LV Thạc sỹ_Improving project loan appraisal–financial aspect for Maritime bank

Principles and best practices of project's financial appraisal..28 CHAPTER 3: CURRENT SITUATION OF PROJECT LOAN FINANCIAL ASPECT IN MARITIME BANK 31 APPRAISAL-3.1.. The importance of pro

NATIONAL ECONOMICS UNIVERSITY

ADVANCED EDUCATIONAL PROGRAM

During this internship period, I have experienced a real workingenvironment, so that I did not only enhance the knowledge I have learnt in classbut also be able to reflect and learn so much more besides the knowledge learnt Iwould like to espress my gratitude to all those who gave me the possibility tocomplete this thesis Without their help and guidance, I could not have completedthis research

First, I am deeply indebted to PhD…, instructors from National Economics

University for his advice, valuable suggestion and support through obstacles in thecompletion of this research work

Second, I would like to show my gratitude to my supervisors – PhD … forhis precious time, his helpful guidance;and all the staffs in Economic ResearchDepartment at Maritime bank for enthusiasm and kindness and for giving mepermission to commence this thesis, to do the necessary research and to usedepartmental data while I have been for internship and completing my thesis Ithas been an enjoyable and rewarding experience to work together with them

2.1.1 Definition of investment project11

2.1.2 The need of investment Project 12

2.1.3 Cycle of an investment project 13

2.2 Project Appraisal 15

2.2.1 Definition 15

2.2.2 Importance of Project Appraisal 15

2.2.3 Aspects of Project Appraisal 16

2.2.4.Non-financial aspect 17

2.2.4.1 Legal aspects of Project appraisal 17

2.2.4.2 Socio-Economic aspects of Project Appraisal 17

2.2.4.3 Technical aspect of Project appraisal 18

2.2.4.4 Managerial aspect of Project appraisal 18

2.2.4.5 Project Risk Assessment 19

2.2.5 Financial Aspect 20

2.2.5.1 Definition of financial appraisal of project 20

2.2.5.2 Perspective of financial project appraisal 20

Criteria 19

2.2.5.4 Financial Project Appraisal Content 21

2.2.6 Principles and best practices of project's financial appraisal 28

CHAPTER 3: CURRENT SITUATION OF PROJECT LOAN FINANCIAL ASPECT IN MARITIME BANK 31

APPRAISAL-3.1 Overview of Vietnam Maritime Bank Commercial Joint stock Bank 31

3.1.1 History and development of Vietnam Maritime Bank Commercial Joint stock Bank 31

3.1.2 Organization Structure of Maritime Bank 33

3.1.3 Business Performance 2009-2011 35

3.2 The importance of project loans: current situation in Maritime Bank 38 3.3 Principles for Project Loan Appraisal in Maritime Bank 38

3.4 Project Loan Appraisal Process in Maritime Bank 41

3.5 Project Loan Appraisal- Financial aspect in Maritime Bank 43

3.6 Example of a Project Loan Appraisal- Financial Aspect “FTN Vietnam Co., Ltd” .45

3.7 Evaluation of the Project Loan Appraisal in Maritime Bank 56

3.7.1 Achievements 56

3.7.2 Limitations 57

3.7.2.1.Limited intheappraisalmethod 57

3.7.2.2 Limited in the appraisal aspects 57

3.7.2.3 Limited in collecting information 57

3.7.2.4 Limited in human resources 57

3.7.3 Causes 54 3.7.3.1 Causes from the Banks 58

3.7.3.2 Causes from the Customers 59

3.7.3.3 Other Causes 59

CHAPTER 4: MEASURES TO IMPROVE PROJECT LOAN APPRAISAL

IN VIETNAM MARITIME COMMERCIAL JOINT STOCK BANK 61

4.1 Oriented Development Plan for Maritime Bank in the next years 61 4.2 Measures to improve Project Loan Appraisal in Maritime Bank 62

4.2.1 Improving Appraisal Aspects 62

4.2.2 Improving appraisal method 65

4.2.3 Improving appraisal procedures 66

4.2.4 Improving Human Resources Efficiency 67

4.2.5 Improving Managerial Effectiveness 68

4.2.6 Improving the efficiency of Information Collection 69

4.3 Recommendation 70

4.3.1 Recommendation to the Government 70

4.3.2 Recommendation to State Bank of Vietnam 71

CHAPTER 5: CONCLUSION 73

REFERENCES

APPENDIX

SBV State Bank of Vietnam

NPL Non Performing Loan

ROA Return on Assets

NPV Net Present Value

IRR Internal Rate of Return

NEU National Economics University

TABLE OF FIGURES

Figure 1: Project Cycle 13

Figure 2: Aspects of Project Appraisal 16

Figure 3: Organization Structure of Maritime Bank 33

Figure 4: MSB Capital Mobilization in 2011 37

Figure 5: MSB Credit Structure 38

Figure 6: Project Loan Appraisal Process 41

Figure 7: Project Loan Appraisal Procedure 43

CHAPTER 1: INTRODUCTION

1.1 Rationale

Vietnam has entered the WTO’s integration process, this gives great opportunities

to Vietnam but also impose a lot of threats and challenges In this integration process,Vietnam’s objective is “To build our country into an industrialized country with modernfacilities - technology, rational economic structure, which is consistent with thedevelopment of productive forces and high standard of living” In order to reach its goal,Investment plays a crucial role and considered as a driving force for the country’sdevelopment However, starting as a poor country in addition to facing the changes whenentering WTO and fluctuations in the World economy, Vietnam’s financial market hasevolved greatly As a result, lending and providing capital to implement the project loans

in turn is having a lot of difficulties

Recent years, under the impact of the financial crisis, the financial system all overthe world has fluctuated significantly, including Vietnam’s financial market & bankingsystem On one hand, the financial crisis occured, leads to the decrease the investmentrate, through which makes the revenue from the credit activity drop On the other hand, inthe difficult background of the global economy, there are many high- risk investmentprojects required to be appraised carefully

Banks, as an intermediary institution, play the roles of facilitating funds to theborrowers Credit activity of commercial banks, therefore, is extremely crucial not only

to the development of an economy but also to the development of each individual bank.Along with credit activity, the quality of credit appraisal is also very important as itidentifies risks, improving the stability, efficiency for a project To be able to reduce baddebts and give out rational loan decisions, Loan Appraisal is an important step in helpingthe Banks prevents project-associated-risks

As a student majored in Finance, I found this very interesting During my time as

an intern in Maritime Bank, I have learn more about Project Loan and understand itsimportant to the development of Vietnam Financial aspect of project loan is associateddirectly with what I have studied at NEU (typically, the subject of Corporate Finance andCommercial Banking) Therefore, I can apply and reflect this theoretical foundation inreality, with the target of researching project appraisal process in Maritime Bank andcontributing in improving this process both in size and depth Therefore, I chose to do my

internship report on “Improving Project Loan Appraisal –Financial Aspect for Vietnam Maritime Commercial Joint stock Bank”

Apart from the introduction and conclusion, my internship report consists of 3chapters:

Chapter 1: Theoretical Foundation of Project and Project Appraisal

Chapter 2: Current situation of Project Loan Appraisal in Maritime Bank

Chapter 3: Recommendation to improve Project Loan Appraisal in Maritime Bank

First, I would like to send my thanks to Maritime Bank- head office, especially thestaffs at the Economics Research Department, Mr Trinh Quang Anh, Ms Do Thuy Dung,

Mr Pham Van Dai for their kind support during my internship there

Last but not least, I would like to thank Dr Hoang Van Hoa, my internshipadvisor, who helped me a lot in completing this report

1.2 Research objective

The objective of this research is to investigate in one section of credit management

in a bank, i.e project loan appraisal Especially, with my major in finance, this research will be particularly focused in financial aspect of a project loan appraisal By

experiencing a real situation in addition to my knowledge studied at university, I was able

to give some evaluation and recommendation to improve the current situation of loanappraisal, especially the financial aspect in Maritime Bank

CHAPTER 2: THEORETICAL FOUNDATION OF PROJECT AND

PROJECT APPRAISAL

2.1 Investment Project

2.1.1 Definition of investment project

According to Law on Investment of Vietnam at Clause 1, Article 3: “Investmentmeans the use of capital in the form of tangible or intangible assets for the purposes offorming assets by investors to carry out investment activities in accordance with theprovisions of this Law and other provisions of the relevant laws”

At Clause 8, Article 3, Law on Investment of Vietnam Investment project isdefined as “a collection of proposals for the expenditure of medium and long-term capital

in order to carry out an investment activity in a specific geographical area and for aspecified duration”

So by looking at this definition, there are three things that we need to take intoconsideration about Investment Project

i Proposals for the expenditure of medium and long-term capital

ii in a specific geographical area

iii for a specified duration

In boarder term, investment project can be defined as follow:

"The expenditure of resources in the present, in order to generate benefits in the future" 1

The key elements of this definition are that resources (whether these be in the form

of money, land, labor or other assets) are used in this year but that the benefits come in

future years If benefits are generated in the same year but not in the future (e.g.

1 FAO Corporate Document Repository

fertilizer to be applied to a current crop), this is not an investment project, but rather the

purchase of inputs for current operations Most investment projects generate a stream of

benefits; that is to say, a single investment now will result in benefits being produced

each year for a number of years into the future It is also important to remember that thefuture benefits do not have to be directly in cash earned, and may not even be in a formthat is easy to define

2.1.2 The need of investment Project

The development theory stated that the development of a nation is determined by

it capacity of capital, technology, labor and resources It is a dependent and closelyrelated system that can be illustrate in the model below:

The results from these projects are needed and could be used in many years,enough to compensate and off-set for the capital invested in the project Many results

could be used in very long time, like hundreds or thousands of years as the ancientbuilding in many countries in the world.

In order for the investment project to be well-implemented, produce desired resultsand bring great socio-economic efficiency, we need to have a well-prepared planningbefore putting on capital to carry on It means that we need to consider and assess all thelegal, socio-economic, technical and natural aspects which are related to the investmentproject, to its efficiency and effectiveness Moreover, we need to predict all the uncertainfactors that might affect the success or failure of an investment All these considerationsand assessments are actually Investment Project Appraisal In another words, well-prepared project plan is a good guideline, solid base in order for a project achieves itsdesired socio-economic goals

2.1.3 Cycle of an investment project

The project cycle has six stages, each stage links with the preceding one and leads forward to the next one These stages are summarized in the diagram and table below:

Figure 1: Project Cycle

Project Stage Jobs undertaken

Programming  Review of local social and economic conditions

 Review of relevant local and central government Policies and initiatives

 Community strategy undertaken and project criteria developed

Identification  Definition of a project problem

 Stakeholder analysis

 Problem and objective assessment

 Strategy options explored and decided

 Quality assurance undertaken

 Assessment of impact and sustainability

 Review of the prepared project for institutional capacity, cost and benefits

 Prepare project proposal

 Prepare budget and a set of financial ratios

 Quality assurance undertaken

Appraisal & Commitment Agree by a partner to support project

 Project appraisal

 Project appraisal undertaken

 Comparative ratios analysis undertaken

 Prepare activity schedule

 Monitor progress of project

Evaluation  Assessment of project Result against objectives

 Evaluation factors influencing future project

2.2 Project Appraisal

2.2.1 Definition

Investment Project appraisal is an objective and thorough consideration and

evaluation in all aspects of an investment project This process will directly affect the feasibility, effectiveness and ability to repay the investment fund so that ones can give consideration and decision on project financing

2.2.2 Importance of Project Appraisal

The purpose of Project Appraisal is firstly, looking at the financial aspect to

calculate and evaluate the ability to repay the banks of a project; secondly, looking at the non-financial aspect to evaluate the feasibility and risks of the project

=> Therefore, it acts as a foundation, protection plan before the project starts to implement Its role is to decide on projects, eliminate risky and infeasible projects, and identify the possible risks imposed and ways to prevent them

Project Appraisal is important to several parties in an economy as follow:

Firstly, to the Government: The preparation and appraisal of an investment project help the state agencies assess the feasibility and suitability of the project with the overall development planning of the whole sector, local and country about the objective, scale, planning and effectiveness Evaluate its economic efficiency, social efficiency such as increasing employment and budget revenues, and especially environmental problems Based on these, the Government can decide on giving the permission for a project to be implemented

Secondly, to the financial Institutions: The preparation and appraisal of aninvestment project help the financial Institutions to give out rational and accuratedecision on lending or sponsoring the project, therefore, minimize the risks on theirfinancial activities

Thirdly, to the project owner: The preparation and appraisal of an investment

project help the project owner to predict the possible risks and factors that affect theimplementation of a project such as technical factor, fluctuations of the market, customerspreferences, production costs Based on that, project owner can take measures to improvethe efficiency and minimize the risks of the project Project Appraisal will help the projectowner to select the best, the most feasible and suitable projects with the natural conditionsand the ability to mobilize funding for the project In addition, project appraisal also helpsthe project owner to get the permission to implement the project more easily andconveniently The preparation and appraisal of a project can help project owner tofacilitate borrowing from financial institutions and call for other investors in a fast andeffective way

2.2.3 Aspects of Project Appraisal

A project appraisal should consider 2 dimensions as follow :

(i) Non- financial issue : evaluate the feasibility and risks of the project

(ii) Financial issue : the suitability of cost expectation, the suitability of cash in- flows

assumptions in order to calculate the ability to pay off the debt

Therfore, project appraisal aims to ensure the accuracy and suitability ofexpectations and assumptions

Figure 2: Aspects of Project Appraisal 2.2.4 Non-financial aspect

2.2.4.1 Legal aspects of Project appraisal

Legal aspect is the very first step in the Project Appraisal procedures and it is arequirement for a Project to continue on the Appraisal Procedure There are twoassessments in the legal aspects of a Project:

1 Check the required documents: check on the sufficiency of all required

documents

2 Check the validity and legality of the documents: assess all the

documents, especially look at the legal status and capacity of the Owner.Check on the validity and suitability of all the documents such as businesslicense with investment certificate and sector planning

2.2.4.2 Socio-Economic aspects of Project Appraisal

In these socio-economic aspects of the appraisal procedures, project needs to betested and analyzed on the issues related to supply and demand of the products andservices from the project Project appraisal Agency need to construct the balance sheet forthe market demand, current supply and forecast the changes in the future; evaluate themarket competition and the competitiveness of the products/services, socio-economicbenefit from the project

1 Output factor- Market and sales prospective

Output factor- Market and sales prospective is estimated on the basis of

 Evaluation of product demand

 Evaluation of product supply

 Target market and market competitiveness:

 Consumption Method and Distribution Network:

 Salability

2 Input factor- Resources and cost management

This step of evaluation test on the availability of the material source, theadvantage and disadvantage in addition with the ability to control the material inputs.Evaluating the input factor are base on the following criteria:

 The ability to get the raw materials (input)

 Number of supplier, their credibility

 Quality of the input compared to the project’s requirement

 Price fluctuations in raw materials

 Construction and development of the input supply area

 Water and electricity supply, etc to serve the project operation

3 Socio-economic benefits from the Project

Project Appraisal on the socio-economic benefits of the Project is based on severalstandard assessment criteria such as: net value added, employment indicator or indicatorassess the impacts of the project to income distribution and social justice, etc

2.2.4.3 Technical aspect of Project appraisal

This assesses the feasibility of operating the project on the technical aspects

(relating directly to the reasonableness of the cash out flow Cfo, cost of working capital and indirectly to revenue CFt) There are three criteria that we need to consider in this aspect: Technology & Facility; Construction scale and solution; Evironment, Fire

protection and quality management

1 Technology & Facility

2 Location of the project

3 Construction scale and architectural solution

4 Environmental, Fire protection and quality management

2.2.4.5 Project Risk Assessment

An investment project, from the time of preparation to the end can be exposed to many types of risks (both subjectively and objectively) We could only calculate and analyze the financial capacity of a project as mentioned in the previous part when a project is risk-free

Therefore, assessing, analyzing and forecasting risks that likely to occur as well ashaving measures to prevent risks are very important The main investment project risks include:

- Policies/Regulation risk

- Market, income, payment risk

- Supply risk

- Technical and operational risk

- Social and environmental risk

2.2.5.1 Definition of financial appraisal of project

Financial aspect is considered the most important aspect in a Project Appraisalwhich assesses the feasibility of the project through the following criteria:

- The need and sufficiency of financial resources for the implementation of theinvestment project as well as determining the scale and the sponsorship for theproject

- Financial efficiency of a project is reflected through criteria such as net presentvalue (NPV), internal rate of return (IRR), Debt service Coverage Ratio (DSCR) benefits of the project

Financial analyses aim to synthesize all the variables in the previous analyses intonet financial cash flows of the project, predicted cash inflow and out flow for the entireproject life cycle Based on the statement of financial cash flow, we can determineimportant variable to be used as input for the financial, economic and social aspects ofproject appraisal.

2.2.5.2 Perspective of financial project appraisal

 Total Investment prospective (Bank’s perspective)

Total Investment prospective (A) also known as Bank’s view a project as anactivity which can generate financial benefits and use financial resources transparently, italso takes into account the financial opportunity costs of the current assets over theproject Through the banks, they will determine the financial feasibility, capital need andthe ability to pay bank the debt of the project.2

A = Direct Financial Benefits – Direct Financial Costs

– Opportunity costs of current assets

 Owner’s perspective

Owner’s perspective (B) look at the increase in net income of the projectcompared to what they get without implementing the project In this perspective,capital is considered as cash inflow, principal and interest payments are considered ascash-outflow Hence, net cash flow according to owner’s perspective is illustrate asfollow:

B = A + Loans – (Principal + Interests)

2.2.5.3. Financial Project Appraisal Criteria

Total Capital/ Capital

matching capital sources-Creditability of each sources

Financial Risks Assess the ability to bear the financial risks of the project.

-Sensitivity Analysis (single, multiple) -Analyze profitability and Coverage Indicators-Use Monte Carlo Model

2.2.5.4 Financial Project Appraisal Content

a Financial condition of the project investor

One of the primary tasks which a bank has to consider before a project loanappraisal process is to appraise financial condition of the project investor Borrowers’financial condition is one of important factors that reflect the safety of the project in thefinancial aspect It includes some dimensions like: financial condition, credit condition,the ability of paying off the debt, and the efficiency of the business operation

Investor’s financial appraisal is considered supporting tool for appraisal process,which helps the bank to have the overview of the situation and the prospectus of thecorporate Moreover, if investor’s the financial condition is clear and transparent, thiscorporate will make more credit worthiness to the bank On the side of the banks, theywill consider a good financial condition as a supporting source, an insurance in case ofproject failure, or the cash inflows from the project does not cover the debt

The key factor in financial appraisal is that the information collected ensures to beobjective and accuracy In order to get this quality, bankers should not only collectinformation from the investor, but also from mass media, financial institutions, corporatehaving relationship with the investor, etc

b Investment capital of a project

It is obvious that appraising investment capital is one of the most important tasks

in project appraisal Banks not only appraise capital, total investment capital of theproject, but they also analyze thoroughly capital structure, the ability of capitalsufficiency, and the need of investment capital according to the project implementation

 Appraise total investment capital of a project

As a matter of fact, some carelessly appraised projects cannot avoid capitalimbalance situation in implementing process, which affects directly its ability to payoffthe debt and the efficiency of the project

In theoretically, total investment of a project is the value of money and necessaryassets used in establishing and implementing the project

Total investment capital= Fixed capital + Working capital + Reserve capital

In the process of investment capital appraisal, bankers have to consider andevaluate whether the total investment capital of the project is suitable or not; also, theyneed to focus on some factors that make costs increase like: inflation, inventory arisingover- expectation, or the change in exchange rate

 Appraise the structure of capital of a project

A project is often sponsored from following sources:

 Equity: in order to define equity of project’s investor, banks have to analyze

financial status, as well as operating status of investor’s corporate at least forlatest 2 years

 Capital from state budget: is one of the safest sources and often provided for

state owned company whose outputs have strategy influence on the economy

 Debt from other commercial banks

 Debt from overseas: this source often occurs in large project, technology

exchange with foreign country

After gathering data about capital structure of the project, appraiser needs to checkcarefully the legal base of these capital sources For example, if the project is sponsored

by state budget, it has provided with the agreements of legal departments in writtencontract Any source has to be supported by certificates of legal departments.

On the base of defined total investment capital, through considering the size ofcapital structure, banks may define the deficit capital and the lending amount for theproject In the case of syndicated loan, the factor of capital sources has to be agreed by allbanks involved

 Define the need of investment capital according to project implementation

Appraisers have to evaluate the progress of project implementation and the needfor capital in each stage Whether the ability of meeting the need for capital in each stage

is suitable or not, equity is often used firstly

Defining implementing progress and the need for capital may be the foundationfor disbursement progress, debt’s interest rate calculation and payoff the debt prediction

c Profits and costs of a project

The financial profits of a project are just the revenues received and the financialcosts are expenditures that are actually incurred by the implementing agency as the result

of a project If a project is producing some goods or services for sale, the revenue that theproject implementers expect to receive each year from these sales will be the profits of aproject The costs incurred are the expenditures made to establish and operate the project.These include capital costs, the cost of purchasing land, equipment, factory building,vehicles and office machines, and working capital, its ongoing operating costs, for labor,raw materials, fuel and utilities

Since the project’s implementers will have to pay market prices for inputs they useand will receive market prices of the output they produce, the financial costs and profits

of the project are measured in these market prices Market prices are just the prices in thelocal economy, and include all applicable taxed, tariffs, trade mark- ups, and commission

d Appraise annual cash flow of the project

With commercial banks, as appraising financial efficiency of a project, someindicators (e.g operating costs, revenues, profit, etc.) have not been the most interestedthing Because these indicators just have meanings of reflecting accounting aspect (haveperiod characteristic), which do not reflect accurately when profits/ costs flows in/out ofthe project Therefore, in order to make accurate analysis and evaluation about a project’sfinancial efficiency, besides some indicators like: revenue or costs, analyst often concern

on the project’s cash flows (CFs)

The financial cash flow of a project is defined as the stream of financial costs andprofits, or expenditures and receipts, which will be generated by the project over itseconomic life

On the side of commercial banks, as the project’s sponsor, projects appraised bybanks are granted by combination of difference capital sources, including: equity anddebt Cash flow appraisal of a project implemented by banks often include followingcontents:

 Cash Inflows (CIFs)

CIFs reflect the amount of money that is received annually through the cycle ofthe project

CIFs include:

 Debt is considered cash inflow of the project in the year when the project isimplemented

 Annual after- tax revenue

 Other receivables (e.g from assets or working capital liquidation)

 Cash Outflows (COFs)

COFs reflect the amount of money that has to be paid out annually through thecycle of the project

COFs include:

 The costs of purchasing and establishing fixed assets and investing removableassets The costs arise in the year when the project is implemented.

 Raw materials, labors, administration costs, and other costs

 Costs of loan interest rate

 Corporate income tax

 Payoff the initial outlay

Ord Criteria Year 0 Year 1 Year 2 Year n

(Source: Credit handbook Maritime Bank)

So, we can say that annual cash flow analysis is the most concrete foundation forbank to evaluate the ability of project’s investor of paying of f both interest rate andinitial outlay

e Important tools for appraising the financial aspect of a Project

To appraise a project both theoretically and practically, there are severalmethods/indicators that we often used:

 Net present value (NPV)

Definition: Net present value (NPV) expresses the sum total of an investment’s future netcash flows (receipts less payments) minus the investment’s initial costs

Where:

CFt is the cash flow at time t

k is the discount rate

CF NPV

1

n is the number of years

Considering among independent investment projects:

 NPV > 0: accept the project

 NPV < 0: reject the project

 NPV = 0 investors will be indifferent between accepting or rejecting the projectbut depend on its importance to the investors

 For mutually exclusive projects, Investors should only choose project that hasNPV>0 and max

Advantages and Disadvantages:

 Advantages:

+ NPV takes into account the time value of money.

+ NPV is calculated based on the project cash flow and discount rate Therefore, it

will give the correct decision advice assuming a perfect capital market It will alsogive correct ranking for mutually exclusive projects

+ NPV measures the direct profit to investors in absolute value.

 Disadvantages

+ Appropriate discount rate is very difficult to determine whereas NPV is highlydependent of discount rate NPV is high when discount rate is low and vice versa.+ Cannot decide on project with unequal economic lives

Internal Rate of Return (IRR)

Definition: IRR is the discount rate often used in capital budgeting that makes the netpresent value of all cash flows from a particular project equal to zero Generallyspeaking, the higher a project's internal rate of return, the more desirable it is toundertake the project As such, IRR can be used to rank several prospective projects afirm is considering Assuming all other factors are equal among the various projects,the project with the highest IRR would probably be considered the best andundertaken first

Considering among independent investment projects:

 IRR > WACC: accept the project

 IRR < WACC: reject the project

 For mutually exclusive projects, choose the project that has IRR> WACC andmax

IRR advantages and disadvantages:

 The Profitability Index ( PI)

Definition: The profitability Index is an index that attempts to identify the

relationship between the costs and profits of a proposed project through the use of a ratio calculated as:

Considering among independent investment projects:

 PI > 1: accept the project

 PI < 1: reject the project

 For mutually exclusive projects, choose the project that has PI> 1and max

PI advantages and disadvantages:

 Advantages:

+ In the case where capital is limited, we cannot rank the project according to theirNPV; instead we have to prioritize according to the profit in the future compared tothe initial investment (PI Index)

+ PI tells investors how much they earned from one dollar cost, hence they cangive out better decision.

Disadvantages: PI cannot explain the difference in size of the project

 Payback Period Indicator

The length of time required to recover the cost of an investment The paybackperiod of a given investment or project is an important determinant of whether toundertake the position or project, as longer payback periods are typically not desirablefor investment positions In fact, before undertaking a project, we need to set aspecific acceptable payback period and only accept project that has shorter paybackperiod Calculated as

Payback Period Advantages and Disadvantages

 Advantages:

Easy and convenient for selecting a project; can combine easily with otherindicators to give out decision Without considering the payback period, we areignoring the risks management when making project appraisal Projects with longerpayback period will impose more risks and vice versa

 Disadvantage:

+ Ignore the money generated after the payback period, therefore does notmeasure profitability

+ Ignore the time value of money during the payback period

2.2.6 Principles and best practices of project’s financial appraisal

Firstly, the principle of obeying the national and/or international legal: Appraisershave responsibility of complying with applicable law or regulation related to creditactivity They must not make corrupt use of the bank’s prestige and assets for personalpurpose in credit activities, but must act with integrity, competence, diligence, respect,and in an ethical manner

Secondly, the principle of suitable loan making according to each bank’s strategy

of development and business in each period

Thirdly, the principle of equality and customer orientation: In providing credit,commercial banks should implement the policy of customer equality, no discrimination ofeconomic background, forms of business ownership (except from cases of granting creditunder the government’s appointing) All transactions of a customer will be served by apart of credit department

Fourthly, the principle of care and judgment: Appraisers should give prominencethe personal responsibility by improving the transparency and the quality of creditactivity Each individual who takes the responsibility of making decision has to beresponsible for this decision

And finally, the principle of practicing ethics and encouraging others to practice:All appraisers have the responsibility of practicing and encouraging others to practice in aprofessional and ethical manner that will reflect credit on themselves and the profession

CHAPTER 3: CURRENT SITUATION OF PROJECT LOAN

APPRAISAL-FINANCIAL ASPECT IN MARITIME BANK

3.1 Overview of Vietnam Maritime Bank Commercial Joint stock Bank

3.1.1 History and development of Vietnam Maritime Bank Commercial Joint stock Bank

Maritime Commercial Joint stock Bank (Maritime Bank) was established underthe decision No 01/GP-NHNN on 8th June 1991 and officially started doing business on

12th July 1991 in Haiphong city, right after the Ordinance of Joint stock Bank, CreditCooperative and Finance Company was valid At that time, the debate about the model ofjoint stock bank was still had not been settled and Maritime Bank was one of the firstCommercial Joint stock bank established in Vietnam It was the result of collaborationstrength and innovative thinking of founding shareholders: Vietnam MaritimeAdministration, Vietnam Post and Communication Group, The Civil AviationAdministration of Vietnam

At the beginning, Maritime Bank only had 24 shareholders, share capital of 40billion VND and several branches in big cities such as Haiphong, Hanoi, Quang Ninh,and Ho Chi Minh City The establishment of Maritime Bank at the early of 1990s was animportant part in structure changing process of Vietnam economy

The period from 1997 to 2000 was the challenging and difficult time forMaritime Bank As the result of Asia financial crisis, Maritime Bank had faced manydifficulties However, by our own strength and spirit, Maritime Bank had step by stepregained the balance and continued to develop since 2005

*Development of Maritime Bank

12.07.1991: Officially started its business in Hai Phong city

1992 - 1994: Strongly developed in internet/online banking transaction and become apopular bank, especially in International payment services

1996: Developed its branch network in 6 economic major cities/towns in Vietnam

1997: Successfully got 28 million USD through Bank of America (B.O.A) with theguarantee of Vietnamese Government to invest in 3 key national project (Lang Hoa LacRoad, Highway 51 and Highway 14)

1998 - 2000: Maintained its economic growth and business, overcomed the slow-growthperiod of national economy and financial crisis of the region

2001: Became one of 6 commercial banks of Vietnam to be selected and sponsored byWorld Bank to get involved in the ‘‘Modernizing Banks and Payment system Project’’

2002 - 2004: Implemented and consolidated the business operation and performance,Continued to sustain its image in the market

2005: Became the only Bank that can continue with the second phase of the

‘‘Modernizing Banks and Payment system Project’’of World Bank form 2005 until now August- 2005: Moved the headoffice to Hanoi This is a strategic and rational move topromote the overall development of Maritime Bank

2006 - 2007: Restructured the apparatus fundamentally and thoroughly : Separation ofbusiness activities and support activities, formation of Business Divisions, andenhancement of the role and management capacity in the headoffice

2008 - now: Continue to complete the organizational and operational structure such asestablishment of AlCO Committee, Human Resources Committee, Risk ManagementCommittee, Credit Committee and continue to complete the Business Divisions

2009: Implementation of the Internal Credit Rating System with the consultation of Ernst

& Young Vietnam Ltd And it is completed in March 2010

2009 - now: Hired the world-top U.S consultant McKinsey&Company construct andimplement the business strategy and bank image

Until now, Maritime Bank has grown strongly, sustainably and created customer’s faith.The current share capital is 8.000 billion VND and total asset reach 110.000 billion VND.Number of branches increase rapidly from 16 branches in 2005 to 230 branches in 2011

3.1.2 Organization Structure of Maritime Bank

Figure 3: Organization Structure of Maritime Bank

Operations Centre & Branches

Transaction offices & Saving Associations

Sub Units/Departments

1 Board of director

Appointed by the General Shareholders Committee (GSC) It is in charge ofthe managerial activities of MSB, have discretion on be half to decide all matters related to the purposes and interests of the Bank, except for matters under the jurisdictions of the GSC BOD’s main role is to set out strategy and plan annually, lead and supervise the Bank’s activities through Board ofmanagement and Committee Currently, Board of director of MSB has 7 members

2 Supervisory Committee

Elected by the GSC, its main responsibility is to supervise the financial activities of the Banks as well as the compliance of the Bank with the accounting, supervising and internal auditing system; evaluate the annual and semi-annual financial statement to give the GSC accurate, genuine and legal financial statements Currently, Supervisory Committee has 3

members

3 Committee, Division and Department

Established by the Board of Director, their role is to counsel and support theBOD in Bank Management, Strategy and Plan Implementation and

Effective Development Currently, the MSB has the following Committee:

 Credit Committee

Give decision on the credit and risks management policies for the whole system of MSB, granting credit for customers/corporations, approving Bank deposit limit at other institutions

Human Resources Committee

Giving counsel and recommendation to the BOD in the completion of organizational structure; managing Bank’s human resources

 Risk Management Committee

Giving counsel and recommendation to the BOD in constructing the risk management system and process in all business activities of the Bank; supervising the compliance of the Bank with the policies; predicting and warning of potential risks and giving measures to prevent these risks both

in short-term and long term

 ALCO Committee

Assets & Liabilities Management Committee (ALCO) has the main function of managing and operating the total Assets and Liability of the whole Bank in a safe and effective way in order to maximizing profit for a certain risks of the Banks and following all the regulations on liquidity risk,market risk management and regulations on Safety Business Performance for Bank.

4 Chief Executive Officer

CEO is responsible to BOD and law for the daily performance of the Bank Helping CEO are deputy CEOs, Division Managers, Chief Accountant and the specialized business Divisions

3.1.3 Business Performance 2009- 2011

In 2011, Vietnam economic situation faced a lot of fluctuations due to the great impact from the World’s financial crisis, recession and domestic difficulties such as high inflation, slow growth rate, both domestic and foreign investment were slow down due to the contractionary monetary and public investment policies

Facing those challenges, Maritime Bank Board of Director and Board of

Management have closely lead and supervised all the activities of the bank, with every effort of Maritime Bank’s employees and staffs, Maritime Bank has grown sustainable and earned some achievements as planned At the end of 2011, Maritime Bank has

achieved the following results

Ord Operation Criteria Unit 2009 2010 2011 Achievement of the plan for 2011 (%)

1 Total Assets billionVND 63,882 115,336 114,375 81,7%

4 Pre-tax profit billionVND 1,005.3 1,518.1 1,037 103,7%

5

NPL (i.e., loans of types 3-5

of the credit regulation of

Financial Institution and issuing bond reached 44,946 billion dong, approximately 110% compared to the beginning of the year; Retail Fund Raising reached 24,527 billion dong, i.e., 121.26% compared to the beginning of the year; fund mobilization grow steadily in every Business unit especially newly opened Transaction offices are working efficiently.Deposits and lending from Financial Institutions are 22,831 billion dong, i.e., 68.44% compared to the beginning of the years, which accounted for 22.2% in total fund

mobilization for business This fund is mostly used for interbank deposits reinvestment and other financial investment, which bring profit for the overall business performance ofMaritime Bank

In addition, funds from investing in the government Bond during the year, Maritime Bank also takes advantage of the Open Market Operation of the State Bank of Vietnam (SBV) through rediscounting activities On 31/12/2011, funds lending from SBV reached 10,116 billion dong, which accounted for 9.84% in total fund mobilization

Figure 4: MSB Capital Mobilization in 2011

2 Credit Performance

Credit activity of Maritime Bank is operated based on Decision No.11/NQ-CP of the Government, which aimed to control inflation; maintain macroeconomic stability and ensure social welfare Total loan outstanding is 37,753 billion dong, equals 118.6% compared to the beginning of the year, in which business loan is still accounted for a large proportion in the total credit 90.5%, i.e., 34,163 at the end of 2011, equals 119.95% compared to the beginning of the year Consumer loan is at 3,590 billion dong, i.e., 107.2% compared to the beginning of the year Credit quality is ensured, bad debts typed 3-5 are 856 billion dong, accounted for 2.27 % in total loan

In 2011, Maritime Bank set up additional provision of 237 billion dong (in which,MSB has set up sufficient Loan loss provision according to SBV, i.e., 0.75%), recovered

36 billion dong in written-off loans overdue, recovery of 123 billion dong and write-off

62 billion dong for risks management

Figure 5: MSB Credit Structure

At the end of 2011,

short-term loan accounted

for a large proportion of

total loan outstanding,

61% whereas medium

term- loan and long term

loan are quite similar at

respectively

3.2 The

importance of project loans: current situation in Maritime Bank

In the period of 2009-2011, the number of project loan that Maritime Bank hasreceived, appraised and approved for the loan is increasing, it not only increase in thenumber of project loans but also the amount of lending The number of applications forproject loan in 2009 is 1,518 projects and in 2011 it increases to 1,783 projects Thenumber of application for project loan has increased gradually by years and along with itthe amount of lending has also increased significantly In 2009, the amount of money forproject loan is 13,110 billion dong In 2011, it has increased to 18,121.44 billion dong

=> It accounts for about 48% of total loan outstanding, and increased by 38%compared to 2009

3.3 Principles for Project Loan Appraisal in Maritime Bank

Firstly, Conforming law, principles, rules: all Maritime Bank employees need to

have responsibility to conform the law and related regulations in the credit activities.They are not to take advantage of the Bank’s reputation and assets for their own personalpurposes in the credit activities

Short-term loan Medium-term

loan

Long-term

loan

Secondly, Lending should be consistent with strategic business and development

of Maritime Bank in each period

Thirdly, Equality, fairness and serves the customers’ purposes: In the credit

activity, Maritime Bank has a consistent principle for all customers, do not discriminatecustomers by economics sectors or ownership form (except in case of credit granted bythe government)

Fourthly, Personal Responsibility, Maritime Bank appreciates personal

responsibility in order to improve the transparency and quality in the credit activities.Individual with the assigned task should take full responsibility for their decision in thecredit activities

 Objects and requirement for a project loan

Maritime Bank’s Principle for Project Loan is not limited for any specific object, italso restricted applying different policies for different object In order to hold equality,lending policies are applied for all applicants Applicants for project appraisal need tosatisfy the following requirements:

- Have the civil legal capacity, Civil Acts Capacity and bear the Civil Responsibilitiesaccording to the Law

- Legal Purpose for the use of loans

- Have the financial capacity to repay the loan within the committed time

- Have the investment project, feasible and efficient project production plan or Projectwith feasible purpose and in accordance with the law

- Have measures to secure project loans according to the regulations of thegovernment, State Bank of Vietnam and Maritime Bank’s guideline

 Term for Project Loan

Maritime Bank do not provide the maximum term of lending Decision on the term

of borrowing for each project loan is based on: