LV Thạc sĩ_Enhancing the corporate credit rating system at Vietinbank

Table 2.8 Credit scoring based on capacity and management experienceTable 2.9 Credit scoring based on credibility in doing business with the bankTable 2.10 Credit scoring based on busine

TABLE OF CONTENTSTable of Contents

1.1.1 Concepts of bank credit

1.1.2 Forms of bank credit for enterprises

1.1.3 The role of bank credit

1.1.4 Bank credit risk

1.2 Credit rating at commercial banks

1.2.1 Concepts of credit rating at commercial banks

1.2.2 The necessity of corporate credit rating

1.2.3 Principles of corporate credit rating

1.2.4 Credit rating models

1.2.5 The process of corporate credit rating

1.3 Factors affecting credit rating operations

1.3.1 Quality of information sources

1.3.2 Level of banking technology

1.3.3 Capacity and knowledge of credit officers

CHAPTER II: CURRENT CORPORATE CREDIT RATING

2.1.3.6 Challenges facing the bank

2.2 Application of the corporate credit rating system at Vietinbank

2.2.1 Overview of the credit rating system at Vietinbank

2.2.2 Credit rating process at Vietinbank

2.2.3 Application of corporate credit rating at Vietinbank

2.2.4 Evaluating the corporate credit rating operations at Vietinbank

2.2.4.1 Achievements

2.2.4.2 Limitations and reasons

CHAPTER III: ENHANCING THE CORPORATE CREDIT

RATING SYSTEM AT VIETINBANK

3.1 Orientation of the credit rating operations at Vietinbank

3.2 Solutions to enhance the credit rating system at Vietinbank in the

future

3.2.1 Improving the efficiency of the collecting and processing information

operations

3.2.2 Perfecting the corporate credit rating operation

3.2.3 Promoting information technology

3.2.4 Improving competencies of employees

3.2.5 Building customer relationship

3.3 Some recommendations

3.3.1 To the Government

3.3.2 To the National Bank

3.3.3 To Vietinbank

ACKNOWLEDGEMENT

First of all, the author would like to give his sincere gratitude to Professor Hoang LanHuong for her support, advise and encouragement from the initial to the final level ofthe thesis

Also, the preparation of this thesis would not have been possible without theenthusiastic guidance from the corporate customer office’s staff at Vietinbank, HoangMai branch

Lastly, the author offers his regards to all of those who supported him in any respectduring the completion of the thesis

EXECUTIVE SUMMARY

LIST OF TABLES

Table 1.1 Moody’s credit rating symbols table

Table 2.1 Vietinbank’s mobilized capital structureTable 2.2 Enterprises’ scale table

Table 2.3 Calculating financial indicators

Table 2.4 Vietinbank’s credit rating table

Table 2.5 Enterprise’s scale scoring

Table 2.6 Enterprise’s financial ratios scoring

Table 2.7 Credit scoring based on cash flow

Table 2.8 Credit scoring based on capacity and management experienceTable 2.9 Credit scoring based on credibility in doing business with the bankTable 2.10 Credit scoring based on business environment

Table 2.11 Credit scoring based on other operational characteristics

Table 2.12 Final credit scores

LIST OF CHARTS & GRAPHS

Chart 2.1: Organizational structure of Vietinbank

Chart 2.2: Organizational structure of Vietinbank’s branch

Graph 2.1 Interest incomes from customers in period 2007-2009

Graph 2.2 Credit loans according to business types in period 2007-2009Graph 2.3 Credit loans according to business sectors in period 2007-2009

CIs: Credit institutions

CIC: Credit information center

1 RATIONALE

Since a long time ago, banks have always been the most essential financialintermediaries that provide capital to the whole economy of a country and help thefinance market run more smoothly Because of this immensely importance of banks, it

is needed to manage all risks that can happen to a bank and keep them in control toensure the safety of the economy, especially when Vietnam is still a developing countrywith a considerably high growth rate On the other hand, among all operations of atypical commercial bank, credit operation is considered the most crucial one as it is notonly the highest source of income but also the one associating with the most numerousmajor risks that a bank can face, for example reducing the liquidity of the bank,downgrading its credit rating, so on and so forth Therefore, with the risks of banks ingeneral and of credit operations in particular, it is a challenging task for managers ofbanks to build an efficient credit rating system to control the risks well

Recently, with the rapid growth of Vietnam’s economy and global integration, creditoperations are becoming more and more popular as capitals are increasingly needed forbusiness, investment, expansion, et cetera This is a great opportunity for banks tofurther increase their profit from credit operations but it also contains potential risksthat need to be manage with a properly built credit rating system.

Since founded in 1988, Vietinbank has developed rapidly and at the moment is one ofthe four biggest banks in Vietnam with a chartered capital of more than 15,000 billionVND However, the larger the bank’s scale is, the more risks it will have to face andVietinbank is no exception Therefore, Vietinbank has been exerting itself to create acredit rating system and it has brought in certain successes for Vietinbank.Nonetheless, the system still exposes a number of flaws that need to be improved andafter a period of internship at Vietinbank, Hoang Mai branch, the author has decided toresearch about the thesis of “ Enhancing the corporate credit rating system at Vietinbank ”.

The type of instrumentation and data collection procedures used is the analyses ofsecondary sources such as:

 Statistical records: the bank’s annual reports, financial statements, etc

 Textbooks: Commercial bank management…

The research structure consists of the following main parts:

 Chapter I: Fundamentals of credit activities and credit rating of commercialbanks

 Chapter II: Current corporate credit rating system at Vietinbank

 Chapter III: Enhance the corporate credit rating system at Vietinbank

CHAPTER I: FUNDAMENTALS OF CREDIT ACTIVITIES AND CREDIT RATING OF COMMERCIAL BANKS

1.1 Bank credit

1.1.1 Concepts of bank credit

Credit is the provision of resources by one party to another party where that secondparty does not reimburse the first party immediately (thereby generating a debt), butinstead arranges either to repay or return those resources (or other materials of equalvalue) at a later date The resources provided may be financial (e.g granting a loan), orthey may consist of goods or services (e.g consumer credit) Credit encompasses anyform of deferred payment Credit is extended by a creditor, also known as a lender, to adebtor, also known as a borrower

To banks, credit operation is an essential activity determining the survival and growth

of them on the financial market Bank credit is the credit relationship between banks

and other entities in the economy, where banks act as both the borrower and the lender.

In other words, banks are the financial intermediaries that transfer capital from placewhere there is a capital surplus to the place where there is a temporary shortage ofcapital Price (interest rate) of the loans that banks determine to the borrowers is theinterest that they have to pay during the lifetime of the loan

Entities participating in the credit relationship are banks, state, enterprises andhouseholds The object used in the credit relationship is money, so it is not subject tothe limit of goods It is the advantage and distinctive feature between bank credit andother types of credit

Overall, there are several main characteristics of bank credit:

 The properties used in bank credit relationship include two forms, which areloans (using money) and leasing (using real estates and estates)

 Derived from the principle of return, when the lender transfers the property

to the borrower, they must have basis to believe that the borrower will paythe debts on time

 Normally, the return value must be higher than the loan value, or in otherwords, the borrowers have to pay the interest besides the capital

 In bank credit relationship, loans are granted on the basis of commitment to

an unconditional refund Regarding legal aspect, documents identifyingcredit relations such as credit agreement, contract, are actually promissorynotes, in which the borrower is committed to unconditionally return the debt

to the lender when due

1.1.2 Forms of bank credit for enterprises:

Based on the demand for loans of enterprises, bank credit can be classified into severaltypes:

 Based on loan purposes:

o Mortgage loans

A very common type of debt instrument, related to the procurement and construction ofreal estate such as housing, land and property in various fields, for example industry,commerce…

o Industrial and commercial loans

A short-term loan used to replenish the working capital of enterprises in the industry,trade and services sectors

o Agricultural loans

A type of loan used to cover the cost of production such as fertilizers, pesticides,seeds

o Financial institution loans

Used to providing credit for banks, financial companies, financial leasing companies,insurance companies, credit funds and other financial institutions

 Based on loan terms:

o Short term loans

Loans with maturity of less than 12 months to cover a temporary shortage of workingcapital of enterprises or expense demand of individuals

o Medium term loans

These are loans with maturity from 12 months to 5 years They are designed mainly forthe purchasing of fixed assets, improving or replacing technology and equipment,expanding business, etc…Medium term loans is also a source of regular workingcapital for enterprises

o Long term loans

These are loans with maturity from 5 years to 20-30 years Long term loans are a type

of credit provided to meet long term demands, such as construction of housing,equipment, large-scale vehicles, building new factories

 Based on the degree of the bank’s trust:

 Based on the origins of credit

o Non-term loans

This is a form of lending in which the banks or the debtors voluntarily repay the debt atany time, but have to notice the creditors before a reasonable period This period can benegotiated in the contract

1.1.3 The role of bank credit

With the economy’s rapid development and global integration, the market is becomingfiercer and fiercer For enterprises to survive and confirm their position in the market,they must be able to utilize bank credit On the other hand, bank credit also helps theeconomy in various aspects

 Bank credit helps enterprises enhance the management and use of capital for business more efficiently

For SOEs at the moment, capital is always a difficult issue in operating their business;and their lack of capital is widespread and very serious Therefore, bank credit is thebest way to meet working capital needs or to use temporarily idle funds of otherenterprises because of its flexibility Gradually, it has become a major source of capitalfor business operations of enterprises Bank credit helps enterprises avoid missingbusiness opportunities, maintain manufacturing business operations’ continuity,improve the efficiency of capital usage and so on

 Bank credit has positive impact on the pace of development and promotes competition

In the context of market economy, enterprises’ activities are heavily influenced byobjective economic laws Production must base on market demands and satisfy marketdemands in term of all aspects Enterprises’ activities must achieve certain economicefficiency according to general conditions of the market in order to survivecompetition To best meet the market demands, enterprises should not only improve thequality of labor, strengthen and perfect the mechanism of economic management, butalso continuously improve of machinery and equipment, seek new materials, expandproduction scale appropriately These activities require a large amount of capital thatoften exceeds the capacity of the enterprises’ equity To solve this problem, enterprisescan apply for bank loans to meet their investment needs Through credit operations,bank acts as a bridge connecting enterprises to markets, the capital the bank creditprovides enterprises plays an important role in improving the quality of all aspects ofbusiness operations, helping them meet the market demands and keeping up with thepace of development, thereby giving enterprises a foothold in the fierce competition

 Bank credit contributes to the acceleration of SOEs’ equitization

In the market economy, the demand for capital has led to the foundation of joint stockcompanies, which is a type of enterprises based on capital contribution to operatebusiness activities In Vietnam’s conditions these days, the formation of joint stockcompanies is inevitable.

Follow this trend and to accommodate the growth in recent years, the Government hasbeen conducting the equitization of SOEs to improve the efficiency of theseenterprises’ operations The practical process of implementation has shown the role ofcommercial banks, especially their credit operations for the formation, survival anddevelopment of joint stock companies in general and corporate equitization of SOEs inparticular

The banks act as efficient supporters for joint stock companies, enabling companies toborrow credits After that, the banks can help companies manage funds in openaccounts Thus, with the participation of commercial banks and especially their creditoperations, SOEs can have many advantages in the equitization process and thereforewill contribute to accelerate the equitization of SOEs today

1.1.4 Bank credit risk

 Credit risk

Credit risk arises in cases where banks do not fully collect or collect in time theprincipal and interest of a loan Credit risk is not only limited to the lending operations,but also including many other credit operations of commercial banks, such asguarantees, commitments, acceptances of trade finance Credit risk may come fromthe business environment, such as fluctuations in the economy which are too fast anddifficult to predict, legal environment is not favorable Credit risk can also come fromthe borrowers and the lending banks, including funds used for improper purposes,weak financial capacity of borrowers

 Consequences of credit risk

When credit risk badly affects the business activities of commercial banks, it can causepsychological panic in the depositors and they can make massive withdrawals whichwill cause serious problems to the entire banking system The panic influences theoverall economy greatly, causing decrease in the purchasing power, increase in pricesand social instability Domestic credit risk of commercial banks also affects theeconomy of others countries related as the global integration has connected themonetary and investment relationship among these countries.

 The usefulness of credit rating in credit risk management

Credit rating system helps banks manage risks by advanced methods, control the level

of customer credibility, and establish lending rates in line with the failure possibility ofeach customer group Banks can evaluate the efficiency of the loan portfolio throughmonitoring changes in outstanding loans and loan classification in each group ofcustomers which has been ranked, thereby adjusting the direction of the priority list ofresources to key customer group

1.2 Credit rating at commercial banks

1.2.1 Concepts of credit rating at commercial banks

 Credit rating at commercial banks estimates the credit worthiness of theenterprises that are the banks’ customers Credit rating is calculated fromfinancial history and current assets and liabilities Typically, a credit rating tellsthe banks the probability of the subject being able to pay back a loan A poorcredit rating indicates a high risk of defaulting on a loan, and thus leads to highinterest rates or the refusal of a loan by the banks Therefore, commercial banksneed to have appropriate analysis methods and indicators to obtain a good deal

of knowledge about enterprises’ resources, potential, business advantages aswell as their potential risks

 Credit rating is a process which is a combination of rules and regulations of thebanks in granting credit It includes the construction of concrete steps in acertain order, from the preparation of documents requesting for credit until theend of the credit relationship This is a process that includes several continuousstages, in a certain order, and are closely related and intertwined.

.2.2 The necessity of corporate credit rating

 For investors

Credit rating is a tool for investors to assess credit risk, mitigate costs to collect,analyze and monitor the repayment capacity of institutions issuing bonds or debtinstruments

 For enterprises

Credit rating helps enterprises expand their capital market both domestically andoverseas, thus reduce their reliance on bank loans Credit rating also helps maintain thestability of enterprises’ sources of funds; enterprises with high rating are able tomaintain their capital market in virtually all circumstances, even when there areunfavorable volatilities in the capital market The higher the credit rating, the lower thecost of borrowing (interest rate) and the investors are willing to receive a lower interestrate for safer securities Credit rating makes funding more flexible, issuers maystructure duration and the total value of securities issued appropriately

 For the banks

Credit rating is the basis for credit risk management to limit and restrict credit risks at

an acceptable level By doing a good job of this task, banks can give out proper loansaccording to the enterprises’ riskiness and prepare themselves for loans that can bedefault

Credit rating provides banks with information about enterprises seeking loans, so thatbanks can assess the enterprises’ strengths and potential risks, therefore makingeffectively credit decisions and minimizing credit risks With enterprises having highcredit rating, banks can apply favorable credit loans, such as lower interest rates, lessenthe paperwork…On the other hand, it is the opposite for enterprises having low creditrating These enterprises have to bear with a more tightening credit policies due to theirrisks

It also helps support the banks in loan classifications and risks provisions, proceeding

to the maximization of profits and protection of the stability of the banking system.Details of the loan classifications according to Article 7 of Decision 493/2005/QD-NHNN on May 22, 2005:

a Group 1 (Qualified loans)

Loans which are judged by credit institutions to be able to fully recovered bothprincipal and interests in a timely manner

b Group 2 (Loans need to be noted)

Loans which are judged by credit institutions to be able to fully recovered bothprincipal and interest in a timely manner, but customers show signs of downturn onrepayment capacity

c Group 3 (Under standard loans)

Loans which are judged by credit institutions to be unable to fully recovered bothprincipal and interests when due These loans are evaluated by credit institutions tolose partial principal and interest

d Group 4 (Doubtful loans)

Loans that are assessed by credit institution as having high chance of loss

e Group 5 ( Loans that have potential loss)

Loans that are judged by credit institutions as unable to recover or loss of capital

 For the government and financial markets

Credit rating helps make the financial market more transparent, improve the efficiency

of the economy and strengthen government’s capacity to surveil market

1.2.2 Principles of corporate credit rating

Modern concepts of credit rating are focused on key principles, including creditanalysis based on the awareness and willingness to repay of the borrowers and eachloan, long-term risk assessment based on the impact of business cycles and trends inthe ability to repay in the future, and comprehensive and uniform risk assessment based

on the symbolic rating system

In the analysis of credit ratings, it is necessary to use qualitative analysis tocomplement the quantitative analysis Quantitative data are measured by figures, whilethe observers that cannot be measured by numbers are classified as quantitative data.Indicators used for analysis can be changed according to the change in the level oftechnology and risk management requirements

1.2.3 Credit rating models

 Moody’s credit rating model

According to Moody's, credit rating are opinions on credit quality and solvencyliabilities of the entities borrowing based on basic credit analysis and are expressedthrough a system of symbols Aaa-C

Table 1.1 Moody’s credit rating symbols table

Numbe

r

1 Aaa Obligations rated Aaa are judged to be of the highest quality,

with minimal credit risk

2 Aa Obligations rated Aa are judged to be of high quality and are

subject to very low credit risk

3 A Obligations rated A are considered upper-medium grade and

are subject to low credit risk

4 Baa Obligations rated Baa are subject to moderate credit risk

They are considered medium grade and as such may possess certain speculative characteristics Problems may arise when economy has deteriorated

5 Ba Obligations rated Ba are judged to have speculative elements

and are subject to substantial credit risk Repayment ability often has trouble in deteriorated circumstances, usually problematic to predict future development

6 B Obligations rated B are considered speculative and are

subject to high credit risk Problems are to be expected in deteriorating situation

7 Caa Obligations rated Caa are judged to be of poor standing and

are subject to very high credit risk High likelihood of

bankruptcy or other business interruption

8 Ca Obligations rated Ca are highly speculative and are likely in,

or very near, default, with some prospect of recovery of principal and interest

9 C Obligations rated C are the lowest rated class and are

typically in default, with little prospect for recovery of principal or interest

 The Cs of credit

The question that must be dealt with before any other is whether or not the customercan service the loan – that is, pay out the credit when due, with a comfortable marginfor error This usually involves a detailed study of the critical aspects of a loanapplication: character, capacity, cash, collateral, conditions and control All of the Cs ofcredit must be satisfactory for the loan to be a good one from the lender’s point ofview

o Character

The loan officer must be convinced the customer has a well-defined purpose forrequesting credit and a serious intention to pay The loan officer must determine if thepurpose is consistent with the lending institution’s loan policy Responsibility,truthfulness, serious purpose and serious intention to repay all monies owed make upwhat is called character

company’s board of directors to negotiate a loan and sign a credit agreement bindingthe company.

o Cash

This feature of any loan application centers on the question: Does the borrower havethe ability to generate enough cash – in the form of cash flow- to repay the loan? Ingeneral, borrowing customers have only three sources to draw upon to repay theirloans: (a) cash flows regenerated from sales or income, (b) the sale or liquidation ofassets, or (c) funds raised by issuing debt or equity securities

o Collateral

In assessing the collateral aspect of a loan request, the loan officer must ask, does theborrower possess adequate net worth or own enough quality assets to provide adequatesupport for the loan? The loan officer is particularly sensitive to such features as theage, condition, and degree of specialization of the borrower’s assets Also if theborrower’s assets are technologically obsolete, they will have limited value ascollateral

1.2.4 The process of corporate credit rating

In general, the process of corporate credit rating consists of these basic steps:

Step 1: Collecting information

This is the first and foremost step of the process of corporate credit rating The qualityand results of the rating depends heavily on the efficiency of this step Information isoften gathered mainly from the enterprises themselves, and from several other sourcessuch as the media and government agencies

Step 2: Classifying enterprises’ business sectors/industries and scale

 Each business sector/industry has its own business cycle, capital needed,potential growth, costs and so on; therefore it is needed for the credit ratingsystem to consider business sectors/industries for a more accurate assessment ofenterprises The classification must be in coherent with the country’s economycharacteristics as well as international regulations

 Scale also plays an important role for banks in assessing the enterprises’ rating

as it affects their position in market, repayment ability, et cetera Usuallyenterprises with larger scale are considered less risky as they have advantages infinance, human resources and production scale Usually an enterprise’s scale isdetermined by factors such as taxes, labors and profits

Step 3: Analyzing criteria for grading enterprises

 Determining financial and non-financial indicators

o Financial indicators:

Financial ratios are useful indicators of a firm's performance and financial situation.Most ratios can be calculated from information provided by the financial statements.Financial ratios can be used to analyze trends and to compare the firm's financials tothose of other firms In some cases, ratio analysis can predict future bankruptcy Beloware the financial ratios that are often used by banks to grade enterprises:

- Efficiency ratios: including inventory turnover ratio, average collection

period ratio, asset turnover ratio…

- Liquidity ratios: including current ratio, quick ratio…

- Leveraging ratios: including debt ratio, debt to equity ratio…

- Profitability ratios: Operating margin ratio, ROE…

- Other indicators.

o Non-financial indicators:

Non-financial indicators are qualitative indicators that are hard to measure inquantitative Some popular non-financial indicators are:

- Credibility in dealing with banks: a company can gain the bank’s trust if it

has good history dealing with bank credit; for example always pays its debt

in a timely manner, has no overdue debts… The company will get higherrelationship score with the bank and can access loans easier

- Capacity and management experience: can be assessed through

achievements and failures of the executive board and their professionalskills, working years…

- Cash flow: besides the financial statements, cash flow statement is also

necessary to thoroughly evaluate the enterprise

- Business environment:Business environment is an important factor to assessthe viability of an enterprise An enterprise is highly valued if it is operating

in a promising sector, has renowned brand, reputation and good competitiveposition in the market

- Other indicators

 Building grading system

- Each financial and non-financial indicator must be given a score

- More important criterion must be assigned higher weight The weights must

be accurate and appropriate according to the business sector and scale

 Using the grading system to grade enterprises’ criteria.

Step 4: Rating enterprises according to the results above and applying the rating

on credit operations

 On the basis of the scores from grading financial and non-financial indicators,banks can synthesize score and give enterprises an appropriate rating using theirown symbol system, along with comments and recommendations This is theresult of the whole credit rating process; therefore the credit officers must beextremely careful and must consult specialists’ opinion if needed

 Based on the rating of enterprises, banks will make appropriate decisions onwhether to give the enterprises loans or not, the interest rates of the loans, creditlimit and so on

1.3 Factors affecting credit rating operations

1.3.1 Quality of information sources

The credibility of the rating results of enterprises depends heavily on the quality of theinformation sources Usually banks have troubles gathering all the information neededfrom enterprises as to keep their position on the market, they want to keep as much oftheir operating information and business secrets to themselves as possible, fearing that

if they give out too much, then competitors may get it somehow There are also casesthat enterprises provide banks with false information so that they can earn better scorefor a higher credit rating, thus can borrow more from the banks Therefore theinformation that they give banks is often insufficient and inaccurate All these reasonsmake the task of collecting information for the credit rating operation a very hard task

1.3.2 Level of banking technology

Level of banking technology also plays an important role in determining the quality ofcredit rating operation The credit rating operation will continue to be imperfect as long

as the process is still done manually Appropriate and modern credit rating software isneeded for a better rating operation of enterprises It helps improve the process’ quality,

eliminate the subjective mistakes caused by credit officers, save time for banks andalso helps store the huge information data from the credit rating operation moreefficiently.

1.3.3 Capacity and knowledge of credit officers

Credit officers are the ones to directly investigate the enterprises, analyze theirinformation, grade them and from there make the proper credit decisions; thereforetheir capacity and knowledge are the essential factors deciding the quality of the creditrating process They need to have firm profession skills about the credit rating processand good knowledge about the business sectors of the enterprises for the results to beaccurate and dependable

Besides, professional ethics is also an important issue Some enterprises may try tobribe credit officers to give them good rating results, or there can be credit officers thatmay offer to give enterprises high grade if they can give them some “commissions”.Therefore having professional ethics is extremely necessary for credit officers toaccurately access the enterprises and give them the appropriate credit rating for theirrisks, business operations and potential

Chapter 2: CURRENT CORPORATE CREDIT RATING SYSTEM

AT VIETINBANK

2.1 Overview of Vietinbank

2.1.1 History and development

Joint Stock Commercial Bank for Industry and Trade of Vietnam (Vietinbank),formerly the Industrial and Commercial Bank of Vietnam, was established under thename Industrial and Commercial Bank Specializing in Business of Vietnam underDecree 53/ND-HDBT on March 26, 1988 of the Council of Ministers about theorganizational structure of SBV and was officially renamed “the Industrial andCommercial Bank of Vietnam" (Incombank) by decision 402/CT of the President of theCouncil of Ministers signed on November 14, 1990

On March 27, 1993, the State Bank Governor signed the Decision 67/QD-NH5 on theestablishment of Incombank of SBV On 21 May 09, 1996, authorized by the PrimeMinister, the Governor signed the Decision 285/QD-NH5 on reestablishing Incombankinto the State Corporation model specified in the Decision 90/QD-TTg dated May 03

1994 of the Prime Minister

On September 23, 2008, Prime Minister Nguyen Tan Dung signed the Decision1354/QD-TTg, approved the equitization plan of Industrial and Commercial Bank ofVietnam On November 2, 2008, the State Bank signed the Decision 2604/QD-NHNNabout the announcement of Industrial and Commercial Bank of Vietnam’s enterprise

value On December 25, 2008, The Industrial and Commercial Bank held the IPOsuccessfully and became a joint stock enterprise

On July 3, 2009, the State Bank signed the Decision 14/GP-NHNN to establish andoperate the Joint Stock Commercial Bank for Industry and Trade of Vietnam JointStock Commercial Bank for Industry and Trade of Vietnam officially operated underthe certificate of business registration No 0103038874 given by the Department ofPlanning and Investment in Hanoi on July 3, 2009

For over 20 years of development so far, Vietinbank has developed in accordance withthe multi-bank model, with network widely distributed in 56 provinces and citiesnationwide, including 01 headquarter ; 03 main transaction offices; 145 branches, 527transaction offices, 116 saving funds; 1042 automated teller machines (ATM), 05representative offices, and 04 subsidiaries, including Financial Leasing Company,Securities Company of Vietinbank (VietinbankSC), Real Estate and FinancialInvestment Company of Vietinbank and Insurance Company of Vietinbank; 03business units including Card Center, Information Technology Center and School ofEducation and Human Resource Development In addition, Vietinbank also joinscapital in business with Indovina Bank and 08 other companies, including VietnamNational Financial Switch JSC, Ha Tien Cement JSC, Phuoc Hoa Rubber JSC, GiaDinh Joint Stock Commercial Bank and so on

Vietinbank currently has agency relationships with over 800 banks, financialinstitutions in over 90 countries and territories worldwide According to auditedfinancial statements of Vietinbank in 2008, total assets and profit after tax of the Bankare 193,590 billion VND and 1,804 billion VND, respectively

 Organizational structure of Vietinbank’s branch

Chart 2.2: Organizational structure of Vietinbank’s branch

General Meeting of Shareholders

General Meeting of Shareholders is the highest power organ of Vietinbank Allshareholders with voting rights included in the list of registered shareholders areentitled to attend General Meeting of Shareholders has the rights to decide thereorganization and dissolution of the Bank, decide the development orientation of theBank, appoint and dismiss members of the Board and Supervisory Board.

Board of Directors

Board of Directors is the highest administrative bodies of the Bank, with full powers

on behalf of the General Meeting of Shareholders to decide issues relating to theobjectives and interests of the Bank, except for matters under the authority of GeneralMeeting of Shareholders The Board is elected by the General Meeting ofShareholders

Executive Committee

The Executive Committee including the CEO, deputy CEOs, chief accountant, isappointed and dismissed by the Board of Directors CEO is the legal representative ofthe Bank and is the highest executive of all daily business operations of the Bank

Supervisory Board

Supervisory Board is elected by the General Meeting of Shareholders, is held on behalf

of shareholders to control all business operations, management and administration ofthe bank

Credit committee

The Credit committee makes decisions to grant credit limits, high value credit; getapprovals from the Board of Directors for loans and large sum of loans; chooses targetindustry, target customer group and decide on other important issues related to creditoperations

Institutional Council

The institutional council has responsibility for external affairs and partnerships, sales

of Vietinbank’s service products to domestic and international financial institutions forprofits

Management Department

 Employees’ salaries management: managing employees’ salaries and bonuses,

issuing policies and regimes for employees

 Accounting and financial management: assisting the Board of Directors and

CEO in the administration and business organization of Vietinbank, building,managing and implementing financial plans and implementing operationsrelated to Vietinbank’s financial accounting in accordance with the provisions ofState Bank, laws and regulations on financial management of Vietinbank

Business Department

 Business services: directly making transactions with strategic customers and

directly providing credits, giving investment consulting

 Foreign currencies trading: Managing and operating the organization of

foreign currencies trading, directly trading of foreign currencies on domesticand international markets

 Remittance services: Developing remittance services, building policies and

process for remittance services

 Trade finance services: developing already existing trade finance operations;

researching, developing new products to meet customer needs

Risk Management Department

Risk Management Department issues management policies, procedures to monitor therisk management function The department is responsible for administering varioustypes of risks, including credit risk, market risk, liquidity risk and operational risk

Support Department

The Support Department has responsibility for supporting all operations of the Bank

Information Technology Department

The department researches and applies information technology to meet therequirements of management and business activities development, ensuring that the ITsystems operate accurately, continuously, smoothly and safely

2.1.3 Operational status of Vietinbank in the past

2.1.3.1 General situation

Overcoming a lot of challenges in 2009, Vietnam has achieved a number of positiveresults Macroeconomic was basically stable, GDP growth was 5.32%, ODAcommitments reached 8 billion U.S dollars, FDI reached 21.5 billion dollars, totalexports and imports reached 56.5 billion dollars and 57.5 billion dollars, respectively.Set in the context of global economic recession, Vietnamese economy had had verypositive results, with important implications for a stable and sustainable development.With the joint efforts of the banking sector, Vietinbank have positively followed thepolicies set by the Government and SB, supported the economy outstandingly,developed stable business, achieved and exceeded planned targets in 2009 Total assetsgrew 25.9%, branch network was expanded, the quality of business become more

efficient and safer Capital mobilization increased 26.1%, loans to the economyincreased 35.1%

2.1.3.2 Capital mobilization

In the period 2004 - 2008, interest rate fluctuations in domestic and internationalcapital markets, inflation and competition among local credit institutions in capitalmobilization had affected the raising capital operations of commercial banks in generaland of Vietinbank in particular By 2009, the market was relatively stable, but thefluctuations in 2008 had negative impacts on the market Despite the challengingenvironment, Vietinbank succeeded in enhancing the mobilization of capital byapplying the capital mobilization strategy with a view of ensuring business activities inparallel with abiding current regulations

Table 2.1 Vietinbank’s mobilized capital structure

Deposits from SB and

Debt securities issued

and other loan funds

(Source: Audited unified financial statements of Vietinbank 2007, 2008, 2009)

In the past few years, despite the difficulties in raising capital due to the competition byother financial institutions and the fluctuation in the market, Vietinbank always strives

to keep its position and attract more funds In 2007, the total capital mobilized of

Vietinbank was 155,466 billion VND but in 2008, the figure rose more than 16% to181,245 billion In 2009, the total funds raised climbed to 231,007 billion, which was

a significant increase of 50,000 billion VND, about 27.45% Overall the growth inraised capital of Vietinbank is relatively stable even though there are negative impactsfrom the market To achieve these results, Vietinbank has focused on promoting,developing the capital mobilization operation, researching on diversified products /packages with more utilities and flexible interest rate policy to suit customer needs andalso to ensure competitiveness Some typical products are centralized accountmanagement, auto-deducting tax account, auto-investing services Besides,Vietinbank also focuses on attracting and exploiting capital from internationalorganizations, ODA sources, such as JBIC, energy-saving projects and many othersources

Analyzing Vietinbank’s sources of funds

 Deposits from SB and other CIs: SB and other CIs deposit their money inVietinbank to pay for the transactions they deal with Vietinbank It accounts foronly a tiny part of the total capital raised which is about 1% In 2008 it was1,968 billion VND, increasing 56% compared to 2007 However, in 2009 thefigure dropped to 1,069 billion, due to the decrease in non-term deposits fromother credit institutions

 Term deposits and borrowings from SB and other CIs: In 2008, the figure was7,625 billion VND, which was 56.3% higher than in 2007, composing of a mere3.21% of the total mobilized capital However, in 2009, the figure rose 262.7%

to 27,661 billion VND, an astonishing increase of about 20,000 billion, made up11.2% of the total

 Customer deposits: This is the largest source of fund for banks In 2007, it was72.49% of the total which was 112,692 billion VND However, even though thenumbers still increased to 121,634 billion VND in 2008 and 148,530 billion

VND in 2009, the proportion decreased gradually to 67.11% and 64.3% in 2008and 2009, respectively.

 Debt securities issued and other loan funds: This is another important source ofcapital for commercial banks In 2007 it was 32,624 billion VND, equal to 21%

of the total raised fund In 2008, it increased 33.87% to 43,676 billion VND.However, in 2009 the number stood still so its proportion in the total capitaldropped to 18.75%

 Other sources of funds: From only 4,007 billion VND in 2007, the figureboosted to 10,416 billion VND in 2009, accounting for 4.5% of the wholecapital in 2009

2.1.3.3 Credit operations

a Operation scale

Along with the strong growth of Vietnam banking system recently, Vietinbank alsoachieves strong growth in assets From 2003 to 2009, the total assets of Vietinbankhave increased nearly 3 times, from 94,979 billion to about 243,785 billion VND Thisgrowth is mainly due to outstanding loans increasing from 61,752 billion in 2003 to163,170 billion in 2009

Since its establishment, lending activity is the core operation in the business strategy ofVietinbank However, since 2005 the annual growth rate of total assets and loans hasdecreased Proportion of outstanding loans to total assets of Vietinbank is reduced bymany factors, but mainly because of Vietinbank’s strategy to restructure directactivities to business services – to be in line with international practices and work ofmodern banking

b Credit operation efficiency

Graph 2.1 Interest incomes from customers in period 2007-2009

(Source: Audited unified financial statements of Vietinbank 2007, 2008, 2009)

Interest income from customers in 2008 was 17,033 billion VND, which nearlydoubled the amount in 2007 of only 9,350 billion VND However, in 2009 the figuredropped to 14,439 billion, due to Vietinbank’s business diversification to lessen creditrisks

c Loan structure

 Loans according to types of enterprises