LV thạc sỹ_An evaluation of selected retail banking services at vietcombank

Besides wholesale services which have an international reputation foreconomic organization coporate banking, Vietcombank is known as a trustedaddress for individual customers with a vari

TABLE OF CONTENTS

TABLE OF CONTENTS i

ABBREVIATION 1

ACKNOWLEDGEMENTS 2

LIST OF TABLE 3

LIST OF FIGURE 4

INTRODUCTION 5

CHAPTER 1 A COMMON CONCEPT OF WHOLESALE BANKING AND RETAIL BANKING 11

1.1 Wholesale banking of commercial bank 11

1.1.1 The concept of wholesale banking services 11

1.1.2 Characteristics of wholesale banking services 12

1.1.3 The roles of wholesale banking services 13

1.1.4 The services of wholesale banking 14

1.2 Retail banking of commercial bank 17

1.2.1 The concept of retail banking 17

1.2.2 Characteristics of retail banking 18

1.2.3 The role of retail banking 19

1.2.4 The services of retail banking 21

1.3 Potentials for developing Retail banking 23

1.3.1 Foundations for developing Retail banking 23

1.3.2 Opportunities in Retail Banking 24

1.3.3 Benefits of Retail Banking 25

1.4 Expansion from wholesale banking to retail banking 26

1.4.1 The bank’s business strategy 26

1.4.2 Diversification as a mean to achieve bank’s business strategy 28

1.4.3 Process of product diversification 30

1.4.4 Evaluation of product diversification 32

CHAPTER 2 EVALUATION OF SELECTED RETAIL BANKING

SERVICES AT VIETCOMBANK 34

2.1 Overview of Vietcombank 34

2.1.1 Establishment and development 34

2.1.2 Organizational Structure 35

2.1.3 Business performance of VCB over period 2008-2010 36

2.2 VCB’s current product development in retail banking 37

2.2.1 Products and services 38

2.2.2 Process of developing product 46

2.2.3 Factors led VCB to retail banking and challenges VCB faced in developing retail banking 49

2.3 Evaluation of selected retail banking products at VCB 54

2.4 Assessment 60

2.4.1 Achievement 60

2.4.2 Constraints 62

2.4.3 Causes of constraints 67

CHAPTER 3: SOLUTIONS TO DEVELOP RETAIL BANKING SERVICES AT VIETCOMBANK 70

3.1 Strategy of Vietcombank in developing retail banking services 70

3.1.1 The retail banking development trends 70

3.1.2 Strategy of Vietcombank in developing retail banking 71

3.2 Proposed solutions to develop retail banking at Vietcombank 75

3.2.1 Building strategy of product development oriented following customer 75

3.2.3 Developing new products and services 76

3.2.4 Expanding network and channels 79

3.2.5 Improving banking administration and risk management 80

3.2.6 Standardize the process of product development at VCB 81

CONCLUSION 85

REFERENCES 86

VCB Bank for Foreign Trade of Vietnam

SBV State Bank of Vietnam

WTO World Trade Organization

WB World Bank

ATM Automated Teller Machine

POS Point of sale

BOD Board of Director

HO Head Office

IT Information Technology

ICT Information Technology and Communication

GDP Gross Domestic Product

FDI Foreign Direct Investment

LC Letter of Credit

P/E Profit on earning

PIN Personal Identification Number

Last, but not the least, I thank my families for their support andencouragment and my dear class mates who always keep contact each other andexchange ideas and documents to pursue my interests.

LIST OF TABLES

Table No.1: Financial status of Vietcombank 37

Table No.2: Status of individual fund mobilization from 2008-2010 38

Table No.3: Status of individual credit 2008-2010 40

Table No.4: Status of individual credit by product 2008-2010 41

Table No.5: Status of transfer money through Swift channel 2008-2010 43

Table No.6: Status of transfer money through Money Gram channel 2008-2010 43 Table No.7: Status of E- banking services 2008-2010 44

Table No.8: Total amount card issuance 46

Table No.9: Total oustanding loans and NPL’s rate of Car loans 2008-2010 55

Table No.10: Margin interest analysis of Car loans 2008-2010 56

Table No.11: Total oustanding loans and NPL’s rate of Project housing loans 2008-2010 56

Table No.12: Margin interest analysis of Project housing loans 2008-2010 57

Table No.13: Total oustanding loans and NPL’s rate of Staff loans 2008-2010 58

Table No.14: Margin interest analysis of Staff loans 2008-2010 58

LIST OF FIGURES

Figure No.1: Model of governance structure of VCB 36Figure No.2 : Portfolio of individual credit 42

-With 89 million people of population today, Vietnam is clearly a hugemarket for retail banking serives According to a recent report by a consultingfirm, Bain & company, Vietnam banking industry is still in an ealier stage ofdevelopment at which by 2007 only 2% of Vietnam’s 84 million people have evertaken out a bank loan and only 5 million have a personal bank account Since then

it is natural to expect that these figures have increased but they shall not besignigicantly improved In the past several years, Vietnamese people havewitnessed and enjoyed a greater choice of retail banking services ranging fromhousing loans, auto loans, saving loans to bancasurrance, guarantee To catchingthe huge and new demand, general banking and retail banking services inparticular in our country is being developed very rapidly The bank is constantlylaunching products, services and technologies to bring many benefits forcustomers, boosting turnover in social capital and promote economic development

-Based on the growing trend of retail banking services of commercialbanking system of Vietnam, Bank for Foreign Trade of Vietnam (Vietcombank)has been implementing supply most of the banking products and services soldretail customers A full awareness of the market importance of retail bankingservices in the context of international economic integration today, Vietcombankconstantly improve the products and services retail banking, and applications usemodern technology to develop products and services retail banking, to meet socialneeds One of the activities that mark the full development, demonstrates thecorrectness of the above strategy is the achievement in the areas of retail bankingservices Besides wholesale services which have an international reputation foreconomic organization (coporate banking), Vietcombank is known as a trustedaddress for individual customers with a variety of services and modern retailbanking services as a flexible loan product, payment cards, ATM system,diversified capital mobilization, the online banking service, remittance services.

-It could be said that the period form 1995 to moment is not a long period inVietcombank’s history but 45 years is the period witnessed many changes to themethods and operations in retail banking in a bank that has advantages inwholesale banking From a few thousand retail customers in the early 90s, now thenumber of individual customers has reached 3 million (over 30% market share inVietnam) and continual development of both quantity and quality

-Having recognised the potentials in retail banking and experienced thedifficult conditions by Vietcombank, the evaluation and developing for retailbanking services is chosen as the topic for this MBA thesis To study mentionedproblems, VCB must push strategies to expand retail banking through usingproduct diversification as a tool It is also research purpose of this thesis Thestudy will research and offer some lessons and strategies for VCB based onanalyzing current situation and its competence

3. Research objectives

-Systemize theoretical theories of retail banking and wholesale banking,potentials for developing retail banking and expansion from wholesale banking toretail banking

-Analyze and evaluate selected retail banking products and realize pendingissues of developing retail banking services at VCB

-Propose solutions to develop retail banking services at VCB

4 Research questions

-What is retail banking and how important is it in commercial banks’operation ?

-Why need to expand from wholesale banking to retail banking ?

-What is the current state of the development in retail banking services atVCB?

-What are solutions to develop retail banking services at VCB?

5 Literatutre reiview

-Development of retail banking services was identified as an important part

in the development strategy of commercial banks in Vietnam, starting from thegrasp opportunities from new markets, from the application of systems andtechnology used to create many new products and services, efficient distributionmethods, enhancing the relationship between clients and banks

-The banks can use product diversification as a tool to develop retail bankingservices Product diversification may also achieve competitive advantage forbanks through economics of scale and other synergies from using the banksresources and capabilities across different product lines Ahmed Ebrahim andIftekar Hasan (2002) had the study to assess the value relevance of productdiversification in US commercial banks, results show that annual abnormal returnshave more significant positive relation with changes in the noninterest component

of bank earnings compared with changes in the interest component of earnings.Alank Reichert and Larry D.Wall (2000) had swept away most of the barriers

limiting the affiliation of banks with nonbank financial services providers Thefocus now shifts to financial services executives who must decide whichcombinations provide the best opportunities to increase shareholder wealth.Existing empirical evidence suggests that an important consideration in thisdecision is the potential gain from portfolio diversification into new activities Theavailable empirical evidence also suggests that the potential for such gain clearlyexists However, the results provided by this article emphasize that the efficientcombination may change over time, perhaps for reasons such as themacroeconomic environment or technology Allen N Berger , Iftekhar Hasanb,Mingming Zhouc (2010), diversification is captured in four dimensions: loans,deposits, assets, and geography Kevin J Stiroh (2002), the U.S banking industry

is steadily increasing its reliance on nontraditional business activities that generatefee income, trading revenue, and other types of noninterest income This paperassesses potential diversification benefits from this shift This shift towardnoninterest income has contributed to higher levels of bank revenue in recentyears, but there is also a sense that it can lower the volatility of bank profit andrevenue, and reduce risk

6 Theoretical background

In this study, a simple model will be applied:

Leding interest rate = Fund mobilization interest rate + Operating expenses rate + Risk premium rate + Gaining profit rate

+ Operating expenses rate is calculated by dividing the operating expenses

(include: the salary, rent house, depreciation, materials…) to everage individualoutstanding loans

+ Risk premium rate is based on budget risk expense divide everage

individual outstanding loans ;

+ Gaining profit rate is calculated by formula: Gaining profit rate = Interest margin – Operating expenses rate - Risk premium rate.

- In Vietcombank, Lending interest rate = Fund mobilization interest rate + Interest margin So that Interest margin must cover all the components: Operating expenses rate, Risk premium rate, Gaining profit rate and also ensure the

competitive lending interest rates in the market Based on the data conducted byVCB’s report from 2008-2010, I will employ the model above to analyze theeffect of product diversification on cost and profit efficiency

Research methodology

-The methodology used in the thesis is quantitative analysis The data ofthesis consists of two sources, including primary data and mostly secondary data.The secondary information and data will be obtained from newspaper, annualreport, magazine, internet, books…Other secondary data regarding VCB will beacquired from VCB and other related sources of information such as SBV, VBA While the primary information and data will be collected through deep interviewwith officials of VCB

Research scope

-The study was conducted at Vietcombank only as follows:

Time: The time research is a period from 2008- 2010 and 1st quarter of 2011

Products: The research focuses on some current retail products at

Vietcombank like: auto loans, housing project loans, unsecured loans

Geographic scope: The primary data would be collected in the whole system

at Vietcombank

-Limitations: This research focuses mainly on financial aspects of evaluation

of selected retail banking services at Vietcombank and the data were 2008-2010 Italso gave out solutions to develop retail banking services at Vietcombank only, notfor the whole economy and other banks Limitations of the thesis also lie on its

sole research on the developing retail banking services, instead of comparingworking model on developing retail banking services at Vietcombank to those ofother banks who have succeeded in this field So this search is for Vietcombank, if

it were applied for another, we should take further and supplemental study

of developing in retail banking services

CHAPTER 1 A COMMON CONCEPT OF WHOLESALE BANKING AND RETAIL BANKING

1.1 Wholesale banking of commercial bank

1.1.1 The concept of wholesale banking services

The concept of wholesale banking was first used in the late '60s of the 20thcentury in England (David Cox, Shelagh Hefernan in England, George H Hempel,Linda Allen in the U.S.) Because the formation and development of wholesalecapital markets, then the banks begin to participate in this market and make loanswith money from depositors Wholesale banking is the term used for transactionsbetween banks and large customers (companies) or dealing with large amounts (up

to deposit and lending hundreds of thousands to millions of dollars or pounds).This term also refers to the wholesale’s transactions between banks made throughinter-bank market which separate from clients Wholesale banking’s activitiesembeded with the development of wholesale market, and then the development ofmulti-national banks and applied flexibly in international finance activities

Depending on the financial conditions in each countries, there are differentdefinitions of wholesale banking such as:

-In the U.S, wholesale banking services is the bank’s services betweencommercial banks (Merchant Bank) and other financial institutions In particular,Merchant Bank is defined as a business major bank which provide theinternational trade finance, long-term loans to companies and issuance guarantee.Merchant Bank does not offer banking services to individual customers

- According www.saga.vn, wholesale banking services is providing completefinancial statements to enterpises and banking services to other institutional clientssuch as pension funds as well as government agencies These services includelending, cash management, commercial mortgages, working capital loans, leasing,mandate services, Most of banks divide wholesale banking activities into

different services varied by enterprises size like: big enterprises, small andmedium enterprises.

In summary, combining the above definitions, we have the concept of

wholesale banking servcies as follows: “Wholesale banking services is the provision of services by banks to the clients such as large corporate clients, mid- sized companies, real estate developers and investors, international trade finance businesses, institutional customers (such as pension funds and government entities/agencies), and services offered to other banks or other financial institutions In essence, wholesale banking services usually involve high value transactions”.

1.1.2 Characteristics of wholesale banking services

Banking is an industry of economic service sector in the internationaleconomy, and is a division of financial services in general, such as public financeservices and operation services on financial market, thus wholesale banking alsohas common features of economic services such as:

-The number of customers is small: The targets of wholesale banking are

mainly large-scale enterprises so the number of customers are not much.Normally, with a wholesale and retail banking, the number of wholesale’scustomer accounts from 10% to 30% of customers

-Big value transactions and the average cost per transactions is small.

-Services and implementation processes are often complex, take a lot of time For example, to lend a big business, banks often have evaluated the projects

longer than a personal loan

-The revenue from the customers are enormous: With about 10% of

customers can bring 50% of income for the banks Therefore, the business risk ofwholesale banking is very high when customers come to other banks with betterconditions

-The average of operating costs is low: Wholesale banking often does not

require much equipment in distribution network and human resources as thenumber of customers in wholesale banking is less than retail banking

1.1.3 The roles of wholesale banking services

For the economy

Through the wholesale’s lending, the banks provide a large amount ofcapital for businesses to meet the goals of economic- social development.Especially, in the current integration, wholesale’s services have a big role with thegrowth of the economy Besides, the payment through bank with large transactionvalue reduces the cost of using cash, saves social costs In addition, wholesale’sservices also create favorable conditions for the development of other bank’sservices, to help banks diversify business activities, reduce risk, thereby create astable, sustainable finance for the country

For commercial banks

If the retail banking decides the scale of funding mobilization, the wholesalebanking decides the scale of lending For banks, the credit is specific and primary

in the creation of profit Profit is the basic for the survival and growth ofcommercial banks

With a intermediary payment function, wholesale banking make the payment

on a large scale regualarly, so that the banks also collect a lot of service fees Inaddition, it also facilitates the other banks’ services development easier Forexample, the salary payment for the employees is developed by opening depositaccounts of the company in banks Besides, due to the number of customers is lessbut it occupies a large proportion of sales transactions so the banks can savetransaction cost based on advantages of the size of transaction

For customers

Through the provision of credit, wholesale banking plays an importantchannels for injecting capital firms to carry out investment projects or import andexport goods while self-funding becomes droughty This is one of the key factors

to determine the success of the business plan and profitability of the company Thequick and schedule disbursement will help businesses save a lot of time and costs,improve efficiency of their capital, thus contributing to profit growth.

Besides, by the funding mobilization services from businesses, the bankshelp them store, manage and balance money effectively Wholesale banking is alsointermediate payments to the company due to the quick, convenient, safe paymentinstrument, help to promote the cash flow and the reproduction of companies With the customers are banks, through the mobilization of capital betweenbanks, the electronic payment services also has the opportunity to develop throughthe application of modern payment instruments, reducing the risk and higheconomic efficiency

1.1.4 The services of wholesale banking.

Mobilization capital

Commercial banks can mobilize capital from banks and large companies inmany varity of products, including current account, term deposits, issuing valuablepapers … Two kind of mobilization capital that banks often offer to theircustomers inlcudes:

-Current accounts: of the wholesale’s customers often have very big

balance of payment because there are a lot the needs of business transactions andinter-bank payments between banks Customers who choose this type of depositoften have the purpose of ensuring safety and utilities in payment transactionsthrough the bank

-Term deposit: is a significant sources of mobilization capital from big

enterprises and credit instituations However, because of the regular demands intransactions, customers only deposit in short term

In addition, commercial banks could raise capital from other sources such asdeposit, deposit to guarantee payment, the other deposits or issuing valuablepapers such as promissory notes, certificates of deposits, saving certificates andbonds

This is typical and most important activity in wholesale banking The kind ofcredit includes:

-Loan: this is a kind of credit which has the highest proportion and is

popular credit service of commercial bank Basing on loan term, loan includes twotypes: short-term loan (to invest in liquid assets), medium- long term (to invest infixed assets, implement project to develop production and business) In the kind ofloan, project finance and co- finance are typical loans and accupied a highoutstanding loan rate

+ Project finance: This type of loan to help accelerate investment in

infrastructure and production in Vietnam

+ Co-finance: is the process of providing credit with the participation of

two or more financial institutions and one financial institution is a clue infinancing for all or a part of projects

-Discount: the banks can discount commercial papers and other short-term

valuable papers for big enterprises and can re-discount them to other banks Withthis service, the banks help enterprises recover capacity payments and acceleratecapital flows

-Guarantee: is the commitment of banks, which is made on a document to

commit to the beneficiary If at maturity, the obligor does not perform thecommitments stated in the contract, the bank will be on behalf of the guarantor toimplement the commitments

-Financial leasing: is a transaction between two entities, including the

owner and the user of property, in which the owner (lessor) transfers property to

the lessee use in a given period and the lessee must pay money for the owner -Factoring: this is a kind of providing credit to the seller through the

acquisition of receipts arised from the sale of goods which is agreed upon in thesale contract

Payment services

-Domestic payment: includes payments between enterprises and payments

between banks Payments between enterprises through banks is extracting moneyfrom the account to pay into other account of beneficiaries through theprofessionally accounting of banks There are a lot of methods of payment throughthe banking system, such as payment by authorized payment, collection, transferautomatically or periodically

- International payment: this service is often applied for the import-export

companies as payment for goods between the seller or the buyer The internationalpayment transactions are usually done through primary methods such as letter ofcredit (L / C), collection, transfer money

Trading foreign currency

-Dealing foreign currency in the inter-bank foreign exchange market: is a

kind of trading foreign currency between commercial banks through inter-bankmarket

- Foreign Exchange with enteprises: Exporting enterprises often have

demand to sell foreign currency which received by exporting to take VND or othercurrencies Besides, they also need to buy and sell foreign currency followingforward contracts or option contracts to hedge exchange rate risk Meanwhile,importing enterprises often need to buy foreign currency for payment of matureimport contract and purchasing foreign currency by forward or option contracts tohedge exchange rate risk

Treasury services

-Collection and payment at counter: The banks receive money from

customers who have demand on savings, deposit money in current account,repaying loans, transfer money, foreign exchange Besides, the banks also paymoney for customers who have demand to withdraw money from savings, currentaccount, loan account

-Collection and payment by banks: The banks are on behalf of customers to

collect money from buyers, pay salary, pay for customers’ partners

E- banking services

E- banking services is a combination between the banks with internetactivities E- banking services for wholesale banking‘s customers are mainlyHome banking and Internet banking The customers of E-banking services aremainly banks, enterprises, organizations which aimed to use consultant servicesand seek information

Other services

In addition to the above services, wholesale banking also provides otherservices such as box services, mandate services,

1.2 Retail banking of commercial bank

1.2.1 The concept of retail banking

“Retail banking is typical mass-market banking where individual customers use local branches of larger commercial banks Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so”

Retail banking means mobilizing deposit form individuals and providingloan facilities to them in the form of home loans, auto loans, credit cards, etc, isbecoming popular This used to be considered by the banks as a tough propositionbecause of the volume of operations involved But during the last couple of years

or so, banks seem to have realized that the only sustainable way to increasedeposits is to look at small and middle class consumer retail deposit and not theprice sensitive corporate depositors

With annual income of population is growing every year The banks aretrying to seize this market through a series of innovative additions to theirproducts, services, technology and marketing methods Fixed and unfixedDeposits, (cluster deposits which can be broken into smaller units to help meetdepositors’ overdraft without breaking up entirely), centralised database for any

branch (whereby the customers can access their account in any branches wherethe account is maintained), room services (whereby the customers are visited attheir residences offices to enable them to open their accounts), automatic tellermachines, tele banking network, extended banking time, courier pickup forcheques and documents, etc are some of the privileges extended to the customers

by the banks in are eagerness to cultivate the retail market In short, in the boldnew world of retail banking, the customers are like king

1.2.2 Characteristics of retail banking

The features of retail banking also are common features of economicservices, so in those characteristics, we can summay through the followingcontents:

-The target customers of retail banking are enormous: individuals,

households and SMEs with a big of numbers and variety kinds of services

-The number of products and services is diversified, but the value of individual transactions is not high Products of retail banking include the products

of liabilities (funding), assets (loans) and other products which diversified invariety and rich in form However, the number customer of retail banking is big,

so to serve each customer of retail banking, the banks must also spend the samecost as a wholesale ‘s customer so the average cost per transaction of retailbanking is often big

-Retail banking services developed primarily based on technology and human resources The development of retail banking services depends on the level

of development of information technology in the economy and in each bank.Typically, E- banking services are applied modern technology to expand andimprove the quality of products In addition, to provide products and services toindividual customers, retail banking needs a great number of staffs andprofessional expertises

-Simple services, easy to implement: Retail banking’s goal is individual

customers, so it focuses on products and services such as deposit accounts, loans,credit card

-The average of operating cost is high: The number of customers is crowded

but spread everywhere so the transaction is not convenient Thus, to serve thesecustomers, banks often have to expand and invest on online trading with high cost

-Management methods and the form of marketing in retail banking is more complex than wholesale banking by the network client is widespread.

1.2.3 The role of retail banking

For the economy

Retail banking services contribute to exploit the resources of the economyand contribute to the implementation of national monetary policy This role isexpressed through facilitating the cash flow, take advantage of the tremendouspotential of capital from individuals, SMEs to develop the economy, improvepeople's life, limit the using cash in payment, save cost and time for both banksand customers

The more developmet retail banking services are, the more specialization thebanks provide products and services to customers, bring services closelier to users,reduce social costs and improving business efficiency of other subjects

The development of retail banking services based on advanced and moderntechnology, present civilization of the national economy because it alters directlythe economy from cash payment to non – cash payment economy By using non-cash payment, retail banking services improve the efficiency of State management

in currency, control commercial frauds, tax evasion and corruption

For banks

Today, if any bank hold the opportunity to expand retail banking services for

a huge population that are short of financial services in the emerging economy,they will become global giants in the future Thus, retail banking services has animportant position in the activities of commercial banks in the world, the global

retail banks will play a key role in the list of top 20 global banks ranked by TheBanker magazine in 2015 The Vietnamese Commercial Banks have beendeveloping retail banking services because this is an inevitable trend, consistentwith the general trend of the banks in the region and in the world, ensure for thebanks manage the risk effectively, supply the high quality services to customers,orient business, objective market, to help the banks achieve optimal businessperformance

In the financial perspective and bank management, retail banking bringsrevenue stability, certainty, reduce risk by outside factors because this is an areathat less affect by economic cycles Revenues will increase if the banks attractmore customers to use their services Developing retail banking services is themost effective way to change the structure of the bank’s income With complexmarket conditions, credit activity becomes riskier, so if the bank only depends onthe revenue from credit interest, it will be uncertain Thus, developing retailbanking services will increase revenue for banks

Retail banking services plays a key role in expanding markets, improvingcompetitiveness, creating medium and long term capital for the banks, diversifyingthe banks’ activities Retail banking expands cross-sold between individuals andbusinesses with banks, thereby it increases network and develops the existingcustomers and potential of commercial banks

Developing retail banking services will bring many benefits from raisingcapital, credit and services to commercial banks Beside relatively stable periodcapital, commercial banks can use the balance of current accounts, issuing cardaccounts, deposit accounts to raise funds with low interest rates

For Customers

Because this sector has advantage in scale and scope so as the more peoplejoin in, the lower cost and more convenient the users The development of retailbanking services based on advanced technology to save manpower and reduceoperating costs, thereby it reduces the cost of services for customers Customers

will get the better services because retail banking brings to customers theconvenience, safety, savings in payment process and using their income

Especially for SMEs, through capital funding and other utility of billing,retail banking facilitate business and production process smoothly, rhythmically,contribute to accelerate the production and circulation of goods

1.2.4 The services of retail banking

Capital mobilization

The banks raise funds from individuals and SMEs mainly in the form such ascash deposits, term deposits, savings deposits, issuance of valuable papers In theform of retail mobilization, savings occupies a big part of banks’ capital, create along-term capital to finance the credit activities of banks In the worldwide, thereare two main types of savings:

-Unmature Savings: when the senders want to withdraw money, they must

notice to the banks before a period of time But today, the banks often allowcustomers to withdraw money without notice

-Purpose - Savings: senders deposit in banks to use for a specific purpose

such as buy houses, pay study cost With these customers, banks often providecredit to compensate deficiency when they use follow the purposes of savings

Credit

Retail banking provides loans to individuals (such as studying oversea loan,installment loan, car loan, housing loan, investment securities, trade gold, buy realestate…) and loans to households and SMEs (such as busniness loan, overdraft,limit loan) In the credit industry, commercial banks are always active anddominant in providing credit to individual customers In general, now thecommercial banks have developed diversified and rich credit products forindividual customers Now the banks often focus on key group loans such assalary payment loan, consumption loan, study oversea loan, auto loan, travelingloan, housing loan, installment loan About regulations and procedures,

individual lending is continue to comply following the credit regulations offinancial institutions

Overall, the proportion of loans to SMEs and individuals is growing in totaloutstanding loans of banks, and it contributes to increase turnover and profits forthe banks However, individual loans often have high management costs becausethe value of loans is often small and dispersible In addition, the borrowers areoften sensitive with factors such as interest rate, term and procedures so the banksare affected by competitive factors in the market and self- interest of customers

Payment services

On behalf of clients, the banks make payments for purchasing of goods andservices such as issuing and balance check, provide electronic payment network They implement these services by opening current accounts for customers Thecommon services of payment include checks, payment cards, collection, order forpayment, commercial paper With the provision of non-cash payment services,banks bring to individuals and SMEs a lot of utilities in payment With theseservices, banks can increase their income from fees and develop other services

E- banking ervices

In recent years, with the development of information technology, banks havedeveloped a lot of modern services, brought utilities for customers and satisfiedthe demands of customers With these modern services (such as phone banking,internet banking, mobile banking, home banking), customers can check accountbalances; check recent transactions; seek information about exchange rate, interestrate, products and services of the banks; access information on individualaccounts, make transactions at home or office via your computer connectedinternet

Other services

In addition to the above services, services for SMEs include internationalpayment services, foreign exchange, guarantee Services for individuals includeremittance services, collecting / order to payment, transfer money, and safe box

1.3 Potentials for developing Retail banking

1.3.1 Foundations for developing Retail banking

Globalization process along with new opportunities and new risks is one of the factors which promote the issuing new products.

The globalization process makes an opportunitie for commercial banks indeveloping countries access to modern banking services in developed countries.Trends in meger or acquisition an internal bank by multi-nation financialcoporation will help to acquire the knowledge and experience in productdevelopment as well as risk management and they becomes inevitability andmotivation for the growth process Besides, the threats from economicglobalization is creating potential risks that customer need to diversify investmentchannels and avoid risks through management asset services for private banking.These are the demands from the market during the globalization

Income and living standards are increasing that arise the demands of new financial services.

Along with the development of the economy, income of populations isimproving and it arises the demands for buying house, car, daily expenditure So,series of retail banking product were issued to satisfy the demands of customers.Besides, it also arises the demands in saving and investment correspondingly Thebanks as a financial intermediary in the economy can not ignore the role ofsatisfying customer needs through product portfolio management and investmentconsulting in addition to traditional saving products Increasing income also meansthat the learning, expanding knowledge or the needs of entertainment, traveling,entertainment demands increase correspondingly Besides, the customers also havequick, convenient transactions and safe payment demands They are bigmotivations for the development of new methods, new payments such as onlinebuying ticket, online trading systems and internet banking They are becoming thetrends, useful payments and becoming popular in the world

The development of new products is the reaction of the banks with changes in the legal environment (such as tariffs, non-cash payments, electronic documents ).

Sometimes, the fluctuations of legal system is an important premise for thedevelopment of new banking products or improving the existing products Forexample, the Finance Ministry's regulations in salary payment of the entire publicunits or state enterprises must be paid through the banking system This is astrategy to develop non-cash payment nation as well as clear financial activities inthe state enterprises Government’s regulations have created a wave of competition

in the banking system in building specialized products, adding new facilities toattract more customers Besides, there are some examplies of regulations on cashmanagement in the securities companies In the booming development of thesecurities companies, there is a situation that the securities companies usedinvestors’ money without customers’ allowance So, it arises lawsuits betweeninvestors and securities companies From this situation, the Ministry of Financehad regulation to request securities companies that must transfer money insecurities account securities to the banks’ account This regulation requests thebanks that must design new series products to connect the system of banks andsecurities companies The changes and constant improvement of the legalenvironment will a great motivation for the development of the banking systemproducts

1.3.2 Opportunities in Retail Banking

Retail banking has immense opportunities in a growing economy likeVietnam The rising of Vietnamese middle class is an important contributoryfactor in this regard The percentage of middle to high-income Vietnamesehouseholds is expected to continue rising The younger population not only wieldsincreasing purchasing power, but as far as acquiring personal debt is concerned,they are perhaps more comfortable than previous generations Improving

consumer purchasing power, coupled with more liberal attitudes towards personaldebt, is contributing to Vietnam’s retail banking segment

The combination of above factors promises substantial growth in retailsector, which at present is in the nascent stage Due to bundling of services anddelivery channels, the areas of potential conflicts of interest tend to increase inuniversal banks and financial conglomerates Some of the key policy issuesrelevant to the retail- banking sector are: financial inclusion, responsible lending,and access to finance, long-term savings, financial capability, consumerprotection, regulation and financial crime prevention

1.3.3 Benefits of Retail Banking

Traditional lending to the corporate are slow moving along with high NPArisk, treasure profits are now loosing importance hence retail banking is now analternative available for the banks to increase their earnings Retail banking is anattractive market segment that have a large number of varied classes of customers.Retail banking focuses on individual and small units Customize and wide rangingproducts are available The risk is spread and the recovery is good Surplusdeployable funds can be put into use by the banks Products can be designed,developed and marketed as per individual needs

Retail banking has inherent advantages which are analyzed from the

resource angle and

asset angle:

Resourse side:

 Retail deposits are stable and constitute core deposits

 They are interest insensitive and less bargaining for additional

interest

 They constitute low cost funds for the banks

 Effective customer relationship management with the retail

customers, built a strong customer base

 Retail banking increases the subsidiary business of the banks

Assets side:

 Retail banking results in better yield and improved bottom line for a bank

 Retail segment is a good avenue for funds deployment

 Consumer loans are presumed to be of lower risk and NPA

 Innovative product development credit

 Retail banking involves minimum marketing efforts in a demand –driven economy

 Diversified portfolio due to huge customer base enables bank toreduce their dependence on few or single borrower

 Banks can earn good profits by providing non fund based or feebased services without deploying their funds

1.4 Expansion from wholesale banking to retail banking

1.4.1 The bank’s business strategy

The objectives in the banking operation are achieving the goal ofmaximization of shareholders wealth These include the increasing in size anddiversification of banking services by offering diversified financial services toretail customers; improvement the quality of products and services by upgradingthe quality management of expertises in the area of high technology andimplementation of automated delivery system for payment services Theseobjectives have to be divided into specific quantifiable goals that embodied withcost and profit efficiency of banking operations:

-Create new retail banking products to fill the market gap: In an imperfect

market, the parties can not move capital across space and time freely, and beunable to perform risk management activities with the most effective, because themarket has no corresponding retail banking products Therefore, the retail bankingproducts are created sequently to fill the gaps in the market This is one importantmotivation for the development of new products Besides, along with thedevelopment of the economy, demands for retail banking products become variety,from the needs related to fixed asset purchases such as homes , car or dailyconsumption, the banks can bring facilities and provide solutions for customers

On a a basic product line, to satisfy quickly demands of a large number of retailcustomers, the banks has developed many product divisions with small differentfeatures such as a percentage of credit loan, loan period, the banks’ partners inproviding products This development process will help meet the needs of eachcustomer segment, increase productivity and efficiency

-Developing retail banking services to increase profits, ensure the sustainable development when the wholesale market is becoming narrow and appearing more competitors: In fact, along with the development of economic

growth, the big coporations and enterprises always seek the support and theguarantee in financial capacity through establishing their own banks These bankshave a absolute advantage in providing financial services to big corporationswhich are their traditional customers and making profits for all the bankingsystem These banks begin to turn to a potential retail banking market In addition,the development of wholesale banking and retail banking is difficult to separateand becoming mutual factors in the development of the banks because when thebanks supply wholesale banking products for businesses, they also provide apackage of retail banking products to businesses’ employees

-Developing new products will help to increase the competition in retail banking operations of the banks: Product development always has been one of the

important roles to increase profit and competitiveness in the banking system The

bank which has a much different product lines, will meet different needs ofcustomers One of the criterias in assessing the competitiveness of retail banking isthe development of product following the oriented needs of customers andconsider the needs of customers is the starting point for building products Eachproduct was crystallized by a process of transformation from the market analysis,demand definiton, developing systems to maximize utilities to provide tocustomers Thus, the diversity of products also show the flexibility, moderninfrastructure and high quality human resources to supply a product line to eachcustomer However, the variety of products must be accompanied with quality andefficiency, avoided the "boom" in scale in terms of quality are not equivalent Thissituation will create opposite effects with unpredictable consequences.

-Development new products to optimize the utilities and reduce transaction costs: A lot of new products in banking and finance, particularly in payment

systems also aim to reduce transaction costs E-cards, ATM help the customerssave a lot of transaction costs compared to traditional services With the means ofelectronic transactions, customers can save time in transaction with the banks,instead of the transaction at counter Now, with a computer connect internet, oronly with a cell phone in hand, customers can perform transactions such asretrieving information, transfering or making other payment transactionsanywhere This will help to reduce the opportunity cost of customers, increaseefficiency in transaction With the banking system, this also increase efficiency inserving customer, increase productivity through automatic transactions

1.4.2 Diversification as a mean to achieve bank’s business strategy.

* Definition of diversification

Diversification is the process of entering new business markets with newproducts Such efforts may be undertaken either through acquisitions or throughextension of the bank's existing capabilities and resources The diversificationprocess is an essential component in the long range growth and success of most

thriving banks, for it reflects the fundamental reality of changing consumer tastesand evolving business opportunity

Diversification in finance is a risk management technique, related tohedging, that mixes a wide of investments within a portfolio Because thefluctuations of a single security have less impact on a diverse portfolio,diversification minimizes the risk from any one investment The strategies ofdiversification can include internal development of new products or markets,acquisition of a bank, alliance with a complementary bank, licensing of newtechnologies, and distributing or importing a products line manufactured byanother bank Generally, the final strategy involves a combination of theseoptions This combination is determined in function of available opportunities andconsistency with the objectives and the resources of the bank

* Types of diversification

There are three types of diversification, including:

-Concentric diversification: This means that there is a technological

similarity between the industries, which means that the bank is able to leverage itstechnical know-how to gain some advantage For example, a bank thatmanufactures industrial adhesives might decide to diversify into adhesives to besold via retailers The technology would be the same but the marketing effortwould need to change It also seems to increase its market share to launch a newproduct that helps the particular bank to earn profit

-The bank could seek new products that have technological or marketing synergies with existing product lines appealing to a new group of customers This alsohelps the bank to tap that part of the market which remains untapped, and whichpresents an opportunity to earn profits

-Horizontal diversification: The bank adds new products or services that are

often technologically or commercially unrelated to current products but that mayappeal to current customers In a competitive environment, this form of

diversification is desirable if the present customers are loyal to the currentproducts and if the new products have a good quality and are well promoted andpriced Moreover, the new products are marketed to the same economicenvironment as the existing products, which may lead to rigidity and instability Inother words, this strategy tends to increase the bank's dependence on certainmarket segments For example, a bank that was making notebooks earlier may alsoenter the pen market with its new product Horizontal integration occurs when abank enters a new business (either related or unrelated) at the same stage ofproduction as its current operations

-Conglomerate diversification (or lateral diversification): The bank markets

new products or services that have no technological or commercial synergies withcurrent products but that may appeal to new groups of customers Theconglomerate diversification has very little relationship with the bank's currentbusiness Therefore, the main reasons of adopting such a strategy are first toimprove the profitability and the flexibility of the bank, and second to get a betterreception in capital markets as the bank gets bigger Even if this strategy is veryrisky, it could also, if successful, provide increased growth and profitability

1.4.3 Process of product diversification.

Step 1 The ideas of new product: New product ideas are original ideas,

concepts, general description of the technical principles of operation to satisfycustomer needs They are just the vague outlines, not specific products The cost

of this phase is usually lower than the later stages but very important as thefoundation for the design of new products It includes two stages:

-Stage 1: Analysing the market opportunities is the process of analysingfactors to detect potential market, such as: the development of informationtechnology, the demand of customers, the supported products and services,competitors, the changes in environment…

-Stage 2: Evaluate and select ideas is the process of evaluating ideas inrelation to customer needs and targets to help assess the level of attraction

Step 2 Design product: The product design process includes the following

basic contents:

 Identify key benefits that provide products and services to customers

 Position the benefits to create a difference with competitors

 Design features and characteristics of products and services

Step 3 Construct deploying product plan: When building plan, we need to

care some issues as follows:

 Forecast potential sales

 Forecast sales, cost of deployment, gaining profit in the short termand long term

 Supported activities for business products like: distribution, settingprice, media promotion

Step 4 Pilot deployment: to reduce risks in the construction, designing,

finishing process and distribute products to customers with the best quality Thetesting methods such as: experiment, the model represent, analyse base on buyerbehavior patterns, try to use product

Step 5 Launching new product to market: The cost for this period will be

high But the risk is still existing and possible happening at this stage, so the bankshould be considered factors carefully for the launch planning of new products tomarket like:

 Choose the location for launching new products to market,

 Choose the time for launching new products to market

 Supervise the activities of communication efforts for the introduction

of products

Step 6 Administrative supervision of the product life cycle:

Managing product follows the product life cycle: Building an accurate chart

of the product life cycle will help the bank evaluate some important issues such asexpanding into new market segments, repositioning product towards the differentgroup customers; continuing to improve product or expand distribution channels…

Supervising product: The supervising is a mean of administrative activities

to ensure completing the targets which have set out The contents need tosupervise including: introduct and deploy product, growth, mature, depression

1.4.4 Evaluation of product diversification

The banks can gain the potential benefits and synergies from an expansion ofbanking business into retail banking activities either from the cost perspective (as

a result of economics of scale) or from the revenue perspective (as a result of theability of the bank to raise more revenues from complementarities in financialservices consumption) When the banks are moving from wholesale banking toretail banking, they will replace traditional lending interest with fee-services areassociated with higher revenue volatility

Product diversification may also achieve competitive advantage for banksthrough economics of scale and other synergies from using the banks resourcesand capabilities across different product lines Such synergies from productdiversification are more likely to be realized when firms expand into related lines

of business or industries Therefore, product diversification is positively related to

a firm’s profitability Product diversification creates a real option that providesadditional synergy from diversification which individual investors cannot createthrough their personal portfolio diversification Such a real option creates strategichedge that turns to be in the money in case of future integration

Besides, product diversification is also a trend toward banks diversifyinggeographically The banks may benefit from their geographical expansion either inthe form of lower costs of producing the current financial services or in the form

of higher revenues from providing a new bundle of services to customers Bankshave the potential to achieve economies of scale in geographical dimension,because once an initial investment is made and the basic infrastructure is in place,organizations can expand the system elsewhere at a potentially reduced cost.Benefits of geographical diversification include: better access to capital markets inother regions/countries, which potentially leads to reduced cost of capital, greatermarket power, and reduced tax liabilities as geographically diversified banks cantransfer resources from high tax areas to low tax areas

The banks’ product diversification results in different synergies includingcost efficiency from the economics of scale It also lowers the systematic risk ofthe bank and three main reasons may explain this decrease in risk:

-First, income from lending activities is less contributing to the banks’revenues and when the banks open their activities into retail banking, the banks’profit will depend on fee- services very Besides, income from retail bankingincome activities which huge customers may suffer from smaller fluctuations thanwholesale banking activities

-Second, expanding retail banking activities may imply a rise in fixed costs(for example, additional staff may be required), which increases the operationalleverage of banks Conversely, once a lending relationship is established, themarginal cost will reduce by the supply of additional services to huge customers -Third, because bank regulators do not require banks to hold capital againstretail banking income activities, earnings volatility may increase because of ahigher degree of financial leverage Moreover, cross-selling of different products

to a huge customer (more products are sold to the same customer) will increase feeincome growth and reduce risk

CHAPTER 2 EVALUATION OF SELECTED RETAIL

BANKING SERVICES AT VIETCOMBANK

2.1 Overview of Vietcombank

2.1.1 Establishment and development

Established on 1-4-1963, Commercial Bank for Foreign Trade of Vietnam(Vietcombank) is one of the largest joint stock commercial bank in Vietnam withtotal assets as of the date 31-12-2010 is 307,496 billion For nearly half a century

of operation, Vietcombank can be proud that has many positive contributions inthe resistance against American; dynamic leader in construction and economicdevelopment - society renovation; deserves a major bank, the state's key economicsectors on the external service of industrialization and modernization of thecountry

Vietcombank has always maintained its position as a provider of financialservices in Vietnam in the field of international trade, in the traditional sectorssuch as venture capital, raising capital, credit, financing project, as well as inmodern banking services: Trading in foreign currencies and derivativeinstruments, card services, Internet Banking, SMS banking, Home Banking .Vietcombank is significant market shares in Vietnam in many areas of businesssuch as loans 10%, deposits 12%, 23% of international payments, card payments

55 %, Vietcombank is also an extensive network of commercial banks include:Head Office, 1 Operation Center in Hanoi, close to 350 branches and transactionoffices in the country, affiliated companies, Representative Office (RO) andoverseas companies and over 1,500 ATMs and nearly 14,800 points of sale cardpayment (POS) across the country Becoming a bank that has the highest profitrate in Vietnam, performing high profitability rate of net profit on equity (ROE)average over 20% annually With the advantage of a foreign main banks of thecountry, Vietcombank has established relationships with over 1,300 banks in 85countries all around the world, effectively supporting the customer's payment

Currently, Vietcombank is an official member of international organizations such

as VISA, MasterCard and American Express; Asian Bankers Association (ABA),the payment network telecommunication global bank (SWIFT) Member VietnamBanking Association (VNBA)

Vietcombank is one of the leading banks in application of moderntechnology, international standards in management and business With thesuccessful deployment of projects to modernize the bank, Vietcombank has built

an image bank advanced, automated processing of traditional banking servicessuch as retail banking, trade finance, business capital and constantly makeelectronic products and services in order to "bring the bank closer to customers"such as Internet banking services, VCB-Money (Home Banking), online billpayment (VCB-P), SMS Banking, Phone banking

With the important contributions to the stable development of bankingsector, the development of economic stability - economic development and fornearly half a century, Vietcombank has been honored with many noble rewardsParty State Government and awarded as: Medal of Ho Chi Minh Medal ofIndependence, many Labor Medal and Certificate of Merit from the Government

2.1.2 Organizational Structure

In fact, Vietcombank is gradually applying organizational models as well asmodels of corporate governance by norms and international best practices today.Vietcombank's operational structure is divided into blocks of activities aremanaged from the central Head office to branches as follows:

Board of Director

Controllers Committee Risk Committee

CEO - Senior Management

Internal Audit

Risk Management Committee Internal Inspectorate

Credit Committee Other Committee

Other Committee

Operational Group Financial Group Treasury & Trading

Wholesale

Business Group

Supporting Depts

The system of Departments and The network of Branches

2.1.3 Business performance of VCB over period 2008-2010

In three years, Vietcombank always achieved high speed growth in bothrevenue and profit, exceeds targets and contributed to the development of thebank, the development of the banking industry as well as prosperity of the country

In the period of the global economic crisis, Vietcombank has gradually overcomethe difficulties to achieve these results which are very proud