SOME SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PETROVIETNAM FINANCE CORPORATION (PVFC)

Therefore, this thesis only focuses on the performance of capital utilization in PVFC from year 2008 to year 2011, including three main activities that directly related to the topic, whi

VIETNAM NATIONAL UNIVERSITY, HANOI

HANOI SCHOOL OF BUSINESS

MASTER OF BUSINESS ADMINISTRATION THESIS

SUPERVISOR: DR NGUYEN VIET DUNG

HANOI - 2012

i

ACKNOWLEDGEMENTS

I would like to express my deepest gratitude to my supervisor, Dr Nguyen Viet Dung for his constructive suggestions, for his patience, enthusiasm, immense knowledge, and also continuous encouragement throughout my research

I would like to take this opportunity to express my faithful thanks to all members at Hanoi School of Business for their incessant support during my study I also deeply appreciate their great contribution to the success of the highly qualified MBA course which provided me invaluable knowledge and assistance to complete my research topic

Last but not least, I owe my loving thanks to my parents for supporting me spiritually throughout my life Without their encouragement and understanding it would have been impossible for me to finish this work

28/08/2012

Phan Thu Ha

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ABSTRACT SOME SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PETROVIETNAM FINANCE CORPORATION (PVFC)

Phan Thu Ha

MBA candidate, 2009-2011

Hanoi School of Business – Vietnam National University, Hanoi

Supervisor: Dr Nguyen Viet Dung

August 2012,104 pages

Currently, many State Economic Groups have established their finance company aiming at a more efficient use and allocation of capital However, the operation in practice still demonstrates the insufficient capital use In the context of the overall restructuring the economy, the restructuring of the entire financial and banking system

is considered a key issue For a large-scale finance company as PVFC, there is a the big question about how to enhance the performance of capital use in PVFC to contribute to the development of the Group, thereby contributing to common national economic development goals in the context of economic integration

The study includes the following contents:

 This Thesis has presented the theoretical framework of the capital using activities

in finance companies and described some assessment criteria on the performance of those activities At the same time, this Thesis has explained the different types of risk which affect the capital using process, together with the quantitative indicators

in order to develop proper assessments on the concerned risks

 Providing detailed analysis on the status of current activities of capital use in PVFC, besides some achievements, author’s analysis has proven the weaknesses in performance of PVFC, which can be observed through the increasing NPL ratio,

of the capital use in PVFC

iv

TÓM TẮT MỘT SỐ GIẢI PHÁP NÂNG CAO HIỆU QUẢ SỬ DỤNG VỐN TẠI TỔNG CÔNG TY TÀI CHÍNH CỔ PHẦN DẦU KHÍ VIỆT NAM (PVFC)

Phan Thu Hà

Khoa Quản trị Kinh doanh- Đại học Quốc gia Hà Nội

Hướng dẫn: Tiến sỹ Nguyễn Việt Dũng

Tháng 8 năm 2012, 104 trang

Hiện nay nhiều Tập đoàn Kinh tế Nhà nước đã thành lập công ty tài chính nhằm mục đích sử dụng nguồn vốn hiệu quả hơn Tuy nhiên, thực tế hoạt động cho thấy vấn đề hiệu quả sử dụng vốn còn nhiều bất cập Trong bối cảnh tái cấu trúc tổng thể nền kinh tế, nội dung tái cấu trúc hệ thống tài chính ngân hàng được xem là một vấn

đề trọng tâm Đối với một công ty tài chính có quy mô tài sản lớn như PVFC, một câu hỏi lớn được đặt ra là làm sao để tăng cường hiệu quả sử dụng nguồn vốn của PVFC để góp phần vào sự phát triển của toàn Tập đoàn, từ đó góp phần thực hiện mục tiêu phát triển kinh tế quốc gia trong thời kỳ hội nhập kinh tế

Đề tài nghiên cứu bao gồm những nội dung chính sau đây:

 Luận văn đã làm rõ khung lý thuyết nền tảng về hoạt động sử dụng vốn của công

ty tài chính và đưa ra các nhóm chỉ tiêu đánh giá hiệu quả hoạt động này, đồng thời làm rõ các yếu tố rủi ro ảnh hưởng đến quá trình sử dụng vốn của công ty tài chính cùng với các chỉ tiêu định lượng để đánh giá các loại rủi ro này

 Đưa ra phân tích cụ thể về thực trạng hoạt động sử dụng vốn hiện nay tại PVFC, bên cạnh một số kết quả đạt được, phân tích của tác giả chứng minh được hiệu quả hoạt động yếu kém của PVFC được thể hiện qua tỷ lệ nợ xấu tăng, tính thanh khoản thấp, lệ thuộc vào thị trường liên ngân hàng, cơ cấu tài sản- nguồn vốn chưa hợp lý

v

 Đề xuất các giải pháp bao gồm giải pháp cụ thể đối với từng hoạt động huy động vốn, tín dụng, và đầu tư, bên cạnh đó là các giải pháp tổng thể như giải pháp đổi mới hoàn thiện công nghệ, nâng cao năng lực quản trị- kiểm soát nội bộ, marketing, giải pháp nguồn nhân lực… và một số khuyến nghị nhằm nâng cao hiệu quả hoạt động sử dụng vốn tại PVFC

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABSTRACT ii

TÓM TẮT iv

TABLE OF CONTENTS vi

LIST OF FIGURES ix

LIST OF TABLES x

LIST OF ABBRIVIATIONS xi

INTRODUCTION 1

CHAPTER 1: LITERATURE REVIEW ON THE PERFORMANCE OF CAPITAL UTILIZATION IN FINANCE COMPANY 5

1.1 Introduction to finance company 5

1.1.1 The definition and classification of finance companies 5

1.1.2 The role of finance companies 6

1.1.3 The major activities of finance company 9

1.2 Improve the performance of capital use in finance companies 12

1.2.1 Definition of capital efficiency 12

1.2.2 The needs to improve the performance of capital use in finance companies 14

1.2.3 Assessment on the performance of capital use in finance company 15

1.3 Factors affect the performance of capital use in finance company 24

1.3.1 The impacts of State policies and regulations 24

1.3.2 Impacts of the development strategies and mechanism of the parent company 25

1.3.3 The internal factors of the finance company 27

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CHAPTER 2: ASSESSMENTS ON THE PERFORMANCE OF CAPITAL

UTILIZATION IN PVFC 31

2.1 Overview of PetroVietnam Finance Joint Stock Corporation (PVFC) 31

2.1.1 Company introduction 31

2.1.2 Scope of business 33

2.1.3 Business performance of PVFC in recent years 35

2.2 Assessment on the performance of capital utilization in PVFC 43

2.2.1 Assessment of capital mobilization activities 43

2.2.2 Assessment of capital utilization 47

2.2.3 Analysis of performance indicators of capital efficiency 55

2.3 Achievements, limitations and causes 67

2.3.1 Achievements 67

2.3.2 Limitations and causes 68

CHAPTER 3: SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PVFC 74

3.1 Opportunities and challenges for PVFC and its development orientation 74

3.1.1 Opportunities and challenges 74

3.1.2 PVFC’s development orientation 76

3.2 Solutions to improve the efficiency of capital use at PVFC 76

3.2.1 Solutions to enhance capital mobilization activities 76

3.2.2 Solutions to improve the performance of credit activities 80

3.2.3 Solutions to improve the performance of financial investment, project investment 87

3.3 The overall solutions for PVFC 90

3.3.1 Investment, innovation, improvement in banking technologies 90

3.3.2 Improve the capability of assets- liabilities management 91

3.3.3 Enhancing the capacity of the internal control system 92

viii

3.3.4 Marketing solutions 93

3.3.5 Focus on developing human resources 94

3.4 Recommendations 95

3.4.1 Recommendations for SBV 95

3.4.2 Recommendations for PVN 97

CHAPTER SUMMARY 99

CONCLUSION 100

BIBLIOGRAPHY 102

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LIST OF FIGURES

Figure 2.1: The structure of capital contribution of PVFC 31

Figure 2.2: The chartered capital of finance companies under Vietnam economic groups 32

Figure 2.3: Growth of total assets over the years 36

Figure 2.4: Asset structure of PVFC in 2011 36

Figure 2.5: Capital structure of PVFC in 2011 37

Figure 2.6: PVFC’s revenue growth and structure over the years 40

Figure 2.7: PVFC’s growth of profit before tax over the years 40

Figure 2.8: Growth of mobilization activities from customers’ deposits and issuance of valuable papers 44

Figure 2.9: Growth and structure of loans by term over the years 50

Figure 2.10: Growth of investment activities over the years 51

Figure 2.11: Profit/ loss of PVFC’s investment activities over the years 51

Figure 2.12: Growth of total assets and ROE of PVFC, VPB, and SHB 57

Figure 2.13: Loan classification by quality in 2011 61

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LIST OF TABLES

Table 2.1: Growth of total assets over the years 35

Table 2.2: Some business indicators of PVFC 39

Table 2.3: PVFC’s revenue structure over the years 41

Table 2.4: Capital structure by mobilized sources 43

Table 2.5: Structure of trusted funds 46

Table 2.6: Growth rate of loan balances over the years 47

Table 2.7: Structure of loans and advances to customers by term 48

Table 2.8: Investment securities of PVFC 52

Table 2.9: Long-term investment and capital contribution 54

Table 2.10: Comparison table of performance indicators between PVFC and VPB, SHB, and banking sector’s average data in two year 2009 and 2011 56

Table 2.11: Quality classification of loans 60

Table 2.12: NPL and overdue debt ratios 61

Table 2.13: Some indicators for liquidity assessment 63

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LIST OF ABBRIVIATIONS

PVFC PetroVietnam Finance Corporation

MSIHI Morgan Stanley International Holdings Inc

VPB Vietnam Prosperity Joint-Stock Commercial Bank

ICRRS Internal credit risk rating system

1

INTRODUCTION

1 Necessity of the thesis

Vietnam has been shifting from the centralized economy towards the market economy and continues its integration into the global economy The development and utilization of financial resources plays an important role in developing Vietnam economy The establishment of financial intermediaries including finance companies in recent decades has contributed significantly to provide a more efficient allocation of capital, channeling the capital from people who lack of effective investment opportunity to the person who are capable of investing such capital resource to produce goods and service in a more effective way

Regarding the development of economy, it should be aware of the strong development and contribution of State economic groups that are engaged in multi-sectors businesses However, together with the development and expansion of those businesses, there is a big question of how to mobilize and utilize the capital resources effectively As the result, this leads to the establishment of finance company under the State economic groups to facilitate the capital allocation among the member companies as well as individuals and organizations from different economic sectors

Vietnam Oil and Gas Group is the leading State own economic group with numerous successful projects which bring remarkable benefit to our country’s society and contribute significantly to state budget In order to better manage the capital resources from the capital-surplus area to the capital-shortage areas as well

as attracting more capital from outside the Group, in 2000, the PetroVietnam Finance Company, now known as PetroVietnam Finance Corporation, was established to perform this essential function With more than ten years of experience, besides some achievements that the Corporation accomplished, there are still difficulties and challenges ahead that require the Company seeks appropriate measures to overcome such limitations

2

Among the continuously fluctuated situation of global finance, with the purpose of conducting the research on the operations of mobilizing and using capital of PVFC

as well as figure out some practical solutions to promote its performance in order to

contribute to the development of Petrovietnam, I choose the topic “Some solutions

to enhance the performance of capital utilization in PetroVietnam Finance Corporation (PVFC)”

2 Research aim and objectives

The overall aim of the study is to analyze and assess the current practices of capital utilization and to make suggestions to enhance the performance of this operation in PVFC The thesis aims to achieve the following objectives:

(1) Systemize the theoretical framework of finance companies in general and the capital utilization in particular In addition, a set of assessment criteria will be discussed to evaluate the performance of the capital use in a finance company (2) Develop the detailed analysis and assessments on the actual situation of capital utilization in PVFC

(3) Propose some practical suggestions and recommendations for the enhancement

of capital utilization in PVFC

3 Scope of the research

The overall business performance of a finance company is a broad topic Therefore, this thesis only focuses on the performance of capital utilization in PVFC from year

2008 to year 2011, including three main activities that directly related to the topic, which are the capital mobilization, credit activity, and investment activity in order

to develop suggestions and recommendations to enhance the performance of capital use in PVFC

3

4 Research methodology

The main sources of data are selectively collected from secondary sources including both local and foreign materials such as data collected from the researched company, from other banks, books, internet, magazines, science reviews, and related journals The methods applied in this study include: logical reasoning combined with historical materialism, quantitative and qualitative analysis, statistic method, comparison method, economic analysis, method of synthesizing to evaluate the performance of capital utilization in PVFC

5 Significance of the research

This thesis identifies numerous weaknesses in the current utilization of capital in PVFC; helps PVFC recognize and have further actions in solving its shortcomings This thesis has proposed some practical solutions in order to enhance the performance of capital use in PVFC case which is the foundation for the improvement in the capital allocation among PVN and its members

Based on the same business environment and same operating models, other finance companies under the State economic groups are suffering the same issues as PVFC Therefore, the recommendations for PVFC provided in this thesis can be seen as a practical case study for other finance companies to consider and apply into their businesses

6 Limitation of the thesis

The research focuses on the performance of capital use in PVFC Due to time and ability constraints, the thesis is not capable of covering a large size of data and information

The limited capability to approach the necessary primary data, the data used in this research is mainly collected from secondary sources

4

At the time of conducting this research, the researched company is currently processing the procedure to transform its business model; in addition, the economic and financial situation is changing rapidly Therefore, the results of this research will be limited in the practical application after the model transformation; the proposed solutions could be applied in short-term rather than long-term objective

7 Thesis structure

Thesis topic: “Some solutions to enhance the performance of capital utilization in

PetroVietnam Finance Corporation (PVFC)”

Introduction

Chapter 1: Literature review on the performance of capital utilization in finance

company

Chapter 2: Assessments on the performance of capital utilization in PVFC

Chapter 3: Solutions to enhance the performance of capital utilization in PVFC

Conclusion

5

CHAPTER 1: LITERATURE REVIEW ON THE PERFORMANCE

OF CAPITAL UTILIZATION IN FINANCE COMPANY

1.1 Introduction to finance company

1.1.1 The definition and classification of finance companies

Finance company is a form of non-bank financial institution with the function of using the financial sources including its own capital, customer deposits and other funds for the purposes of lending, investment, providing advisory services in finance, monetary fields, as well as perform some other services as prescribed by law, but are not allowed to provide the payment service or receive deposits with term of less than 1 year as a commercial bank

Classification by business activities, finance companies can be divided into three

main types as follows:

First, sale finance company

These companies indirectly grant credit to consumers to purchase goods from a retailer or from a certain manufacturer This type of finance company is often established by the retailing or manufacturing company to support the consumption

of their commodities For instance, in the U.S., General Motors Acceptance Corporation specializes in providing financial supports for car buyers of GM

Second, consumer finance company

This kind of finance company provides the majority of their capital for the household and individual loans for the purpose of purchasing consumer goods such

as furniture, home appliances or repairs Most of the loans are made under installments with higher interest rates compared to the market interest rates because these loans often contain high risks

Third, business finance company

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This type of finance company provides credit for businesses under the forms of factoring and forfeiting, discounting the receivables of the businesses, or leasing, these companies provide loans to purchase machinery according to customer’s needs, then lease those items to customers, etc [7,17]

Based on the relationship of ownership, Finance companies are divided into

First, the independent finance company which performs numerous operations, such

as credit operations including loans and guarantees to commercial and manufacturing customers, the leasing of property; factoring; currency trading; financial advisory

Second, the finance company established by economic groups is primarily engaged

in the following activities: seeking investment capital to provide for the members of the group, management and investment of unused funds in corporations, managing and channeling the temporarily idle funds among the group’s members; being the hub and providing advisory to the group and its members in order to build relations with banks and investment partners; management and application of measures to prevent financial risks within the group; providing financial advisory services to the member companies besides that, the company also provides financial services for external customers such as loans to buy goods produced by the corporation, and other financial advisory services

1.1.2 The role of finance companies

The role of the finance company for the economy in general

The history of economic development of many countries shows that, in the market economy, finance companies always exist and become increasingly popular The funds allocated dispersedly in the population and economic organizations can be gathered for long-term capital needs of a specific industry, a certain area, and the overall economy

7

Because of few limitations, finance company is able offer loans to meet the diverse needs of customers in a more convenient manner compared to commercial banks Through the activities of finance company, capital in society can be agglomerated to serve the capital needs of the economy as well as other long-term investments Activities of these companies contribute to the expansion of the stock market The operation of finance company on the stock market helps ensure sustainable stability

of the market, ensure the safety and improve the business performance of those companies

In short, finance company is a financial intermediary in the economy market, despite some limitations compared to commercial banks, for the market economy, finance companies play an important role as follows:

Firstly, finance companies generate capital for investments to develop the economy

based on advantages of wide branch-network, providing variety of products and services Facilitating the needs of borrowers and lenders via activities of capital mobilization and credit business

Second, through the credit activities, finance companies facilitate the sustainability

and expansion of businesses of all economic sectors

Third, finance companies strengthen the development of securities markets, through

the issuance of the major instruments of financial markets, for instance debentures, bonds and shares

Forth, finance companies also play the role as an important channel for capital

flows of foreign investment With its functions, finance company can provide consultancy to both local and foreign investors on the methods and forms of investment, how to promote effective management of capital investment [8,20]

The role of finance companies in economic groups

For finance companies operating under economic groups, thanks to better understanding of business activities of member companies, and capturing more

8

internal information, they can provide loans to the customers of the member companies which help generate higher revenue The key roles of finance companies

in economic groups are:

First, the establishment of finance companies in economic groups help expand

business operations, diversify businesses, reduce risk and generate new source of revenues from those industries of high profitability, finance company in economic group has better conditions and ability compared to a commercial bank in term of managing the financial risks for the member companies

Second, the establishment of finance companies under economic groups assists

those groups in seeking and mobilizing external funding channels through the determination of the methods of raising capital, the amount of capital needed, deposits’ period, lending and repayment terms to timely meet the capital needs of parent company at the lowest possible cost

Third, the establishment of finance companies helps holding companies effectively

manage the optimal capital through ensuring the investment to be in line with the overall development orientation, selecting the most potential projects of high economic profitability, thereby improving business performance of the group

Fourth, the establishments of finance companies help parent companies to harness

the power on the financial and monetary market through the unified and centralized management of financial resources, regulating the temporarily idle funds, ensuring flexible management of capital, maximizing internal capacity through the implementation of currency trading and participating in the financial and monetary markets both locally and overseas

Fifth, the establishment of finance companies in economic groups help facilitate

activities of the group towards a systematic, centralized and uniform orientation; economic groups have large advantages in term of development resources, vast market, governments often promote policies to encourage and create favorable conditions for economic groups including the finance companies under those groups [8,20]

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1.1.3 The major activities of finance company

1.1.3.1 Mobilization activities

Capital mobilization from customers

Finance companies in economic groups can borrow funds from the organization customers, however only medium and long term capitals with term of equal or over

12 months are allowed according to the regulations of the law on credit institutions

Issuance of shares, bonds, debt certificates

Issuance of shares: The prerequisite for the establishment of any finance company

is to have sufficient legal startup capital Initial charter capital of the company is contributed by the holding company and/ or its affiliates In addition, finance companies can raise more capital from the public sources by issuing shares or bonds

of that finance company

Issuance of medium and long term bonds: bond is a type of debt certificate,

representing the long-term borrowings of finance company and will be paid off after

a certain period Bondholders are entitled to a fixed income and depend on the business results of the finance companies Finance companies often raise capital in the form of bonds

Issuing debt certificates: debentures issued by the finance companies in order to

mobilize capital in the money market to meet the urgent needs for cash or term funds

short-Borrowings from credit institutions

The finance company under economic group can borrow from the credit institutions

on the principle: credit institutions shall operate according to legal provisions; lending and borrowing activities shall comply with credit agreement and loans must

be secured by mortgage, pledge or guarantee

Borrowings from parent company

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Besides the issuance of shares, bonds, certificates of debt or borrowing from other credit institutions, finance company in economic groups can borrow from its holding company

The economic groups, based on the reputation and business advantages, will mobilize capital through the issuance of bonds, and then transfer the capital to the finance companies On the other hand, when the economic group issue bonds, it is not bound to the regulations on reserve rate, interest rates… by the SBV because they do not operate as credit institutions

1.1.3.2 Activities of capital utilization

a Lending

A key business activity of finance company in economic groups to generate profits, incomes from interest rates will offset the costs of capital mobilization, preservation costs, management costs, taxes, and costs of investment risks Lending activities are

diverse and abundant including the following forms:

Based on forms of loans, lending activities include:

 Advances to customers is provided on the basis of the credit agreement, in which customers (individuals, businesses) are granted a certain lending amount in

an agreed period Credit advances contain two types: Secured advances and advances without guarantee

 Overdraft: also known as credit limit, is a form of credit advances particularly made on the basis of the credit agreement, in which the customer is allowed to use a limited credit balance over a specified period

 Commercial paper discounting: a short-term credit operation, the good or service suppliers provide the commercial papers which represent the goods and services supplied, then transfer the ownership of those commercial papers to the finance company which would be paid prior to maturity at par value amount of commercial paper subtracting interests and commission fees; finance companies are

11

responsible for collecting money from the purchasers of goods and services upon their maturity

Based on the types of borrower, lending activities include:

 Lending to different business sectors known for business loans, for instance, lending to industries, trading, services, agriculture, real estate

 Loans to consumers to purchase consumer items such as cars, durable products such as home repairs, credit cards, personal expenses

 Loans to other credit institutions

 Loans to parent company and member companies

Based on the loans’ term, lending activities are divided into:

 Short-term loans (loan period less than 1 year)

 Medium-term loans (loan period from 1 year to 5 years)

 Long-term loans (loans period equal to or over five years)

b Investment activities

Investment activities in securities: finance companies in economic groups are also

investors in financial market Investment securities are the second important source

of profit after the lending business, it also helps companies improve financial liquidity, reservation, and diversification of business activities in order to diversify risks and improve the efficiency of business operations of finance companies Overall, the finance companies under economic groups usually develop concrete policies for investment in securities Portfolios of securities range from the safest securities as Treasury bonds to relatively safe or the relatively risk securities

In addition to direct investment in the centralized market, finance companies participate in the OTC market creating an investment channel to increase the liquidity and risk diversification

12

And other financial investments: finance companies also participate in joint

ventures, equity contributions, other long-term investment in projects and businesses

In addition to the main activities of mobilization, lending and investment to be covered within this thesis, finance companies are also engaged in a number of other activities such as property leasing including operating leases and financial leases, factoring operations, the issuance services of securities, foreign exchange trading, and other financial services such as mortgage of commodities, materials, foreign currencies [7,10,17,20]

1.2 Improve the performance of capital use in finance companies

1.2.1 Definition of capital efficiency

Capital is a prerequisite for any business, either engaged in industries or services in the economy To conduct business activities, enterprises need to hold a certain amount of capital

Capital is the concept which includes all the elements arranged to produce goods and services Capital is put into production in various forms It consists of tangible assets and intangible assets as well as all the accumulated knowledge of the business, management and operational levels of leadership as well as staffs’ qualification

There are different definitions for capital; some of them can be defined as follows:

“Wealth in the form of money or assets, taken as a sign of the financial strength of

an individual, organization, or nation, and assumed to be available for development or investment”

In terms of accounting “money invested in a business to generate income”

In terms of economics “Factors of production that are used to create goods or services and are not themselves in the process” (businessdictionary.com)

The concept of efficiency can be defined as follows:

“The comparison of what is actually produced or performed with what can be achieved with the same consumption of resources (money, time, labor, etc.) It is an important factor in determination of productivity” (www.businessdictionary.com) “Efficiency in general describes the extent to which time, effort or cost is well used for the intended task or purpose It is often used with the specific purpose of relaying the capability of a specific application of effort to produce a specific outcome effectively with a minimum amount or quantity of waste, expense, or unnecessary effort.” (www.wikipedia.com)

First of all, the initial concept of efficiency in general is how to use the resources of the economy in the most effective way to satisfy the needs and expectations of the participating parties

Capital efficiency, or the performance of capital use of a business can be understood

as the relationship between how many expenses are incurred by the company to how much money is used to manufacture a good or service

Thus, from the above-mentioned concepts and definitions, in the opinion of the

author: "The effective use of capital in credit institutions in general and finance companies in particular are assessed in terms of financial performance as the result

of capital activities, reflecting the correlation between the financial performance and the total capital use, represented through the use of resources, governance capacity, financial capacity and the level of risk control on the financial activities”

Business process of a finance company requires capital in advanced The final result

of business operation is the net profit and the ability to maintain safety of the

14

operation In the longer term, the level of safety is also reflected through net income (provision for losses) Therefore, the rate of net profit reflects the most common way of using the capital in the finance company Profit is an important measure in assessing the efficiency of capital use In finance field, profit and risks always comes together Therefore, evaluating the effectiveness of capital use should be fully evaluated on both aspects of profit and the accompanying risks

Basically, improving efficiency in the use of capital in finance companies means seeking measures to increase the return on capital spent

1.2.2 The needs to improve the performance of capital use in finance companies

In the market economy, improving the efficiency of capital use is always associated with competition; this is an objective principle of the production of goods, a matter

of market mechanism Competition will result in a number of enterprises in general and finance companies in particular will be excluded from the market, while other companies still exist and further develop Competition in the financial market also leads to the constant improvement of capital’s effective use

By improving the efficiency of capital use, the finance company can:

 More capital accumulation Consequently, increasing equity, support companies

to purchase more modern equipments and new technologies to further improve performance

 Higher dividends: increasing the market value of company’s shares

 Increase the incomes, bonuses and other benefits of the employees, this is an important factor to promote service quality, reduce risks in finance companies

 Customers, the depositors and borrowers of finance companies can also benefit through the expansion in operations and business scale

 Increase the tax contribution to State budget [20]

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1.2.3 Assessment on the performance of capital use in finance company

Assessing the efficiency of capital use is an important subject in order to improve the overall performance of finance companies Within the scope of this thesis, the author focus on some quantitative and qualitative indicators needed to evaluate the effectiveness of the capital use activities which may indicate the limitations of the capital performance and propose solutions to improve the efficiency of those operations The elements necessary to better assess the performance of capital use activities in finance company include:

Firstly, selecting the proper criteria to make assessments

Secondly, analysis of the factors affecting the elements that constitutes effectiveness Thirdly, evaluating the achievements and limitations of capital use activities

Normally manager chooses the comparison method over the previous period in terms of size, proportion to make assessment on the level of increase/decrease over the same period If the comparison suggests an increase, we can conclude there is

an improvement in performance However, during the economic recession, a company may not grow, even suffering losses but remaining positive indicators than other companies at same scale and similar activities, those companies can be assessed to be more effective Therefore, the analysis and evaluation of effective use of capital requires the integration of macroeconomic risks

In a highly competitive environment, shareholders easily move to the finance company with high performance, the comparison between different finance companies in the same area with same advantages and business model, simultaneously compared to the average data of financial-banking sector to make a comprehensive assessment is very important Selecting comparison group, determining the average rate of profitability, if the comparison shows a larger profitability compared to the average rate, we can assess that that company achieve above the sector-average profitability Method of group comparison is important; it

is also a measure to control risk

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑠𝑠𝑒𝑡𝑠 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠This indicator shows how profitable a finance company is relative to its total assets, ROA indicator suggests how efficient management is by using assets to generate earnings after tax, reflecting the efficient level of operation of finance companies

𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦This indicator is considered the most important, reflecting the profitability of equity ROE measures the profitability by revealing how much profit a finance company generates with the money invested by their shareholders This is the fundamental norms that any managers are always interested in This indicator reflects the business performance in the relation with the capital structure in a finance company ROE can be seen as the most important criteria, in which the incomes after all expenses and taxes divided by equity including common stocks, undistributed earnings, and reserves ROE ratio, in term of management, reveals the capabilities, the level of generating incomes on the book value of equity invested in a finance company

We can also apply the above formula to measure the efficiency of capital use for different components such as credit, investment

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Measurement of profit and risk of finance companies should be compared with the credit institutions at same scale and business activities Generally, the higher the return, the higher the risk is Corporate governance in finance company attempts to maximize equity value by balancing the tradeoff between risks and profits

Measurements of profits

Profit is a final measure of the income statement which receives particular interest Profit is a measure of the ability to generate value for shareholders, creates additional business capital and maintains or improves the reputation of the company Profit is also a measure of the governance capability in relation to the quantity and quality of assets and liabilities of a finance company

Net profit after tax = (incomes from interest - interest expenses + other incomes - other expenses - provision for losses) × (1 - corporate income tax)

So there are many elements that constitute after-tax profit

Net interest margin (NIM)

In addition, we use the net interest margin, also known as the difference in interest rates displayed in percentage, which is equal to interest incomes minus interest expenses divided by average earning assets

Net Interest Margin (%) = (Interest incomes – Interest expenses)/ Average Earning Assets

Activities of capital use in finance company can be divided into activities performed

by earning assets non-productive assets (cash on hand, fixed assets) Thus, the net interest margin indicator measures the effective use of investment capital for the earning assets

Interest incomes

Interest incomes = interest incomes from credit activity + interest incomes from deposits + interest incomes from investment securities

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Interest income is an important outcome indicator which can be seen as the top concern to any credit institution For the majority of financial intermediaries, interest incomes account for the largest proportion in total incomes and decide the size of net incomes

Factors that constitute the interest incomes in a finance company consist of the size, structure, term and the interest rates of earning assets and overdue loans If finance companies’ portfolios have a large proportion of risky assets, the interest incomes will be subject to high expectations of returns Interest rates are decided by market condition To increase interest incomes, the finance company needs to increase the size of earning assets, and the proportion of higher-yielding assets as well as minimize losses

The interest incomes indicate the importance of business capacity of the capital use activities in finance company, such as credit and investment activities Therefore, the interest incomes generated from credit operations and investment activities on outstanding securities are employed to reflect the efficiency of those both operations

[5,7,17,20]

1.2.3.2 Assessment on the management capability of the risks affecting the activities

of capital use

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Risks, in financial intermediaries in general and of finance company in economic groups in particular, are always the concerns of any financial institution Unexpected events always seem to potentially occur even in the cases of highly effective and experienced institutions A finance company in the economic group often faces with the following fundamental types of risk:

Credit risk

Among different types of risk, finance companies paying special attention to credit risk Credit risk is the possibility of unexpected losses Credit risk is revealed in the case of finance companies facing difficulties in collecting the full principal and interest of the loans or the principal and interest payments doesn’t properly match the maturity

Credit risk is exposed when the finance company extends credit to customers and gets the debentures issued by the debtor with a commitment to fully pay the principal and interest in time for finance companies At the time of granting credit and accepting debentures, finance companies recognize the high probability of high solvency of customer, while the probability of losing liquidity is assessed at a much lower level In case the borrower goes bankrupt, finance companies can hardly recover the interests and may also lose wholly or partly the principals, dependent on the ability of finance companies to access the assets of the debtor after the bankruptcy or dissolution

Credit risk is not limited to lending activities, but also includes several activities that related to the credit activities, such as guarantee, commitment, acceptance of trade financing, trade credit, co-funding therefore, credit risk is a great concern not only for the financial institutions, but also for the entire economy The finance companies always seek to maximize profits by seeking loans with the highest profits possible, simultaneously trying to minimize the risks associated with such lending activities, filtering and monitoring clients, establishing long term customer relationships, regulations on credit line, collateral, lending balance

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The indicators that reflect the assessment of credit risk include:

(1) Overdue loans and the overdue loans to total loans rate

(6) Operating environment of the borrowers

Within the scope of this thesis, the author will make evaluation based on some quantitative indicators to measure the level of credit risk in the researched company without concretely mentioning about qualitative issues such as credit relationship, operating environment of the borrowers Specifically, credit risk is evaluated by observing the composition of assets To analyze credit risk, the employment of data relating to overdue loans or credit losses will offer a more accurate assessment on the level of credit risk faced by the company

Interest rate risk

In the operation of the finance company in economic group, the asset transfer process is a particular function of the finance company It includes the purchase of securities (capital use) and issuing securities (raising capital) Maturity and liquidity

of the securities in the portfolio of assets is often disproportionate to the securities

of liabilities The maturity difference between assets and liabilities in finance company is subject to interest rate risk

Interest rate risk is the risk that a finance company are subject to where there are fixed-rate loans but the mobilization rates fluctuate, it means that the interest incomes remain unchanged however the interest expenses increase according to the change in the market rates

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Liquidity risk

Finance company are also concerned about the danger of not having sufficient cash and borrowing capacity to meet deposit withdrawals, loan demand, and other cash needs A finance company tends to minimize the amount of cash on hand because they are not profitable or less profitable; at the same time, investing in long-term assets of low liquidity, and high profitability Although most of the assets can be converted into cash, however some properties can only be converted into cash immediately at a very high cost

Liquidity risk of finance company in economic group arises when debts come to due and the company is requested to make instant payment to numerous debts while the cash reserves of the company remained at low level; customers may require the company to reschedule the loans’ payment; therefore, this situation requires finance company to borrow more money or to sell its assets to meet the repayment made to customers The finance company can adopt another method rather than selling its assets, which is borrowing from the money market

Somewhat more common is a shortage of liquidity due to unexpectedly heavy deposit withdrawals, which forces finance company to borrow funds at an elevated interest rate, higher than the interest rate other banks are paying for similar borrowings

There is a tradeoff between profit and risk, that a shift from short-term investment securities into longer-term securities or loans will increase profits, but also increase the liquidity risk of credit institution Thus, the higher the liquidity ratio of the finance company, the lower the risk level and returns

Loan - to - deposit ratio (LDR) is one of the ratio to assess the security level of assets which is universally used by different countries in the world Analysts and managers regularly assess the repayment capability of a credit institution to depositors and other creditors without subject to excessive costs, simultaneously maintain the capital growth Liquidity of a credit institution is assessed through a

it generates the largest profit in the property structure When LDR ratio increases, the liquidity of credit institutions decreases accordingly, thus becomes vulnerable to protect themselves from the risk of unexpected withdrawals of depositors When LDR ratio is increased to relatively high levels, the company will be reluctant to provide loans and investments, require more precautious decisions and apply stricter credit policies to rebalance this ratio at a reasonable level to ensure the liquidity and create buffers to protect themselves against the risk of unexpected withdrawals Hence, high LDR ratio is a factor affecting investment and lending decisions

In addition to LDR ratio, the loans to total assets ratio could be applied to measure the total outstanding loans as a percentage of total assets The higher this ratio indicates a bank is loaned up and its liquidity is low The higher the ratio, the more risky a bank may be to higher defaults The liquidity is lowered when the major proportion of assets are used for lending purpose, it also proves the low capacity in applying a good asset diversification in order to spread risks

Capital risk

Capital risk in finance company is exposed where the owner capital does not sufficiently compensate for the deposits of the customers and creditors when facing operational risk Therefore, a finance company with the equity/ assets ratio equal to 10% is more secure and be better protected compared to another company with this ratio maintained at 5%

Capital risk is associated with the equity ratio and return on equity ratio (ROE) When a finance company maintain its high capital risk, the equity ratio and ROE is increased, in contrast, when the company moderate this ratio, equity ratio and ROE

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is lowered choose higher risk capital, equity ratio and ROE is higher, when the company chooses to reduce risk capital, equity ratio and lower ROE In short, the higher the capital risk, the higher ROE ratio

Capital adequacy ratio

The greater the debt ratio, the higher the ROE ratio is However, the equity is required to comply with the minimum capital requirements of the SBV (capital adequacy ratio-CAR) CAR is a fundamental measure for managers to assess the financial reliability of the finance company If a financial intermediary fails to ensure the capital requirement, it is considered e as facing liquidity risk and inability to operate properly

Under current regulations in Vietnam, the CAR maintained equal or greater than 9% will be considered as sufficient capital adequacy

Environmental risks

The finance company has to well perform to overcome the impacts of the external environment within in a limited control to achieve desired outcomes at an acceptable level of risk

The first factor is the legal risk, only a change in the legal regulations will

significantly affect the outcomes of operations of finance companies, as the result, performance may be downgraded or limited in various areas

Secondly, the economic risk, when the economy is prosperous, the operation of

finance company will thrive accordingly and vice versa, if the economy deteriorates, the activity should be narrowed down to avoid the bankruptcy

Thirdly, risk of competition, the competition in the finance-banking field is

increasing fierce because most of the services and products in the banking sector could be provided to a greater extent by commercial banks and other non-bank credit institutions

[5,6,17,19,22,24]

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1.3 Factors affect the performance of capital use in finance company

1.3.1 The impacts of State policies and regulations

State plays a vitally important role in the formation and development of financial intermediation in general and of finance company in State economic groups in particular The role of state management influences the overall activities of finance company in general and the capital use activities in particular through the formulation, maintenance and promotion of and socio-economic and legal environmental needed to support financial intermediaries operate efficiently The effects are demonstrated as follows:

To maintain the social stability, order, and economic development

 Creating and maintaining a stable political and social environment is a leading precondition which allows State to focus on the optimal use of resources and implementation of strategies, policies and long-term economic development

 To perform the functions of regulating, stabilizing the economy through strategic planning, key programs, macroeconomic objectives and the implementation of economic- finance policies, to ensure steady economic growth and sustainable development

 Creating a favorable socio-cultural environment including population, employment, social justice, poverty alleviation overcome and suppress the negative impacts of the market mechanism

 Developing proper development orientation as the premise for the decision making process of the economic groups and its finance company

 Promulgate policies to support economic groups to focus investment in the prioritized in order to encourage economic development, at the same time promote policies to protect domestic production, support and improve the competitiveness of economic groups

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 Promote the flexible implementation of external economic policy, enlist and promote the advantages of international collaboration, both avoiding the imbalanced competition with the economic groups and large financial organizations with absolute advantages of capital, advanced technology, highly qualified employees and management experience

 Developing tight relationships and cooperation between governments and relevant ministries with economic groups, finance companies in the economic groups for the mutual benefit

 Elaborating legal environmental to ensure fair competition, encourage the development of financial institutions

Activities of finance companies in the economic groups were conducted in a strict legal framework, which was built primarily to ensure the safety of the financial system and to protect the interests of the whole society

State develops the legal framework in order to put regulations on the establishment and scope of activities, merger & acquisition, consolidation, business expansion; bankruptcy, dissolution, financial security and safety to control and regulate the operation of financial institutions, including finance companies in economic groups The basic requirements of the legal framework are the consistency, stability, transparent and application of common standards which have been worldwide recognized, in order to create an environment of fair competition

1.3.2 Impacts of the development strategies and mechanism of the parent company

Business Strategy

The establishment of the Economic groups derived from the economic interests of the member companies and the common interests of the entire group To improve competitiveness and maximize profits, economic groups often develop the overall business strategy and consistent implementation across the group Development

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strategy of the Group focuses their investments on priority areas; give priority to the research works and the development of new technologies, new products, mobilizing the financial strengths and resources of the whole group into key areas, expanding market share, consolidating and enhancing the prestige and reputation of the Group Based on the development strategy of the parent company, the finance company takes initiative to identify and select their own business strategy in accordance with the environment and specific conditions in each areas, each market regions; increasing profit while promoting the synergy of economic group

Operating mechanism

Economic group is a form of economic integration; it only survives and sustainably develops through applying the operating mechanism which concerns the harmony of the economic interests between member companies individually and the whole group

In the economic group, there is a close and co-dependent relationship among the parent company, the subsidiaries, and the finance company; they support each other

to serve the common goals of the group Such relationship is controlled by the contract or agreement to coordinate economic activities In order to limit internal competition between its member companies, the members in an economic group are often specialized in specific fields, businesses or make an agreement on separating markets, customers, price, and product quality

Finance companies are fully active in spending their equity into business The capital borrowed from parent company shall be approved in terms of the borrowing purpose, business plan and payment schedule in accordance with the parent company’s requirements The investment projects of the member companies must comply with the development strategy of the parent company, such projects are entitled to preferential financial supports Finance companies are allowed to borrow at internal interest rate Besides, finance companies are usually assigned to temporarily regulate the idle funds of the member companies and invest in the most lucrative sectors

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1.3.3 The internal factors of the finance company

1.3.3.1 The level of technology development

Information technology can be seen as a major trend in modern banking activities over the past decade, the selected technology solutions are appropriate to ensure that the banking information technology is developed in the right direction IT is the factor which helps credit institutions increase their competitiveness through diversification of products and services, expanding market shares by automatic transaction equipments, enhancing capacity and business performance of credit institution, accelerating payment process, increasing the capital turnover, thereby contributing to the efficiency

of social capital The extensive application of information technology and the development of e-banking transactions have contributed to improve the management and administration of the finance- banking system

Technology is an essential platform if any credit institution wants to develop new products Accompanying with the technology is a complete system of internal control and administration, decision-making; this is a determinative factor to the viability of a financial institution

1.3.3.2 The level of corporate governance and control system

Current system of credit institution has developed diverse forms of ownership, types

of services, and the scale of operations; business and financial capacity has been increasingly improved Governance capacity, competitiveness, and the application

of information technology are also improved

Corporate governance is general a series of relations between board of management, board of director, shareholders and other stakeholders within a business Corporate governance is a mechanism to identify the target of enterprise, tools to achieve those objectives and monitoring the performance

Regarding the corporate government in a finance company, the board of directors plays the central role and is ultimately responsible for the overall business operation

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in the company, including the approval and monitoring of the overall strategy, risk management, and monitoring the board of management Board of directors is responsible for the approval and supervision of the strategy implementation, as a basis for development orientation and annual planning; specifying plans for each sector in terms of size, internal organization, market, capital, networks, products and services, risk management, information technology and human resources to achieve strategic goals

The issue of corporate governance is becoming increasingly important and is crucial for the development direction of the entire system of credit institutions in general and finance companies in particular

Decision-making and inspection process is also particularly important The collapse

of the credit institutions can be attributed to the consequences of the wrong decision-making process during a long period Under the Vietnam legal provisions, the board of supervisors performs the monitoring function over the board of directors and board of management Board of supervisors is supported by the internal audit department which is responsible for inspecting the entire operation of the company, compliance with legal regulations and internal rules

The company’s organization not only affects the capital use activities but also affect the overall activities of the company The irrational organization may create overlaps in the work coordination between departments within the company, affecting their decision in granting loans and investment If the company is properly organized, the decision making process will be shortened, and still minimize the imprecision, ensuring both operational security and better customer services, thereby improving the quality of capital use’s performance [10,20]

1.3.3.3 Capacity of human resources

People are always crucial to the success or failure of any organization As the businesses become increasingly sophisticated, the requirements of human resources are increasingly elevated accordingly To make better use of the capital particularly