LV thạc sỹ_Product diversification for retail banking services at vietcombank

in social capital and promote economic development- Based on the growing trend of retail banking services of commercial banking system ofVietnam, Bank for Foreign Trade of Vietnam Vietco

TABLE OF CONTENTS

TABLE OF CONTENTS 1

ACKNOWLEDGEMENTS 3

LIST OF FIGURE 4

LIST OF TABLE 5

INTRODUCTION 6

CHAPTER 1 A COMMON CONCEPT PRODUCT DIVERSIFICATION IN RETAIL BANKING 11

1.1 Retail banking of commercial bank 1.1.1 The concept of retail banking services 11

1.1.2 Characteristics of retail banking services 12

1.2 Product diversification of retail banking 15

1.2.1 Definition of product diversification 15

1.2.2 The necessary of product diversification in retail banking 16

1.2.3 Products of retail banking 17

1.2.4 The benefits of product diversification 20

1.3 Factors affecting product diversification 23

1.3.1 Internal factors 23

1.3.2 External factors 26

CHAPTER 2 PRODUCT DIVERSIFICATION IN RETAIL BANKING AT VIETCOMBANK 29

2.1 Overview of Vietcombank 29

2.1.1 Features the formation and development 29

2.1.2 Organizational Structure 30

2.1.3 Business performance of VCB over period 2008-2010 32

2.2 VCB’s current product diversification in retail banking 33

2.2.1 Products and services 33

2.2.2 Customer and Market 44

2.2.3 Distribution network 45

2.2.4 Product diversification result in retail banking at VCB 48

2.3 Factors driving the product diversification in retail banking at VCB 54

2.3.1 Internal factors 54

2.3.2 External factors 57

2.4 Assessment 59

2.4.1 Achievement 59

2.4.2 Constraints 62

2.4.3 Causes of constraints 65

CHAPTER 3: SOLUTIONS TO IMPROVE PRODUCT DIVERSIFICATION IN RETAIL BANKING AT VIETCOMBANK 68

3.1 Strategy of Vietcombank in product diversification in retail banking 68

3.1.1 The retail banking development trends 68

3.1.2 Strategy of Vietcombank in product diversification in retail banking 69

3.2 Proposed solutions to develop product diversification in retail banking at Vietcombank .72

3.2.1 Building retail banking strategy 72

3.2.2 Identifying retail banking target market and marketing strategy 73

3.2.3 Developing new products and services 73

3.2.4 Expending network and channels 77

3.2.5 Invest in banking technology 78

3.2.6 Improving banking administration and risk management 79

CONCLUSION 81

REFERENCES 82

First and foremost, I would like to express my sincere gratitude to my supervisor, Dr …

Last, but not the least, I thank my families for their support and encouragment and mydear class mates who always keep contact each other and exchange ideas and documents

to pursue my interests

LIST OF TABLES

Table No.1: Financial status of Vietcombank 32

Table No.2: Status of individual fund mobilization from 2008-2010 34

Table No.3: Status of individual credit 2008-2010 36

Table No.4: Status of individual credit by product 2008-2010 37

Table No.5: Status of transfer money through Swift channel 2008-2010 39

Table No.6: Status of transfer money through Money Gram channel 2008-2010 40

Table No.7: Status of E- banking services 2008-2010 41

Table No.8: Total amount card issuance 43

Table No.9: Total branch network 2008-2010 46

Table No.10: Total oustanding loans and NPL’s rate of Car loans 2008-2010 49

Table No.11: Margin interest analysis of Car loans 2008-2010 50

Table No.12: Total oustanding loans and NPL’s rate of Project housing loans 2008-2010 .50

Table No.13: Margin interest analysis of Project housing loans 2008-2010 51

Table No.14: Total oustanding loans and NPL’s rate of Staff loans 2008-2010 52

Table No.15: Margin interest analysis of Staff loans 2008-2010 52

LIST OF FIGURES

Figure No.1: Model of governance structure of VCB 31Figure No.2 : Portfolio of individual credit 38Figure No.3: Structure of customers of Retail banking 44

in social capital and promote economic development

- Based on the growing trend of retail banking services of commercial banking system ofVietnam, Bank for Foreign Trade of Vietnam (Vietcombank) has been implementingsupply most of the banking products and services sold retail customers A full awareness

of the market importance of retail banking services in the context of internationaleconomic integration today, Vietcombank constantly improve the products and servicesretail banking has, and applications use modern technology to develop products andservices retail banking, to meet social needs One of the activities that mark the fulldevelopment, demonstrates the correctness of the above strategy is the achievement in theareas of retail banking services Besides wholesale services which have an internationalreputation for economic organization (coporate banking), Vietcombank is known as atrusted address for individual customers with a variety of services and modern (retailbanking services- retail banking ) as a flexible loan product, payment cards, system ATM

automated teller machine, the product diversification of capital mobilization, the onlinebanking 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 the methodsand operations in retail banking in a bank that has advantages in wholesale banking From

a few thousand retail customers in the early 90s, now the number of individual customershas reached 3 million (over 30% market share in Vietnam) and continual development ofboth quantity and quality However, along with achievements, there are still problemsthat need to be improved First, customers don’t completely satisfy with retail bankingproducts and services at Vietcombank They feel that the bank’s staffs are notprofessional, the retail banking products are poor which charaterised with limiteddiversification to sub-segments of the market and rather simple customers’ care.Secondly, the network remains concentrated largerly on big cities and metropolitan areasrather expands to rural areas Even when openned in the cities, proportion of the full-range-of-services branches over the total numbers of branches are relatively small, givinglimited accesses to the customers Some reasons can be used to explain for the aboveexisting problems: lack of human resource, lack of policy for customers’ care, limitednetwork, lack of strategy for product diversification

- Having recognised the potentials in retail banking and experienced the difficultconditions by Vietcombank, product diversification for retail banking services is chosen

as the topic for this MBA thesis To study mentioned problems, VCB must pushstrategies to expand retail banking through diversifying product It is also researchpurpose of this thesis The study will research and offer some lessons and strategies forVCB based on analyzing current situation and its competence

- Propose solutions to develop product diversification in retail banking at VCB.

4 Research questions

- What is product diversification and how important is it to develop retail banking in acommercial bank?

- What is the current state of the product diversification in retail banking at VCB?

- What are effects of financial aspects of product diversification at Vietcombank?

- What are solutions to develop the product diversification in retail banking at VCB?

5 Literatutre reiview

- Development of retail banking services was identified as an important part in thedevelopment strategy of commercial banks in Vietnam, starting from the graspopportunities from new markets, from the application of systems and technology used tocreate many new products and services, efficient distribution methods, enhancing therelationship between clients and banks

- Product diversification may also achieve competitive advantage for banks througheconomics of scale and other synergies from using the banks resources and capabilitiesacross different product lines Ahmed Ebrahim and Iftekar Hasan (2002) had the study toassess the value relevance of product diversification in US commercial banks, resultsshow that annual abnormal returns have more significant positive relation with changes

in the noninterest component of bank earnings compared with changes in the interestcomponent of earnings Alank Reichert and Larry D.Wall (2000) had swept away most ofthe barriers limiting the affiliation of banks with nonbank financial services providers.The focus now shifts to financial services executives who must decide whichcombinations provide the best opportunities to increase shareholder wealth Existingempirical evidence suggests that an important consideration in this decision is thepotential gain from portfolio diversification into new activities The available empiricalevidence also suggests that the potential for such gain clearly exists However, the resultsprovided by this article emphasize that the efficient combination may change over time,perhaps for reasons such as the macroeconomic environment or technology Allen N.Berger , Iftekhar Hasanb, Mingming Zhouc (2010), diversification is captured in fourdimensions: loans, deposits, assets, and geography Kevin J Stiroh (2002), the U.S.banking industry is steadily increasing its reliance on nontraditional business activitiesthat generate fee income, trading revenue, and other types of noninterest income This

paper assesses potential diversification benefits from this shift This shift toward noninterestincome has contributed to higher levels of bank revenue in recent years, but there is also

a sense that it can lower the volatility of bank profit and revenue, 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 everageindividual outstanding 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 Leding interest

rates in the market Based on the data conducted by VCB’s report from 2008-2010, I willemploy the model above to analyze the effect of product diversification on cost and profitefficiency

Research methodology

- The methodology used in the thesis is quantitative analysis The data of thesis consists oftwo sources, including primary data and mostly secondary data The secondaryinformation and data will be obtained from newspaper, annual report, magazine, internet,books…Other secondary data regarding VCB will be acquired from VCB and otherrelated sources of information such as SBV, VBA While the primary information anddata will be collected through deep interview with 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, living house loans, unsecured lending to employees, saving loans

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

Vietcombank

- Limitations: This research focuses mainly on financial aspects of product diversification

at Vietcombank and the data were 2008-2010 It also gave out solutions to developproduct diversification at Vietcombank only, not for the whole economy and other banks.Limitations of the thesis also lie on its sole research on the product diversification,instead of comparing working model on product diversification at Vietcombank to those

of other banks who have succeeded in this field So this search is for Vietcombank, if itwere applied for another, we should take further and supplemental study

Research structure

- This paper has been specifically written to provide its readers a comprehensive picture ofproduct diversification in retailbanking, product diversification in retail banking atVietcombank at present, and propose solutions to VCB in the coming time Followingthis introduction are three chapters Chapter 1 will discuss on theory about productdiversification in retail banking and factors that would have an effect on the development

of product diversification in retail banking Chapter 2 will outline overview ofVietcombank’s business result and it also accesses the product diversification in retailbanking at Vietcombank Besides, the chapter will indicates factors driving thedevelopment of product diversification in retail banking at Vietcombank Theseassessment will supply all achievements, constraints and causes of constraints of productdiversification in retail banking Chapter 3 will propose solutions to further developproduct diversification in retail banking at Vietcombank The chapter researches allsolutions based on strategic orientations of Vietcombank and the retail banking trends.The solutions were executed base on studying both theoretical aspect and the assessmentreality of product diversification in retail banking Implemeting solutions will enableproduct diversification in retail banking at Vietcombank to develop the productdiversification in retail banking

CHAPTER 1 A COMMON CONCEPT PRODUCT DIVERSIFICATION IN RETAIL BANKING.

1.1 Retail banking of commercial bank

1.1.1 The concept of retail banking services

- In the past 20 years, the world of financial services has changed dramatically with theoutbreak of the banking services that changes the approach to the basic operation of acommercial bank There are many different approaches to retail operations Literally, inthe provision of goods and services, retail is selling directly to final consumers, little bylittle It differs from the wholesale which is selling to intermediaries, distributors.However, due to the particularities of banking that the term "retail" in the bank canunderstand a little differently According to economic experts of the Asian Institute of

Technology-AIT, “the retail banking is the provision of products and banking services to every single individual, small and medium sized businesses through its branch network ,

or the client can direct access to products and banking services through the means of information technology, electronics and telecommunications” According to the definition of the Bank for Foreign Trade of Vietnam: “retail banking activities are the activities of banking transactions with individuals and small and medium enterprises that value only from a few hundred VND to few tens of millions VND”

- In the Dictionary of Banking and Informatics, the retail banking / retail bankingoperations/ retail banking services is banking for the masses, often as a group financialservices including loan amortization, mortgage and credit securities, deposits andpersonal account According to commercial banks and business management, the term

"retail banking" is mentioned as a type of bank divided by the nature of operations whichforms mainly provide services directly to businesses, households and individuals withsmall credits However, the document also points out that with the current developmenttrend, there are little banks that has only retail banking or wholesale banking They areoften universal banks that have both mutual support activities

- Let’s look at main features of banking services and retail banking services:

Banking Services Retail banking services

Customers

All customers: from individuals and households

to enterprises, business organizations, financial institutions and

governments and other financial institutions

Individuals and small and mediumenterprises

The value of each

- Thus, we can use the concept about retail banking of the economists of the Asian Institute

of Technology-AIT as basic concepts to study services in general at commercial banks

and Vietnamese in particular: “Retail banking is the provision of products and banking services to every single individual, small and medium enterprises through a network of branches, or the client can make direct contact with the product, banking services through the means of information technology, electronics and telecommunications”

1.1.2 Characteristics of retail banking services

- Banking is a industry of economic service sector in the national economy, and is adivision of financial services in general, such as public finance services and operationservices on financial markets as securities, banking and non banking Thus bankingservices also are common features of economic services such as abstraction, not

reservations, arised from entrust of clients However, in those characteristics, retailbanking services also have specific ones that can be summarized through the followingprincipal contents:

Diversity and complexity

- As stated above, customers include many classes which have different characteristics onearnings, financial expenditure, the educational level, knowledge of banking, socialpsychology and so there are many requirements for various banking services Adapting

to these characteristics, the bank has developed many different types of services fromtraditional services to new and modern services

Dependency.

- Any of the provision of retail services of the bank which is also derived from theauthorization of the customer For example, customers can authorize the bank to transfermoney to the Third party The bank can only tranfer the amount money that customersrequested and the bank does not have ownership of the money but only by proxy In thecase of accepting deposits from customers, banks are authorized to use that money for aterm but not ownership of that amount Banks must pay back the principal amount atmaturity and interest that is the cost for using clients' money

Abstract.

- The invisible feature is worthy in providing retail banking services This feature made theclient difficult to assess and evaluate the quality of products and services before buying.Customers only have to set goals, requirements and agreements with banks on a rule,such requests quickly, accurately and safely in payment services Meanwhile, to purchase

a commodity product, the direct access of goods is crucial act of buying or not buying theproduct Therefore, banks must navigate to the elements can be observed such as locationservice providers need to spacious, the staff must be proficient in dealing withprofessional and good communication skills, real-time transactions as short as possible

Time factor.

- Banking services are generally not able to create a series to store as conventionalproducts Meanwhile, retail banking services to serve the primary customers that ownpsychological characteristics and depends heavily on cultural factors, belief, faith Forexample, the number of customers are more numerous on beautiful day than on rainyday On "good" year, days before the New Year, before the long holiday the customersoften have more transactions, the volume of cash transactions is bigger So banks need tohave knowledge of psychological, social, to predict the time of crowded customers toplan, calculate the amount of money, human resource which are ready to serve customerswell and quickly

Conditionlity.

- The process of providing banking services and products based on strict rules on theprocessing conditions Facility to implement the provisions of law and agreementsbetween banks and customers as well as technical mechanisms to operate, especially theattitudes of human resources in the bank Customers by direct or indirect handed mandate

to the bank and required the bank staff to respond promptly to the ability to perform theauthorization of the customer Therefore, banks must not only train staff communicationskills, professional skills but also skills guide customers, skills captured the hearts and thecoordination of individual customers with bank staff to complete the process of providingservices

The stability of quality.

- The agreement of customers embodied in the mandate could happen each time, eachservice or periodically, but the request processing (timeline, accuracy and safety) isrequired to comply with regular all conditions That is the decisive factor for the bank toset up the trust of customers, in particular, that is sensitive issue in the banking market toprotect and develop the potential market Banks must have a strategy and developappropriate solutions and train quality human resources The violation of the quality ofservices can occur, especially technical problems and staff skills but the solution must beminimized and treated promptly, and compensate for the losses of the customers

1.2 Product diversification of retail banking.

1.2.1 Definition of product diversification.

inition of diversification

- Product diversification means adding new products or services to expand the businessoffering within existing markets Product diversification is a strategy to increase thevariety of business, service, or product types within an organization Diversification can

be a growth strategy, taking advantage of market opportunities, or it may be aimed atreducing risk by spreading interests over different areas It can be achieved throughacquisition or through internal research and development, and it can involve managingtwo, a few, or many different areas of interest Diversification can also be a corporatestrategy of investment in acquisitions within a broad portfolio range by a large holdingcompany One distinct type is horizontal diversification, which involves expansion into asimilar product area, for example, a domestic furniture manufacturer producing officefurniture Another is vertical diversification, in which a company moves into a differentlevel of the supply chain, for example, a manufacturing company becoming a retailer

- Diversification in finance is a risk management technique, related to hedging, that mixes

a wide of investments within a portfolio Because the fluctuations of a single securityhave less impact on a diverse portfolio, diversification minimizes the risk from any oneinvestment

pes of diversification

Diversification in finance can be divided into two kinds:

- Vertical diversification: Vertical diversification is investment between different types ofsecurities Again, it can be a very broad diversification, like diversifying between bondsand stocks, or a more narrowed diversification, like diversifying between stocks ofdifferent branches

- Horizontal diversification: is when a portfolio is diversified between same- typeinvestments It can be a broad diversification (like investing in several companies) ormore narrowed (investing in several stocks of the same branch or sector).

- While horizontal diversification lessens the risk of investing entirely in one security,vertical diversification goes beyond that and protects against market and/ or economicalchanges

1.2.2 The necessary of product diversification in retail banking

- Product diversification can be a growth strategy in changing process from wholesalebanking to universal banking The value of universal banks is probable that by offering awide range of finance services, universal banks are more able to attract and keepcustomers The product diversification here is analyzed in two sides: widely and deeply.First, wide diversification means diversifying all kinds of products Banks not only have

to maintain traditional products but also access and apply modern products In terms ofmicro aspect, diversifying products help banks diversify income structure, reduce risks inbusiness, improve trade name and prestige in the market In terms of macro aspect,diversifying bank products will supply residence and economy a variety of services andproducts, since then make a contribution to enhance living standard as well as push theeconomy up Secondly, deep diversification means improve service quality When there

is no differences between banks on the sides of variety of products, services quality will

be the vital factor deciding the existence of a bank Therefore, from the beginning, banksshould set up suitable plans and strategies as well as perfect their products best in order tooffer customers convenience, fast speed, saved cost based on the comply with lawregulations and bank security

- In international economic integration, Vietname’s state owned banks often haveadvantages in wholesale banking so they can take the advantages in economies of scopeand scale to develop retail banking services Further, the types of finance products andservices available to customers are still comparatively limited while competitive pressurehave been more and more intensified due to the evolution of the global and domesticfinancial markets and the persistent existence of excess liquidity in the local bankingsystem The force of change in the banking industry is the rapid evolution of consumer

wants and desires Consumers are demanding anytime- anywhere delivery of financeservices along with an increased variety in deposit and investment products In thisregard, diversification in the array of banking products and services should be one wayfor banks to meet these challenges.

1.2.3 Products of retail banking

All banks are operated with three basic functions : deposit, lending and collectionpayment These are the most basic functions which the banks base on to develop thetraditional services But in the early 90's, modern banking system also has other servicesmore widely and more sophisticated In real, retail banking services are developed andexpanded based on the traditional services The variety of products focuses on thefollowing groups:

 Deposits

- Deposits are the pricipal source of funds for any financial institutions in general andbanks in particular Deposit products assist customers to save and earn interests fromtheir deposits Deposit products of retail banking can be categorized as the followings

 Demand deposits under the forms of checking or current account (those accounts

normally come with a chequebook and the credit balance of those account do notdraw interest) and saving accounts (those accounts that normally come with apassbook where their credit balances are entitled to earn interests)

 Fixed deposits which are placed for a fixed period of time at a fixed interest rate

(those deposits often come with certificates, which spell out the name of accountholder, amount or principal placed, applicable interest rate, the date and duration

of placement)

- In order to attract more deposits from customers, banks offer derivatives of the abovewith different modes of interest payment (interest premayment, periodical interestpayment, due date interest payment) and different methods of interest calculation(monthly, daily basis or progressive calculation)

 Lending activities

- Consumer Loans: are loans to finance expenditure needs, the purchase of individuals

and households These loans are often used for purposes such as building, repairing andbuying houses, buying household appliances and transportation, personal expenses such

as travel expenses, to cover hospital fees, study Consumer loans may take thefollowing forms:

One- time paymenst: are the loans of individuals and households to meet immediate

needs and one-time payments when the loan matures Most of these items are small andused to pay for the trip, shop supplies, automotive and housing, pay hospital fees

Installment : Loans often have medium term or long term and to be paid as many times

(usually by month, quarter or year) The loans used to buy expensive items like cars,appliances, buy the apartment

Home mortgage loan: A type of loan is to buy a house and the loan is secured by the

house or apartment

Car loan: A type of loan is to buy a car to satisfy the demand of travel, trade and

business

Staff loan: A type of loan is to meet the consumers’ demand quickly and conveniently

which is not required security properties

Credit Card: credit card is a revolving credit for credit card holders Each credit card

holder is assigned a specific credit limit based on the credibility and ability to ensurepayment of the cardholder The ability to ensure payment is determined based on thesynthesis of various information such as income, expenditure status, relationships, socialstatus of clients From the evaluation and classification of customers that banks andfinancial institutions offer credit card products varied: for example, Gold credit card(Gold) and standards card(Classic / Standard)

- Overdraft: Overdrafts are loans on account of customer payments at banks Customers

are allowed to spend over the current balance a maximum amount as the overdraft limitthat the bank allows To use overdraft, customers must sign the contracts with the banks.Overdraft limit is determined for each customer on the basis of determining the currency,credibility and solvency of the customer In overdraft, customers used the bank loan

without mortgage or collateral nor do the procedures for payment of principal or interestand the banks will collect the debt on customer accounts

mittances and Payment services

Like other banking products, remittance service of retail banking is carried out via thefollowings:

- Demand draft: is an unconditional order in writing, signed and issued by a bank,requesting the bank to whom it is addressed to pay the beneficiary the sum as stated there

in the demand draft

- Money transfer order: is made by customers to request the bank to transfer funds to othercustomers or even to themselves with designated accounts

- Letter of credit (L/C): is a written undertaking by the issuing bank, in favor of thebeneficiary (seller/exporter) at the request of the appicant (buyer/importer), to affect theagreed payment sum within a prescribed time limit and against complied stipulateddocuments It is often used in trading and by business

- Collection: Under collection, the bank acts as an intermediary to collect payment fromthe buyer on behalf of seller as instructed

her Services

- Safe deposit boxes: Safe deposti boxes are rented out to customers to keep their valuables

and important documents Safe deposit boxes are rented out for a fixed period and arenormally renewable on a yearly basis The bank provides security to items kept bycustomers and earns rental charges The security features include fireproof safe depositroom and dual access to the the safe deposit room and boxes

- Consultant and providing information: The bank has a good database due to their

relationships with the broad economic sectors, different customers, and banks are themost profound understanding of banking, finance, currency, so it has advantage inconsulting clients Taking these advantages, the bank has provided consulting services

and provide information not only for businesses but also for individuals In addition toconsulting services, the bank also consults on areas such as law, investment, tax Consulting Services and providing information to meet the needs of our customers whohave relatively high incomes, have not much time It help to reduce costs, risks ofbusiness and settlement of personal relationships

- Insurance Services: Banks provide insurance services to their individual customers via

insurance companies including life insurance, traveling insurance, property insurance,etc

1.2.4 The benefits of product diversification

Retail banking service is one type of services which has high quality It plays animportant role in economic and international integration process We can summarize therole of banking service on the following perspectives:

 Benefits for banks

In about three past decades, the strong development of retail banking had brought arevolution in the banking operations on market share and trade relationship among thebanks Retail banking services is very important for some reasons:

- Enhance profit for banks: In the past, traditional incomes of a bank are mainly from the

differences between deposit interest and loan interest, fee incomes os accounted for asmall proportion, of which most from payment services At present, modern banks profitfrom loan interest has been reduced gradually while non- interest income has beenincreasing Banks have been generating non- interest income from a number of newresources On the other hand, product diversification improves the professionalism andensures incomes for banks to make its business strategies

- Change the banks’ structure and management: In order to face with the tough

competition effectively, the banks must diversify product with high- tech through newdistribution channel that require banks change dramatically their structure as well asmanagement A connection between traditional products and technology advances is atypical form of modern bank with a variety of services like ATM networks, internetbanking, etc In order to diversifying products effectively, they must focus on core

banking, automate branches and set up call centers However, new products appeared likeinsurance or investment force banks restructure its organization and management to avoidconflict of benefit between these activities This claims banks not to apply the old modelfor development; they have to change themselves suitably with the new role as “ financialsupermarket”.

- Diversify the investment of the bank and reduce risk: International economic integration

leads to a tough competition and increase risks for business entities including commercialbanks Diversifying products is a feasible and positive solution in helping banks reduceand share risks, this claim banks have strong finance resources

- Keep an important role in expanding the customer, expanding markets, improving competitiveness: The customer is the determining factor of a successful bank Expansion

of customers is the goal of any bank Development of retail banking services to helpbanks attract new customers, retain old customers thereby improving the image of itsown position

- Create a key source of capital for the bank, revenue stability and increased sales activity for the bank: In past several centuries, the profound transformation of the banking

industry have shown that retail banking services is a driving force for the strongdevelopment of the banking sector and capital mobilizing contributed to the banks’activities, to help banks overcome the lack of funds to serve the process ofindustrialization To nowadays, captial mobilization from the population alwaysrepresents a large percentage of the total capital raised by a bank

- Contribute to the diversification of banking activities, utilization and exploiting the potential of the bank: Activities of serving customer will promote the banks to innovate

and invest to improve service quality, diversify services, develop new services to meetthe needs of the customers Simultaneoustly, the development of retail banking serviceswill help banks to exploit the advantages of experience, qualifications and relationshipsavailable to serve all sectors of society better Thus, with the fundamental interests of thedeployment retail banking activities, the retail banking services have marked abreakthrough in commercial banking activities in Vietnam, by the ability in providing arange international standard of retail banking services

 Be nefits for customers.

- Save expenses: Product diversification create many new modern bank products which

allows customers to save transaction cost compared to using traditional products, becausecustomers have chance to use electronic products which are considered as having lowestcharge This can be explained that banks can save cost, lower bank charge throughreducing number of front office staffs, decreasing operating expenses of transactionsoffices and other cost related to operation activites

- Save transaction time: In such a technology era, people are always busy with work,

family and worries, so they wish to reduce time to trasact minimum With the support of

IT, they can do all transaction at home, at office or at any where connected to internetlike checking accout, transfer money, pay bills, etc

- Convinient: With modern banking services, the customers do not have to go to bank

offices, they are at home to make all transactions that they want in a very fast speed withE- banking products such as checking account, trasfering money, finding exchange rate,payment in credit card, buying travel cheque, etc Diversifying bank products assistscustomers to access banks 24h/day and 7days/week for updating latest informationinstead of going to banks in working time Everything happens very quickly throughautomatic systems of a bank and customers do not take time to queue for waiting time ofbank

 Benefits for the economy

- Take advantage of the tremendous potential of capital to develop the economy: Retail

banking services varied, plentiful and convenient help attract potential capital investmentfrom residential to develop the economy, especially in stock market conditions have notdeveloped When banking services are convenient, the benefits of open accounts, depositand use the payment services of banks promoting individual, household deposits idlemoney into the banks, making investment environment for all economic sectors, toreduce holding cash or invest in real estate which does not bring benefit to the society.Especially for developing countries, promoting internal strength of the economy through

focusing all capital from the population to become a large amount of capital that has avery important meaning

- Retail banking services promote the development of production and contribute to GDP

growth: As the financial intermediary institutions, the banks mobilize idle funds in the

economy to invest, to lend customers and producers Economic conditions in our countrywhen other funding channels are underdeveloped, the system has become the channelbanks to provide capital resources for the economy Through the services of lending, thebanks help the enterprises restructure production, shift investment capital and renewalequipment and technology which aimed to reduce cost and improve competitiveness inthe international economic integration Besides, retail banking services to help the state tocontrol the transactions of residents and the economy, help to prevent the evils ofeconomic, social as tax evasion, money laundering and the state bank is easier inconducting monetary policy

1.3 Factors affecting product diversification

The development of the number and quality of retail banking services depends not only

on economic motives or internal resources of providers and users, but also influenced byenvironmental factors such as economic, social and legal environment, the advancement

of science and technology

1.3.1 Internal factors

Internal factors relates to strengths and weakness of each retail banking, including capital,technology, human resource, distribution network… These factors implement both twofunctions such as necessary factors to develop business activities of retail banking andfactors that push competitive position of retail banking Some main internal factors are asfollows:

Banking policies.

- Banking policies affect so much the development and operation of retail banking Oneretail banking will be successful if it builds reasonable policies Banking policies orientthe role and postion of retail banking in whole bank Banking policies also set upbusiness orientation for the development of retail banking in future

- Besides, banking policies also look for structure and development orientation for retailbanking For all banks, all banks develop both corporate banking and retail banking butthe structure of two banks depend on banking policies of each bank However, each bankmust plan realistic structure for retail banking and coporate banking, the independent ordependent structure are belong to banking policies of each bank.

- On the other hand, banking policies are displayed in many dissimilar policies:distribution network, services, human resource… These policies are the bridge to deliverbanking services to customers One bank only exists and develops if customers use itsservices Selling services will bring more profit for the bank and the bank can remain itsmarket share Therefore, retail banking should put up these practical policies to make alladvantages to develop business activities

Business management capacity.

- This factor detemines largely successes or failure of any retail banking Each bank hasdifficult strategies in managing banking business However, one bank that combinesstrengths and weakness and targets right business plan, this bank will develop morebusiness activities as well as reduction its weakness

- Business capacity and business management relate development strategies, market share,orientation objectives… All elements will affect all business or retail banking In moderneconomy, applying modern business management will help retail banking develop moreactivities and bring more profit On the other hands, business capacity and businessmanagement also must balance benefit of customers and bank because customers are thepeople that bring profit for bank

- On the contrary, small capital affects so much on business activities of retail banking.Retail banking will have more difficulties in developing services as well as enhancingmore competition with other banks.

Human resource.

- This factor is one key that brings success for retail banking Human resource is a face ofany retail banking and to be a potential factor for any banks For banks, all banks needbig employees for their all branches and transaction office, especially human resource hashigh qualification and high capacity High quality human resource will access hightechnology as well as modern business management and the competition of bank will behigher

Technology.

- Technology enables bank to be closely with customers thought delivering new products,developing distribution channels to satisfy demands of people Thanks to thedevelopment of banking technology, banking services is diversifying with the hightechnology products, for example: ATM, credit cards, internet banking…

- Banking technology helps banks in saving expense, time and enlarges potential customergroups Therefore, modernizing and investing banking technology is a strategy and vitalkey to exist in competitive environment

- One bank cannot develop without distribution network because services and productscannot deliver to customers Besides, the bank also cannot develop more potential market

to satisfy demands of customers in different market

1.3.2 External factors.

Economic- social environment

- Economic environment include income, educational level, the stable economicenvironment Demand for banking services depends heavily on personal income Whenthe income of the people is low and unstable, it is just enough to meet daily essentialexpenditure and the demand for banking services like deposits, transfer money As theeconomy is developing, peoples' incomes increase, demand for banking servicesappeared and increased with the rise of the economy

- With different levels of income, demand for banking services is also different The studyshowed that the higher income is, the bigger demand for banking services is The grouphas a relatively high income prefer to use the services of high technological, such ascards, checks, counseling, financial planning, preferred to deposit products Middle-income group preferred the quick, easy and convenient banking services, relative highincome groups wishing to borrow rather than low-income groups

- Psychological, personal habits play a decisive role in selecting products for everycustomer Consumer habits usually change slowly compared to the advance of scienceand technology, it impacts significantly on the ability in providing banking services Thehabit of using cash make the consumers difficult to accept the use of modern means ofpayment such as ATM cards, checks because they think that using cash is moreconvinient Vietnamese don’t like to borrow so it makes the speed of issuing credit card

is lower than debit card Psychology afraid to change is resistance to the development ofnew banking products by banks as well as the use of new services of the consumers

Environmental law

- These factors of external environment has the greatest impact and most often tocommercial banking operations in general and to retail banking in particular Because thelargely influence of financial activity on the economy, each commercial bank will bestrict control by laws since it is established The law creates a legal basis for the activities

of banks Those regulations required banks to comply, but also as a basis for resolvingdisputes arising during operation of the bank If the provisions of the law is incomplete,

unclear and lack of uniformity, consistency that will make it difficult for the bankingoperations In contrast, a complete and clear legal system will be a solid legal frameworkfor banks in their activities Then, the law will have a positive effect, become the drivingforce for banks operating more efficiently

Scientific and technological progress

- The changes in technology have significantly impacted on the economy and society,especially for banking industry With the craft, without the support of science andtechnology, personal banking services may not develop and mature Scientific and ITdevelopment brought profound changes to the content and method of operation of varioustypes of services, impact on how to use banking products and services of the population,create demand, requires new banking products and services that make banks have theappropriate changes

Demographic factors.

- The demographic environment contains population, demographic structure, demographicmigration, demographic policies… Total population, demographic strucuture decidesmarket power of retail banking because the features of retail banking often orientateyoung demographic structure, which have a large power Demographic factor createsdemand and market framework about banking services Furthermore, it is also a basicbackground to build distribution channels of retail banking

Geographic factors.

- Geographic relates to national territory, village, province, cities of nation Each area hasdifferent characteristics, including demand, demographic structure, and income,economic development… Geographic environment takes shape trade center, shoppingcenter… Base on geographic factors, retail banking defines potential market aboutbanking services Geographic factors contribute on founding distribution channels ofretail banking as well as demographic factors

International economic integration in Finance and Banking

- Integration will create strong competition between domestic banks and foreign banks.The fair competition to develop is also an opportunity Therefore, to survive and develop,the domestic bank must attempt to consolidate the management to achieve efficiency,reduce risk and enhance reliability for customers

- The process of globalization, liberalization and international integration of financialbanking sector create major opportunities and challenges for Vietnam's commercialbanks With the implementation of the opened policy and world economic integration ofVietnam, the foreign banks have been increasingly more liberal in scope and scale ofoperation in Vietnam The diversity of product, technology and applications experience

in retail banking services make motivation to promote reform Vietnam's financial systemstruture towards greater attention to retail banking services

CHAPTER 2 PRODUCT DIVERSIFICATION IN RETAIL BANKING AT VIETCOMBANK

a major bank, the state's key economic sectors on the external service of industrializationand modernization of the country

tcombank has always maintained its position as a provider of financial services inVietnam in the field of international trade, in the traditional sectors such as venturecapital, raising capital, credit, financing project, as well as in modern banking services:Trading in foreign currencies and derivative instruments, card services, Internet Banking,SMS banking, Home Banking Vietcombank is significant market shares in Vietnam inmany areas of business such as loans 10%, deposits 12%, 23% of international payments,card payments 55 %, Vietcombank is also an extensive network of commercial banksinclude: Head Office, 1 Operation Center in Hanoi, close to 350 branches and transactionoffices in the country, affiliated companies, Representative Office (RO) and overseascompanies and over 1,500 ATMs and nearly 14,800 points of sale card payment (POS)across the country Becoming a bank is the highest profit rate in Vietnam, performinghigh profitability rate of net profit on equity (ROE) average over 20% annually With theadvantage of a foreign main banks of the country, Vietcombank has establishedrelationships with over 1,300 banks in 85 countries across all continents, effectivelysupporting the customer's payment Currently, Vietcombank is an official member ofinternational organizations such as VISA, MasterCard and American Express; Asian

Bankers Association (ABA), the payment network telecommunication global bank(SWIFT) Member Vietnam Banking Association (VNBA)

tcombank is the first bank in the application of modern technology, internationalstandards in management and business With the successful deployment of projects tomodernize the bank, Vietcombank has built an image bank advanced, automatedprocessing of traditional banking services such as retail banking, trade finance, businesscapital and constantly make electronic products and services in order to "bring thebank closer to customers" such as Internet banking services, VCB-Money (HomeBanking), online bill payment (VCB-P), SMS Banking, Phone banking With experience activities in the market, availability of financial products and servicesbanks outstanding on a modern platform, Vietcombank has a large client system from anation-wide corporations, companies and large enterprises to small and mediumenterprises, as well as foreign enterprises, joint ventures Vietcombank has young humanresources that was trained in the field of banking and finance, knowledge of the marketeconomy, foreign languages, ability to adapt to the environmental sensitivity of modernbusiness nature and high integration

h the important contributions to the stable development of banking sector, thedevelopment of economic stability - economic development and for nearly half a century,Vietcombank has been honored with many noble rewards Party State Government andawarded as: Medal of Ho Chi Minh Medal of Independence, many Labor Medal andCertificate of Merit from the Government

2.1.2 Organizational Structure

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

Board of Director

Controllers Committee Risk Committee

CEO - Senior Management

Internal Audit

Risk Management

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

Figure No.1: Model of governance structure of VCB

2.1.3 Business performance of VCB over period 2008-2010

- In three years, Vietcombank always achieved high speed growth in both revenue andprofit, exceeds targets and contributed to the development of the bank, the development

of the banking industry as well as prosperity of the country In the period of the globaleconomic crisis, Vietcombank has gradually overcome the difficulties to achieve theseresults which are very proud

Table No .1 : Financial status of Vietcombank

in 2010, it reached 5,479 billion, up 9.5% to 2009 and up 36.7% compared to 2008.Besides, in 2010 profit after tax reached 4,236 billion, up 7.4% to 2009 and up 31.6% to

2008 That is a perfect growth for a joint stock commercial bank in the changing worldeconomic stage currently

the past three years, the retail banking activities had significant progress which is showed

by the criterias that Vietcombank has achieved Target rate of funding from the

population in 2010 reached 48.3%, up 5.9% compared with 2009 (45.6%), up 23.8%compared to 2008 (39%) Target rate of personal loans reached 10.8% as of 2010,increased 1.1% to 2009 (9.7%), up 1.8% to 2008 (9.0%) Until 12/2010 number ofbranches, transaction offices reached 350, the retail officers estimated 3,292, the number

of retail products have been standardized to 55 products, the number of service channels

is 8 channels Besides, we must have mention about the enormous contribution of theproduct line card, the number of ATM and POS is 16,300, the number of debit card is 4.4million cards, the number of credit card is 650,000 cards, remittance turnover reached 1,2million USD

2.2 VCB’s current product diversification in retail banking

2010, Vietcombank has continuously strengthened its retail banking activities through theresearch and launching various highly functional products of fund mobilization,individual credit, internet banking service, money transfer as well as improvedcustomer services, standardized operational procedures, increased services income.Individual money transfer is still a Vietcombank’s strength; the total amount of moneytransfer to individual customers was nearly USD 1.2 billion, up 21.8% compared to 2009,which was 103% target for oversea remittance

number of retail products have attracted the large number of customers, such as: modernVCB-IB@nking, VCB-SMS B@nking service The number of individual customersreached 5.2 million individual accounts, increased 20% compared to 2009 This provedthat Vietcombank is able to achieve its objective of becoming one of the top 5 banks inretail banking.

2.2.1 Products and services

raising to maximise exploitation of the capital market ; promoted advertising products,focused on customer care, restored the debt array of aid and mandate, the receipt andmanagement of foreign capital which is the strength of Vietcombank If in 2008,Vietcombank only provided to customers 02 kinds of traditional products as savings anddeposits, then the type of services in 2010 rose to 08 products to meet all kinds ofcustomers with different demands, namely:

+ Management investment securities

+ Interest paid periodically savings

+ Savings for VIP customers

+ Programs offered insurance savings

+ Interest flexibility savings

+ The ladder savings following the time, money

+ Deploy 07 Certificates of deposit and 06 mobilization programs withpromotion

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

Unit: billion VND, million USD

2008 and early 2009, with high inflation, Vietcombank had actively follow the direction

of the Government, the central bank about the implementation of tight monetary policy,controlling the growth of the means of payment Total individual funding ofVietcombank in 2009 increased 27.8%, lower than the rate of growth in 2008 In 2010,interest rates reduced by the SBV’s decision to cut base rate together with attractiveprofits from other investment channels (the stock market, gold market, propertymarket ) which the causes of the dificulty of raising capital for most banks, includingVietcombank But with the flexible interest rates policies, the total mobilized capital of

Vietcombank in 2010 reached 97.283 billion VND, up 25.5 % over time 31/12/2009,lower than the rate of growth in 2009

structure of Vietcombank funding through 2008, 2009 and 2010 have changed but notsignificantly Deposits from individuals increased steadily in proportion of total funding,which in turn reached 43.8%, 45.6% and 48% in 2008, 2009,2010

the fierce competition among credit institutions in fund mobilisation, from the start of theyear 2010, the bank defined that fund mobilisation as a key target of the year Toimplement this task, the Board of Management drastically assigned the fund mobilisationtarget to all branches, and actively diversified fund mobilisation products with reasonablemobilised interest rates, in conjunction with promotion programs, proper investment intechnology, enhancing competitiveness in fund mobilisation The bank’s branches haveactively penetrated into and broaden the market, approached and thoughtfully cared forcustomers As a result, fund resources of the bank increased spectacularly Mobilisedfunds from the economy reached more than VND 208,320 billion equivalent, or 23%higher than 2009, this is also the highest level during the past 5 years, meeting theplanned target In 2010, fund mobilisation from population gained special result withtotal of VND 98,880 billion equivalent, increased by 28.5% against 2009 The bank alsorecorded VND 108,172 billion mobilised from organisations, increased 16.3% compared

to the previous year, and VND 69,600 billion mobilised from interbank market, or 13.3%higher than 2009

risk management, promoted treatment and recovered the bad debts, reviewed andremedied loans in high risk areas With only 04 leding products from 2008 as studentloan, car loan, project housing loan, staff loan, in 2010 the number of leding product hadincreased to 16 products including:

+ Not collateral loan package for staffs (including overdraft, credit card)

+ Not collateral loan package for managers include overdraft, credit card)

+ Not collateral loan package for Vietcombank staff

+ Loans for Vietcombank’s employees to buy VCB’s stock

+ Overdraft for mass customers, overdraft for VIP customers

+ Project housing loans ( which have 3 subsidiary product : Ecopark, IndochinaPlaza Hanoi, Crown Plaza Nha Trang)

+ Car loans ( which have 2 subsidiary product with Truong Hai auto, Ford).+ Support working capital

+ Pledge, mortgage valuable papers

+ Guarantee the transactions of land

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

- In

2008, implementing the direction of the Government and SBV about credit control tohelp curb inflation, Vietcombank has adjusted the credit policy to suit with marketconditions and credit activities to ensure the effect Through these measures to controlcredit growth system, Vietcombank has guaranteed the growth system from 29% to down15% End of December 2008, outstanding credit of Vietcombank increased 15.53%,higher than the revised plan at 15%

2009, Vietcombank has always strictly adhere to the direction of the Government, SBVand the market to adjust business activities in general and in particular the creditactivities to ensure the safety, the effect In the first half of 2009, implementing the policy

to stimulate, to extend credit to contribute effectively to prevent economic declining,Vietcombank has developed credit growth target of at least 22% After the SBV directionabout restraining credit growth and making the ceiling intest reate is 25%, Vietcombankhas timely adjust the appropriate targets for each phase Ended 2009, total individualloans of Vietcombank reached 13,747 billion, achieved the growth rate of 31% In recentyears, parallel with the development of the clients are corporations and big business,Vietcombank also focus on small and medium enterprises and individuals To date31/12/2009, outstanding credit of individuals account for 10.7% of total loans

2010, the bank’s credit activities saw a noteworthy result As at 31/12/2010, totaloutstanding individual loans were VND 19,158 billion, up 39% against 2009 Loans toindividuals accounted for 11% of total loans, meeting the target figure

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

Unit: billion VND

Real estate investment loans 975 946 833

ality of individual credit is always paid special attention by the bank By classifying loans

in compliance with Article 7 of Decision 493, the bank’s credit quality has beenimproved The bank’s NPLs ratio was 2.16%, lower than targeted figure set by the bank’sBOD The NPLs ratio in 2010 was higher than 2009, this is because of the debtclassification method, presented prudent viewpoint of the bank

Figure No.2 : Portfolio of individual credit

(Source: Retail banking department’s information 2008- 2010)