LV Thạc sỹ_Improving liquidity risk management in BIDV

IMPROVING LIQUIDITY RISK MANAGEMENT IN BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM BACHELOR’S THESIS IN FINANCE... The sources of liquidity demand and supply are various and to perfo

IMPROVING LIQUIDITY RISK MANAGEMENT

IN BANK FOR INVESTMENT AND

DEVELOPMENT OF VIETNAM

BACHELOR’S THESIS IN FINANCE

IMPROVING LIQUIDITY RISK MANAGEMENT

IN BANK FOR INVESTMENT AND

DEVELOPMENT OF VIETNAM

BACHELOR’S THESIS IN FINANCE

ABBREVIATION

LIST OF TABLES

LIST OF FIGURES

ABSTRACT

CHAPTER 1:

INTRODUCTION

1.1 Rationale 1

1.2 Research Objective 3

1.3 Research Methodology 3

1.4 Scope of Research 3

CHAPTER 2:

THEORETICAL BACKGROUND ON BANKING LIQUIDITY MANAGEMENT

2.1 Liquidity management concept 4

2.2 Liquidity management policy in modern bank 5

2.2.1 Purposes and principles of liquidity management 5

2.2.2 The process of liquidity management 5

2.2.3 Strategies for liquidity management 6

2.2.3.1 Asset liquidity management strategy 6

2.2.3.2 Liability liquidity management strategy 7

2.2.3.3 Balanced liquidity management strategy 7

2.2.4 Estimating liquidity needs 8

2.2.4.1 The Sources and Uses of Funds Approach 8

2.2.4.2 The structure of funds approach 9

2.2.4.3 Liquidity Indicator Approach 10

2.3 International experience on banking liquidity management 14

The case of Argentina in 2000-2002: 14

CHAPTER 3:

3.1.1 General Introduction to BIDV 17

3.1.2 History and Achievements 19

3.1.3 Organizational structure 23

3.1.4 Business performance during the period 2007-2011 26

3.2 Liquidity management in BIDV 29

3.2.1 BIDV’s regulations on liquidity management 29

3.2.2 The organizational structure of liquidity management in BIDV 31

3.2.3 The methods used for liquidity management 33

3.2.3.1 Building liquidity gap table and demand-supply of liquidity table 33

Liquidity risk is the possibility that the bank has difficulties in performing their obligations for financial liabilities This risk arises when the bank may be unable to perform their repayment obligations when these liabilities are due at normal or difficult time To minimize liquidity risk, the bank has to mobilize from various sources beside the bank’s core capital Based on the liquidity table, the bank has a management policy of assets with high quality, flexibility, and daily monitor future cash flows and liquidity level 35

3.2.3.2 Analyzing liquidity simulation, building liquidity scenario 35

3.2.3.3 Using liquidity indicators 36

3.2.4 The process of liquidity management 40

3.2.4.1 The daily liquidity management 40

3.2.4.2 The periodic liquidity management 43

Analyze information report to 43

S Supervise 43

3.2.4.3 The process of issuing and supervising liquidity limits 45

3.3 The evaluation of liquidity management in BIDV 47

3.3.1 Achievements 47

3.3.2 Limitations 50

CHAPTER 4

RECOMMENDATIONS TO IMPROVE LIQUIDITY RISK MANAGEMENT IN BIDV

4.1 BIDV's oriented strategy in 2011-2015 and vision to 2020 54

4.1.1 BIDV’s priority objectives 54

4.2 Recommendations to improve liquidity risk management in BIDV 56

4.2.1 Complete the policy for liquidity risk management 56

4.2.2 Develop strategy for liquidity risk management 57

4.2.3 Improve financial capability 58

4.2.4 Adjust the model of liquidity risk management 58

4.2.5 Improve human resources quality 59

4.2.6 Upgrade the technology system 59

4.2.7 Enhance internal audit 60

4.3.Recommendations for SBV 60

4.3.1 Improve the legal framework 60

4.3.2.Implement monetary policy flexibly 61

4.3.3.Intensify credit institutions inspection, supervision and build a warning system 62

4.3.4.Promote the derivative security market 62

CONCLUSION

REFERENCES

APPENDIX

This thesis would not have been possible without the supports of teachers, my classmates in Advanced Finance Program Intake 50, my family and others.

I owe my deepest gratitude to my direct instructor – PhD, Prof … whose encouragement, guidance, and support from the initial to the final level of the thesis enabled me to develop an understanding about this topic.

Besides, I would like to thank MsC … She has made available her support in many ways I had the chance to approach BIDV’s liquidity risk management procedure These models will be the center of my thesis She also gave me a lot of precious and rare data

I am really grateful to my classmates in Advanced Finance Program 50 They helped me not only in finding related materials but also in giving advice and ideas This thesis has never been completed without their support

Lastly, I offer my regards and blessings to all of those who supported me in any aspect during the completion of this graduation thesis

A great love for all,

ALCO Asset Liability Management Committee

BIDV Bank for Investment and Development of Vietnam BOD Board of Directors

IMF International Monetary Fund

L/C Letter of Credit

NIM Net Interest Margin

SBV State Bank of Vietnam

S&P Standard and Poor

US The United State of America

Table 3.1: BIDV’s 2010 ratings

Table 3.2: BIDV’s liquidity table at 31/12/2011

Table 3.3: BIDV’s static liquidity indicator at 31/12/2011

Table 3.4: BIDV’s liquidity gap ratio at 31/12/2011

Table 3.5: BIDV’s demand-supply liquidity ratio at 31/12/2011

Figure 3.1: BIDV’s organizational structure

Figure 3.2: BIDV’s total assets during the period 2007 – 2011

Figure 3.3: BIDV’s Owner Equity during the period 2007-2011

Figure 3.4: BIDV’s Profit before tax during the period 2007-2011

Figure 3.5: BIDV’s profitability indicators during the period 2009-2011

Figure 3.6: Organizational structure of liquidity management in BIDV

Figure 3.7: Daily liquidity management process in BIDV

Figure 3.8: Periodic liquidity management process in BIDV

In the global economy, together with a strong and inevitable integration, developingcountries have witnessed the gradual development of financial institutions, especiallycommercial banks Modern banks have to face with many risks and liquidity risk isconsidered to be the most unpredictable risk From that, it raises a need for allcommercial banks to have a solid and efficient liquidity risk management system inorder to reach the business stability and sustainable development

This paper aims to assess the details of liquidity risk management in BIDV based

on theoretical frame work After reviewing BIDV’s liquidity risk management, thisthesis provides evaluations on the banks’ achievements and limitations in liquidity riskmanagement It also offers some appropriate solutions to improve this profession in thebank

The research finds out that BIDV has an efficient liquidity risk managementsystem However, there are some shortcomings which the bank needs to deal with It issuggested that the bank should build a complete policy, develop specific strategies, andadjust the model of liquidity risk management Furthermore, the bank needs to improveits financial capacity, better the human resources quality, upgrade the technologysystem, and enhance its internal audit Finally, some recommendations are offered forthe SBV so that commercial banks can apply liquidity risk management efficiently The structure of this thesis includes four main chapters: Chapter 1 – Introduction,Chapter 2 – Theoretical background, Chapter 3 – Liquidity management in BIDV, andChapter 4 – Recommendations

in the survival of commercial banks

Consequently, liquidity risk management is one of the most important professions

in commercial bank management Staying in good liquidity position indicates that thebank can maintain significant amount of spendable funds or can easily borrow fundswith low cost or can sell some assets immediately with reasonable price The crisis inUS’s banking system in 2008 shows that the lack of liquidity sent signals about thebank’s financial difficulty Following this, banks faced series of deposit withdrawalsand they could not attract more deposits due to the customer’s conservative attitude.These banks eventually went bankruptcy or received support from the government

As regards Vietnam’s commercial banks, most of the liquidity indicators are

“fragile” In term of chartered capital, our commercial banks’ chartered capital is reallysmall compared to other commercial banks in the same area In fact, a medium bank inthe region has the chartered capital of approximately VND 20,000 billon whereas thecommercial bank with the highest chartered capital is EXIMBANK - VND 10,000billion According to the decree number 10/2011/ND-CP, up to 31st December, 2011,commercial banks must have the chartered capital at least VND 3,000 billion It is

certainly believed that it takes a lot of time and effort for our commercial banks toincrease chartered capital to have better liquidity As for cash status, up to 2010, thereare only 20 commercial banks with cash status under 10% It is noticeable that somebanks have cash status under 5% such as Agribank, Mekong Housing Bank, An BinhBank, Hanoi Building Bank and so on Thus, when the liquidity needs raise, thesebanks have to lend in the interbank market with high interest rate and the bankruptcyrisk is also high Additionally, the liquidity indicators of commercial banks are not verysatisfactory Most banks keep low liquidity securities due to the downturn in the stockmarket in 2009

Recently, the merge of the three commercial banks: Ficom bank, Tin Nghia Bank,and Saigon Commercial Bank showed that the liquidity capacity of these commercialbanks is weak and the liquidity risk is very high The Governor of SBV, Mr NguyenVan Binh said that this merge was the first step in the process of restructuring thebanking system and there might be many other merges in 2012 It is undoubtedlyaccepted that many commercial banks has high liquidity risk and the merge willbecome the tendency in Vietnam’s banking system

Overall, liquidity management is an important task in commercial bankmanagement and banks need to improve their liquidity capability so as to compete withothers and comply with SBV’s regulations

Bank for Investment and Development of Vietnam (BIDV) is a stated owncommercial bank with solid foundation and high reputation The bank aims to be a bigfinancial – banking corporation in the region However, as the integration is becomingwider and deeper, the bank has to deal with many opportunities and challenges Inorder to adapt well in the international environment, improving financial capacity isessential Liquidity risk management, thus, is the issue that the bank concerns the most

The dissertation’s topic is “Improving the liquidity risk management in Bank for

Investment and Development of Vietnam”

1.2 Research Objective

This paper aims to accomplish three major objectives, which are

- Understanding the liquidity concept and the liquidity risk management in modernbank

- Understanding the process and method of managing liquidity in BIDV, analyzingachievements and limitations in liquidity management in BIDV

- Providing suggestions to improve BIDV’s liquidity management

1.3 Research Methodology

The theoretical model which the author chooses to research is the model mentioned

by Peter S Rose in his book “Bank management and financial services” This modelwill be illustrated and analyzed in detail in Chapter 2

The data is downloaded from BIDV’s official websites, or taken from their datacenters All the data is qualified by its relevance, suitability, adequacy, and reliabilityand most of it is publicly The figures have just updated and manipulated at least in

2011 and carefully scrutinized to be sure the correctness

1.4 Scope of Research

The research will concentrate on analyzing the process and methods of liquiditymanagement in BIDV from 2007 up to December 31 2011 Due to the limitation ofcondition, this study focuses only on general liquidity management in BIDV, identifiesthe achievements as well as limitations, and suggests methods to improve the liquiditymanagement in BIDV

CHAPTER 2:

THEORETICAL BACKGROUND ON BANKING LIQUIDITY

MANAGEMENT

2.1 Liquidity management concept

Liquidity management is a “dual” term in that each word deserves explanation to

understand the issues involved In fact, liquidity refers to how quickly and cheaply anasset can be converted into cash Liquidity management, therefore, is the task ofpreparing to have ready access to immediately spendable funds at reasonable cost atprecisely the time those funds are needed Money (in the form of cash) is the mostliquid asset Assets that generally can only be sold after a long exhaustive search for abuyer are known as illiquid

The liquidity need for a financial institution, which is a bank in this case, can be

viewed within a demand-supply framework The sources of liquidity demand and

supply are various and to perform liquidity management skillfully, it is necessary todetermine the net liquidity position, which is calculated as followed:

Net Liquidity position (Lt) = Supplies of Liquidity Flowing in – Demands for Liquidity

When Lt < 0, banking managers face liquidity deficit, and they have to decide whenand where to raise additional funds On the other hand, if Lt > 0, they will prepare for aliquidity surplus by finding ways to invest surplus funds efficiently until liquidity needsraises

The essence of liquidity management can be described in two succinct statements:

- Rarely are demands for liquidity equal to the supply of liquidity at any particularmoment in time

- There is a trade-off between liquidity and profitability.

In summary, making sure that the institution is in a good liquidity position is anever-ending problem to banking managers In order to dealing with liquidityproblems, mangers have to forecast and restrict many risks that interest will change(interest rates risk) and that liquid funds will not be available in the volume needed(availability risk)

2.2 Liquidity management policy in modern bank

2.2.1 Purposes and principles of liquidity management

• Purposes of liquidity management:

- Comply with central bank’s regulation

- Meet requirement of payment obligations with reasonable costs, ensuring the safety

of the bank’s operation

- Reduce the liquidity risk by recognizing, estimating, and supervising liquidityindicators in accordance with international standards

- Improve the efficiency of using capital

• Principles of liquidity management:

- Frequently monitor the operation of departments which mobilize and/or use funds

- Foreseen the cash flow in/out

- Analyze the liquidity needs on the continuous basis

2.2.2 The process of liquidity management

The process of managing liquidity management includes the following steps:

- Identify risks:

This is a procedure of monitoring continuously and systematically the bank’sbusiness activities in order to list and predict all the related risks It is also thefoundation for supervising and handling liquidity

- Supervise and prevent risks:

Commercial banks use technical means to prevent liquidity risks

- Solve the problems: What to do when risks occur?

When liquidity risks happen, banks need to measure the loss of assets and financethese losses immediately and appropriately In general, there are two main methods toovercome this situation: self recovery and risk transfer

2.2.3 Strategies for liquidity management

There are 3 main strategies that banking managers often use to deal with liquidityproblems: providing liquidity from assets (asset liquidity management); relying onborrowed liquidity to meet cash demands (liability management); and balancing (assetand liability liquidity management)

2.2.3.1 Asset liquidity management strategy

This strategy requires banking managers to keep highly liquidity assets such as cashand marketable securities In fact, these liquid assets have a ready market, have areasonably stable price, and are reversible

This approach is used mainly by small commercial banks that find it less risky toliquidity management than relying on borrowed funds It is generally agreed that there

is an opportunity cost to store liquid assets because they carry the lowest rates of return

of all assets Additionally, these sales involve significant transaction costs and may benegatively affected by the market

2.2.3.2 Liability liquidity management strategy

This method suggests banking managers to borrow immediately spendable funds tocover all anticipated demands for liquidity Generally, big commercial banks favor thisstrategy Compared to asset liquidity management strategy, this does not lower thepotential returns of the institution Moreover, this permits banks to leave the volumeand composition of its asset portfolio unchanged if it is satisfied with the assets which

it currently holds Nevertheless, due to the volatility of interest rates and the rapiditywith which the availability of credit can change, this approach is very risky It is certainthat banks frequently have to buy liquidity with difficulties of cost and availability Insome cases, borrowing liquidity might send a message of financial problems tocustomers As a result, it leads to the nonstop deposits withdrawal and bankruptcypossibly happens

2.2.3.3 Balanced liquidity management strategy

Because of the fact that asset and liability liquidity management strategies bothhave their own advantages and disadvantages, it will be rational to combine them.According to the balanced liquidity management strategy, some of the expecteddemands for liquidity are satisfied by keeping liquid assets whereas other liquidityneeds are taken cared by advanced arrangements for lines of credit from potentialsuppliers of funds

In conclusion, there are some principles that managers should follow in order tosolve liquidity problems successfully Firstly, they must keep track of the activities ofall departments using and/or supplying funds Secondly, they should know in advancewhen and where the biggest demands and supplies of funds occur This will help them

to plan ahead to deal more effectively with emerging liquidity surplus or deficit.Thirdly, they must ensure that the priorities and objectives for liquidity management ofthe bank are clear Last but not least, liquidity needs must be analyzed on a continuingbasis to avoid both excess and deficit positions

2.2.4 Estimating liquidity needs

Over the years, there are several methods that have been used to estimate a financialinstitution’s liquidity situation The three most popular methods are sources and uses offunds approach, the structure of funds approach, and the liquidity indicator approach.Due to the fact that each methods is built based on specific functions and banks canonly estimate approximately liquidity requirements, it is necessary for managers toprepare for fine-tune estimates of liquidity requirements as new information becomesavailable

2.2.4.1 The Sources and Uses of Funds Approach

To start with, it is needed to understand the concept of liquidity gap Liquidity gap

is measured by the size of the difference between sources and uses of funds If sources

of liquidity exceed uses of liquidity, the bank will have a positive liquidity gap(surplus) Similarly, when uses exceed sources, banking managers face a negativeliquidity gap (deficit)

In order to estimate the liquidity gap for short term and long term, a bank mustfollow the key steps:

- Loans and deposits must be forecast for a given planning period

- The estimated change in loans and deposits must be calculated for that same period

- The managers must estimate the liquidity gap for the planning period by comparingthe estimated change in loans (or other uses of funds) to the estimated change indeposits (or other sources of funds)

A simpler approach for estimating future deposits and loans is to divide the forecast

of future deposit and loan growth into three components:

- A trend component: constructing a trend growth rate using as reference points oftotal deposits and loans established over recent years

- A seasonal component: measuring how deposits and loans are expected to behave inany given time due to seasonal factors.

- A cyclical component: representing the change in deposits and loans based on thestrength and weakness of the economy

After predicting the liquidity requirements, managers can determine which assetsare available for use, and then decide the sources of funds that can possibly beborrowed Then, the manager will distribute credit lines and deposits mobilization to itsbranches

2.2.4.2 The structure of funds approach

This method contains major steps:

Firstly, deposits and other sources of funds are classified into groups based on theestimation of their probability of being withdrawn For example, we can divide abank’s deposits and loans into three categories:

- Volatile liabilities: deposits and funds which are very sensitive to interest rate

- Vulnerable funds: about 25-30 percent of this will probably be withdrawn sometimeduring the current time period

- Stable funds: funds that management considers unlikely to be removed

Secondly, the managers must set aside liquid funds according to some desiredoperating rule for each of these funds sources Specifically, they may decide to set up

95 percent liquid reserve behind all hot money funds, 30 percent behind vulnerabledeposit and non-deposit liabilities, and 15 percent behind total stable funds sources Thirdly, the total liquidity is calculated by summing deposit and non-depositliability liquidity requirement and loan liquidity requirement Admittedly, the depositand loan liquidity requirements which make up the above equation are subjectiveestimates that rely heavily on management’s judgment, experience, and attitude towardrisk

In deciding how much liquidity to hold, banks frequently use probabilities.According to this approach, the managers will want to define the best and the worstpossible liquidity positions their banks might find them self in and assign probabilities

to each Then, they will calculate their expected liquidity requirement, based on theprobabilities they assign to different possible outcomes

2.2.4.3 Liquidity Indicator Approach

Generally, some commercial banks and financial institutions estimate their liquidityneeds by calculating certain liquidity indicators and comparing them to industryaverages Some frequently used indicators are listed as followed:

1 Cash position indicator

Cash position indicator = Cash and deposits due from depository institutions Total assets

A greater proportion of cash implies the institution is in a stronger position tohandle immediate cash needs

2 Liquid securities indicator

Liquid securities indicator = Government securities

Total assets

This indicator compares the most remarkable securities an institution can hold withthe overall size of its assets portfolio; the greater the proportion of governmentsecurities, the more liquid the depository institution’s position tends to be

3 Net federal funds and repurchase agreements position

(Federal funds sold and reserve repurchase agreements – Federal funds purchasedand repurchase agreement) ÷ Total assets, which measures the comparative importance

of overnight loans relative to overnight borrowings of reserves; liquidity tends toincrease when this ratio rises

4 Capacity ratio

Capacity ratio = Net loans and leases

Total assets

It is really a negative liquidity indicator because loans and leases are often the mostilliquid of assets

5 Pledged securities ratio

Pledged securities ratio = Pledged securities

Total security holdings

It is also a negative liquidity indicator because the greater the proportion ofsecurities pledged to back government deposits, the fewer securities are available tosell when liquidity needs arise

6 Hot money ratio

Hot money ratio = Money market assets

Volatile liabilitiesMoney market (short term) assets ÷ volatile liabilities = (Cash and due fromdeposits held at other depository institutions + holdings of short term securities +Federal funds loans + reserve repurchase agreements) ÷ (large CDs + Euro currencydeposits + Federal funds borrowings + repurchase agreements) , a ratio that reflectswhether the institution has roughly balanced the volatile liabilities it has issued with themoney market assets it holds that could be sold quickly to cover those liabilities

7 Deposit brokerage index

Deposit brokerage index = Brokered deposits

Total depositsBrokered deposits consist of packages of funds placed by securities brokers fortheir customers with institutions paying the highest yields Brokered deposits are

interest sensitive and may be quickly withdrawn; the more a depository institutionholds, the greater the chance of a liquidity crisis.

8 Core deposit ratio

Core deposit ratio = Core deposits

Total assetsCore deposits include total deposits less all deposits over VND 2 billion Coredeposits are primarily small denomination checking and savings accounts that areconsidered unlikely to be withdrawn on short notice and so carry lower liquidityrequirements

9 Deposit composition ratio

Deposit composition ratio = Demand deposits

Time depositsDemand deposits are subject to immediate withdrawal via check writing, while timedeposits have fixed maturities with penalties for early withdrawal This ratio measureshow stable a funding base each institution possesses; a decline suggests greater depositstability and a lesser need for liquidity

10 Loan commitment ratio

Loan commitment ratio = Unused loan commitments

Total assetsThis ratio measures the volume of promises a lender has made to its customers toprovide credit up to a pre-specified amount over a given time period Thesecommitments will not appear on the lender’s balance sheet until a loan is actually

“taken down” by the borrower Thus, with loan commitments there is risk as to theexact amount and timing when some portion of loan commitments become actual

loans The lender must be prepared with sufficient liquidity to accommodate a variety

of “taken down” scenarios that borrowers may demand A rise in this ratio impliesgreater future liquidity needs

The first five indicators above focus mainly upon assets or stored liquidity The lastfive concentrate on liabilities or future commitments to lend money and are aimedmainly at forms of purchased liquidity These tend to be highly sensitive to season ofthe year and stage of business cycle One noticeable thing is that the industry averagescan give misleading understanding

Another useful method to estimate liquidity needs is the discipline of the financialmarketplace Particularly, managers should pay attention to market signals by askingthe following questions:

1 Public confidence

Is there evidence the institution is losing money because individuals and institutionsbelieve there is some danger it will be unable to pay its obligations?

2 Stock price behavior

Is the corporation’s stock price falling because investors perceive the institution has

an actual or pending liquidity crisis?

3 Risk premiums on CDs and other borrowings

Is there evidence the institution is paying higher interest rates on its offerings oftime and saving deposits and money market borrowings than other institutions ofsimilar size and location? In other words, is the market imposing a risk premium in theform of higher borrowing costs because it believes the institution is headed for aliquidity crisis?

4 Loss sales of assets

Has the institution recently been forced to sell assets in a hurry, with significantlosses, in order to meet demands for liquidity? Is this a rare event or has it become afrequent occurrence?

5 Meeting commitments to credit customers

Has the institution been able to honor all potentially profitable requests for loansfrom its valued customers? Or have liquidity pressures compelled management to turndown some otherwise acceptable credit applications?

6 Borrowings from the central bank.

Has the institution been forced to borrow in larger volume and more frequentlyfrom the central bank in its home territory lately? Have the central bank officials begun

to question the institution’s borrowings?

2.3 International experience on banking liquidity management

 The case of Argentina in 2000-2002:

Argentina is the third biggest economy of Latin America During the period from

1990 to 2000, this country implemented policy to restructure the economy, includingthe privatization of many state owned enterprises This helps the government increaseits foreign reserve However, due to the weaknesses in implementing economic policy,the foreign debt increased dramatically and this caused many negative impacts to theeconomy in general and the banking system in specific In the scale of this thesis, theauthor wants to focus on the liquidity crisis in Argentina’s commercial banks during theperiod from 2000 to 2002, the main reasons of this crisis and the lessons learned fromthis crisis

• Liquidity crisis in Argentina’s commercial banks:

- At the end of 2000: the government announces the plan of reducing expenditure andreceiving support from International Monetary Fund (IMF)

- In November 2001, Argentina citizens withdrew approximately USD 1.2 billionfrom commercial banks

- In December 2001, the Government intervened to prevent the cash outflows fromcommercial banks Specifically, it decided to set the limit for withdrawal is USD 1,000per month and exchange deposits with 10 year Government bonds.

- In January 2002, the Argentina’s currency, Peso, depreciated 29 percent Theexchange rate was 1.4 Peso/USD

- In December 2002, around USD 100 million was withdrawn from commercialbanks each day The Government required commercial banks to close indefinitely

• The major reasons that cause this liquidity crisis are:

- The government implemented monetary policy inflexibly and inappropriately Inspecific, the fixed exchange rate was applied with 1 peso exchange for 1 USD Thegovernment expected that this policy would help decrease the inflation rate and thepublic debt However, when Brazil dumped the exchange rate of Real (Brazil’scurrency), foreign investment in Argentina and the export volume decreasedconsiderably As a result, the pessimistic potential of the economy caused negativeinfluence to the banking system

- The citizen’s trust in the Government and commercial banks was significantly low.When there were negative signs of the economy, the citizens came to commercialbanks to exchange their money from Peso to USD with the rate 1:1 With the purpose

of helping commercial banks, the government set up the limit of withdrawals.However, this policy increased the anxiety of the citizens and made the situation worse

- The banking system was loosed Argentina’s commercial banks were not prepared for the crisis When the citizens withdrew massively, these banks werepassive and they merely depended on the government’s support

well-With the aim of overcoming the crisis, Argentina’s government has implementedpolicy in many fields related to trade, investment, foreign affairs, and so on As regardfinancial policy, they decided to manage the exchange rate of Peso closely, recover the

citizen’s trust in the government and commercial banks, and promulgated newregulations to assure the safety of the banking system.

From the liquidity crisis in Argentina, the following lessons can be useful for SBVand Vietnam’s commercial banks:

- Disseminating liquidity management experience to credit institutions

• For Vietnam’s commercial banks:

- They have to Comply with SBV’s regulations relating to loan procedure, guaranteeprocedure, and so on Additionally, commercial banks need to improve their liquiditymanagement in accordance with international standards

- It is necessary to Estimate accurately the demand and supply of liquidity in shortterm and long term Also, the bank has to plan ahead what to do when the liquidity riskhappens

- Commercial banks need to use modern tools to collect and assess information If theinformation is informed timely and fully, commercial banks can save a lot of money

CHAPTER 3:

LIQUIDITY MANAGEMENT IN BIDV

3.1 An introduction to BIDV

3.1.1 General Introduction to BIDV

- International transaction name: Bank for Investment and Development of Vietnam

- Abbreviated name: BIDV

- SWIFT: BIDVVNVX

- Address: BIDV Tower, 35 Hang Voi Street, Hoan Kiem District, Hanoi

- Chairman of the Board: Mr Tran Bac Ha

- Chief Executive Officer: Mr Tran Anh Tuan

- Tel: 84-4-22205544 – Fax: 84-4-22200399

- Website: www.bidv.com.vn

- Owner: Vietnamese Government (100%)

- Regulator: State Bank of Vietnam

- Business registration no.: 0106000439

- Tax code: 0100150619

- Auditor: Ernst & Young

- Financial advisor for BIDV’s equitization project: Morgan Stanley

- The banks’ rating in 2010 is shown in table 3.1:

Moody’s Standard & Poor FitchRatings Ratings Ratings

B

Table 3.1: BIDV’s 2010 ratings

(Source: BIDV 2010 annual report)

In term of Fitch’s rating in 2010, big commercial banks such as Vietinbank, Asia Commercial Bank (ACB) were also rated as D/E According to Standard & Poor’s

rating toward Vietcombank in 2010, the bank fundamental strength rating is D and the

LT counterparty rating is BB/B It is generally agreed that BIDV’s rating in 2010 is quite good compared to other big commercial banks

3.1.2 History and Achievements

BIDV was established with the name Bank for Construction of Vietnam underDecision No 177/TTg dated 26th April, 1957 by the Prime Minister From 1981 to 1989the bank’s name was Bank for Investment and Construction of Vietnam From 1990 tonow, it has operated under the name Bank for Investment and Development of Vietnam(BIDV)

 From 1957 to 1981: Bank for Reconstruction of Vietnam

• 1957-1960

The bank had some important contributions to controlling basic constructioncapital, decreasing cost price, practicing economy, hoarding the capital of theStatement

• 1960-1965

In this stage, Bank for construction of Vietnam provided the capital to buildindustrial areas, basic construction projects serving national welfare and citizens’livelihood and contributing to change of the North economic aspect

• 1965-1975

This period, the bank for and people of the country worked together to complete thetasks of basic construction in wartime and supply capital in time for the air defenseproject, evacuation, move important industrial enterprises and timely finance for thework of rescue, recovery, and ensure traffic at war, setting local industry

• 1975- 1981

Together with people, the bank restored the leaf over of war, received and providedrenovation as well as built economic establishments in the South, construct projects ofthe country and people's welfare on the ruins of war

Bank for Construction provided capital for industrial and agricultural projects,transportation, and public welfare

 From 1981 to 1990: Bank for Investment and Construction of Vietnam

The bank played an important role in improving measures of supplying andmanaging basic investment, improving the role of credits in matching with the volume

of increasing basic capital and wide demands Credit relation in field of basicconstruction was expanded, credit role is also upgrade The Bank for Investment andConstruction of Vietnam mobilized for all organization of construction, encouragingunits to install and construct in quick manner, techniques innovation, expandingproduction capacity and increase economic calculating regime

 From 1990 up to now: Bank for Investment and Development of Vietnam

• Ten years of Innovation (1990 - 2000):

Thanks to the synchronized implementation of solutions, the operation of BIDV inthis period was optimistic It is shown as below spectrums:

- Self-manage for capital to develop: In addition to raising capital domestically, BIDValso raised capital from various forms of loans borrowing such as commercial loan,corporate loan, borrowing through level of payments limits, loans under the tradeagreement, long-term syndicated loan, export finance loans, co-financing andguarantee, etc

- Serving investment development in modernization, industrialization orientation:With sufficient funds mobilized through many forms, BIDV has focused its investment

on large projects, key projects, and key sectors of the economy as: Electric Power

Industry, Telecommunications, industrial zones with loan sales reached 35,000billion.

- Completion of special tasks: BIDV has combined efforts with the Foreign TradeBank of Laos for setting up a joint venture Laos - Vietnam with the aim of

"contributing to the development of the Lao economy”

- Business in multipurpose at the functions of commercial banks: Develop servicessuch as international payments, Domestic payment, guarantees, remittance, etc forstructural adjustment of revenue on the orientation of increasing the proportion ofpublic rate from services and inter-bank currency business

- Technological innovation to improve banking competition: Informatics technologiesand applications are applied and promoted efficiency in the international paymentservices, internal settlement, capital mobilization, credit management, currency tradingand executive management Other new services, such as Home Banking, ATM , etc aretested and estimated revenue results

• Integration period (from 2000 to present)

After the years of economic renovation, the Bank for Investment and Development

of Vietnam (BIDV) has achieved important results in the following aspects:

- Scale and financial capability has been boosted: BIDV has maintained the high,safe, and effective growth During the period from 2006 to 2010, the total asset hasincreased more than 25% per year, the capital mobilization has raised approximately24% per year, the outstanding credit has increased around 25% per year, and the pretaxprofit has gone up 45% per year

- Restructuring activities towards a more rational: BIDV has adjusted the customerstructure to reduce the proportion of outstanding credit in the State enterprises andorient to individuals and private enterprises In addition, the bank has adjusted the

credit structure, reduced the proportion of medium and long term loans, and focused onshort-term credits Besides, BIDV has focused on the development of modern bankingservices, to increase the bank’s services revenues.

- Increasing the shakeout in fiscal and financial capacity: BIDV has implemented thetransparency and publicity of the business Since 1996, BIDV continuously perform anindependent international audit and publish its reports In 2006, it was the first bank tohire the Moody's investor services for credit rating In the same year, the bank, with theadvice of Ernst & Young, has become the pioneered commercial banks inimplementing the internal credit ratings under the Article 7 of Decision 493 in line withinternational standards that has been recognized by the State Bank

- Developing information technologies investment: The bank developed informationtechnology systems such as ATM, POS, Contact Center; consolidated and developedthe infrastructure systems such as financial supervision network resources, network-oriented services (SONA), workstation access controlling; enhanced the informationprocessing for banking executive management MIS, CRM

- Completing restructuring the organizational of management, operations andadministration according to the criteria of modern bank: Since September 2008, thebank’s headquarters are separated by seven functional block: Block of wholesalebanking, block of retail banking, block of capital and capital trading, block of riskmanagement, block of operation, Block of internal management, and block ofaffiliation There are 5 blocks are defined in the branch: Block of customer relations;Block of risk management, block of operation, Block of internal management, andblock of affiliation

- Investment, creating potential facilities and expanding product distributionchannels: Up to now, the bank has 108 branches, over 500 transaction offices, andthousands of ATMs and POS in 63 provinces nationwide

- Nonstop investment for strategy of training and human resource development: BIDValways pay adequate attention to life and spiritual needs of the employees.

- Continuance to extend and upgrade the international relation to a higher level: BIDVhas established its joint ventures including: Vid Public Bank (with Public Bank Berhad

in 1992), Laos Viet Bank (1999), Laos-Viet Insurance (in 2008), Venture Bank ofVietnam - Russia (2006), the company managing investment funds BVIM (withVietnam Partners in 2006), BIDV Tower Real Estate Company (with BloomHillHoldings Ltd., in 2005), investment fund management companies in Hong Kong andestablished its representatives in the Republic of Chezce etc

- Enterprise of community: BIDV has made effective contributions to thedevelopment progress of the community During the period from 2004 to 2008, thebank dedicated to social work 106.5 billion VND in many different forms such assupporting health, education, housing for the poor, relief people affected by natural,etc

- Strengthen business culture:

To Clients, partners: BIDV make continuous effort in building relations in reliable and

long-term manner, sharing benefits and together carry out all agreed commitment

To Employees :With the motto "Each staff of BIDV is a competitive advantage", BIDV

commit to create a professional working environment, creating equal job opportunitiesand equal career development while boosting the power and passion, love andcloseness to each employee

3.1.3 Organizational structure

Figure 3.1: BIDV’s organizational structure

(Source: BIDV’s annual report in 2010)

Supervisory Board

IT Committee

Credit Management Committee

Other Committees (as needed)

Branch Management Dept.

Card Centre

Treasury Dept Credit Risk

Management Dept.

Market &

Operational Risk Management Dept.

Credit Management Dept.

Payment Centre

Customer Services Centre Trade Finance Operation Centre

Accounting Dept.

Finance Dept.

MIS & ALCO Support Dept.

Administrative Office

Human Resources Dept Corporate Planning Dept Legal Affairs Dept.

Public Relations & Brand Management Dept Premises & Facilities Management Dept.

Southern Construction Project Management Dept Technology Dept.

Equitization Project Management Dept.

Representative Office

in Myanmar Representative Office

in Cambodia Representative Office

in HCM City Representative Office

in Da Nang City

Northern Construction Project Management Dept.

Trade Union

Party Office BIDV Training Centre

Administrative Units

BIDV Information Technology Centre

Joint – Ventures

Banking Group Subsidiaries

3.1.4 Business performance during the period 2007-2011

During this period, key macro-economic indicators of the world and Vietnam such

as inflation, interest rate, exchange rate, gold price, etc continued to fluctuate and hadadverse influence on the bank’s operation However, the bank has strived to achieveoutstanding results despite numerous challenges arising from the businessenvironment

- Continued growth in scale:

Total assets at year-end 2011 reached VND 406,918 billion under VietnameseAccounting Standards and System for Credit Institutions (VAS), which increases by11% compared to 2010 Owner’s equity reached VND 23,871 billion under VAS.Mobilized funds grew by 24% and loans and advances to customers went up 23%

Unit: VND billion

Figure 3.2: BIDV’s total assets during the period 2007 – 2011

(Source: BIDV’s financial statements during the period 2007-2011)

Unit: VND billion

Figure 3.3: BIDV’s Owner Equity during the period 2007-2011

(Source: BIDV’s financial statements during the period 2007-2011)

- Improved efficiency:

Efficiency indicators were higher in comparison with those of 2010, in which totaloperating income reached VND 15,027 billion under VAS, an increase of 36%compared to this in 2010 Significantly, the profit before tax reached VND 4,626billion in 2010 and this is the highest level during the period from 2007 to 2010

Unit: VND billion

Figure 3.4: BIDV’s Profit before tax during the period 2007-2011

(Source: BIDV’s financial statements during the period 2007-2011)

- Improved income structure:

Key contributions to the bank’s total operating income are net interest and similarincome, net fee and commission income, and net gain from currency trading There is atendency that fee and commission income has gained a larger proportion in the totaloperating income during the period

- Well managed operating expenses:

Total operating expenses in 2011 reached VND 6,540 billion under VAS, anincrease of 17% compared to this in 2010 However, the total operating expenses/totalassets ratio in 2011 decreased by 0.09% compared to this ratio in 2010 This resultindicated that even though facing with the pressure of growing CPI, BIDV hasmanaged its operating expenses efficiently

- Adequate provisioning for credit losses:

Pursuant to VAS and in consistent with prudent principles, in 2010, the Bank has setsufficient general and specific provisions as regulated under the Decision No.493/2005/QD-NHNN The bank has strived to set aside adequate provisions for credit

losses since 2008, fulfilling the SBV’s requirements in terms of progress of 5 yearsfrom 2005, setting preconditions for the BIDV’s equitization.

- Profitability indicators at standard levels:

Return on total asset (ROA) has fully accomplished the target for 2010 andimproved over the years, increasing from 1.04% in 2009 to 1.13% in 2010 with agreater rate of profit before tax (~28%) in comparison with that of total assets (~24%).Return on equity (ROE) slightly decreased mainly due to the chartered capital injection

of VND 4,101 billion from the Government Besides, Net interest margin (NIM)increased gradually from 2009 to 2011

Figure 3.5: BIDV’s profitability indicators during the period 2009-2011

(Source: BIDV’s financial statements during the period 2009-2011)

3.2 Liquidity management in BIDV

3.2.1 BIDV’s regulations on liquidity management