Interest rate risk management in vietcombank

NATIONAL ECONOMIC UNIVERSITY BUSINESS SCHOOL NGUYEN MANH QUAN BUSINESS SCHOOL  NGUYEN MANH QUAN E-BBA 3B  INTEREST RATE RISK MANAGEMENT IN VIETCOMBANK Bachelor of Business Administration in English (E-BBA) Thesis HÀ NỘI - 2015 HANOI, 2015 NATIONAL ECONOMIC UNIVERSITY BUSINESS SCHOOL BUSINESS SCHOOL INTEREST RATE RISK MANAGEMENT IN VIETCOMBANK Bachelor of Business Administration in English (E-BBA) Thesis Student : NGUYEN MANH QUAN Class : EBBA – 3B Student code : CQ533156 Supervisor HANOI, 2015 : Dr Tran Thi Minh Huong ACKNOWLEDGEMENT I would like to express my gratitude to all those gave me the possibility to complete this dissertation I deeply indebted to my supervisor Mrs Tran Thi Minh Huong, whose help, stimulating suggestions and encouragement helped in all the time of research for and writing of this dissertation She always gave full and immediate support whenever necessary In addition to that, I would like to thank to all teachers of EBBA program for giving me basic knowledge to conduct this dissertation I want to sincerely thank to Vietcombank Security Company for giving permission to commence this dissertation in the first instance, providing me with the effective data, helped to supply relevant material and support me much for the competition of this dissertation Without the support of all those people I could not complete my dissertation and gain a great knowledge for my field of research Thus, I want to thank all of them again EXECUTIVE SUMMERY With the rapidly developed in the economy, globalization is not the strange concept but becoming a new necessary trend of development to every macro economy of each nation Official join the World Trade Organization (WTO) at November th 2006 and some local co-cooperation organizations, Vietnam in general and banking system in particular now is taking some very first steps to integrate to the new trend of development Considered as a developing country, Vietnam has many advantages and along with disadvantage in changing the economic structure Specially, for each nation to developing in the economy, the banking system must be considered as the most important factor to ensure the forward moving of this economy However, Vietnamese commercial banks business in the market economy is facing with many difficulties and potential risks which have great impact to the business result and banks’ prestige Therefore, to ensure the stable and effective development of commercial banking systems, all the commercial bank in Vietnam must monitor and minimize the potential risks through the act of risk management In recent years, risk management has gained the notice of all commercial banks in Vietnam, however, the consideration is not totally completed Most of the banks now just pay attention to the credit risk management and liquidity risk management but forget some very specific important basic risks of banking business which are FX risk, interest rate risk … In reality, the act of remaining the stable in interest rate in long period of commercial bank has made their administrators neglect the interest rate risk management However, the interest rate risk is one of very specific risk of the banking business which means that when the managers have the great effort to control the risk, it will make their bank develop with the rapid speed Therefore, the administrators of Vietnamese commercial banks must have heightened the awareness about the importance of interest rate risk management TABLE OF CONTENT INTEREST RATE RISK MANAGEMENT IN VIETCOMBANK ACKNOWLEDGEMENT EXECUTIVE SUMMERY .2 TABLE OF CONTENT ABBREVIATIONS LIST OF TABLES AND FIGURES INTRODUCTION Rationale: Research objective: Research question: Research methodology: Research scope: .9 Research structure: Chapter 1: Theoretical background on interest rate risk management in commercial banks: 10 1.1 Overview of interest rate risk management: 10 1.1.1 Interest rate risk: 10 1.1.2 Interest rate risk management: 12 1.1.3 The need of interest rate risk management in banking business: 12 1.2 Content of interest rate risk management .14 1.2.1 Identifying interest rate risk: 15 1.2.2 Measuring interest rate risk .16 1.2.3 Controlling interest rate risk: 20 1.3 Factors affecting interest rate risk management in commercial banks: 29 1.3.1 Internal factor: 30 1.3.2 External factors: 31 Chapter 2: Reality in interest rate risk management in Vietcombank .33 2.1 Introduction to Vietcombank 33 2.1.1 History: 33 2.1.2 Organizational structure: 34 2.1.3 Business performance 36 2.2 Reality in interest rate risk management in Vietcombank: 37 2.2.1 Identifying interest rate risk: 37 2.2.2 Measuring interest rate risk : 40 2.2.3 Controlling interest rate risk: 44 2.3 Evaluate the real interest rate management in Vietcombank: 45 2.3.1 Achievement: 45 2.3.2 Shortcoming: 46 2.3.3 Reasons: 48 Chapter 3: Solution to improve interest rate risk management in Vietcombank 54 3.1 Orienting the interest rates risks management of Vietcombank 54 3.1.1 Orienting the interest rates risks management in Vietnam’s banking system: 54 3.1.2 Orienting the interest rates risks management of Vietcombank: 55 3.2 Solution to improve interest rate management in Vietcombank 56 3.2.1 Improving the policies on interest rate risk management: .56 3.2.2 Improving method for measuring interest rate risk : .58 3.2.3 Improving method for controlling interest rate risk: .63 3.2.4 Other Solutions: .64 3.3 Recommendations: 67 3.3.1 Recommendation for the State: .67 3.3.2 Recommendations for central bank: 69 CONCLUSION 73 REFERENCES 74 ABBREVIATIONS ALCO Assets and Liability committee BOD Broad of management FX Foreign Exchange USD United State Dollar VCB Vietcombank VND Vietnamese Dong LIST OF TABLES AND FIGURES FIGURE 1: RESEARCH PROCESS FIGURE 1.1: MODEL OF RISKS IN COMMERCIAL BANKING BUSINESS 11 FIGURES 1.2: MODEL OF INTEREST RATE RISK MANAGEMENT 15 FIGURE 1.2: THE TRANSACTIONS OF HEDGING INTEREST RATE: 20 FIGURE 1.3: GRAPH OF INTEREST RATE FLUCTUATIONS AND CONTRACT CAPS 27 FIGURE 1.4 GRAPH OF INTEREST RATE FLUCTUATIONS AND CONTRACT FLOORS .28 TABLE 2.1: VCB BUSINESS RESULT IN PERIOD OF 2009-2013 36 TABLE 2.2: VALUE OF ASSET – LIABILITY IN EACH PERIOD IN 2013: 41 TABLE 2.3: REACTION WHEN THE SENSITIVE GAP IS POSITIVE .42 TABLE 2.4: REACTION WHEN THE SENSITIVE GAP IS NEGATIVE .42 TABLE 2.5: THE AVERAGE MATURITY OF LIABILITY – ASSET IN 2013: 43 TABLE 3.1: EXAMPLE FOR RE-PRICING MODEL .59 TABLE 3.2: THE VALUE OF ASSET AND LIABILITY DUE TO THE RE-PRICING PERIOD: 62 Introduction - Rationale: The essential of risk management is undeniable not only for the commercial banks but also for all the firms which want survive and develop in the market In 2014, the system of commercial banks in Vietnam has to face with the huge numbers of problems despite the announcement of Standard & Poor, which is one of the Big three credit-rating agencies, about the advance of banking business due to “the stable economic environment in Vietnam” These are the high challenge of asset quality, the challenge of low revenue and the weakness of capital Those problems cannot be solved in one day with only one or two methods However, the most relevant solution for commercial banks in Vietnam to develop is to promote the act of risk management This economic topic has a wide range of research Despite of that fact, each business will have the own specified risk and the interest rate risk is one of the most basic risk of banking business The nature of banking business is to get profit through the fluctuation in the rate Thus, the more successful bank will be the bank which performs better in controlling the rate To have the clarified awareness of the impact of interest rate risk management, Vietcombank is one of the first commercial banks in Vietnam to have paid consideration to this work However, some restrictions are still existed and have played a role to encumber the business of the bank itself The biggest shortcoming of Vietcombank is not having the appropriate policies in managing the interest rate risk Hence, the dissertation will focus on the interest rate risk management of Vietcombank and draw out some method to improve the act of interest rate risk management in Vietcombank - Research objective: Giving theoretical background on interest rate risk management in commercial banks - Analysing the real in interest rate risk management in Vietcombank - Recommending the potential solutions to improve the interest rate risk management in Vietcombank - Research question: From the above objectives, the research is conducted to find the answer for the following questions: o What factors that affect the interest rate risk management in commercial bank? o What is the reality of the interest rate risk management in Vietcombank? o How to improve the quality of interest rate risk management in Vietcombank? - Research methodology: Research process: Figure 1: Research Process Research objectives Theoretical background Recommendations Collecting data Reality in interest rate management in Vietcombank ... of interest rate risk management in banking business: 12 1.2 Content of interest rate risk management .14 1.2.1 Identifying interest rate risk: 15 1.2.2 Measuring interest rate risk. .. Reality in interest rate risk management in Vietcombank: 37 2.2.1 Identifying interest rate risk: 37 2.2.2 Measuring interest rate risk : 40 2.2.3 Controlling interest rate risk: ... bank in general 1.2 Content of interest rate risk management The content of interest rate risk management will be including main processes: - Identify interest rate risk - Measuring interest rate