LV Thạc sỹ_Financial analysis customer in Vietinbank hanoi branch

TABLE OF CONTENT NATIONAL ECONOMICS UNIVERSITY...1 ADVANCED EDUCATIONAL PROGRAM...1 ...1 BACHELOR THESIS...1 ...1 FINANCIAL ANALYSIS CUSTOMER IN VIETINBANK HANOI BRANCH...1 CHAPTER 1:

NATIONAL ECONOMICS UNIVERSITY

ADVANCED EDUCATIONAL PROGRAM

FINANCIAL ANALYSIS CUSTOMER IN VIETINBANK HANOI BRANCH

TABLE OF CONTENT

NATIONAL ECONOMICS UNIVERSITY 1

ADVANCED EDUCATIONAL PROGRAM 1

1

BACHELOR THESIS 1

1

FINANCIAL ANALYSIS CUSTOMER IN VIETINBANK HANOI BRANCH 1

CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS OF BORROWER 8

CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN VIETINBANK HA NOI BRANCH 8

CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH 8

CHAPTER 1 10

FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS 10

OF CUSTOMER 10

CHAPTER 2 28

CURRENT FINANCIAL ANALYSIS OF CUSTOMER IN VIETINBANK HA NOI BRANCH 28

CHAPTER 3 59

RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH 59

3.1 Direction for development of Vietinbank Ha Noi branch 59

3.2 Recommendation for improving the financial analysis of customers in the branch 62

3.2.1 Human Resource recommendations 62

Employees are crucial for any company, and Vietinbank Ha Noi branch is not exception Loan officers directly conduct analysis and make the loan; they are the directly sources creating profit for the bank Good loan officers will be benefit for the branch They will directly improving the quality of the banking activity In order to build a good group of staff, there are three ways the branch can apply: 62

3.2.2 Recommendations for improving the content of FAC in Vietinbank Ha Noi Branch 66

3.2.3 Recommendations for improving database used for FAC 71

3.2.4 Other recommendations 73

CONCLUSION 74

REFERENCES 75

Original Z-score Component Definitions Variable Definition Weighting Factor 83 [edit] Z-score estimated for private firms 83 [edit] Z-score estimated for Non-Manufacturer Industrials & Emerging Market Credits 84

.◊.◊.◊

“First of all, I would like to thank National Economics University (NEU), especially Advanced Program, for providing much precious opportunities to know real nature of the banking activities through this internship

Secondly, during data collecting period, Ms…., a loan officer in Vietinbank Ha Noi branch, and her colleges helped me greatly, especially on collecting financial analysis data Without this useful data, I wouldn’t finish this research For that reason, I would like to describe my cordial thanks to her and her colleges.

Finally, as a student in Advanced Class, I was very happy because I could work on this study with Prof I would like to send him big thanks for guiding and making useful comments to help me finishing this research Also, I would especially like to thank all my friends in Advanced Class for all their encouragement and intellectual support that has made this report possible Any mistake is my own responsibility.”

Vietinbank Vietinbank Ha Noi branch

BS Balance Sheet

CFS Cash Flow Statement

CIC Credit Information Center

SBV State Bank of Vietnam

SMES Small and Medium Enterprises

EXECUTIVE SUMMARY

.◊.◊.◊

This research discusses the details of conducting a comparison and analysis ofseveral model used in Financial Analysis of customer in the commercial banks.The purpose of this comparison and analysis was not to identify the “best” model

of FAC, but rather to identify varying levels of targets or indicators used in eachmethod, and to identify unusual or distinct trends, patterns of FAC Thesefindings will illustrate the strengths, weaknesses, and current issues of eachmodel which in-turn will leads to improvements in future FAC

The models utilized in this research include Ratio model, Comparison model, Altman model, DuPont model, and Credit Scoring model The time period forthis research is from 2009 to 2011 Preliminary results of this research indicatethat a good FAC depending on the method of estimation, the experience of loanofficers, the regulations of the commercial banks and SBV, the availability ofpublic information, and the strength of information system

1 Rationale

Financial Analysis of customer is a very important process in banking activities.FAC is a part of credit process, and also one of the sources help the banksdetermines the creditworthy of the loan applicants In Vietnam, although thegeneral model for FAC is the same for all banks, the detail is often different.Even in the same banks, the process varies to each branch based on the role andposition of that branch Therefore, the quality of the loan or the way to determinecustomer as creditworthy is quite different among banks It raises the need forthe improvement in FAC

As we all know that credit process is essential in banking activities This is thebase for the loan officers make the decision Credit process also helps the bankimprove credit quality and minimize credit risk In which, FAC is the maincontribution I want to do this research to understand more about the role of FACand how FAC is applying in Vietinbank Ha Noi Branch

In additions, the change in technology and expanding of customer’s demandimpact on customer financial analysis in some dimensions These impacts might

be positive or negative This raise in me the desire to research on these impacts.All above reasons lead me to the final decision to do this research

Customer financial analysis is a complex process and requires high skillcreditors In a report funded by USaid (2006), it was said that analysis of thefinancial condition of the borrower may require an extensive effort, depending

on the size and complexity of the borrower’s business The more complex theborrower, the more difficult it will be to analyze the financial statements andunderstand the interrelationship among the balance sheet, income statement andcash flow statement If the borrower is part of a larger corporate structure, it willrequire an experienced lender, perhaps even a team of lenders, to fullyunderstand the borrower’s financial condition Because of this characteristic,there is often the gap between experience and less experience loan officers Thelack of expertise can lead to the wrong loan decision or other bad effects

Besides, in some banks, this process is not considered as important as it would

be The under estimated this process can lead to risk taking that could otherwise

be detect from doing financial analysis Also, as I mention earlier, up to date ofthe technology and the more popular in the using of applied knowledge infinancial analysis lead the need for improving financial analysis

2 Research questions

This study will aim at answering three questions:

What is financial analysis?

What are the issues of financial analysis in Vietinbank Ha Noi?

What are recommendations for improving the finance analysis inVietinbank Ha Noi?

3 Research objectives

The purpose of this research is to analyze the issues in financial analysis andhow to make this process more effective in Vietinbank Ha Noi

4 Research methodology

5 Research scope

In this research I just pay attention on Vietinbank, Ha Noi Branch and analysis isjust focus on business customer analysis Moreover, all data will be analyzed in 3years from 2009-2011

6 Research structure

CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS

OF BORROWER

CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN

VIETINBANK HA NOI BRANCH

CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF

BORROWER IN VIETINBANK HA NOI BRANCH

CHAPTER 1 FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS

OF CUSTOMER 1.1 Concept of finance analysis of customer in commercial bank

1.1.1 Definition

FAC (also referred to as financial analysis of customer) refers to an assessment

of the viability, stability and profitability of a business, sub-business or project

It is performed by professionals who prepare reports using ratios that make use

of information taken from financial statements and other reports Then, thesereports are usually presented to top management as a base for making businessdecisions Based on these reports, Loan officers may make decisions regardinginvesting or lending (Wikipedia)

1.1.2 Position in credit process

There are six steps in the lending process in commercial bank These are:

Step one: Finding Prospective Loan customers

Step two: Evaluating a prospective customer’s character and sincerity

Step five: Assessing possible loan collateral and signing the loan agreement

Step six: Monitoring compliance with the loan agreement and other

customer service needs

FAC is the fourth part of the credit process In this part, loan officers will collectseveral crucial documents from borrowers in order to fully evaluate the loanrequest, including complete financial statements (BS, IS, CFS) and otherdocuments depend on the regulation of each bank and depend on the law

“Once all documents are on file, the lender’s credit analysis division conducts athorough FA of the applicant, aimed at determining whether the customer hassufficient cash flow and backup assets to repay the loan The credit analystsdivision then prepares a brief summary and recommendation, which goes to theappropriate loan committee for approval On larger loans, members of the creditanalysis division may give an oral presentation and discussion will ensuebetween staff analysts and the loan committee over the strong and weak points of

a loan request.” (Peter S Rose & Sylvia C Hudgins, 2008)

In Vietnam, this process is made by loan officer or creditor and most of them aredone through supporting of technology and software The credit analyst justinterprets the result to make recommendation on the lending decision

1.2 Role of finance analysis of customer in credit process

FAC plays several important roles include:

First, FAC detects and limits the risk faced by banks, especially the risk from

lending such as risk from pay back the loan, bad debt, liquidity risk, etc Bydoing FAC, the bank can determine the proper reserve Besides, evaluating the

risk also help banks make the right lending decision, and more efficient in usingbanks’ capital Therefore, FAC can enhance the ability to generate profit for thebank.

Second, FAC is very important in making lending decision Because FAC

activities are done before making lending decision, FAC gives the loan officerthe deeply understanding about company including the ability to control cost,ability to generate revenue, ability to pay back the loan, etc Besides, FAC alsohelps the creditors anticipate future cash flow of the companies If the companiescan continually maintain the good financial condition, banks will approve theloan applicant Vice verse, if the situation of the companies in the future is notgood, the bank might not approve the loan applicant to protect the banks’ capital

It is important to remember that FAC is not the only source for the bank to makethe final lending decision Lending decision is based on many factors such aslegal entity, firm’s management, relationship between firms and other financialinstitutions, etc Therefore, in some case, even the FAC show the not good view,the firm may still receive the money from banks

Thirdly, FAC is the non-stop process until the loan is fully collected For that

reason, FAC is also a tool for the banks to control and supervise the loan Afterloan decision is made, if FAC result indicates that the firm and the loan may be

in problem, the bank may need to have action to collect the loan or to warn thefirms For instance, the firm’s loan applicant aim at investing in fixed asset, andafter the firms receive the money, the ratio Fixed asset/ Equity is unchanged.This is the indicator that the firm uses the loan for other purpose The bank need

to have action in order to supervise the loan to ensure whether continue the loan

or not

One issue here is that the FAC’s role as supervising tool is only effective whenthe financial data is correct The reality, borrowers often do not provide theaccurate information for the banks or the information is made up in order tofulfill the requirement of the bank Moreover, banks also do not have enoughtools to detect or figure the accuracy of supply information.

Fourth, data from FAC process is stored and used for further analysis Forinstance, from collecting data for FAC, banks can build the data base aboutcustomers, especially the data in financial statement Combining with enhancingrelationship with customers will be helpful for banks in the future Good database will be useful in anticipating the future of the companies

1.3 Rules and method in customer financial analysis

1.3.1 Rules in FAC

There are three rules in doing FAC:

First, FAC should be done periodical It’s up to the condition of the bank so that

FAC can be done monthly, quarterly or annually This rule is set up to ensure thatbanks can detect the problems and have immediate action to limit the possiblerisk The more frequency doing FAC, the faster the bank can detect the problem

Second, FAC must be trustfully and accurately This rule is based on two factors,

the ethic of the loan officers and the truthfulness of the customers Because, thesources of financial statements mostly come from customers, these financialstatements may be audited or unaudited The un-ethics can happen when thecustomer did not provide the accurate data The moral of creditor is also very

important Recently, in some cases, customers had lobbied creditors in attempt to

receive the loan from bank The case was just revealed when the customer was

bankruptcy and couldn’t pay back the loans Therefore, both of these criteriashould go in the same direction to bring the most benefit to two parties

Finally, FAC must anticipate the risk in the future FAC based on the past and

current information to determine the current situation of the firms, while futurecash flow from firms is the key to determine if the firms can pay bank the loan

So, from FAC, loan officer must anticipate the situation of the firm in the future.The more the accurate of the anticipation, the better be the lending decision

1.3.2 Methods using in FAC

There are several methods that often be used in FAC Those are:

RATIO METHOD: From Wikipedia/Financial analysis, this method is defined

as using ratio in analyzing the firm condition There are often four groups ofratios:

1 Profitability - its ability to earn income and sustain growth in both short-term

and long-term A company's degree of profitability is usually based on theincome statement, which reports on the company's results of operations;

2 Leverage - A company's leverage relates to how much debt it has on its

balance sheet, and it is another measure of financial health

3 Liquidity - its ability to maintain positive cash flow, while satisfying

immediate obligations;

4 Stability- the firm's ability to remain in business in the long run, without

having to sustain significant losses in the conduct of its business Assessing a

company's stability requires the use of the income statement and the balancesheet, as well as other financial and non-financial indicators.

In many case not all of these ratios was taken into consideration The loanofficers, depending on each specific case, decide which groups of ratio are takeninto highly consideration and which are not or consider only minor indicators.Nowadays, some banks using software and technology to facilitate this processand make it more accurately This method is gaining popularity because thismethod is simple and easy to interpret

One weakness of this method is that ratio is calculated based on the current data,the result itself does not show the trend of future firm’s situation, and do notreflect the change of ratio through time, and take into relation with othercompetitors and industry Also different accounting methods may result insignificantly different ratio values Some common ratios that are usually used inFAC can be seen in the appendices

COMPARATIVE METHOD: a method of comparing financial values in a

certain order to determine the financial situation of customers To apply thismethod, credit analyst needs to ensure suitable conditions of the financial criteriasuch as same unit, same content, same nature, same space, etc

There are various comparison types: vertically or horizontally comparison, timecomparison or space comparison Melissa Bushman (2007) suggested twocommon types of comparison analysis that are:

Horizontal Analysis

The horizontal analysis compares specific items over specific periods Thehorizontal analysis can be classified in two ways:

Absolute Currency

One way is comparing the absolute currency amounts of certain items over aperiod of time For example, this method would compare the actual currencyamount of operating expenses over a period of several accounting periods Thismethod is valuable when trying to determine whether a company is conservative

or excessive in spending on certain items Also, this method is useful indetermining the effects of outside influences on the company, such as a reduction

in the cost of materials

Percentage

The second way is comparing the percentage difference in certain items over aperiod of time The currency amount of the change is converted to a percentagechange For example, a change in revenue from VND 100 billion in period one

to VND 110 billion in period two would be reported as a 10% increase Thismethod is particularly useful when comparing small companies to largecompanies

Vertical Analysis

The vertical analysis compares each separate figure to one specific figure in thefinancial statement The comparison is reported as a percentage This methodcompares several items to one certain item in the same accounting period Loanofficers often expand upon vertical analysis by comparing the analyses of severalperiods to one another This can reveal trends that may be helpful in decision

making Here are two simple examples of vertical analysis comparison onincome statement and balance sheet.

Income Statement

Performing vertical analysis of the income statement involves comparing eachincome statement item to sales Each item is then reported as a percentage ofsales For example, if sales equal VND 100 billion and operating expenses equalVND 10 billion, then operating expenses would be reported as 10% of sales

Balance Sheet

Performing vertical analysis of the balance sheet involves comparing eachbalance sheet item to total assets Each item is then reported as a percentage oftotal assets For example, if cash equals VND 10 billion and total assets equalsVND 100 billion, then cash would be reported as 10% of total assets

DUPONT METHOD: Saunders (2000) provides a model of financial analysis

for financial institutions that is based on the DuPont method This method isbased on the system of financial analysis return on equity model The return onequity model is disaggregated into the three components including net profitmargin, total asset turnover, and the equity multiplier The profit margin allowsthe loan officers to evaluate the income statement and the components of theincome statement Total asset turnover allows the loan officers to evaluate theleft-hand side of the balance sheet which is composed of the asset accounts Theequity multiplier allows the loan officers to evaluate the right-hand side of thebalance sheet which is composed of liabilities and owner’s equity Moreover, thismethod is not only analyzing the financial firm’s performance but also provides a

system for planning DuPont method can be used to develop a pro forma incomestatement From the pro forma statement, loan officers can anticipate the futurenet income level, total revenue level, etc, and this will be the base for bankofficers determine the future perspective of the borrowers Here is how return onequity decomposed:

ROE = (ROA) (EM)

ROA = (NPM) (TAT)

Where,

ROE = return on equity ROA = return on assets

EM = the equity multiplier NPM = net profit margin

TAT = total asset turnover

Return on equity is net income divided by total equity capital and return on assets is net income divided by total assets The equity multiplier is the ratio of total assets and total equity capital

ROE = (NI) / (TEC)

ROA = (NI) / (TA)

CREDIT SCORING METHOD: From Wikipedia/Credit score, a credit score

is defined as a numerical expression based on a statistical analysis of aborrower's information to help the bank determine the creditworthiness of thatperson

Wallis, Lyle Paul (2001) said that credit scoring can be defined as a method ofevaluating the credit worthiness of your customers through the implementation

of a formula or set of rules Testing the credit worthiness of your customer basevia a credit scoring model is by no means a new science, but it is a methodologythat has evolved over the last quarter of a century Today credit scoring is set to

be the corner stone of the credit granting process for the future

Credit scoring provides a lot of benefits to commercial banks These benefitsinclude speed, accuracy, consistency, reduction in bad debts, prioritization ofcollection activities and reduction in time required for risk assessment Withcredit scoring, entire financial information can be reviewed at one time ratherthan considering separately as in traditional methods Besides, accuracy isenhanced because risk from human error is low This process is automaticallydone by computer Consistency is attained by using the same set of rules andweighted variables for review of the entire data Through credit scoring, loanofficers can regularly review the entire information; therefore, they can quicklyand efficiently identifying those accounts that require immediate attention forcollection activity or other needed actions to facilitate the bad events

Credit scoring is also useful for the banks in making lending decision Banks usecredit scores to evaluate the potential risk faced by lending money to consumersand to mitigate losses due to bad debt Banks use credit scoring to determine

who qualifies for a loan, at what interest rate, and what credit limits Banks alsouse credit scoring to determine which borrowers are likely to bring in the mostrevenue For that reason, credit scoring is preferred to almost commercial banks.Wallis, Lyle Paul (2001) considers three factors in credit scoring These factorsare traditional credit information, credit agency information and financialstatement scores Traditional information includes pay history, bank ratings,trade reference information, industry credit group information, control years,NSF checks reported or placed for collection, suits or judgments and tax liens.Examples of agency information include D&B ratings and paydex scores,NACM evaluations and Experian DBT, and intelliscores Financial statementscores include Liquidity Ratios, such as the current and quick ratios, ProfitabilityRatios, such as return on equity and percent of total assets, and Solvency Ratios,such as debt to equity and fixed assets to tangible net worth

To do credit scoring, loan officers can approach through behavior based scoring,

rules based scoring and neural network modeling Based scoring approach uses

regression techniques and identifies to find to level of default of businesses.Rules based scoring is calculated through weighted values which are assigned byusers Neural network approach is a statistical based scoring model The basis forthis approach is a series of algorithms that are constantly and automatically beingrefined and updated by the time

It’s still the debate to clear which approach is the best Each approach has itsown advantages and disadvantages Many people suggest users should usecombination of these approaches in order to get the best result

Here is an example of credit scoring model applying popular over the world:FICO model is one of the best-known and most widely used credit score models

in the United States and many countries

The following is a percentage breakdown of a FICO score:

35% - Payment History

30% - Debt Ratio

15% - Length of Credit History

10% - Types of Credit

10% - Number of Credit Inquiries

In the US, FICO Credit scores range from 300-850, with 723 being the medianFICO score of Americans FICO scores below 600 are considered high riskborrowers, 620 being the dividing line between good and bad, 640 or abovebeing "pretty good", 650 as average general credit-use behavior, and above 690

or 720 being excellent Scores are based on payment history, outstanding debts,credit history, new credit, and credit in use

1.4 FAC process

1.4.1 Gather the information:

Information sources relevant to borrowers include but are not limited to:financial statements from the supplier, government documents, and informationfrom commercial resources, analyses by brokerages, interviews with supplierpersonnel, information in audit reports and the media Information from auditreports and data from commercial information sources are useful but are not to

be used alone as substitutes for the complete analysis Information need to obtainfrom the borrower at the minimum: the most recent year and the two previousfiscal years' balance sheets, income statements, plus current interim financialstatements and cash flow forecasts Additionally, loan officer had to obtaininformation about: contract backlog information, inventory costing methodused, credit/banking line and obtain a point of contact for following through onreferences with the bank and/or lending institution Obtain enough informationfrom the documents to ascertain whether the borrower has sufficient workingcapital/ cash flow to perform the contract

1.4.2 Perform the analysis:

After gathering information, loan officer had to perform an analysis byconsidering all relevant data Loan officers had to review the supplier's financialstatement in recent periods A typical analysis also includes review of thesupplier's inventory costing method, credit availability, and cash flowprojections As part of the analysis, examination of accounting records for thereview include, but is not limited to liquidity, leverage and profitability ratios,and working capital analysis Analysts perform the significant ratios and should

consider the Altman's Z-Score as well as address the trends over time Loan

officers also need to become familiar with assumptions inherent in the analysismodels that might be used in performing the analysis or for making comparisons Once the ratios are computed, make (peer) comparisons to acceptable industrystandards Other elements to review in order to have a complete analysisinclude:

• The supplier’s operational environment Consider the general economicoutlook, the industry's outlook, the company's competition, the potentialimpact of Government actions, and changes in technology Other factorsmay include the outlooks for the credit and capital markets, foreigncompetition, or other external factors that may affect the supplier'sfinancial condition

• The supplier as a business entity Problems such as those in productionand quality, marketing, pending lawsuits, subcontracting and purchasing,pending or current restructuring and labor and management stability areinternal to the supplier They may affect the supplier's financialcondition Some conditions and factors to be considered are changes indeliveries, changes in subcontractor/vendor relationships with the supplier

as well as changes in accounts payable These conditions may indicatefinancial stress Investigate further as necessary

1.4.3 Supply the result in order to make decision:

Analysis result will be submitted to lending committee if the loan amount islarge or submitted to the manager for approval and signature The manager willcarefully revise the analysis again and then accept the loan If the manager findssomething wrong or unclear, he or she would ask loan officers for more details todecide whether accept the loan or not When the loan application is accepted, itwill be delivered back to the loan officers and to risk management departmentfor excising and control after lending

1.5 FAC Experience among commercial banks

1.5.1 International commercial banks

In international commercial banks, a prospective lender will use four primaryfinancial statements for assessment There are personal financial statement,

balance sheet, income statement, and cash flow statement A Personal Financial Statement indicates your net worth Each partner or share holder owning a

substantial percentage (for example, 20 percent or more) of the business shouldsubmit one A personal financial statement is necessary to the lender, especially

in case borrowers have never received financing for their business before,because it gives the lender evidence of personal assets that borrowers couldpledge to secure a loan A Balance Sheet

provides lender a snapshot of borrower’s business at a specific time Thisstatement gives the information about assets, liability and equity of the

borrowing company A Profit and Loss Statement shows the profit or loss for the year Finally, a Statement of Cash Flows presents the sources of cash in

your business such as net income, new capital, or expenditures over a specifiedperiod of time

In additions, lender often uses financial ratio analysis Ratios permit review of acompany's current financial performance versus that of previous years Ininternational banks, loan officers are trained to appreciate both the benefits andlimitations of ratio analysis and to consider financial results in the context of thecompany's "peer group" of similar companies within its industry

Loan officers also look at Pro Forma Financial Statements and FinancialProjections during their analysis process Pro forma financial statements are theentrepreneur's best guess about what next year will look like for the business.Thus, loan officers could anticipate whether future cash flow will be sufficient to

cover all borrowers’ costs, and if not, how much money borrowers will need toborrow Meanwhile, financial projections helps loan officers estimate aboutfuture sales levels, expansion costs, or general business conditions and see howsuch conditions would affect borrowers’ financial results in the future

Loan officers usually look for customers who don`t have a history of failing topay their debts (or who have a history of constant late payments), and who don`tseem over-leveraged For that reason, loan officers pay high attention of businesscredit scores before issuing a loan Also, commercial lenders consider industryratio analysis an important component of cash flow projections and of thecommercial loan application package Loan officers often consider the use ofindustry ratio analysis to be critical with regard to the potential success of thebusiness Furthermore, the role of loan review process is highly gain attention ofloan officers because they believe that this process is extremely useful in gainingunderstanding of what the borrower’s business is about

ALTMAN Z-SCORE: This method is applied to predict the probability that a

firm will go into bankruptcy within two years The model look quite simple butthe original number generated in the model is very complex This method usesmultiple corporate income and balance sheet values to measure the financialhealth of a company

In estimation of the formula, four or five common business ratios, weighted bycoefficients, are combined in linear relationship to create this model Thecoefficients were estimated by a complex process of collecting sample of firmswhich had bankruptcy or survived, with matching by industry and approximatesize (assets)

“Altman applied the statistical method of discriminated analysis to a dataset ofpublicly held manufacturers The estimation was originally based on data frompublicly held manufacturers, but has since been re-estimated based on otherdatasets for private manufacturing, non-manufacturing and service companies.”(Wikipedia)

The original Z-score formula was:

Z = 0.012T1 + 0.014T2 + 0.033T3 + 0.006T4 + 0.999T5

Table 1.2: Meanings of factors in Z-score Model

T1 = Working Capital / Total Assets

Measures liquid assets in relation to the size of the company

T2 = Retained Earnings / Total Assets

Measures profitability that reflects the company's age and earning

power

T3 = Earnings Before Interest and Taxes / Total Assets

Measures operating efficiency apart from tax and leveraging factors

It recognizes operating earnings as being important to long-term

viability

T4 = Market Value of Equity / Book Value of Total Liabilities

Adds market dimension that can show up security price fluctuation as a possible red flag

T5 = Sales/ Total Assets

Standard measure for sales turnover (varies greatly from industry to

industry)

Source: Wikipedia.org

Altman found that the ratio profile for the bankrupt group fell at -0.25 averages, and for the non-bankrupt group at +4.48 averages

This method shows quite an amazing result when about 72 percent accurate inpredicting bankruptcy two years prior to the event, and approximately 80-90percent accurate in predicting bankruptcy one year prior to the event From about

1985 onwards, this method gained wide acceptance by auditors, managementaccountants, and bank officer used for loan evaluation For more detail about thismethod, please see the appendices

1.5.2 Domestic commercial banks

Domestic banks often do not apply all the methods in CFA process Somemethods are not suitable in Vietnam situation For example, Z-model is not usedue to the facts that the ratio apply for this method does not accurate in Vietnam.The formula's approach has been used in a variety of contexts and countries

Many banks apply technology in CFA, especially in the credit scoring process.The various types of software help the loan officers calculate the credit score ofborrowers In Vietnamese commercial banks, loan officers often highly considerresult from credit scoring is the key to determine whether to grant the loan ornot The score is often showed in symbol such as A, B, C In which, customerswho get A will have more chance to receive the loan

Loan officers often collect balance sheet and income statement of borrowers forassessment The FAC is mostly done based on two statements Also, the loanofficers pay much attention of understanding the current business situation, and

to define financial performance Loan officers highly believe that good past andcurrent performance will be continue in the future

CHAPTER 2 CURRENT FINANCIAL ANALYSIS OF CUSTOMER IN VIETINBANK

HA NOI BRANCH 2.1 Overview of Vietinbank Ha Noi

On 26th March 1988, the Specializing Bank for Industry and Trade wasestablished in accordance with the Decree No 53/NĐ-HĐBT of the Council ofMinisters on the organizational apparatus of the State Bank of Vietnam, and wasofficially renamed “Vietnam Bank for Industry and Trade” in accordance withthe Decision No 402/CT of the Chairman of the Council of Ministers dated 14thNovember 1990

On 27th March 1993, the Governor of the State Bank of Vietnam signed theDecision No 67/QĐ-NH5 on the establishment of Vietinbank under the StateBank of Vietnam On 21st September 1996, under the authorization of theGovernment Prime Minister, the Governor of the State Bank of Vietnam signedthe Decision No 285/QĐ-NH5 on the incorporation of Vietinbank according to

the State-owned Corporation model as stipulated at the Decision No 90/QĐ-TTgdated 07th March 1994 by the Prime Minister.

Over 20 years of incorporation and development, Vietnam Bank for Industry andTrade has developed toward a universal banking model with its operationnetwork scattered over 56 provinces and cities throughout the country, including

01 Head Office; 03 Transaction Centers; 138 branches; 188 transaction offices;

258 points of sales; 191 savings offices; 742 Automatic Telling Machines(ATMs); 02 Representative offices; and 03 Subsidiaries covering FinancialLeasing Company, Securities Company Ltd (VietinbankSC) and the Debts andAssets Management Company; 03 administrative units including a Card Center,

an Information Technology Center, and a Human Resource Development andTraining School Moreover, Vietinbank has participated its joint-venture capital

in Indovina Bank and Incombank - Asia Insurance Company Limited (IAI);invested its capital in 07 companies, including Vietnam National FinancialSwitching Joint-Stock Company, Ha Tien Cement Joint Stock Company, PhuocHoa Rubber Joint Stock Company, Gia Dinh Commercial Joint Stock Bank, SaiGon Bank for Industry and Trade etc

At present, Vietinbank has correspondent banking relationships with over 800banks and financial institutions in more than 90 countries and territories in theworld Vietinbank’s statutory capital at the time of corporate revaluation(31/12/2007) was over VND 7,608 billion, with its total assets reaching up toVND 166,112 billion, accounting for around 10% of all the total assets in thewhole banking industry According to Vietinbank’s unauditted financialstatements, as at 30/09/2008, Vietinbank’s statutory capital and total assets werearound VND 7,626 billion and VND 187,534 billion respectively

Some achievement highlights of Vietinbank at present can be summed up belowand can also serve as its strengths over other peer commercial banks:

• Rapid growth in the size of Assets and Liabilities and other businesses,which actively and efficiently meets requirements for production andtrading operations of businesses and public individuals, affirms its role as

a main force commercial bank in Vietnam Widening and developing newtypes of products and services, integrating itself into regional and worldfinancial markets

• Establishing and developing its strong organization and business operationnetwork, developing human resources to efficiently and effectively operateits business system

• Developing and completing its policies and regulations system on businessperformance and internal operations management: which are consistent,complete, advanced to meet business requirements in today’s new businessenvironment, to ensure safety, quality and efficiency This can be seenfrom the Credit Manuals and 61 business processes which are, consistentwith scientific standards, ISO certified

• Developing the technical infrastructure and modernizing the bankingtechnologies: The entire transaction premises cum vault systems from theHead Office to the branches, transaction offices, point of sales are allspacious and modern, and are designed toward Vietinbank trademarkstandard 88 new office construction sites have been being built, such as:the Head Office Building at 25 Ly Thuong Kiet, the Staff Training Centers

in Hue City and Dong Nai province (over 5 ha size each); the 10.2-haHuman Resource Development and Training School in Van Canh, the 26-storeyed Branch No 1 building in Ho Chi Minh City, the 30-storeyedHoang Mai branch building.

• Since its incorporation (1988), Vietinbank has been awarded: 01 Class Independence Honor, 01 Third-Class Independence Honor, 04 First-Class Labor Honors, 22 Second-Class Labor Honors, 121 Third-ClassLabor Honors, 01 Third-Class Feat-of-Achievements Honor, 03 businessunits were collectively awarded title “Labor Hero in Modern Days”, 333certificates of merit given by the Prime Minister, 08 Emulation flagsawarded by the Government, 20 Emulation flags awarded by the Governorand thousands of certificates of merit conferred by the Governor and otherMinistries and government bodies etc Also, in 2008, Vietinbank won theAward “Capital City Gold Star 2008” for the E-Partner product; Gold Cup

Second-“Trademark - Brand” for the Third Time; Award “ISO Gold Cup for theFourth Time – 2008” voted and given by the Ministry of Science andTechnology, and the “International Star Award (ISAQ)” in Switzerlandwas also given to Vietinbank, being the first bank in Vietnam to receivesuch an honor

conditions for business operation of the banking system in general and thebranch in particular Moreover, a continuous diversification in forms of raisingcapital with attractive interest rates to attract deposition from civilization.

Difficulties:

Competiveness from foreign bank such as ANZ, Standard charter bank, CityBank or HSBC These banks compete on all segments Besides, investors findmany ways to invest their leisure money; therefore less money was used forsaving Banking capital was intensively competed from other channels Realestate markets also raise capital and pay interest equal saving rates Thesecurities companies raise capital by type of business entrusted to savingsdeposit interest rate These sources highly affect the ability to attract capital ofthe branch One difficulty for the branch is the geographic position, it is far fromcenter, and there are quite a lot of other commercial banks nearby The branch ispressure from these banks which often offer higher interest rate by promotions.Another difficulty is the high rental cost

2.1.1.2 Financial situation

The two main activities of the branch are borrowing activity and finance activity.Those two activities really worked well and have a good growth rate in recentyears

Borrowing Activity

Capital is the key for all activity of the bank The amount of money that thebranch lends out depends on how much capital the branch has Capital is also thekey for managers making finance decisions, strategy decisions, etc The total

money borrowing of the Vietinbank Ha Noi in the last three years is presented inthe table 2.2 below:

Table 2.1: Financial Highlight

Unit: Million Dong

Total money borrowing 337,765 828,164 145.19% 1,081,997 30.65%

Classification by types of borrowers

strong development There are several reasons for the increasing of total moneyborrowing including:

- Vietinbank Ha Noi branch is on the road to become the main branch levelone

- Vietinbank Ha Noi branch continues to maintain and develop goodbanking products and services to customers

- The branch often introduces new products and service to extend andattract new customers

- The suitable borrowing policies

From the static, we can see that the increase of total money borrowing mostlycome from the individual, then from organizations and institution and othersources The percentage of individual saving dramatic increase in recent years,while the money deposited from institutions tend to decrease Individualcustomers are not stable and highly effect by the interest rate change Thestatistic in the fist half of FY 2010 reveals this issue when the individual savingwas about VND 618 billion – decreasing compared to the previous periods andalso the plan Therefore, the branch needs to reconsider the borrowing structure

to maintain a good development in the future By time classification, the branchstatistics reveal a good performance when a larger proportion of the moneycomes from saving with time more than 24 months This source is stable andgood for the branch

Finance and Lending Activity

Finance and lending activity are always the main activity of the Vietinbank HaNoi branch and bring the most profit for the bank Finance and lending activity isalso the strength of the branch Recently, to follow government’s monetarypolicies, many plans are suggested and approved in Ha Noi branch For example,the total money lend out in year 2012 is not over VND 875 billion, percentage ofmidterm and long term lending over total money lending is under 28% and so

on In year 20011, many product and services are stopped such as lending to buycar, lending to stock related activities, etc

Table 2.3: Lending Situation

Unit: million Dong

33 percent in year 2011 In which, all short-term, medium-term and long-term

loan were at higher level than year 2010 One minor point is both medium-termand long-term loan did not fulfill the branch’s plan Other good point fromfinancial result that we can see was low level of the bad debt in Vietinbank HaNoi as percentage to total outstanding debt This ratio was just 0.35 percent in

2011 It was very attractive; even a dream for many banks in banking system

On the other hand, Vietinbank Ha Noi branch, in the past, did not pass its set upplan In year 2010 it implemented 87.27 percent of its plan; in year 2011 itimplemented over 99 percent of its plan, and in the first half of 2010, itimplemented nearly 95% of its plan The reason came from many objectivefactors One was because the plan was set up by the Vietinbank, and it wasmostly based on the current financial situation of the branch not on the capacitythat branch could perform Also, in year 2009 & 2010 the great recessionimpacted on the banks industry as a whole and the branch in particular Anofficer in Vietinbank Ha Noi said: “Even we do not fulfill 100 percent financialresults as plan, our branch still generates positive profit and that amount of profitovercome the plan.” It is the most important, the net profit – he emphasized One more weak point revealed from financial record was the overdue loan Thisamount increased over the years In 2010, overdue loan was about VND 12.5billion (2.55 percent of total outstanding debt); in 2011, overdue loan increased

to approximate VND 150 billion (18.95 percent of total outstanding debt), and inthe first half or 2012, this amount was VND 204 billion (26.35 percent of totaloutstanding debt) This growth might be the indicator for the lack efficiency inevaluating and control loan The branch has to take more actions and apply moremethods in control the risk Financial analysis of customers could be one step in

the actions Furthermore, amount of bad debt in the first haft of 2012 show a notgood signal, when the amount triple compared to the end of 2011 (approximateVND 6.9 billion) A loan officer in the branch said that, even the static show thenot good result about overdue loan, it should not be more a problem The reason

is simple; about 80 percent of these overdue loan was just overdue less than oneweek While the result was automatically close on the reference date That whythe amount of bad debt is low

2.2 Situation of finance analysis of customer in Vietinbank Ha Noi

FAC in Vietinbank Ha Noi is doing in three steps:

Step 1: Gather information Information sources relevant to borrower include

Financial statement:

 Balance sheet of two consecutive years

 Income statement of two consecutive years

 Credit relationship with financial institutions

 Inventory record, account payable record, account receivable record,prepayment record

Information from commercial resources

Interviews with supplier personnel:

 This section is doing before and doing the analyzing process At the firsttime, borrowers must come to the banks to answer any question by loanofficers Sometime, interview is done via mail, phone or site visit

Government records/documents:

 All documents related to customer’s activity, products or FAC process iscollected.

Step 2: Perform the analysis:

The FAC is done by using three methods that will be discussed later

Step 3: Supply the result in order to make decision:

After loan officer make financial report, it must be summit to the head ofdepartment, then to manager of the branch This process aim to ensure that therecould be no mistake in doing this analysis and the decision is right

How FAC is performed?

FAC in Vietinbank Ha Noi branch includes three methods: ratio analysis,comparative analysis and credit scoring

Ratio method:

In Vietinbank, loan officers analyze borrowers on several following ratios:

Table 2.4: Ratios Used in Vietinbank Ha Noi branch

Working capital turnover

Days of working capital

Account receivable turnover

Days for collection

Inventory turnover

Days of inventory

Profit Ratios

Profit before tax/ Sales

Profit after tax/Sales

Others ROS

ROA

ROE

Financial Leverage

E/A

Source: Financial Analysis Document, Vietinbank Ha Noi

After calculating these ratios, loan officer start to interpret these indicators toconclude about the performance of the borrowers If the indicators show the notgood or abnormal result, loan officers will indicate the reasons which lead tothese results Not good results are all indicators perform lower than previousperiod or lower than reference indicator Abnormal results are all indicatorsabsolutely high or low or highly increasing/decreasing compared to previousperiods Loan officers, then, determine whether the cause dues to internal factors

or external environment Also, these ratios are compared to reference value tomake conclusion For example, quick ratio is compare to one If firm’s quickratio is greater than one, firm would ensure the ability to pay short-term debts Compared to the theoretical model, Vietinbank Ha Noi applies three over fourthgroup of ratios in analysis process including profit group, leverage group andliquidity group Besides, the branch uses some operating ratios to analyzecustomers The use of ratio is suitable but some of them seem to duplicate eachother For example, “Working capital turnover” and “Days of working capital”can be interpreted in same way; so, loan officers can ignore one of them Thesame happen with “Account receivable turnover” and “Days of collection”,

“Inventory turnover” and “Days of inventory”