vietnam

BOD Board of Director

BOM Board of Manager

CIC Credit Information Central

NPL Non-performing Loan

Table 2.1 Classification Loan of MSB 2012-2014 (Unit: Billion VND) 27

Table 2.2 Non-performing Loan 2012-2014 (Unit: billion VND) 29

Table 2.3 Credit rating policy for enterprise customer of MSB 36

Table 2.4 Credit rating policy for retail customer of MSB 38

Figure 1.1 Type of credit risk 6

Figure 1.2 The Credit Risk Management Process 10

Figure 2.1 Maritime Bank Organization Structure 19

Figure 2.2 CAR ratio versus granting/funding 22

Figure 2.3 Customer Deposit 2013-2014 24

Figure 2.4 Revenue Structure 25

Figure 2.5 Operation Cost 26

Figure 2.7 Classification of 28

Figure 2.8 Overdue Loan of MSB 2012-2014 30

Figure 2.9 Granting Process of MSB 32

1 Rationale

The ruinous impact of global financial crisis has illustrated the vulnerability ofbusiness world follow the shift of the market This vulnerability was formed bydifferent reasons; one of them was the circumstance of risks Risks could influence allparties in the financial market, ranging from financial institutions and enterprises toindividual investors Moreover, the seriousness of managing risk has been notice of bymost of financial market practitioners and the authority

In our country, the recent recession has harmed the financial institution badly,exclusively in the case of commercial banks Subsequently, banks have to face withincreasingly risk and credit risk is one of the most important risks that a bank meet.Credit risk is the risk that a borrower will default on any type of debt by failing tomake required payments Providing loan for new customers is one of the benefitsources to banks; however, business relationships are not always successful, especially

in this era of economic crisis Thus, credit risk management becomes a crucial act tosurvive for commercial banks Banks use non-performing ratio to evaluate theeffectiveness of their credit risk management The period of three years from 2009 to

2012 in Maritime Bank (MSB), the credit services were stopped follow the consultingresult of Mckinsey – a global management consultant, as a result, after comeback tothe retail credit service game in 2012, risk managing in MSB face many problems.These reasons lead to the thesis topic: Credit Risk Management of Maritime Bank:Evaluations and recommendation

2 Research objective and questions

2.1 Research objective

At first, this research objective is getting a rooted understanding of the concept ofcredit risk and credit risk management By looking at those theoretical backgrounds,the research will help MSB RB to assess its credit risk management, discovering gapsand the reason of forming those gaps Lastly, the researcher will conduct somerecommendations to improve credit risk management of MSB RB

2.2 Research questions

What is the current situation of MSB RB’s credit risk management?

What are the weaknesses of the bank’s credit risk management? Reasons?

How can bank improve its credit risk management?

4 Research scope

The thesis will investigate the credit risk management of MSB RB, if the riskmanagement policy is relevant enough, the competences of credit managers and staffs,collaboration between departments in bank To assess MSB RB credit risk, its creditquality is considered in the period of 2012 - 2014 Such a revolution period of retailcredit system to reveal debt’s characteristics

5 Research framework

Together with Introduction and Summary, the thesis includes three chapters:

 The first chapter describes the theoretical framework of credit risk, credit riskmanagement and the principles of credit risk management in banking

 The second chapter analyses current situation of MSB RB ’s credit riskmanagement, which aimed to find weaknesses

 The last chapter offers some recommendations to improve credit riskmanagement of Maritime Bank Retail Banking

CHAPTER I THEORETICAL FRAMEWORK

In pursuance of assess the efficiency of a bank’s credit risk management,understanding of the theory foundations is essential Wherefore this chapter will givegeneral knowledge of commercial bank, credit risk, and credit risk management

1 Credit risk at commercial banks

1.1 Fundamental understanding of commercial banks

1.1.1 Definition of commercial banks

The word “bank” is one of the most used word in all languages all over theworld; however, still, the obfuscation of defining bank is happen A bank stated bythree aspects: how the economic function it serves, which services it offers for clients,

or the legal basis of existence

According to the functional performance, banks are financial intermediaries thatinvolved in transferring funds from savers to borrowers and paying for goods andservices (Rose and Hudgins, 2009, p 2)

According to services offer to customers, banks have a great range of financialservices - from checking and debit accounts, credit cards, saving plans to loan forbusiness, consumers and government In addition, banks also provide investmentbanking, insurance protection, financial planning, advice for merge companies, thesale of risk management services and numerous other innovative services Insummary, banks tend to become the general financial-service providers (Rose andHudgins, 2009, p 2)

According to Vietnam Legislation, a commercial bank is a credit institution thatpermitted to conduct all banking activities and other related business activities

1.1.2 Basis functions of commercial banks

As approached above, commercial banks have two basic functions

The primary purpose of commercial banks is to encourage individuals andinstitutions to save and transfer those saving to those individuals and institutionsplanning to invest in new projects (Rose and Hudgins, 2009, p 5) Bank emboldenscustomer’s act of saving by accepting deposit, including demand deposits, termdeposits, saving deposits After that, based on the funded capital, banks grant credit towhom needing investment spending This process nursing the growth of economy,

creating new jobs, and upgrading living standard

However, not only transform saving into investment, commercial bank alsoprovides several supporting services for daily life They manage customers’ accounts,provide payment services such as checks, credit and debit cards , and performcollecting and spending for customers in payment transactions This helps speed up thepayment process and ensures the safety and accuracy of payment Besides, banksprovides risk protection services for those who save and venture to invest, includingderivative contracts and insurance policies, liquidity services to make it possible toconvert property into immediately available spending power, and credit services forthose who need loans to supplement their income (Rose and Hudgins, 2009, p 5) 1.1.3 Credit activity of commercial banks

Commercial banks’ business activities can be divided into three main aspects:capital mobilization activities, credit activities and other activities Capitalmobilization helps the banks to ensure resource for operate its functions together withcredit activities by transferring fund from banks to customers in specific period withspecific cost, creating the income for the bank

Three main characteristics of credit activities:

 The right to use the capital can be transfer from owners to users

 The transfer has specific term

 There are cost and risk going with the transfer

In “Bank Management Financial Services 8 th ” (Rose and Hudgins, 2009), credit is classified by different criteria:

 By purpose of credit:

 Real estate loans are secured by real property, such as land, building,and other structures, and include short-term loans for construction andland development and longer-term loans to finance the purchase offarmland, homes, apartments, commercial structures, and foreignproperties

 Financial institution loans include credit to banks, insurancecompanies, finance companies, and other financial institutions

 Agricultural loans are extended to farms and ranches to assist in

planting and harvesting crops and supporting the feeding and care oflivestock

 Commercial and industrial loans are granted to business to coverpurchasing inventories, paying taxes and meeting payrolls

 Loans to individuals include credit to finance the purchase ofautomobiles, mobile homes, appliances, and other retail goods, torepair and modernize homes, and to cover the cost of medical care andother personal expenses and are either extended directly to individuals

or indirectly through retail dealers

 By term of credit:

 Short- term loan: has maturity less than 1 year The purpose of thistype of loan is mainly for financing the investment of current assets

 Medium- term loan: has maturity from 1 year to 5 years The purpose

of this type of loan is mainly for investment of fix assets

 Long- term loan: has maturity more than 5 years The purpose of thistype of loan is usually for financing long- term project

 By collateral:

 Non- collateral loan: this loan does not have collateral or guarantee ofthird party and it relies only on creditability of customers to decide togrant loan

 Collateral loan: this type of loan has collateral, pledge or guarantee of the third party for the borrower

1.2 Credit risk at commercial banks

Fundamental information of commercial banks and their credit activity areshowed in the previous part Next to continue the analysis, deeper understanding ofcredit risk will be provided which is detail credit activity

1.2.1 Definition of credit risk

For banking management, risks may be defined as the unexpected events whenoccur leading to lose bank’s assets, decline the actual profit compared withexpectation, or have to spend an additional cost to complete a certain financial service(Rose and Hudgins, 2009, p 181) In banking activity system, there are numbers of

risk types include interest rate risk, liquidity risk, operational risk, market risk Among them, one of the most frequently concerned for financial participants should becredit risk.

Credit risk refers to the risk that a borrower will default on any type of debt byfailing to make required payments The risk is primarily that of the lender and includeslost principal and interest, disruption to cash flows, and increased collection costs(Wikipedia) Moreover, people can tell that credit risk can arise in relationships whenbanks are creditors and the debtors cannot afford to pay debt obligations when theycome due This type of risk directly related to banks’ credit activity

In the quantitative aspect: credit risk can be reflected by the amount of overdue loans

of each bank

In qualitative aspect: credit risk conversely relates to the credit quality, whichmean risk can be decreased by increased the credit quality In the case whether creditquality is low and the amount of overdue loans is high, credit risk becomes compellingand has direct effect on business operations of banks

1.2.2 Classification of credit risk

Based on the causes of credit risk, credit risk can be divided into following categories:

Figure 1.1 Type of credit risk

The figure has show that credit risk includes two categories: transaction risk andportfolio risk

Credit Risk

Credit Risk

Transaction Risk

Transaction Risk

Selection Risk

Operational Risk

Operational Risk

Guarantee Risk

Guarantee Risk

Portfolio RiskPortfolio Risk

Intrinsic Risk

Concentration

RiskConcentration

Risk

Transaction risk: is the form of credit risk which caused by constraint in thetransaction, approving- loan process and customer evaluation This riskcombined by three categories: selection risk, guarantee risk and operationalrisk.

Selection risk born from process of credit analysis and assessment, whenbanks choose the effective loans to grant credit to customers

Guarantee risk is risk connected to standards as the terms of the loancontract, the type of collateral, and how the loan guarantee on the value ofthe collateral

Operational risk created by the management of loans and lending activities,such as the use of credit rating systems and techniques to solve problemloans

Portfolio risk: the form of credit risks that link to limitations in themanagement of the loan portfolio of banks Portfolio risk contains two parts:intrinsic risk and concentration risk

Intrinsic risk is risk related to the personal factors and characteristics withparticular consequences of the borrowers or of the economic sectors Itcomes from characteristics of the way customers choose to use loans

Concentration risk arises when banks make loan focus on several customers

or several enterprises in the same economic fields, same sectors, samegeographical areas or in the same risky type

1.2.3 The consequences of credit risk

Even though there are many reasons lead any financial situations to meetdifficulties, the main reasons are considered to be related to the lack of credit standardsand guides for borrowers and other parties, the gap in portfolio risk management andnotice to changes in economy together with many other conditions that could makenegative impact in credit standing for banks

Economic environment’s reasons:

Under rate the economic growth could have negative effect on the ability torepaid debt of customers There are many factors which lead to the passive growth ofthe economy, including political situation concerns or the threat of violence AsVietnam showed as import potential market, the low economic growth of strongcountries like the US or China can be a problem as well More than that, there are

some reasons such as avian flu, leading to damage in businesses, or appreciation ofVND against other currencies

From borrowers:

The main reason make borrowers could not return money to bank is poorbusiness operation Organization may not manage to predict the economy flow in theright direction, either make the wrong strategy or control information wrongly All

of those mistake could lead to fragile in business performance Thus, some borrowersborrow money to invest more which make they could not pay back the money in time.This leads to credit risk at bank In certain circumstances, entrepreneurs borrow moneybecause the need of urgent liquidity or payment for operations that is why they cannotguarantee the time to pay back money

From the bank:

Credit risk can some time come from bank’s staff or credit risk management.Even though bank’s staffs have to strictly follow credit rules, sometime they can earnmoney from unqualified customers and approve to lend money to them The personswhom charge of evaluating business operation or the collateral’s status also makemistakes in the process and overestimate the true value of the customers’ assets Thebank cloud be lead to an increase in credit risk by these facts

1.2.4 The measurement of credit risk

In “Bank Management Financial Services 8th” (Rose and Hudgins, 2009), thelevel of credit risk can be quantified using the following ratios, this make it easier forcommercial banks to manage their credit risk:

Overdue loans ratio:

Overdue loan ratio = (Total overdue loan / Total outstanding loan) × 100%

Overdue loans: loans that a part or all of principal and interest have been over the maturity (According to Decision No 493/2005/QD- NHNN on April 22nd, 2005)

Overdue and rescheduled on outstanding rate (ORRO):

ORRO = [(Overdue loan + Reschedule Loan) / Total outstanding Loan] x 100%

The ORRO ratio shows the percentages of total loans are overdue or rescheduled

Bad debt ratio (nonperforming loans ratio) :

NPLs ratio = (NPLs / Total outstanding loan) x 100%

According to Decision 493 of SBV introduced in 2005, nonperforming loanscontain loans from categories 3, 4 and 5

The NPLs ratio shows the percentage of loans which is default in the totaloutstanding loan The smaller the ratio, the better the bank is controlling credit risk Even though these ratios are valuable in helping commercial banks classify the level ofcredit quality, there are weaknesses which found in the ratios By technical methodssuch as increasing the total outstanding loan, rescheduling or writing off loans creditinstitutions can easily manipulate the figures

2 Credit risk management at commercial banks

2.1 The definition of credit risk management

The management is an establishment of a program for a long or short term for abank, identifying resources to implement that program and guiding banking staff toachieve goals

Credit risk management is defined as identification, measurement, monitoringand control of risk arising from the possibility of default in loan repayments (Basel,2000) This means, in general, credit risk management is applied in every steps of thelending process from finding prospective customers, evaluating the characteristics andpurpose of the loan, making site visit and evaluating customer’s credit record toconsult how to use the loan after lending For bank to have an efficient credit riskmanagement system is important to keep the credit risk at a safe level

2.2 The necessity of credit risk management

To the bank:

Credit risk will increase the possibility profiting for any intermediaries, theresults in making the expansion of credit activities also will become harder Thepayment of deposits will also be negatively influent Bank loans can be uncollectablewhile interest are still been paying; the opportunities cost will be higher If the risk issmall, damage can be control by using provisions If the risk is high, the damagecannot be healed, it will come to the scenario of reducing bank’s credibility andenhance the possibility of going bankrupt

To the customers:

Credit risk is connected straightly to the business risk of customers Loanscontinuously turn into overdue debts, which has strongly affected to both banks andcustomer As a result, borrower moved into banks black list to stop any chances can

lead bank to bankrupt.

To the economy:

Economy participant such as individuals, households and financial institutionsare strongly connected to banking operation Moreover, a country’s economy partlyreflected through bank’s operation result An unsustainable economy will produce a lot

of risks for banking activities Monetary market becomes inconsistent, unstable whichlead enterprises toward lot of problems in managing operation activities This factobviously harms the economy and society in a significant way Shrinking andeliminating credit risk is one option of strengthening the stability and progressivelygrowth of the community Credit risk remains as one of the most gigantic concern ofbanking industry

2.3 The process of credit risk management

Credit risk management includes 4 steps: realizing, measuring, controlling and supervising & adjusting

Figure 1.2 The Credit Risk Management Process

In this process, bank will collects information through interview, loanapplication assessment or go through business’s partners or government offices to seekfor hidden risks in the business and the environment around it

There are following signals to realize credit risk:

Signals concerned with the bank’s relationship, including regular transactions inthe account of business, long-term sponsors among with low liquidity, raising thenumbers of loans, yet previous repayment is late

Signals concerned with procedure to manage customers, including disagreement

in BOD or BOM, rising in expense unreasonably, family and related relationshipwhich affect to the working efficiency

Signals concerned with operation in business, including acquirement inperfecting the operation, inappropriate products

Signals concerned with analysis of financial and accounting information,including unrelated information, rising in revenue but falling in profit, increasing baddebt ratio and inventory

Measuring:

Credit risk management is a process which uses both quantitative and

qualitative methods to measure, evaluate and analyze, which as a result, helps to calculate the level of risk

Qualitative model – 6C model bases on the characteristics, cash flow, collateral,conditions and controlling criteria to estimate the risk level Although the model is simple, its accuracy depends greatly on the capacity of credit officers to analyze and the information

Quantitative model – Z score model bases on the financial ratio and level of importance of that ratio to appoint related points to business borrowers, calculating theprobability of repayment (Altman, 1968)

Z = 1.2𝑋1 + 1.4𝑋2 + 3.3𝑋3 + 0.6𝑋4 + 0.999𝑋5Including:

𝑋1= Working Capital / Total Assets

𝑋2 = Retained Earnings / Total Assets

𝑋3 = Earnings before Interest and Taxes / Total Assets

𝑋4 = Market Value of Equity / Book Value of Total Liabilities 𝑋5 = Sales/ Total Assets

The bonus point of this model is simple in calculation However, this is only able to classify two types of businesses: risk and without risk

Synthesis model – credit pointing and rating model is a mixture of both quantitativeand qualitative, based on both customers’ financial and non-financial information Therating includes AAA, AA, A, BBB, BB, B, CCC, CC, C, D with the order ofincreasing risk This model manages to bring out the detailed evaluation for ability torepay money of customers However, this model acquires many information that could

be affected subjectively by credit officers

to business

Risk transferring: To minimize the risk, the bank could agree to approve for theloan if another party would underwrite for that business On the other and, in thissituation, the bank will receive less profit

Risk deduction: This method is concerned with using provision or selling collaterals Risk acceptance: If the risk is low and the interest rate is high enough for the bank tocover, the bank can approve for the loan

Supervising and adjusting:

Bank will start to disburse the loans after the improvement for lending This step is considered to be the most important one in credit risk management, as this assures all policies to be well implemented to keep minimizing the risk

2.4 Principles of Sound Credit Risk Management (Basel principles)

In order to maximize a bank’s risk adjusted rate of return, Basel introduced

credit risk management in which credit risk exposure is maintained within acceptableparameters Based on principles of portfolio management, both the credit risk arisingfrom individual creditors or transactions and the risk of the entire portfolio arerequested to be controlled

Understanding the principles of credit risk management credit risk managementcan help explain how banks can manage credit risk regardless of different approachesthe banks may use According to Basel (2000), the sound practices of bank credit riskmanagement should cover the following five areas:

2.4.1 Establishing an appropriate credit risk environment

Principle 1: The board of directors should have responsibility for approving

and periodically (at least annually) reviewing the credit risk strategy and significantcredit risk policies of the bank The strategy should reflect the bank’s tolerance for riskand the level of profitability the bank expects to achieve for incurring various creditrisks

Principle 2: Senior management should have responsibility for

implementing the credit risk strategy approved by the board of directors and fordeveloping policies and procedures for identifying, measuring, monitoring andcontrolling credit risk Such policies and procedures should address credit risk in all ofthe bank’s activities and at both the individual credit and portfolio levels

Principle 3: Banks should identify and manage credit risk inherent in all

products and activities Banks should ensure that the risks of products and activitiesnew to them are subject to adequate risk management procedures and controls beforebeing introduced or undertaken, and approved in advance by the board of directors orits appropriate committee

2.4.2 Operating under a sound credit granting process

Principle 4: Banks must operate within sound, well-defined credit-granting

criteria These criteria should include a clear indication of the bank’s target market and

a thorough understanding of the borrower or counterparty, as well as the purpose andstructure of the credit, and its source of repayment

Principle 5: Banks should establish overall credit limits at the level of

individual borrowers and counterparties, and groups of connected counterparties that

aggregate in comparable and meaningful manner different types of exposures, both inthe banking and trading book and on and off the balance sheet

Principle 6: Banks should have a clearly-established process in place for

approving new credits as well as the amendment, renewal and re-financing of existingcredits

Principle 7: All extensions of credit must be made on an arm’s-length basis.

In particular, credits to related companies and individuals must be authorized on anexception basis, monitored with particular care and other appropriate steps taken tocontrol or mitigate the risks of non-arm’s length lending

2.4.3 Maintaining an appropriate credit administration, measurement and monitoring process

Principle 8: Banks should have in place a system for the ongoing

administration of their various credit risk-bearing portfolios

Principle 9: Banks must have in place a system for monitoring the condition

of individual credits, including determining the adequacy of provisions and reserves

Principle 10: Banks are encouraged to develop and utilize an internal risk ratingsystem in managing credit risk The rating system should be consistent with the nature,size and complexity of a bank’s activities

Principle 11: Banks must have information systems and analytical

techniques that enable management to measure the credit risk inherent in all on- andoff-balance sheet activities The management information system should provideadequate information on the composition of the credit portfolio, includingidentification of any concentrations of risk

Principle 12: Banks must have in place a system for monitoring the overall

composition and quality of the credit portfolio

Principle 13: Banks should take into consideration potential future changes

in economic conditions when assessing individual credits and their credit portfolios,and should assess their credit risk exposures under stressful conditions

2.4.4 Ensuring adequate controls over credit risk

Principle 14: Banks must establish a system of independent, ongoing

assessment of the bank’s credit risk management processes and the results of such

reviews should be communicated directly to the board of directors and seniormanagement

Principle 15: Banks must ensure that the credit-granting function is being

properly managed and that credit exposures are within levels consistent withprudential standards and internal limits Banks should establish and enforce internalcontrols and other practices to ensure that exceptions to policies, procedures and limitsare reported in a timely manner to the appropriate level of management for action

Principle 16: Banks must have a system in place for early remedial action on

deteriorating credits, managing problem credits and similar workout situations

2.4.5 The roles of supervisor

Principle 17: Supervisors should require banks to have an effective tool on

hand to perform the act of measure, monitor and control credit risk as part of an embracing address to risk management system Supervisors need to conduct anindependent evaluation of all bank operational factor are strategies, policies,procedures They also review the practices related to the granting of credit and thecontinuously portfolio management Supervisors are recommend to set prudentiallimits which restrict bank exposures to single borrowers or groups of connectedcounterparties

all-CHAPTER II CURRENT SITUATION OF CREDIT RISK MANAGEMENT AT MARITIME BANK RETAIL BANKING.

1 OVER VIEW OF MARITIMEBANK.

1.1 General Introduction

Vietnam Maritime Commercial Joint Stock Bank (Maritime Bank) was established under theLicense No 0001/NH-GP dated 8th June 1991 issued by the Governor of State Bank ofVietnam The bank started operation on 12th July 1991 in Hai Phong City, following theOrdinance on Joint Stock Bank, Credit Cooperative and Finance Company took effect.Despite on the debate about the model of join stock bank had not been settled during the time,Maritime Bank became one of the first commercial join stock banks in Vietnam It was theresult of collaborative strength and innovative thinking of founding shareholders: VietnamMaritime Administration, Vietnam Post and Communication Group, The Civil AviationAdministration of Vietnam and etc

History of development

25 years of development.

At the beginning, Maritime Bank had only 24 shareholders with charter capital ofVND 40 billion and several branches in big cities such as Hai Phong, Hanoi, QuangNinh and Ho Chi Minh City Some have said that the establishment of Maritime Bank

in the early 1990s represented a major breakthrough the economic transformation inVietnam

The period between 1997 and 2000 was the most challenging one for Maritime Bank

As Asian financial crisis took effects, Maritime Bank was faced with adversities.However, thanks to our own strength and spirit, Maritime Bank has gradually regainedthe balance and continued its development from 2005 onward

In 2010, Maritime Bank officially launched the new brand identity with the impressivecombination of red and black color The bank increased its chartered capital to VND5,000 billion and expanded the network to 144 branches across the country MaritimeBank’s headquarter was relocated to Sky City Tower, 88 Lang Ha street, Hanoi Allthese changes gave the bank a brand new look: Dynamic, innovative, professional andmodern

Entering 2014 with determination to improve its position in the financial market,Maritime Bank carried out the procedure for the merger with Bank for Development ofthe Mekong (MDB), given the principle approval of the State Bank, while refining andexpanding business model of the Community Bank, having direction to focus on smallbusiness segment, agriculture and business & consumer finance model

On July 2015, Maritime Bank decided to repurchase Vietnam Textile and Garmentfinance joint stock company – TFC to develop the consumer finance which still has agreat potential and to effectively support the established strategy which is to focus ondeveloping Banking retail segment

On 08/12/2015, with approval from the State Bank, MDB was officially merged intoMaritime Bank The event brought Maritime Bank to being the one of five leadingcommercial banks in Vietnam, having total assets of 111,753 billion VND, 11,750VND of charter capital, equity of 14,000 billion, and trading system of nearly 300points The number of customers across the country also increased more than 1.4million individual customers, approximately 30,000 corporate customers, in which,there are 600 businesses and large financial institutions

Having a clear business strategy, strong leadership of a talented and experiencedmanagement team, as well as a dedicated and creative workforce of more than 5,000employees, Maritime Bank is confident to reach target to become the best commercialbank in Vietnam

Year of 2014

 Improving and expanding the business model of the Community Bank (FCB)

 Successful implemented the financial business models and consumer credit

 Was selected as one of the first 10 banks for implementation Basel II

 Was selected as one of the 5 most popular E-Bank in 2014

Year of 2011

 Increase its chartered capital to VND8,000 billion

 202 transaction points nationwide with a total of 230 ATMs, a successful

connection with international card organization MasterCard

 Technological activity was increasingly focuses to support development work

 Improving and upgrading all products, utility services; networking and business development

Year of 2010

 Increase charter capital to VND 5,000 billion;

 Launch of the new brand identity, new logo with a impressive combination of red and black;

 Maritime Bank headquarters moved to the new location – Sky City Tower, 88 Lang Ha, Hanoi

 Increase the number of transaction points to 144 points nationwide

Year of 2009

 The charter capital of 3,000 billion VND;

 Officially signed a consultancy contract with McKinsey to develop a strategy fordevelopment;

 109 transaction points nationwide

Figure 2.1 Maritime Bank Organization Structure

1.3 Products and services

Currently MSB offers its clients with a variety range of banking products and services :

 Account services

 Capital mobilization services (savings deposits, bonds, debentures)

 Credit services (short, medium and long term)

 Forex trading services

 Correspondent banking services

of community 2015” Award

 Vietnam Maritime Commercial Joint Stock Bank (Maritime Bank) has recentlybecome the first bank in Vietnam to be awarded the title “Best retail Bank in Vietnam2015” by the World’s most trusted and leading financial publication – World finance,for its contributions to and outstanding achievements in retail banking sector

 Maritime Bank was awarded the title “Best Domestic FX Bank in Vietnam” byAsian Banking & Finance Journal (ABF) This year, Maritime Bank is the only bank

to be granted with this prestigious award

 On May 22nd 2015, at the Headquarters (88 Lang Ha, Hanoi), Maritime Bankwas once again recognized by Wells Fargo – ranked 1st in capitalization value and 4th

in total assets in the United States – as one of the banks with the highest volume of andmost effective global currency payment via Wells Fargo global payment system

 On March 21, 2015, Maritime was honorably named at the 2014 strong brandname awards ceremony within 2015 strong brand names and golden dragon enterprises

festival, This evidences the sustainable and strong development of Maritime Bank overtime in the context of economic difficulties and challenges.

 On 04/02/2015, at “Government Bond Market Member Conference 2015”,Vietnam Bond Market Association (VBMA) organized Best Market Maker AwardCeremony 2014 Maritime Bank won two awards including: Market Maker OfferingBest Price and Market Maker with Highest Volume of Transactions This is the thirdconsecutive years that VBMA has held an award ceremony for top market makers whoengage in Market Makers Agreement (MMA) of VBMA

 With desire for bringing about a friendly, practical and dynamic award,meanwhile recognizing Vietnam’s national outstanding and pre-eminent E-bankingproducts, My E-bank ceremony was held for the first time in Hanoi with theparticipation of nearly 30 banks nationwide

1.5 Mission and Vision

Mission

 To be the BEST financial partner of our customers, providing them with full

range of financial products and services which are BEST served to their needs

 To provide our employees with a professional working environment where they have multiple opportunities for their BEST career development.

 To offer our shareholders BEST long term returns by executing a consistent

development strategy while enforcing rigorous corporate governance and riskmanagement best international practice, in comply with SBV and Vietnam’sregulations

Vision

Maritime Bank aspires to be one of the BEST commercial joint-stock banks in Vietnam

1.6 Business performance

General Financial Situation.

In 2014, Together with the bright side is that the inflation is controlled at theappropriate level and the stableness of interest rates, the economic situation ofVietnam continued to grow slowly and faced with many challenges The politicaltensions in the region caused some significant risks to economic activity and financialsituation Currency markets in 2014 witnessed the continued downward trend ininterest rates when the money go through the banking system have not found a

corresponding output Only in few months of the year, new lending activity started toshow signs of recovery as production and business area entered the stage of rapidgrowth and the real estate market becomes warmer In this context, to develop towards

a safe and sustainable way, Maritime Bank continued stick with the goal of improvingthe quality of asset, focused on exploiting low cost funds to improve profitability,increase services income while enhancing risk management and corporate governance

Balance sheet.

With the aim of sustainable development, in the last two years, rather thanfocusing on the growth scale, Maritime Bank focus more on managing the balancesheet The total assets of the system at the end of the year decreased by 2.56%,reaching 104.369 billion, with the structure of assets and capital to be adjusted in thedirection of safety and profitability more efficiently The coefficient of capitaladequacy was maintained stable at 12% -13% during the year to ensure therequirements of 9% of the State Bank of Vietnam (SBV) and significantly improvedreaching 15.7% at the end year, an increase of 5.14% over the previous year

Figure 2.2 CAR ratio versus granting/funding

Customers Loans

In 2015, Maritime Bank made strong steps to restructure the loan portfolioaccording to the new business strategy with positive adjustments in the credit