Summary of financial and banking phd thesis Development of commercial bank''s non-credit services in Vietnam

THE MINISTRY OF EDUCATION & TRAINING THE STATE BANK OFVIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY PHAM ANH THUY DEVELOPMENT OF COMMERCIAL BANK'S NON-CREDIT SERVICES IN VIETNAM SU

THE MINISTRY OF EDUCATION & TRAINING THE STATE BANK OFVIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY



PHAM ANH THUY

DEVELOPMENT OF COMMERCIAL BANK'S NON-CREDIT SERVICES IN VIETNAM

SUMMARY OF FINANCIAL AND BANKING PHD THESIS

HO CHI MINH CITY, 2013

THE MINISTRY OF EDUCATION & TRAINING THE STATE BANK OFVIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY



PHAM ANH THUY

DEVELOPMENT OF COMMERCIAL BANK'S NON-CREDIT SERVICES IN VIETNAM

SUMMARY OF FINANCIAL AND BANKING PHD THESIS

RESEARCH FIELD: BANKING AND FINANCE

CODE: 62.34.02.01

SCIENCE INSTRUCTOR:

PROF., DR TRAN HOANG NGAN

HO CHI MINH CITY, 2013

INTRODUCTION

1 PhD Thesis's necessity and importance

Vietnam officially became the 150th member of the World Trade Organization (WTO) This WTO membership will bring both opportunities and challenges for commercial banks (commercial banks) in Vietnam requiring the commercial banks to implement their enormous reforms to maintain and develop their roles in the fiercely competitive business environment

In Vietnam the banking competition is rather fierce All banks throughout the country are currently doing business with their great excitement For every minute, the banks are competing with each other by launching new products and services, offering low interest rates, process improvement, modern banking technology application

In 2012, when Vietnam Government removed some restriction in field of bank finance, the foreign banks performed their business with more free access So far, for commercial banks, the main source of income is credit operations especially in respect of medium and long term credit, real estate credit Due to the credit operation is in possible risks and the State Bank of Vietnam (SBV) firmly decided to set the maximum growth rate, the commercial banks were forced to increase their income from non-credit operation However, this is not easy way for commercial banks in the current period

It is one of financial restructuring activities of credit institutions in the master plan

"Credit institutions restructuring for the period of 2011-2015" approved by the Prime Minister at Decision No 254/QD-TTg dated 01 March, 2012 that : To gradually restructure the business model of commercial banks with less reliance on credit operations and more income from non-credit services

The non-credit services development is of socio-economic significance making the safe, accurate and fast payment; restricting corruption, illegal trafficking In addition, non-credit products will create more stable and safer income for commercial banks, although these banks have been facing with hard competition in the fierce business environment Therefore, Vietnamese banks have to prepare the appropriate steps in the near future to keep their existence and sustainable development meanwhile the state protectionism for domestic banks is step-by-step removed Moreover the development of non-credit services provides many positive social and economic impacts as more effective capital accumulation; safer, more accurate and easier monetary transactions; tightly-controlled illegal income

Based on the above approach, with a desire to participate in the development of commercial bank's non-credit services in Vietnam, I choose this PhD thesis "Development

of commercial bank's non-credit services in Vietnam" for my financial economics and banking subject It is hoped that this PhD thesis will contribute to the development of Vietnam commercial bank's services in the near future

In particular, for this thesis, the author applied the new methodology of combined two research methods including qualitative methods (studying scale of non-credit service development) and quantitative methods (studying quality of non-credit service development)

As qualitative research, the author conducts a data survey and analysis in 38/40 commercial banks in Vietnam It is the new point in his research on scale of Vietnam commercial bank's non-credit services development that the allocation of general operating expenses by operation type (types of credit service, non-credit service and other services) and the cost of provision for credit losses is itemized in the cost of credit operation As the result, the author calculates the contribution of each type of service to the profit before tax showing the real effectiveness of non-credit service development

As quantitative research, the author conducts a customer survey for non-credit services in a number of commercial banks in Vietnam and SPSS software application to identify the impacts on the customer satisfaction

3 Objectives

To study the non-credit services development on two aspects of scale and quality for identification of both advantages and limitations to the development of commercial bank's non-credit services in Vietnam On that basis, the thesis proposes solutions for commercial bank's non-credit services development in Vietnam

4 Subject and Scope of study

Subject: Commercial bank‘s non-credit services in Vietnam

Scope of study: Commercial bank‘s non-credit services in Vietnam

5 Methodology

The thesis is based on methods of statistics, analysis, synthesis, logic, comparison, inductive, synthesis, dialectical materialism, comparison between theory and practice, combined qualitative and quantitative researches and reference

The fact study was performed in two steps: preliminary and official studies Preliminary study is performed basing on qualitative methods with expert opinions for adjusting QoS reference point for non-credit services and its impact on customer satisfaction Official studies are carried out basing on quantitative methods of direct interview and survey via Internet

Chapter 2: Current development of Viet nam commercial bank’s non-credit services Chapter 3: Solutions for developing Viet nam commercial bank's non-credit services

CHAPTER 1: THEORY OF COMMERCIAL BANK’S NON-CREDIT SERVICES

1.1 OVERVIEW OF BANKING SERVICES

1.1.1 Definition

Banking services are banking operations providing customers services as required including deposit saving, lending, payment and foreign exchange trading, guarantee, advisory services,

1.1.2 Characteristics of banking products and services

1.1.3 Classification of banking services in term of income source

+ Foreign Currency Trading

+ Guarantee service (fee-based )

+ Trust Service

+ Advisory Service

+ Banking supervision

+ Money brokerage

+ Other non-credit services

1.2 OVERVIEW OF NON CREDIT SERVICES

1.2.1 Definition

Non-credit services are bank services creating income apart from interest and from the account payment services, treasury services, fee-based collection services, advisory services, trust services, foreign currency exchange

1.2.2 Development of non-credit services

1.2.2.1 Background

The author's views:

+ Development both in scale and quality : Each bank initially builds its investment plan of non-credit services development It is necessary to improve existing non-credit services with the application of international standards and practices, the maximum exploitation to strengthen customer confidence and optimizing investment On the other hand, it is required to access to new technologies for developing the customer and market networks However, the investment capital should not be wastefully and inefficiently allocated It is essential to harmonize the diversification with quality

+ Development in line with control capacity and market demand: The bank itself can control the arising risks to meet the customer needs The massive and out-of-controlled development can lead to unsafe condition at one unit, section or affect the bank's entire operations

1.2.2.2 The need to develop commercial bank’s non-credit services

+ For Banks

- Non-credit service is highly profitable for banks because of its low cost

- Non-credit service not require banks to use more capital

- Non-credit service helps banks reducing potential risks as its safe and low-risk level

- Non-credit service to help banks in recruiting and staff retraining

- Non-credit service to help banks in public relation, brand name promotion and market survey

- Non-credit service development is consistent with the trend of banking sector development

- Non-credit service to help bank cooperation for development + For the economy

- To meet the rising demand for banking service in the economy

- Required banking modernization to develop a modern economy

1.2.2.3 Impacts on the non-credit service development

The impacts on the development of commercial bank’s non-credit services is classified into two types

+ Internal impacts First, the financial capacity Second, the information technology infrastructure Third, governance capacity and effective human resources strategy Fourth, the distribution channels

Fifth, customer policy + External impacts First, the legal basis Second, the level of international economic integration and intra competition Third, economic growth and social environment

Fourth, the political situation and social order and security Fifth, the client's needs

Sixth, the government's policy Seventh, competitors

1.2.2.4 Criteria for the non-credit service development

The level of non-credit service development is rated basing on the following criterion

First, the criterion for the scale of non-credit service development + Sales and income increase

+ Customer and market share increase

+ Bank brand name and reputation

The criteria evaluation and measurement of banking service quality can be represented upon the model and customer perception of banking services quality According to previous studies, the banking service quality is often measured by the SERVQUAL model (five-component model) RVPERF model and FSQ & TSQ models

- SERVQUAL model (five components) Reliability

Responsiveness Tangibles Capability Empathy

1.2.3 Risks of developing non-credit services

1.2.3.1 Liquidity risk

1.2.3.2 Interest rate risk

1.2.3.3 Exchange rate risk

1.2.3.4 Operational risk

1.2.3.5 Technology and operational risks

1.3 EXPERIENCE ON NON- CREDIT SERVICE DEVELOPMENT OF FOREIGN

1.3.1 Experiences of some international banks

1.3.1.1 Hang Seng Bank (Hong Kong)

1.3.1.2 Standard Chartered

1.3.1.3 Citibank (Japan)

1.3.2 Lessons for Vietnamese commercial banks

First, to improve the legal environment for banking services, especially e-banking services

Second, to create the necessary infrastructure for the banking service development, especially the information technology-based and associated tools and means

Third, to develop governance capacity and professionalism of bank staff, employees

Fourth, to diversify bank products and services, modernizing traditional services in parallel with developing up-to-date services

Fifth, to pay reasonable attention and develop the appropriate banking network Sixth, to pursue the right customer policies

Seventh, to focus on advertisement, public relation, introduction of banking services benefits

Eighth, to set up reasonable prices

Conclusion of chapter 1 :

For Chapter 1, the thesis systematically presents the basic theory of commercial bank services, non-credit service, experiences on developing non-credit services in the world and lessons for commercial banks in Vietnam

For the overview of banking services, the thesis presents banking service concepts, the characteristics of banking products and services and income-based service classification For the overview of non-credit services, the thesis presents the concept of

non-credit service, development of non-credit services (in terms of scale and quality of service) and the risks of non-credit services performance for commercial banks in Vietnam In particular, regarding to the development of non-credit services, the author points out the widely applied models for rating banking service quality and customer satisfaction to build the theory framework for quantitative study shown in Chapter 2 In addition, the thesis refers to the experiences of non-bank credit services development in the world to draw out 8 key valuable lessons for reference for commercial banks in Vietnam The above arguments help to form basical theory for the realization of task-oriented thesis

CHAPTER 2: CURRENT DEVELOPMENT OF VIETNAM COMMERCIAL BANK’S

NON- CREDIT SERVICES

2.1 CURRENT OPERATION OF VIETNAM COMMERCIAL BANKS

As of 31 December, 2011, the Vietnam banking system consists of 01 Development Bank, 01 Bank for Social Policy, 5 state-owned commercial banks of which 03 state-owned equitized commercial banks, 35 joint-stock commercial banks, 50 branches of foreign banks, 05 100% foreign invested banks, 4 joint-venture banks Thus, currently the total number of Vietnam commercial banks is 40

Vietnam banking system is continuously expanded and diversified in terms of scale, ownership and business

However, the weakness of the Vietnam banking system are shown as following: First, a very high level of debt with bad debt compared to the economic growth level;

Second, liquidity problem in respect of interest racing for the past time; Third, weak management of corporate and risk, business losses and inefficiency

2.1.1 Financial capacity

2.1.1.1 Capital and capital adequacy ratio of commercial banks

+ Capital of commercial banks

In 2011, the average chartered capital of commercial banks in Vietnam is VND

6043 billion (equivalent to USD 290 million - as the average inter-bank exchange rate announced by the State Bank of Vietnam on 31 December, 2011) Now there are 14/40 banks with chartered capital of over VND 5,000 billion, of which 7 banks with over VND 10,000 billion in capital namely as Vietnam Bank for Agriculture and Rural Development (VND 21,511 billion), Vietnam Joint Stock Commercial Bank for Industry and Trade (VND 20,230 billion), Joint Stock Commercial Bank for Foreign Trade of Vietnam (VND 19,698 billion), Joint Stock Commercial Bank for Investment and Development of Vietnam (VND 12,947 billion), the Vietnam Export Import Commercial Joint Stock Bank ( VND 12,355 billion), Saigon Commercial Joint Stock bank (VND 10,740 billion), Saigon commercial bank (VND 10,584 billion)

Till 31 December, 2011, three small banks with capital of less than VND 3,000 billion as Petrolimex Group Commercial Joint Stock Bank (VND 1,000 billion), Bao Viet commercial bank (VND 1,500 billion) and Saigon commercial bank for Industry and Trade (VND 2460 billion)

+ CAR Ratio

Table 2.4: CAR Ratio of Vietnam commercial banks

Table 2.7: Bad Debt ratio of Vietnam commercial banking system

Unit : %

Source: Annual Reports of State Bank of Vietnam [42]

2.1.1.3 Business Performance Results

+ First, the income statement Table 2.9: Business Performance of Vietnam commercial banks

Unit: VND million

1 Income from credit operation 46.291 52.466 54.932 84.969 132.067

2 Net gain from non-credit service 8.377 10.722 11.743 14.202 12.707

3 Net gain from other operations 5.674 7.658 12.698 12.364 6.470

4 Total income (1+2+3) 60.342 70.846 79.373 111.535 151.244

5 Total operating expenses 17.016 21.041 29.844 43.945 57.926

6 Net operating profit before provision of

7 Cost for provision of credit losses 28.016 26.488 14.650 23.237 37.296

8 Profit before tax (6-7) 15.310 23.317 34.879 44.353 56.022 Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11] The year of 2011 is a difficult year for commercial bank's operation in the monetary market However, as shown in the business performance of a number of commercial banks, the commercial banks 's profit have increased over the years

Second, the operating income structure of Vietnam commercial banks Figure 2.1: The operating income structure of Vietnam commercial banks

13,9 9,4

74,1

15,1 10,8

69,2

14,8 16,0

76,2

12,7 11,1

87,3

8,4 4,3

Source: Annual Reports of 38 Commercial Banks in Vietnam and the author's analysis [8, 10, 11]

Table 2.11: Net gain from non-credit service of Vietnam commercial banks

Unit: VND million

2007 2008 2009 2010 2011

1 Net gain from payment service 1.236 2.331 3.739 5.687 6.208

2 Net gain from treasury service 145 238 355 765 882

3 Net gain from guarantee service 547 1.098 1.599 2.018 2.752

4 Net gain from trust service 26 53 101 397 303

5 Net gain from advisory service 15 6 150 112 24

6 Net gain from other services 1.822 2.199 2.560 3.338 2.332

I Total net profit from services (1->6) 3.791 5.925 8.504 12.318 12.500

II Net profit from foreign currency

trading operations 4.586 4.797 3.239 1.884 207 III Net profit from non-credit services

Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11] Table 2.12: Proportion of net profit from non-credit services of Vietnam commercial

banks

Unit : %

2007 2008 2009 2010 2011 Net gain from payment service 14,8 21,7 31,8 40,0 48,9

Net gain from guarantee service 6,5 10,2 13,6 14,2 21,7

Net profit from advisory service 0,2 0,1 1,3 0,8 0,2 Net gain from other service 21,8 20,5 21,8 23,5 18,4 Net profit from foreign currency trading operations 54,7 44,7 27,6 13,3 1,6 Total net gain/loss from non-credit services 100 100 100 100 100 Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11]

As shown in Table 2.12 in respect of proportion of net profit from non-credit activities, payment, treasury, guarantee services are growing with stable net gain The trust services, advisory services and foreign currency trading business and other services are unstably growing In particular, net gain from foreign currency exchange operations seriously decreased over the years of 2007-2011 and accounted for lower proportion of total income from non-credit services

Third, the net income of each business after allocation of operating costs

Table 2.14: Income statement of Vietnam commercial banks

Unit: VND million

2007 2008 2009 2010 2011

1 Income from credit operation 46.291 52.466 54.932 84.969 132.067

2 Operating expenses for credit operation 13.054 15.582 20.654 33.478 50.581

3 Cost of Provision for credit losses 28.016 26.488 14.650 23.237 37.296

I Net gain after provision for credit losses

and operating expenses allocation 5.221 10.396 19.628 28.254 44.190

4 Net gain from non-credit service 8.377 10.722 11.743 14.202 12.707

5 Cost for non-credit activities 2.362 3.184 4.415 5.596 4.867

II Net gain from non-credit activities after

operating expenses allocation 6.015 7.538 7.328 8.606 7.840

6 Net gain from other operations 5.674 7.658 12.698 12.364 6.470

7 Costs for other activities 1.600 2.275 4.775 4.871 2.478 III Net gain from other operations after

allocation of operating expenses 4.074 5.383 7.923 7.493 3.992

IV Total net gain = Profit before tax 15.310 23.317 34.879 44.353 56.022 Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11] Table 2.14 shows the net income of each business (including credit and non-credit services and other services) as taking costs for provision for credit losses into net gain from

credit services and operating costs allocation for each business After such allocation, the total net profit from the bank business is equal to the profit before tax

Table 2.15: Proportion of net profit per each business to Total profit before tax

Unit: %

2007 2008 2009 2010 2011

1 Net gain after provision for credit

losses and allocation of operating

expenses

34,1 44,6 56,3 63,7 78,9

2 Net gain from non-credit activities

after allocation of operating expenses 39,3 32,3 21,0 19,4 14,0

3 Net gain from operations after

allocation of operating expenses 26,6 23,1 22,7 16,9 7,1

4 Total net gain = Profit before tax 100,0 100,0 100,0 100,0 100,0 Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11]

Table 2.16: Proportion of Operating income of Viet Nam commercial banks

Unit: %

2007 2008 2009 2010 2011

1 Net gain from credit operation 76,7 74,1 69,2 76,2 87,3

2 Net gain from non-credit operation 13,9 15,1 14,8 12,7 8,4

3 Net gain from other operation 9,4 10,8 16,0 11,1 4,3

4 Total operating income 100,0 100,0 100,0 100,0 100,0 Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11]

As shown in Tables 2.15 and 2.16 net gain from credit operation takes a smaller proportion of the profit before tax than that of operating income over the years 2007 to

2011 It is proved that the credit operation is the major source of income for Vietnam commercial banks but potentially risky

Meanwhile, income from non-credit activities are taking greater proportion of profit before tax than that of operating income over the years 2007 to 2011 It is proved that income from non-credit operation is less risky and more profitable for Vietnam commercial banks

2.1.2 Rate of return (%)

2.2 CURRENT DEVELOPMENT OF VIETNAM COMMERCIAL BANK ’S NON- CREDIT SERVICES IN TERM OF SCALE

2.2.1 Services

2.2.1.1 Deposit account services, payment and treasury services

+ First, deposit account services

- Product and features Deposits, withdrawals, bank transfers, loan guarantees, loan guarantees to third parties in the bank; collection at the request of customer;other products as flexible savings account – floating interest rate : Customers can deposit more or withdraw a partial capital

on the interest payment day Moreover, customers can withdraw all before maturity when needed

Benefit and quality of service:

Deposits, withdrawals, transfers, payments; monthly salary receiving; Overdraft account; card issuance, checque issuance; Sign up for e-banking services; online banking services via the internet; banking services via mobile message; banking by phone 24/7; Automatic Transfer for periodic payments; payment transactions, withdrawal, money transaction for securities trading, for auction, online dividends receiving with affiliate securities companies; confirmation of financial capacity for abroad travel, study, savings account for loan payment or bank transfer to the other account

Capital raising performance:

Table 2.19: internal capital raising of Vietnam commercial banks

comparing to the previous year

(%)

Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analysis [8, 10, 11]

As shown in Table 2.19, the growth rate of capital raising of Vietnam commercial banks continuously increased over the years 2007-2011 In 2011, the capital raising has been facing with difficulties due to the impact of tightened monetary policy and strict control of the foreign exchange market In addition, capital mobilization has been facing much more challenges due to the unfair competition of a number of commercial banks,

+ Second, the payment service

- Domestic Payment

- Product and features:

Domestic payment products include payment order, collection order, checque payment and card payment

Payment, online payment, payment for electricity, telephone bills, shopping invoices, , airline tickets buying ;monthly salary receiving; overdraft account; bank cards issuance: Smartlink, Banknet, and VNBC; checque issuance; registered electronic banking services: Internet banking, Mobile banking, Home banking; automatical money transfer for the periodical payment; payment transactions, withdrawal, money transaction for securities trading, for auction, online dividend receiving from securities companies affiliated with banks;

-Benefit and quality of service

To best serve the cardholders, Vietnam commercial banks are constantly expanding their card acceptance points and ATM network throughout the provinces and the cities for ready response to domestic and foreign customer' demands

Customers can use the payment service through ATM and POS as payment for electricity, water, postal charges, shopping in commercial centers

International Settlement International settlement provided by Vietnam's commercial banks is well growing thanks to the wide network of correspondent banks around the world

Payment service performance Table 2.20: Net gain from payment service of Vietnam commercial banks

Unit: VND million

2007 2008 2009 2010 2011 Income from payment service 1.582 3.022 4.462 6.830 7.828 Cost of payment service 346 692 723 1.143 1.620 Net gain from payment service 1.236 2.331 3.739 5.687 6.208 Ratio of Net gain / income from

Increase or decrease rate of payment

service over the previous year (%) (0.01) 60,4 52,1 9,2 Source: Annual Reports of 38 Vietnam Commercial Banks and the author's analyis [8, 10, 11]

As shown in Table 2.20, the ratio of net gain from payment service always reaches

at 77% to 83.8% Thus, the payment service is highly profitable for Vietnam commercial banks

Currently, banks are competing on bank fee for non-credit services Fee schedule of the state-owned commercial banks are more competitive than that of joint-stock commercial banks in recent years However, the Vietnam commercial banks apply some not appropriate fee as account management fees, charges for account close, cash withdraw

in case the account holder deposited into his account or got interest within two days, high charge for account statements extraction up to VND200,000 / account / month, charge for certified audited balance, charges for all deposits with maturity within 5 days fees are sometimes too rigid not to create incentives for large and loyalty customers

+ Third, treasury services

- Product and features The treasury services include cash collection/withdrawal service with quick and safe deposit and withdraw; Acquisition, change of unqualified VND cash; collection of foreign cash that are crumpled, sticky chemicals, fire, termites and expired at circulation, not qualified for circulation; professional guidance for recognizing fake foreign currency at authorized exchange dealers and other bank units

- Benefit and quality of products Easy account opening and transaction; open an account in VND or foreign currency; Cash on business account is kept safe, secure; convenient deposit and withdrawal at all