LV Thạc sỹ_Enhance the financial analysis of business borrowers in Sacombank dong da branch

1.1 Credit service of the commercial bank 111.1.1 Definition, characteristics and roles of the commercial bank 11 1.1.2 The risk in the credit service of commercial banks 13 1.2 The fina

1.1 Credit service of the commercial bank 11

1.1.1 Definition, characteristics and roles of the commercial bank 11

1.1.2 The risk in the credit service of commercial banks 13

1.2 The financial business analysis of commercial bank 16

1.2.1 Definition and roles 16

1.2.2 Information used in the financial business analysis 18

1.2.3 Methods used in the financial business analysis 24

1.3 Factor influencing financial business analysis 36

1.3.1 Subjective factor37

1.3.2 Objective factor 38

CHAPTER 2: CURRENT SITUATION OF FINANCIAL BUSINESS ANALYSIS IN THE CREDIT SERVICE OF SACOMBANK’S DONG DA BRANCH 41

2.1 Sacombank’s Dong Da branch 41

2.1.1 Establishment and development 41

2.1.2 Organizational Structure 41

2.1.3 Functions and roles 42

2.2 Current situation of financial business analysis in the credit service of

Sacombank Dong Da branch 48

2.2.1 Content of the financial business analysis 48

2.2.2 Financial business analysis process 51

2.2.3 Illustrating the financial business analysis of Toan Thang joint-stock company 52

2.3 Results, Limitation and Reasons 58

2.3.1 Results 59

2.3.2 Limitations 59

2.3.3 Reasons for limitations 61

CHAPTER 3: RECOMMENDATIONS FOR THE QUALITY

IMPROVEMENT OF FINANCIAL BUSINESS ANALYSIS IN

SACOMBANK’S DONG DA BRANCH 64

3.2.3 Enhance the competencies of credit staffs 69

3.2.4 Assign the revaluation of the financial business analysis task 71

3.2.5 Construct the industrial benchmarking 72

3.2.6 Debt classification and management 72

3.2.7 Strengthen the financial business analysis through cash flow assessment73 3.2.8 Establish a storage, management and information processing parts 73 3.2.9 Expand the relationship with other agencies in Hanoi 74

3.3 Recommendations 74

3.3.1 Recommendations for government 74

3.3.2 Recommendation to the State Bank of Vietnam and relevant ministries 75 3.3.3 Recommendations to Sacombank 76

3.3.4 Recommendations to the business borrowers77

CONCLUSION 79

REFERENCES 81

Appendix A: General information about Sacombank 82

Appendix B: Sacombank organizational Structure 84

Appendix C: Sacombank Total Assets in the period 2006-2011 85

Appendix D: Sacombank Total Equity in the period 2006-2011 85

Appendix E: Sacombank Profit after Tax in the period 2006-2011 86

Appendix F: Sacombank Total Deposits and Total Loans in the period 2006-2011 86

Firstly, I want to give a special thank to Asso.Prof Dr… who is a dedicated supervisor has brought a lot of suggestions and advice to me when I am in a quandary situation

Secondly, I sincerely thank to staff members who are working at the Sacombank’s Dong Da branch, especially Mrs …_ manager of Hao Nam Transaction Department

enthusiastically instructed and supported me in completing given tasks over 10 weeks.

I would like to thank my friends for their time, interest and helpful comment My time at Advance Class was made enjoyable, grateful in large part due to the many friends and groups of becoming part of my life

Last but not least, I would like to thank my family: my parents for giving birth to

me at the first place and supporting me spiritually throughout my life

1 Background and motivation

History and development of commercial banks have been bound up with the development of production and circulation of products After satisfying the capital

demands of individual and group of people who want to enhance the operational and trade services in the early days, the commercial banks have become the most significant financial intermediaries which cope with and get the bottom of almost of economic issue nowadays

Credit service has played the most important role among the bank services Loans are the assets which account for the largest proportion make the top of income

accompanied by the highest risk Therefore, it’s necessary that ensuring and improving the quality of credit activities serve as not only an objective but also the potential factor for competition and development of each commercial bank Before giving a loan, banks have to always consider carefully, estimate the potential risks and profitability based on the analysis of the financial and nonfinancial aspect through a rigorous process in which financial analysis is involved

There is an appearance of mutual credit relationship between commercial banks and borrowers, especially entrepreneurs If businesses don’t have the ability to pay the debt on the due date, the revenue of commercial banks will reduce, which leads to the existence of banks and other borrowers Therefore, commercial banks should enhance thequality of business financial analysis with a view to making a good decision whether theygive the loans to the businesses

For each commercial bank in Vietnam, lending activities usually make up around

90 percent of revenue Thus, the financial analysis of borrowers which can be done through before, during and after giving the loans can enable the creditors evaluate and analyze the financial abilities of customer at the different time From this, creditors may classify, assess the current situation of loans and make the adjustment method in time

Through the internship time in Sacombank’s Dong Da branch, I realize that the financial business analysis activity which has still existed lots of restrictions resulting in low effective of lending activities Thus, with a view to contributing to enhance the

quality of this service, I choose the bachelor topic” Current situation and

recommendations to enhance the financial analysis of business borrowers in the Sacombank’s Dong Da branch” as a graduated thesis.

Finally, the research will contribute some recommendation to Sacombank,

government and other relevant parties with a view to enhancing the quality of financial business analysis in lending activities

3 Research scope:

As a result of the limited time and human, I only focus on the assessment of the current situation of financial business analysis in the Sacombank’s Dong Da branch

4 Research questions:

The research aims to deal with the following questions:

 What is the current situation of financial business analysis in Sacombank’s Dong Da branch?

 What are some solutions to improve the quality of financial business

analysis in Sacombank’s Dong Da branch in particular and in Vietnam banking system,

in general?

5 Research methodology:

First, I observe the lending process which happens every day in the Sacombank’s Dong Da branch

Second, I enquiry the banking staffs to gain more understanding and awareness of current situation of financial business analysis in Sacombank’s Dong Da branch

Third, I gather information from Sacombank website along with asking the

internal information from the banking staffs in the Sacombank’s Dong Da branch to achieve both external and internal data and to calculate the financial ratio

Fourth, I combine some analysis methods to assess the current situation of

financial business analysis in credit activities in Sacombank’s Dong Da branch

6 Research structure:

My thesis’ structure includes three chapters:

Chapter 1: Basic theories about financial business analysis in the commercial banks

Chapter 2: Current situation of financial business analysis in the credit service of Sacombank Dong Da branch

Chapter 3: Recommendations for the quality improvement of financial business analysis in Sacombank’s Dong Da branch

SBV: State bank of Vietnam

CIC: Credit Information Center

LIST OF TABLES

Table 1: Loan analysis by industry in Sacombank’s Dong Da branch in the period 2009-2011 46 Table 2: Loans analysis by quality in the Sacombank’s Dong Da branch in 2009- 2011 47 Table 3: Cursory Balance Sheet of Toan Thang JSC in the 2010 and first half of 2011 54 Table 4: Cursory Income Statement ( In VND million) of Toan Thang JSC in the

2010 and first half of 2011 54

LIST OF FIGURES

Figure 1: Sacombank’s Dong Da Branch Organizational Structure 42 Figure 2: Loan analysis by currency in the Sacombank’s Dong Da branch in 2009- 2011 47 Figure 3: Loan analysis by maturity in the Sacombank’s Dong Da branch in 2009- 2011 48 Figure 4: Current ratio and quick ratio of the Toan Thang Company in 2010 and 06/2011 55 Figure 5: Asset turnover ratio of Toan Thang Company in 2010 and 06/2011 56 Figure 6: Financial leverage ratio of the Toan Thang Company in the 2010 and 06/2011 57 Figure 7: Gross profit margin ratio and Net profit margin ratio of Toan Thang Company in 2010 and 06/2011 58

CHAPTER 1: BASIC THEORIES ABOUT FINANCIAL

BUSINESS ANALYSIS IN THE COMMERCIAL BANKS

1.1 Credit service of the commercial bank

1.1.1 Definition, characteristics and roles of the commercial bank

1.1.1.1 Definition

Credit is the belief which allows one party to offer resources to another party where that second party does not repay the first party immediately (thereby generate a debt), but instead arranges either to refund or return those resources (or other materials ofequal value) at a later date The resources provided may be financial (e.g granting a loan), or they might consist of goods or services (e.g consumer credit) Credit

encompasses any form of deferred compensation Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower

Credit is a short-term transfer of value from the owner to the user After a definite period of time, it will turn back to the owner with a price greater than original value.History of development indicates that credit is not only a economic term but also a commodity product which is the important factor to promote the economy of goods to new advanced stage Although there are many kinds of different concepts through a variety of socio-economic status, they all include two parties The first party is the personwho own amount of money or products transferred to the second party in order to use in the prescribed interval time The second party who receive the money or products is committed to refund them to owner with greater value and the difference between

original value and latter value called profit or interest

The credit activities can be taken place directly between the party who has a redundant capital and ones who need capital to invest However, in reality, it’s difficult that these parties can match together with size, using time Even they can meet these requirements; they did also waste the expensive search costs Therefore, it’s necessary to

appear a third party who collect the capital from the owners having the redundant money,classify and allocate to the users needing through the form of lending method This third party called financial intermediate institutions in which commercial banks are

preponderant Those commercial banks gather capital in the form of mobilization and distribution throughout lending method is known as banking credit

1.1.1.2 Characteristics

Credit is the distribution of a value on the basis of belief It’s the place where the lenders count on the borrowers using the loans effectively in the fixed interval period andhaving the ability to repay both of principal and interest on the prescribed date

Credit is the distribution of value having the specific term To ensure the debt can

be paid on time, the lenders always identify the lending period clearly The determination

of this lending period is reclined on the flow of borrower’s capital It means that lending period must be eligible with the cycle of capital rotation of the borrowers, and then the borrowers are in the favorable conditions to repay debts If the lending period is smaller than the cycle of capital rotation of borrowers, it will be difficult for borrowers that they can pay debt on the due date On the contrary, if the lending period is larger than the cycle of capital rotation of borrowers, borrowers will have the opportunities to use the capital for wrong purpose Besides, lending period based on not only flow of borrower’s capital but also characteristics of lenders’ capital If the lender capital is stable, then lending rate can be longer On the other hand, if the lender capital is not stable, then lending rate should be shorter to make sure the bank liquidity

Credit is the temporary transfer of a value on the basis of the repaid principal and interest This is the unique characteristic of credit After a certain period of time, banks have to pay back capitals to people having spare capital because they are real owner of this capital In addition, since banks need to compensate for cost they did spend on the operations, such as depreciation, wages of staffs, etc, the borrowers must repay to banks original principal as well as interest

1.1.1.3 Roles

In society, there are usually some people who have the spare money and others whoneed money to invest Nevertheless, it’s difficult for them to meet together directly.Supposing they can find each other, the cost will be high and not in time Thus, bankingcredit is the bridge which matches the people having capital and others who need capital

to deal with their demands It means that banking credit attracts all monetary funds whichare temporarily spare come from the economic organizations and residents to allocate tothe process of expanding production, economic growth, satisfying capital demand,promoting the circulation of goods, speeding the capital flow to society Besides theycontribute to expand the reproduction and give a favorable condition for economicsustainability

Through the banking credit, money supply in circulation can be monitored andfollowed to the rule of monetary circulation On the other hand, banking credit alsoencourages the entrepreneurs to strengthen the accounting system and helps them toexploit the potential profitability in the production and service activities Furthermore,banking credit also facilitate the expansion of economic relationship with foreigncountries, as a bride for economic exchange and a mean to tighten the economicrelationship with most countries in the world

1.1.2 The risk in the credit service of commercial banks

Being newly established at the end of the decades, Vietnam banking system hasrun mainly the traditional services included the credit service which brings the mostsubstantial income to commercial banks Yet, credit service also puts commercial banks

at danger If risk happened to any banks in the Vietnam banking system, it will beunpredictable impact on the whole bank in the system Through the rate of bad debts ofthe commercial bank in recent year, it’s irrefutable that credit risk is always the mostconcerned issue

In recent times, by controlling the quality of the loans, disposal of the collateralassets in the case of bad debts and providing the provision, the bad debt level experiencedthe decrease trend Though in practice, potential risks are still remarkable as a result of

the high pace of credit, the complicated fluctuation of some raw material and inputproduct prices, real estate investment trend and the capital stuck in the basis construction.Therefore, SBV as well as credit institutions have to pay attention heavily on quality ofcredit service to prevent and minimize the hazard.

extended, committed, invested, or otherwise exposed through actual or implied

contractual agreements, whether reflected on or off the balance sheet

1.1.2.2 Causes for credit risk

Credit service of the commercial banks usually goes along with the risk There aresome following reasons for risk

General reason originates from the economic recession, lack of the consistent and

integrated government policies, the fluctuation of political crisis in the domestic and inthe geographical area or the natural disaster such as climate change, storm, flood,drought, etc

Reason comes from the customer In regards to individual customers, they

underwent the reduction of income because of health deterioration, low skills, their companies where they are working go into bankruptcy Besides, maybe they have to copewith the sudden movement in their lives, for example accidents, diseases, divorce or death

Banks also incur risk when the borrowers misfire their budget, trick the

commercial banks and escape with money In terms of business customers, their

businesses operate inefficiently and get loss or use the capital for the wrong purpose

In addition, the causes can be happened because of poor management abilities Entrepreneur runs in the industry having the decline trend Entrepreneur having high fixed cost or borrow too much from the past can incur the risks, which leads to income drop and difficulties of raising new capital That businesses face with the difficulties in financial problem is also the factor contributing to the credit risk of commercial bank They don’t have abilities to tackle with debt repayment as their capital stuck in the fixed asset or real estate

Even some businesses intently deceive the commercial banks They make fake contracts, forgery certificates or borrow some unreal fixed asset to trick the commercial banks

Banks are also the causes for credit risks Due to the unreasonable credit policy,

commercial banks have too much profit targets, extend over the credit level which SBV stipulated, make loan terms ineligible, don’t perform or consummate the analysis process

of financial condition of customer prior to lending, during the lending or after lending

Banks can also not monitor the debt well because of insufficient and misleading information that banks gathered There are loopholes in the preparation and signing the credit contract The determination of lending rates and loan term may be not appropriate

The recruitment process of bank itself is not good from interview, arrangements totraining, which leads to the weakness of both professional skills and organization

understanding

Bank officials may violate the professional ethics Besides, banks may make a flaw that they don’t get the good guarantee credit, does not comply with the legal

provisions on the guarantee property

Credit guarantee can also induce to credit risk When it comes to real asset as a

credit guarantee, the value of real asset is able to fall with the market price or

depreciation happened in the using process If commercial banks hold this asset, they will

be in the peril

Turning to third party guarantee, after borrowers stayed in the trouble of debtrepayment, third party can refuse to implement its payment obligation.

In summary, general causes, customers, banks and credit guarantee are the

sources distributing to the credit risk of commercial banks However, whatever reasons come from any sources mentioned, the preponderant factor is strategic planning and controlling of bank management bound up with the weakness of both creditor’s

competencies and ethic In order to minimize the credit risk and speed up the

effectiveness of lending service, commercial bank should always continue to enhance the management’s professional skills and integrity, creditor staff’s professional behavior

1.2 The financial business analysis of commercial bank

1.2.1 Definition and roles

1.2.1.1 Definition

Financial business analysis is the process of assessment businesses, projects, budgets and other finance-related entities to agree on their fittingness for investment Typically, financial analysis is used to evaluate whether an entity is steady, solvent, liquid, or beneficial enough to be invested in When looking at a particular company, the financial analyst will often concentrate on the income statement, balance sheet, and cash flow statement In addition, one key area of financial analysis involves transforming the company's past performance into an estimation of the company's future performance

Financial business analysis of commercial banks intently identify the following objectives:

Evaluation of the past performance Historical performance is a good quality

indicator of future performance Investors or creditors are passionate about the tendency

of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment These trends offer a means for judging management's past performance and are possible indicators of future performance

Evaluation of current position Financial statement analysis indicates the current

position of the firm regarding to the types of assets owned by a business firm and the different liabilities owed against the enterprise

Estimation of profitability and growth prospects Financial statement analysis

enable to assess and predict the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in making decision about earning potential of business enterprise

Estimation of bankruptcy and failure Financial statement analysis is an important

tool in analyzing and predicting bankruptcy and probability of business failure

Evaluation of the operational efficiency Financial statement analysis helps to

analyze the operational efficiency of the supervision of a company The actual

performance of the firm which is discovered in the financial statements can be compared with some standards setting earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management

1.2.1.2 Roles

Since credit service accounted for the highest proportion of commercial bank income accompanied by credit risk, loan giving of the commercial banks must be

compliance with the strict process included the careful analysis step of borrowers’

financial and nonfinancial information The result of this step is going to show the

profitability, risk level in the customers’ plan of using capital, which affects directly on whether commercial banks should give the lending decision Thus, it’s the financial business analysis that played a significant role

On the other hand, in fact, the identification of factors which are the legal capacity

of customers, the reputation of the borrower, business management competencies and integrity and business prospects are very complicated and intricate They are measured byqualitative assessment, not quantitative Therefore, commercial banks also need the quantitative financial information to evaluate and select customers Financial business

analysis provides an opportunity for commercial banks to decide whether they should grant their loans to borrower, identifies the factors of credit level for borrower,

determines a reasonable lending period and the interest repayment date for each

customer Thus the financial analysis is not only customer needs Thus, financial businessanalysis of commercial bank is not only the voluntary demand but also compulsory requests for all commercial banks

1.2.2 Information used in the financial business analysis

There are many sources of information to analyze and evaluate financial firms If the information is complete and accurate, the analysis results will be reliable

Sources of information include:

1.2.2.1 Information within the company:

Internal information mainly originates from financial statement of the business submitted to the bank at the end of accounting period Business performances are

specified and illustrated by financial targets Financial statement includes Balance sheet, Income statement and Statement of cash flow

Balance sheet:

In financial accounting, a balance sheet or statement of financial position is a review of the financial balances of a sole proprietorship, a business partnership or a company Assets, liabilities and ownership equity are listed as of a precise date, such as the end of its financial year A balance sheet can be called as a "snapshot of a company's financial condition" Of the four basic financial statements, the balance sheet is the only statement which contributes to a single point in time of a business' operation year

A standard company balance sheet has three parts: assets, liabilities and equity The main categories of assets are usually listed firstly in order of liquidity Assets are followed by liabilities The difference between the assets and the liabilities is identified as

equity or the net assets or the net capital of the company and according to the accounting

equation, net worth must equal assets minus liabilities

In financial accounting, assets are economic funds Anything physical or

intangible that is likely owned or monitored to produce value and that is held to have constructive economic value is considered an asset Merely stated, assets stand for

ownership of value that can be transferred into cash (although cash is also considered an asset) The balance sheet of a company records the monetary value of the assets owned

by the firm It is money and other valuables pertaining to an individual or business Two major asset classes are physical assets and intangible assets Physical assets contain various subclasses, comprising current assets and fixed assets Current assets include cashand cash equivalent, account receivable, prepayment, inventory, whilst fixed assets comprise such items as buildings and equipment, land, plant Insubstantial assets are nonphysical resources and rights that have a worth to the company since they give the company some kind of benefit in the market place Examples of intangible assets are goodwill, copyrights, trademarks and patents

In financial accounting, a liability is an obligation of an entity arising from past

transactions or events, the agreement of which may lead to the convert or use of assets, provision of services or other yielding of economic benefits in the future A liability is defined by the following characteristics:

Any type of borrowing from persons or banks for improving a business or

personal income that is payable during short or long time;

A duty or responsibility to others that entails settlement by future transfer or use

of assets, condition of services, or other transaction yielding an economic advantage, at a specified or determinable date, on happening of a particular event, or on demand

A duty or liability that originates from the entity to others leaves it little or no discretion to pass up settlement; and a transaction or event which obligates the company that has already occurred

Liabilities are listed on a balance sheet and are usually separated into two

categories Current liabilities — the liabilities are reasonably projected to be liquidated

within one year They normally comprise payables such as wages, accounts, taxes, and accounts payable, unrecognized revenue when adjusting entries, portions of long-term bonds to be paid in year, short-term obligation (example from purchase of equipment) Long-term liabilities — the liabilities are reasonably projected not to be liquidated withinone year They normally include issued long-term bond, notes payables, long-term leases,pension obligations, and long-term product warranties.

In financial accounting, equity is the residual claim or interest of the most of class

of investors in assets, after all liabilities are paid If liability exceeds over assets, negative equity will exist In an accounting content, Shareholders' equity (or shareholders' funds , stockholders' equity, shareholders' capital or similar terms) presents the residual interest

in assets of a company, stretch among individual shareholders of common or preferred stock

At the beginning of a business, owners invest some funding into the business to run the operations This establishes a liability on the business in the form of capital as the business is a separate thing from its owners Enterprises can be considered, for

accounting purposes, sums of liabilities and assets; this is the accounting equation After liabilities have been made up for the positive remainder is deemed the owner's interest in the entity

This description is useful in understanding the liquidation process in case of bankruptcy Firstly, all the secured creditors are paid against cashes from assets After that, a series of creditors, ranked in priority the orders, have the next claim and right on the remaining proceeds Ownership of equity is the last or remaining claim against assets,paid only after all other creditors are paid In many cases where even creditors could not get enough money to repay their bills, nothing is left over to pay back owners' equity Thus owners' capital is reduced to zero Ownership capital is also known as risk capital orliable capital

The balance sheet has the following characteristics:

The indicators in the balance sheet reflected the worth measured by money Therefore, we can compute the total value of assets of the entire business at a special time Therefore, it’s easy to get an overall evaluation of financial business situation.

The indicators in the balance sheet reflected at a particular time which is usually

on the end day of the accounting period The information of both current year and

previous year provides the investor an opportunity to analyze the volatility of assets and equity between the two accounting period

Accounting equation is Assets= Liability + Equity Therefore, through the balance sheet, investors can compute all the existing assets of the business, physical forms, the structure of assets, equity and capital structure Thus, balance sheet accounting is an important document for study assessed the situation and overall business results, level of capital use and the economic outlook, financial businesses.

Income statement:

Income statement is referred to the profit and loss statement (P&L), statement of

financial performance, revenue statement, operating statement earnings statement, or statement of operations) is a company's financial statement that shows how the sales (money received from the sale of products and services before expenditures are taken out,also known as the "top line") is changed into the net income (the outcome after all

revenues and expenses have been made up for, also known as Net Profit or the "bottom line") It displays the sales recognized for a specific period, and the cost and expenditurescharged against those revenues, including write-offs (e.g depreciation and amortization

of various assets) and taxes The reason of the income statement is to indicate managers and investors whether the company gain or lost money during the period being reported

The essential thing to remember about an income statement is that it represents a period of time This contrasts with the balance sheet, which present a single moment in time Income statements should enable investors and creditors find out the past financial performance of the entity, predict future performance, and evaluate the capability of

generating future cash flows through statement of the income and expenses However, information of an income statement has several restrictions:

Items that should be relevant but cannot be reliably measured are not reported, for example brand recognition and loyalty

Some figures depend on accounting methods used, for example using FIFO or LIFO accounting to estimate the inventory level

Some figures depend on judgments and evaluation, for example the depreciationexpense depends on projected useful life and salvage value

Cash flow statement

In accounting and finance, a cash flow statement is also known as funds flow statement or statement of cash flows is the financial statement that indicates how changes

in balance sheet accounts and income influence cash and cash equivalents, and breaks theanalysis down to the operation, investing, and financing activities Basically, the cash flow statement is considered with the flow of cash flew in and cash out of the business The statement captures both the current operation results and the accompanying changes

in the balance sheet As an analytical tool, the statement of cash flows is helpful in

deciding the short-term feasibility of a company, mainly its ability to pay bills

International Accounting Standard 7 (IAS 7) is the International Accounting Standard that get the bottom of cash flow statements

The cash flow statement was previously recognized as the flow of Cash statement Therefore, the cash flow statement reflects a firm's liquidity

The balance sheet is a snapshot of a firm's financial position and obligations at a one point in time, and the statement of income summarizes a firm's financial transactions over the interval of time These two financial statements reveal the accrual basis

accounting used by business to match sales with the expenses associated with generating those revenues The cash flow statement comprises only inflows and outflows of cash and

cash equivalents; it excludes transactions that do not directly influence cash receipts and payments These non-cash transactions consist of depreciation or write-offs on bad debts

or credit losses to name a little The cash flow statement is the cash basis report on three types of financial activities: operation activities, investing activities, and financing activities Non-cash activities are normally reported in footnotes

The cash flow statement is proposed to provide information on a firm's liquidity and solvency and its ability to vary cash flows in future situation provide additional information for evaluating changes in assets, liabilities and equity enhance the

comparison of different firms' operation performance by eliminating the effects of

different accounting methods show the amount, timing and probability of future cash flows The cash flow statement has been adopted as a standardized financial statement since it eliminates allocations, which might be resulting from different accounting

methods, such as a variety of timeframes for depreciating fixed assets

Notes and disclosures attached with financial statements are also necessary

source of information They contribute and elucidate further information and details, support other information in the financial statement They include the characteristics of the business operation, accounting period, the currency used in accounting , the

accounting standard and policies which company complies with, the application of accounting policies , the additional information for items presented in the balance sheet, income statement and statement of cash flow

In conclusion, with the combination of both internal and external information, commercial bank can have the good information which is the foundational to assess the financial position of business

1.2.3 Methods used in the financial business analysis

1.2.3.1 Financial Business Analysis Methods

Financial business analysis methods which include the system of tools and approaches enable investor to access and investigate the facts, phenomena, external and internal relationship of business In addition, they also provide the opportunities to identify and analyze the cash flow stream and the movement in financial operations of business Due

to them, investor s can calculate the general criteria and specific detail to assess the business operations entirely

1.2.3.1.1Comparative analysis method

Comparative analysis which is one of the most popular, flexible methods is well known in the financial business analysis and frequently appeared in the first step of analysis process With a purpose of describing the movement in each criterion, analysts can refer the pace, development trend of the economic result While comparing, analysts should use the information which reflected the same meaning of economic substance, consistency with calculation method and measurement unit and collected in the same length of time period for the sake of ensuring the precise analysis Comparative analysis comprises three main methods which are horizontal analysis method, vertical analysis and cross-sectional analysis method

Horizontal Analysis

Methods of financial statement analysis generally entail comparing certain

information The horizontal analysis uses specific items to compare over a number of accounting periods With the horizontal financial analysis, creditor can compare a

business entity over different months or defined periods within an accounting period For example, revenue generated over different months of a year can be used to analyze the overall business performance or a particular project

An accountant can chase one of the two given below methods to carry out a

horizontal financial analysis:

Dollar analysis is a first method of horizontal financial analysis in which the figures in absolute dollars of various items are compared for a business over different periods of time This type of analysis enables to analyze the spending trend of a business Besides, it also enables to analyze the effects of external factors like rise in prices over business expenses

Percentage analysis is based on the adjustment in different items over different periods of time calculated in terms of percentage With the help of this kind of analysis, the performance of a small business can be use to compare to that of a large business in the same industry

Vertical Analysis

This involves the method of comparing dissimilar figures of separate entities to one particular figure of an entity for one particular period of time This method compares several items to one certain item in the same accounting period Users often enlarge upon vertical analysis by comparing the analysis of several periods to one another This type ofanalysis is of great implication in carrying out the decision making process

Evaluation of the balance sheet is one good example of carrying out vertical financial analysis In the balance sheet, for example, the assets and the liabilities and equity are each expressed as a 100% and each item in those categories is expressed as a percentage of the respective totals

In the normal size income statement, sale is expressed as 100% and every item in the income statement is expressed as a percentage of sales

Cross-Sectional analysis method

A type of evaluation an investor, analyst or portfolio manager may carry out on a business in relation to that company's industry or industry peers The evaluation

compares one company against directly the industry it operates within, or against certain competitors within the same industry, in an effort to discover the best of the breed

When carrying out a cross-sectional analysis, the creditor seeks to identify, by using comparative metrics, the evaluation, debt-load, future viewpoint and/or operational effectiveness of the target company This allows the investor to evaluate the target

company's effectiveness in these areas, and to make the best speculation choice among a collection of competitors or the industry as a whole

When comparing the aim firm to competitors, the analyst must be cautious to believe the unique operating characteristics of each company and how that will influence any comparative metrics used

1.2.3.1.2 Sectional analysis method

Sectional analysis method is the method which used to divide and aggregate the research events, the economic results into a great number of group bases on the specific criteria Normally, criteria can be time period, location, business scope or constituent part

of the targeted analysis By dint of this action, analyst may analyze the target object throughout the interval period of time, scope, which indicates the exact causes for results,identifies the obvious factors to create the recommendations to exploit the strengths ad restrict the weaknesses

1.2.3.1.3 Ratio analysis method

Financial ratio analysis is one instrument of investigation and comparing

relationships between dissimilar pieces of financial information Investors use

information from the income statement and balance sheet to compute financial ratios in order to find out information about small business firm

Ratio analysis is one of the most fashionable financial analysis techniques for companies and chiefly small companies Ratio analysis provides company owners with information on trends within their own business, often called tendency or time-series analysis, and tendency within their industry, called industry or cross-sectional analysis

Financial ratio analysis is ineffective without comparisons Most businesses do industry analysis while they use standard companies Benchmarking companies are those considered most accurate and most significant and are those used for comparison

regarding industry average ratios Companies even standard different divisions of their company against the similar division of other benchmark companies

1.2.3.1.4 Dupont analysis method

The nature of this method is the separation of a synthetic indicator of economic performance ratio into lots of ratios which have the cause and effect relationship That action itself allows analysts to analyze the influence of the composition ratios (factor contributing ratios) on the synthetic ratio Thanks to this approach, analysts can find the factors, the causes leading to good and bad scenario in each of the business activities, then analysts can achieve the strengths and weaknesses in business operation

1.2.3.2 Content used in financial analysis

1.2.3.2.1 Income statement analysis

Income statement analysis is the first step of researching financial statement forms The easiest way to find income statement of companies is to browse investor's corner of their websites, where you will most often find quarterly and yearly reports

Professional investors do an income statement analysis immediately after the company publishes new quarterly report, because that is the moment when public is informed of the latest business results, how much did the company earn (revenues), how much did the company spent (costs) and how profitable were their activities (earnings) in the latest time period

The very first thing an investor should check while reading income statement is weather the company is making money or not; if the company is spending more money than it brings in, you should be very careful before investing in such company's stocks

On the other side, if expenses of the company are well under control and they manage to generate much higher revenues, you should rank such company as the one with strong fundamentals and put it on the top of the list of stocks for potential investment

Revenues

Revenues or sales are the first figure investor should investigate when doing income statement analysis Creditor can find this figure on the top of the statement, most often as one single number, which can be broken down geographically or by business segment with bigger business.

What creditor should research in depth is the dynamic of company's revenues overthe years and within the year it is a positive sign, if the company is increasing its sales constantly and improving its profitability in this way If there are only temporary

increases of sales because of some marketing activities, it is not as powerful as constant improvement Stabile growth of sales is what creditors are looking for

Expenses

Every business involved in business has many kinds of expenses The most

ordinary are expenses related to the cost of goods sold (COGS), other operational

expenses and financial expenditure

Costs of Goods Sold

COGS is the expense directly linked to producing (how much is the cost for the company to produce the good or service) or purchase (how much is the cost for the company to purchase the good or service) the goods or services sold by the business

Operational Expenses

Operational expenses comprises all the other expenses related with the company's business, like marketing costs, salaries, research and development expenses, and other

Amortization and depreciation expenditure in this part of income statement

evaluation is the one you should be specifically careful about Amortization and

depreciation are like 'virtual costs', which are integrated in income statement with

purpose of lowering income with the purpose of reserves for replacing worn out assets Because different accounting standards and regulations permit the use of different

suggested and maximal amortization rates, accountants frequently find some room for manipulation of the overall company's outcome (profit or loss) by setting the amortization

and depreciation numbers to outfit their needs They might be hiding some profit in good years if they employ maximal amortization rates and use the inverse approach in awful times.

Research and development costs can be a significant part or company's expenses, especially with technology business In most cases the long-term success of this

company's depends of R&D, so they shouldn't be cutting them for the purpose of better final earnings outcome

Financial Expenses

In the section of analyzing financial costs, interests and taxes are crucial

components If business is financing its operation with high debt than creditor can expect also to observe high interests expense in the income statement analysis Taxes are

something businesses have to pay, but accountants have some possibilities to influence

on the ultimate result on which taxes are calculated and paid

Earnings

Earnings are designed as revenues minus expenses If revenues are higher than expenses, the business is generating profit If the situation is around and the company's expenses are higher than sales, the ultimate result is known as loss or negative profit

In finance many categories of earnings are used, relying on which expenses we compute in the formula

Gross Profit

Gross profit is computed as revenues minus COGS If it is expressed in percentageterms, it is recognized as gross margin Creditors should be looking for companies with the highest gross profits in industry, since they will be able to well sustain other parts of company Like elsewhere in income statement analysis, trend is significant factor If gross margin is decreasing, this is not a good signal, especially if the business is

operating in a environment where it is difficult to pass higher expenses onto customers

Net profit

Net profit is computerized as revenues minus all expenses, including financial expenses This is the ultimate earnings figure calculated and is most common used in common conversations among people

1.2.3.2.2Balance sheet analysis

Assets are physical forms of the equity Analysis of the structural asset will show the level of concentration of equity for each asset group By virtue of operation time and lines of business, analyst can assess the reasonable allocation of the capital specifically For example, If firms are in the start-up step or investment period , capital will certain

ly go into fixed assets and long-term investment After finishing the investment and coming into the normal operation, capital will be distributed much to working capital and short-term investments On the other hand, It’s in the case where enterprise run into trading area that current asset will be accounted for the majority of total assets On the contrary, enterprise which only manufactures the products, the capital can be allocated much more to the fixed asset Therefore, according to the specific situation, analysts need to clarify the influence of the factors triggering to the fluctuations in the proportion

of assets in hope of assessing the reasonable level of the asset structure

Capital which is the cash form of asset reflects the origin of sources which use to create the asset Capital includes two parts which are liability and equity Firstly, analyst should use the horizontal analysis method to observe the fluctuation of each part in the capital resource Then analyst can find out the trend of movement in capital resource Besides, analyst should ponder carefully on each type of capital resource and changes through the times with hope of assessing the reasonable level of capital structure and estimate the potential liquidity risk for the current creditors

Assets and capital have mutual relationship In principle, most assets are financed with the capital source which has the equivalent time period Thus, with a view of safety and stability in the financing activities, long-term assets need to be funded by long-term funds (called permanent capital) and similarly, short-term assets ought to be funded by short-term capital (called temporary capital)

Permanent working capital refers to the minimum quantity of all current assets

that is essential at all times to ensure a minimum level of continuous business

operations Some minimum quantity of raw materials, work-in-progress, bank balance, finished goods etc., and a company has to carry all the time irrespective of the stage of manufacturing or marketing operations This stage of working capital is referred to as core working capital or core current assets However the stage of core current assets is not a stable sum at all the times For a growing company the permanent working capital will be rising, for a declining company it will be decreasing and for a stable company it will almost stay the same with few variations Thus, permanent working capital is perennially needed one though not fixed in quantity This part of the working capital being a permanent venture needs to be financed through long-term resources

The temporary or varying working capital varies with the quantity of operations

It fluctuates with the size of operations This is the additional working capital required from time to time over and beyond the permanent or fixed working capital During seasons, more production/sales take place resulting of larger working capital needs The reverse is true through off-seasons As seasons vary, temporary working capital

requirement moves up and down Temporary working capital can be raised through short term funds like current liabilities When the stage of temporary working capital moves

up, the business may use short-term funds and when the stage for temporary working capital recedes, the company may retire its short-term loans

1.2.3.2.3Financial ratios analysis

Financial ratios are helpful indicators of a firm's outcome and financial situation Most ratios can be computerized from information provided by the financial statements

Financial ratios can be used to evaluate trends and to compare the firm's financials to those of other companies In some cases, ratio analysis can forecast future bankruptcy.

Financial ratios can be listed according to the information they provide The following types of ratios normally are used:

 Liquidity ratios

 Asset turnover ratios

 Financial leverage ratios

 Profitability ratios

Liquidity Ratios

Liquidity ratios present information about a firm's ability to gather its short-term

financial liabilities They are of fastidious interest to those extending short-term credit to the business Two frequently-used liquidity ratios are the current ratio (or working capitalratio) and the quick ratio

The current ratio is the ratio of current assets to current liabilities:

(Equation 1.1)Short-term creditors choose a high current ratio since it reduces their risk

Shareholders may favor a lower current ratio so that more of the firm's assets are working

to grow the business Typical values for the current ratio vary by business and industry For example, firms in cyclical industries may sustain a higher current ratio in order to stay solvent during downturns

One problem of the current ratio is that inventory may include many items that are difficult to liquidate quickly and that have unsure liquidation values The quick ratio is analternative measure of liquidity that does not include inventory in the current assets The quick ratio is identified as follows:

(Equation 1.2)

The current assets got in the quick ratio are cash, accounts receivable, and notes receivable These assets basically are current assets less inventory The quick ratio often

is called to as the acid test.

Finally, the cash ratio is the most traditional liquidity ratio It excludes all current

assets excluding the most liquid: cash and cash equivalents The cash ratio is defined as follows:

(Equation 1.3)The cash ratio is a suggestion of the firm's ability to pay off its current liabilities if for some reason immediate payment were required

Asset Turnover Ratios

Asset turnover ratios show of how efficiently the firm utilizes its assets They occasionally are referred to as efficiency ratios, asset utilization ratios, or asset

management ratios Two normally used asset turnover ratios are receivables turnover and

inventory turnover.

Receivables turnover is a suggestion of how quickly the firm collects its accounts receivables and is indentified as follows:

(Equation 1.4)The receivables turnover regularly is reported in terms of the number of days that credit sales stay in accounts receivable before they are collected This number is

recognized as the collection period It is the accounts receivable balance divided by the

average daily credit sales, computerized as follows:

(Equation 1.5)

Other major asset turnover ratio is inventory turnover It is the cost of goods sold

in a time period divided by the average inventory level through that period:

(Equation 1.6)

Financial Leverage Ratios

Financial leverage ratios present an indication of the long-term solvency of the firm Unlike liquidity ratios that are anxious with short-term assets and liabilities,

financial leverage ratios gauge the extent to which the firm is using long term debt

The debt ratio is identified as total debt divided by total assets:

(Equation 1.7)

The debt-to-equity ratio is total debt divided by total equity:

(Equation 1.8)Debt ratios rely on the classification of long-term leases and on the classification

of some items as long-term debt or capital

The times interest earned ratio shows how well the firm's earnings can cover the interest payments on its debt This ratio also is recognized as the interest coverage and is

calculated as follows:

(Equation 1.9)where EBIT = Earnings Before Interest and Taxes

Profitability Ratios

Profitability ratios offer several different procedures of the success of the firm at generating earnings.

The gross profit margin is a gauge of the gross profit earned on sales The gross

profit margin considers the firm's cost of goods sold, but does not contain other costs It isknown as follows:

(Equation 1.10)

Return on assets is a gauge of how effectively the firm's assets are being used to

generate profits It is known as:

(Equation 1.11)

Return on equity is the bottom line gauge for the shareholders, measuring the

profits earned for each dollar invested in the firm's stock Return on equity is known as follows:

(Equation 1.12)

1.2.3.2.4 Cash flow statement analysis

Cash flow statement analysis will indicate investor, how much money was earned and spent by a business in a particular time, usually a quarter or a year One would say it reveals the same information as income statement, but there is a significant difference among them related to accrual accounting Sales and expenses in income statement are booked when they incur, which is in most cases not the same point of time as cash

changes hands On the other side, income statement comprises some revenues and

expenses, which are not booked in cash flow statement

To simplify cash flow statement analysis knowledge, creditor can think of final netcash from operations as the "true" company's income, while the net profit reported in the

income statement doesn't compulsory mean any increase in the balance sheet at the end ofthe accounting period

You as creditor should be specifically careful analyzing cash flow statements when picking candidates for possible investment By looking only the income statement creditor could be mislead by the figures reporting net profit, while company could suffer its business because of inadequate cash flows, which can result of insolvency as worst case scenario Cash flow statement analysis will offer you a much better sense of how successful the company's commerce really is

Cash flow from operating activities

This section of cash flow statement analysis is relevant to the cash that comes in from revenue of the company's goods and services minus the cash used for producing its selling products Creditors should look for those companies which are producing positive cash flow from operating Of course, there is a difference between businesses among industries; for example the high tech and IT sector is recognized to produce negative cashflow from operations in the earlier level of company's growth

Figures from cash flow statement are often used as a preview sign of the future netincome Interesting information for investors is the active of the gap between cash flow from operations and net profit for the last few periods Widening or narrowing gap is

signaling speeding or slowing charge bookings

Cash flow from investing activities

Capital expenditures are related to new equipment and other investment related with company's ongoing primary business Acquisitions and investments on financial markets are also part of this section of cash flow statement

One of the most important parts of analyzing investing figures is to compare depreciation and re-invested capital in ongoing business in a specific period Re-

investments should be at least equal (preferable higher) than depreciation, since

artificially high cash inflows are not sustainable over a longer period of time

Cash flow from financing activities

Outside financing activities can be related to cash inflows out of primary (new emission) stocks of bonds selling or of additional borrowings submitted by banks on one side, while cash outflows can represent paying back a bank loan, dividend payments or buying back its own common stocks.

1.3 Factor influencing financial business analysis

The quality of the financial business analysis is known as the accurate assessment

of the business’ financial situation, the risk and efficiency belonged to customer andreports finance frequency Therefore, there are lots of different factors that influence notonly directly but also indirectly to the quality of financial business analysis They aredivided into two main factors: subjective factors and objective factors Each factor hasdifferent level of the impact but they all have a great impact to the quality of financialbusiness analysis

1.3.1 Subjective factor

First, the competency of banking staffs is one the most important contributing to the quality of financial business analysis As a result of the subjective assessment and opinions, the banking staffs should get the basis knowledge of the accounting standard and policy In addition, they should also have a financial analysis skills and general knowledge in hope of understanding the nature of financial business During the financialanalysis process, banking staffs need to know how to inquiry the information, to reach enthusiastic cooperation from the clients and to check and verify the data that customers provide, which is ensure the precise and relevant information

Lending policies and loan conditions of each commercial bank came to the secondfactor affecting on the result of the financial business analysis Content of the financial business analysis is affected by the level of tightened lending policy of each commercial bank If commercial bank is in the tightening period, the financial evaluation would be much strict and high request In contrast, if commercial bank is in the expansionary period, the financial analysis will be open and easier Similarly, secured loan policy has a

large effect to the work of analyzing the financial situation The loans are secured by certain and safe mortgage, evaluation and assessment stages will be simpler in some certain contents However, if loans are unsecured or secured by the assets formed from another loan source, banking staffs will always require the cautious and detailed

information to analyze and give the cautious ideas

The coordination of bank with other related agencies is the third subjective factor Gathering the information is essential before banking creditors can conduct the financial analysis Therefore, the good communication between bank lending with the relevant authority agencies such as tax bureaus, State banks of Vietnam and other credit

institutions in Hanoi will generate the source for useful information with a view of

supporting to the assessment of financial business, which leads to an accurate and

objective opinion

1.3.2 Objective factor

First factor came from the borrower Firstly, the competency level of accounting

department in the borrower’s business is the important factor that determines the quality

of the financial statement content because financial statement is the integrated

information summarizing the data from most of the original documents and book ledgers

of the business If the business accounting work is well qualified, the recording of

bookkeeping is scientific and compliance with the standard, then the information which isprovided by the borrower will be sufficient and appropriate Conversely, if the abilities ofthe staffs in the accounting department are not good, the information of the financial statements can be hardly accurate, complete and timely In this case, banking creditors need much time to verify the information which is recorded in the ledgers and documents

of the borrowers

Besides, customer’s regulatory compliance and integrity are the things that decide the reliability of the financial statement The honest customers are always willing to supply the necessary information and to give the favorable condition for banking staff in the evaluation process as well as debt management Moreover, the compliance with the

provisions of the legal law as well as credit institutions as set the bank’s mind at peace whereas borrowers use the loans In fact, there are a substantial number of borrowers whoabuse the bank’s trust only share the limited information or provide inaccurate

information for banking staffs, which makes the content of the financial business analysisinaccurate or less detailed

In addition, that borrower report and create the financial statement fully and timely

in accordance with regulation is also crucial to the content and quality of the financial business analysis A financial statement consists of four parts which are balance sheet, income statement, statements of cash flows and notes to financial statements However, the cash flow statement is not compulsory for medium and small enterprises, so they rarely establish and issue this statement Furthermore, many businesses do not focus on the information in the notes in the financial statements even though this is kind of the mandatory information The limitation of the information in the financial statement beingalong with the deliberate hiding of the borrowers makes the financial business analysis difficult and imperfect

Law environment is the second objective factor Following the current

regulations, most businesses only issue the annual financial statement, except for some special enterprises which are state corporation, enterprises state owner over 50% shares, joint stock companies listed on the stock market have to issue the quarter financial

statement reports Nevertheless, the maximum time for completion of the financial

statement is the date of 31, March next years after end of the closing accounting period Thus in order to obtain the detailed financial data for analysis, banking staffs must wait atleast after the March 31st later year If enterprises have to audit the financial statement, banking staffs must wait until the results of the audit agency For monthly financial report, the business is allowed to issue this report until the date of 20th next month Thus,financial information which provides to the banking staffs is hardly in time If this report can be satisfied the timely element, it only include the brief information, not detailed

enough for banking staffs It’s difficult for them to analyze the financial situation of the borrowers.

Another relevant factor to the law environment should be mentioned One of the

important elements being indispensable in the financial analysis is the benchmarking

ratios for different sectors If the benchmarking ratio is available and identified correctly,

then the financial business will be much easier

Conversely, if the average industry ratio is incomplete or not updated regularly, it may result in the wrong assumptions and the incorrect decisions of the creditors At the present time, there is not any government agencies official assigned to the task of

gathering and calculating the financial average indicators in industry These financial averages indicators are just constructed by some special industries with a view to

implementing their purposes They can be securities firm, commercial banks, etc

Therefore, it’s confusing when the financial average indicators are applied

The third factor is the technology Nowadays, technology education contributes

significantly important role for the analysis of the financial position of business By dint

of using excel table the comparisons and calculations will be done quickly and accurately

in large quantities Also with the birth of the internet system, analysts can easily look up the necessary information at the specialized websites in the analysis process to make comparison and conclusions

In conclusion, Chapter 1 mainly clarifies some characteristics of financial

business analysis, method and content which are existed in Vietnam and then found out the objective and subjective influencing on the financial business analysis This is the theoretical basis for research the current situation of financial business analysis in the credit service of Sacombank Dong Da branch which is described in chapter 2