(Luận văn) measure the interest rate risk, a case study of vietcombank

i ng hi ep MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY w n lo ad ju y th yi pl n ua al PHAM THI XUAN LIEN n va fu ll MEASURE THE INTEREST RATE RISK: oi m at nh A CASE STUDY OF VIETCOMBANK z z k jm ht vb om l.c gm ECONOMICS MASTER THESIS n a Lu n va y te re HOCHIMINH CITY, 2010 ac th ii ng hi MINISTRY OF EDUCATION AND TRAINING ep UNIVERSITY OF ECONOMICS HO CHI MINH CITY w n lo ad ju y th yi PHAM THI XUAN LIEN pl ua al n MEASURE THE INTEREST RATE RISK: va n A CASE STUDY OF VIETCOMBANK ll fu oi m at nh Financial and Banking Major Code: 60.31.12 z Major: z k jm ht vb gm ECONOMICS MASTER THESIS om l.c n Dr Le Thai Thuong Quan a Lu Supervisor: n va y te re ac th HOCHIMINH CITY, 2010 iii ng hi ACKNOWLEDGEMENT ep w n lo I would like to express my honest gratitude to my devoted research Supervisor, Dr ad y th Le Thai Thuong Quan, for his assistance and valuable guidance during the course of ju fulfillment this thesis yi pl I would like to thank my colleagues from Vietcombank, who have helped me in al ua collecting data for this thesis: Ms Nguyen Thi Minh Trang from An Giang Branch, n Ms Le Mai Trinh from Dong Thap Branch Especially, I would like to express my va n sincere thanks to Ms Ho Thi Bich Lien – chief accountant of An giang Branch for fu ll her recommendation to Ms Phung Nguyen Hai Yen, Deputy Director of Finance m oi and Accounting Department in Vietcombank head office nh at I would like to avail this opportunity to express my appreciation to Professor z Nguyen Dong Phong, UEH Board of Director for conceiving the Banking Master z ht vb Program in English I also would like to express my sincere gratitude to all mu jm teachers at Post-graduate Faculty- University of Economics Hochiminh City for k their teaching and guidance during my Master in Banking course gm Finally, I would like to extend my deepest gratitude to my beloved family, special l.c n a Lu great support during study period om thanks to my husband, Pham Trung Khanh, my son, Tony for their endless love and n va y te re ac th iv ng hi ABSTRACT ep w n With the volatility in the interest rate recent years, the interest rate more lo ad becomes a vital problem of Vietnamese bankers Fluctuations in the interest rate ju y th since 2008 that effected sharply to the bank‟s interest income and value, making yi interest rate risk management decisive to its success It is necessary to call for high pl degree in the asset and liability management with the duty of managing the bank‟s al n ua interest rate risk exposure through the use of various hedging strategies and n va instruments as well as balance sheet adjustment ll fu This qualitative research measures the interest rate risk in Vietcombank - the oi m leader in interest rate maker in domestic banks by using the gap model (dollar gap) also referred to as the funding gap or the maturity gap The research shall investigate nh at the movement of the Vietnam interest rate in financial market since 2008 Then it z will analyze the gap (dollar gap) in Vietcombank financial statement to measure the z vb interest rate risk that affected to the income of the bank Finally, there shall be some ht k jm suggested solutions in improve the gap as well as the net interest income om l.c gm n a Lu n va Gap, Gap analysis, interest rate, interest rate risk, interest rate risk measurement, ac th asset and liability management, Vietcombank, financial statement, SBV, VNIBOR y te re Keywords: v ng hi CONTENTS ep w n lo Acknowledgement ad y th Abstract ju Contents yi List of Tables pl va Chapter 1: n Abbreviations ua al List of Figures INTRODUCTION n ll fu 1.1 Background, context and rationale for the research oi m 1.2 Why is the problem worth addressing? 1.4 Methodology at nh 1.3 Objectives/goals of the research z vb THEORY OF INTEREST RATE RISK AND gm Chapter 2: k jm ht 1.6 Study structure z 1.5 Data analysis and finding INTEREST RATE RISK MEASUREMENT n va n 2.2.2 Interest rate risk a Lu 2.2.1 Credit risk om 2.2 Risks assumed by banks l.c 2.1 Background 2.2.5 Price risk ac th 2.2.4 Liquidity risk y te re 2.2.3 Operational risk vi ng hi ep 2.2.6 Compliance risk 2.2.7 Foreign Exchange risk w n lo 2.2.8 Strategic risk 10 2.2.9 Reputation risk 10 10 y th ad 2.3 Interest rate risk 12 2.4 The model of measuring the interest rate risk ju 14 yi 2.4.1 Definition pl 2.4.2 Calculation 14 17 2.5 Interest rate risk management 18 n ua al 2.4.3 Limitation of gap model n va 18 ll fu 2.5.1 On balance sheet adjustment 19 oi m 2.5.2 Off balance sheet adjustment 2.5.2.1 Using interest rate futures to hedge a dollar gap position nh 20 at 2.5.2.2 Using forward contract 21 z z 2.5.2.3 Using option contract 22 ht gm 2.6.2 Defensive management 25 k 2.6.1 Aggressive management 24 jm 2.6 Manage interest rate risk with dollar gap vb 2.5.2.4 Using interest rate swap 25 l.c 25 om 2.7 Conclusion a Lu Chapter 3: 19 n INTEREST RATE MOVEMENT IN VIETNAM AND VITECOMBANK INTEREST RATE POLICY va 27 n 3.1 The movement interest rate in Vietnam 3.1.3 Interest rate volatility period 29 ac 28 th 3.1.2 Interest rate after the Renovation Policy y 27 te re 3.1.1 Interest rate before the Renovation Policy vii ng hi 3.2 Interest rate policy in Vietcombank 31 ep w n lo ad 3.2.1 Background 31 3.2.2 Interest rate policy 32 3.2.3 The fluctuation in 2008 34 3.2.4 The fluctuation in 2009 36 y th 37 3.3 Conclusion 38 3.2.5 The movement in first six month of 2010 ju yi pl al MEASURE THE INTEREST RATE RISK IN THE COMMERCIAL JOINT STOCK BANK FOR FOREIGN TRADE OF VIETNAM (VIETCOMBANK) n ua Chapter 4: n va ll fu 39 oi m 4.1 Introduction 4.2 Research design 40 nh 42 z 42 ht 47 k 4.5 Gap Analysis 45 jm 4.4 Balance sheet structure vb 4.3 Interest rate risk exposure z 4.2.2 Personal interview 41 at 4.2.1 Data collection and analysis gm 4.6 Conclusion 54 Suggest and conclusion om l.c Chapter 5: n a Lu 56 n va 5.1 Conclusion 5.3 Suggest for hedgeing the gap 59 ac 59 th 5.3.1 Balance sheet adjustment y 57 te re 5.2 Conclusion related to search questions viii ng hi 5.3.2 Off – balance sheet 60 ep 5.4 Limitation of the research and suggest for further research 63 w n lo References ad Appendix ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th ix ng hi ABBREVIATIONS ep Asset and Liability Management ALCO Asset and Liability Committee VCB The Bank for Foreign Trade of Vietnam w ALM n lo ad y th The State Bank of Vietnam ju SBV yi State Owned Commercial Bank pl SOCBS n Rate Sensitivity Viability n va Financial Statement ll fu FS Rate Sensitivity Asset ua RSC al RSA Small and Medium Enterprises NRS Non Rate Sensitivity VND Vietnam Dong VAS Vietnamese Accounting Standard BOM Board of Management oi m SMEs at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th x ng hi LIST OF TABLES ep w n Table 2.2 Classification of Assets and Liabilities by interest rate sensitivity The relation in Gap, Interest rate changes and net interest income lo Exposure to interest rate ad Table 2.1 Table 2.3 y th ju Table 2.4 yi Table 4.1 Distinction incremental gap and cumulative gap VCB balance sheet in 2009 pl VCB Classification of Assets and Liabilities by interest rate ua al Table 4.2 n sensitivity va VCB Gap, Relative gap, interest sensitivity ratio Table 4.4 Maturity buckt of loans and deposits from customer at n Table 4.3 ll fu oi nh Table 4.5 m 31.12.2009 VCB Reprcing mismatch in 2008, 2009 and first six months in at z 2010 z The compnent of net interest income in each maturity bucket Table 4.7 The effect f changing interest rate to NII k jm ht vb Table 4.6 om l.c gm n a Lu n va y te re ac th - 60 - ng hi liabilities is always over than meant that VCB controlled the interest rate volatility ep to achieve the positive net interest income w n lo The sensitive asset and liability are divided into incremental (1-30 days, 30-90 ad days, 91-360 days, 360+ days, over years) that 1-30 days „maturity bucket‟ always y th appears negative All interviewee agree that this phenomenon occurs due to the ju yi customers were attracted by competitive interest rate and other promotion in short pl al time (within month) and while the borrowers tend to engage loan in longer term n va to lend longer term n ua In dead, this incremental shall be rolled over in several terms so that bank can utilize ll fu oi m What is the extent of interest rate risk in Vietcombank? Whether or not such risk affect to its profit? at nh z z The bank interest income mainly generate from lending and interest expenses stem vb from fund mobilization, any changes in interest rate should effect to the net interest ht jm income desperately It was elucidated that VCB has an asset sensitive balance sheet k and maintain a consistent growth for many years The interest income was gm contributed by long term while interest expenses natured from shorter term Among l.c om of incremental, the highest interest income mainly are short term loans within year and 360+ days and interest expenses are bear by short term deposit (within n a Lu month) n va suitable judgment in driving their interest rate policy not only in each branch of the ac th whole system but also the ALCO decision The researcher also explored that the y te re All interviewee agree that the current interest rate risk measurement help them have - 61 - ng hi interest income as well as expenses changes pro rata during surging or declining ep interest rate scenario The inerest expense burden in short term has been improved w year by year while the longer term interest income has also reach to an ideal ratio n lo that 30-90 days and 90-360 days term Moreover, the interest income in longer term ad (360+ days and over years) has been reduced thanks to eliminate longer term y th credit policy ju yi pl al All interviewee agree that they keep track of the Gaps every transaction day and n ua they can manage the Gap in short term as well as long term related to lending and n va borrowing policy in short term and long term Since each branch must follow the oi m structure ll fu target from the Head Quarter so they can assure about the Gap in their balance sheet nh at 5.3 Suggestion for hedging the gap z z vb With the great achievement in the past, VCB are proud as the leader banker in ht jm Vietnam However, in the violent competition banking market, there is not sure for k the man resting on his laurels, some suggestion to hedge the gap that closely to gm improve the net interest income are needed in this circumstance om l.c n a Lu 5.3.1 Balance sheet adjustment: n va Due to its asset sensitive balance sheet, the VCB will have a prosperous net interest vary the interest sensitivity of assets by making deposit to SBV, other financial ac th institutions or loan maturity y te re income position during upward sloping phases of the interest rate cycles Bank can - 62 - ng hi In fact, VCB have managed the balance sheet well, but the negative gap in 1-30 ep days horizon can get trouble in raising deposit interest rate competition w Another thing to maintain the positive gap, the Bank must pay more attention to n lo credit quality to reduce the allowance for loans and advances customers associated ad with bad debt For many years, VCB‟s credit activities mainly focus on SOEs with y th long term finance at corporate interest rate Nowadays, it‟s time to expand the credit ju yi activities to SMEs with variable interest rate to diversify the credit products pl al n ua In the liability side, banks can also diversify the maturity of the deposit offered to n va customers or may borrow in the interbank market The fund mobilization plays a ll fu significant role in the growth target of VCB, so it is necessary to attract more oi m attention from customers as well as improve the relation with existing ones nh at In recent, head office allocate all main targets to every branch with the aim to z z enhance the status of consolidated balance sheet The ALCO has managed the vb interest rate risk with the aggressive strategy to ensure the consistent growth in net k jm ht interest income om l.c gm 5.3.2 Off-balance sheet a Lu At present, risk on derivative products are mainly conduct in foreign change n transaction, specifically the forward contracts They are managed by Vietcombank va on the basis of compliance with regulations, imposed by the SBV on foreign n applicable regulations of the SBV relating to foreign exchange position and y te re exchange management (Ordinance on Foreign Exchange in 2006) and other ac th - 63 - ng hi transactions of credit institutions that are allowed to engage in foreign exchange ep transactions as specified in Decision 1081/2002/QD-NHNN of October 2002 w However, banks have not conducted interest rate hedging yet in specific condition in n lo Vietnam Although VCB should take some risks in an acceptable management ad practice but never bet the bank on any interest rate forecasts Most of derivative y th instruments are executed internal between branches and head office complied with ju yi regulations pl al n ua In accordance with the Bank‟s regulations and policies, branches are only allowed n va to deal with customers on the basis to ensure the overall safety position of the Bank ll fu and in compliance with regulations relating to forward contracts Branches are not oi m allowed to maintain their own position in order to avoid interest rate risk and settlement risk All transactions, including forward foreign exchange transactions, nh at are managed and monitored centrally via internal accounts of Vietcombank In z z accordance with this Decision, position at branches including position of the vb forward contracts at the end of each day will be automatically squared to the Head k jm ht Office gm The BoM has applied the aggressive management to ensure the net interest income l.c SOCB as well as the undeveloped market in Vietnam om In conclusion, the using derivatives instruments are not aware by the nature of a n a Lu n va 5.4 Limitation of the research and suggest for further research te re It would be interesting to conduct the measurement of interest rate risk with others ac th analysis, risk return exposure,…) With the limitation of knowledge and time, the y models applied to joint-stock commercial banks in Vietnam (such as Duration, ratio - 64 - ng hi researcher have just survey a simplest and most common model in measuring the ep interest rate risk w In the fierce competition in interest rate market, the interest rate risk measurement n lo and management should be treated as prior in the process of developing and ad y th penetrating the international context This thesis is designed as case study, so future ju research is needed to expand and make the findings more representative yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 65 - ng hi References ep w n  lo Benton E.Gup and James W Kolari 3rd Edition – Commercial Banking ad The Management of Risk Bessis, J.,2002 Risk management in banking (2e) ju Eugene F.Brigham and Michael C Ehrhardt 10th Edition – Financial yi  y th  pl Frank Skinner – 1st published 2005 – Pricing and Hedging interest and n  ua al Management Theory and Practice va n credit risk sensitive instrument Gareth Alan Williamson, 2008 – Interest rate risk management: a case ll fu  m oi study of GBS Mutual Bank Master in Commerce (Financial Markets) of at Mahshid, D and Naji, M.R.,2003 Managing interest rate risk – a case z  nh RHODES University z ht vb study of four Swedish savings banks Master thesis Hostterminen: School of k Mishkin, Frederic S, Eakins, Stanley G (2003) - Financial market and institutions 4th edition Boston: Addison Wesley l.c Maurice D.Levi 3rd Edition – International Finance The Markets and a Lu Financial Management of Multinational Business om  gm  jm Economics and Commercial Law, Goteborg University Neil J.Salkind – 6th Edition – Exploring Research  Ross Westerfield Jaffe 7th Edition – Corporate Finance  Robert K.Yin – Case Study research Design and Methods 3rd Edition n  n va y te re ac th - 66 - ng hi  ep Santomero, Anthony M, Babel, David F (1997) – Financial Markets, Instruments and Institutions w n  Saunders, Anthony (2000) Financial institutions management – A lo modern perspective ad Van Son, Lai, Hassan, Kabor M (1997), An empirical investigation of y th  ju asset-liability management of small US commercial banks yi Website www.sbv.gov.vn  Website www.vietcombank.com.vn  Website http://asianbondsonline.adb.org  Vietcombank Annual Report 2007, 2008, 2009  Ms Phung Nguyen Hai Yen – Deputy Director of Financing and pl  n ua al n va ll fu oi m at 2010 nh Accounting Department in VCB head office, personal communication 15 Nov z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 67 - ng hi ep APPENDIX A w n lo ad ju y th BALANCE SHEET STRUCTURE & GAP CACULATION yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 68 - ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 69 - ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 70 - ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 71 - ng hi ep w n lo ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm n a Lu n va y te re ac th - 72 - ng hi APPENDIX B ep w n lo ad AN INTERVIEW WITH MS PHUNG NGUYEN HAI YENA SENIOR OFFICER IN VIETCOMBANK ALCO y th ju Conducted by personal phone call in the middle of November 2010 yi pl ua al Researcher: I was attracted by a consistent growth and remarkable net interest income of VCB recent years I would like to know what key that VCB have achieved n va n Ms Hai Yen: For more than 50 years of establishment and development, VCB has been proud as a specialized bank in servicing as well as a friendship accompany With the whole country net work (over 300 branches, local subsidiaries) employed about 10,000 skillful staff, VCB try to pursuit the consistent growth harmonized with community activities ll fu oi m at nh z z We have conducted a closed process in managing interest rate to maintain the positive growth net interest income jm ht vb k Researcher: How does the bank calculate the interest rate risk, which models are used to measure the interest rate risk? l.c gm om Ms Hai Yen: Among the existing interest rate measurement such as Maturity structure analysis, Balance sheet projection, Gap analysis, Net interest income projection, Risk-return exposure, Duration analysis, Ratio analysis we n a Lu n va choose the most common and basic method to measure the interest rate risk that is Gap Analysis This measurement has been adopted in whole system of the VCB and in charged by ALCO y te re ac th Researcher: What is the ALCO personnel and how long ALCO execute meeting as well as leave the decision? - 73 - ng hi Ms Hai Yen: Usually, ALCO hold the meeting every month with participant of Board of Director, Head of Treasury Department, Head of Accounting Department and some other involved officer Moreover, ALCO can call for ep w n extraordinary meeting in urgent interest rate chaos lo ad Researcher: In your opinion, what are the advantages and disadvantages of this y th model used? How long does your bank apply this method? ju yi pl Ms Hai Yen: Of course, this is the most common and basic model to measure the interest rate risk It‟s easy to conduct daily not only in the H.O Treasury Department as well as each branch in while system They can have a thorough grasp n ua al n va of an interest rate problem day by day, week by week and month by month This method is suitable for us at least in current and near future ll fu m oi Researcher: What is the shape of the GAPs? How the GAPs effect to the bank income and how can your bank manage the GAPs? at nh z Ms Hai Yen: Our bank has maintained the positive Gap for many years and we shall that in the future Although some time horizons have been negative such as 1-30 days or 31-90 days but we always maintain positive position to ensure the asset sensitive balance sheet About the GAP management or interest rate risk z k jm ht vb om l.c gm management, we drive it actively to preserve the net interest income in which on balance and off balance sheet adjustment have been implemented We allocate some main target to each branch about the loan turnover related to interest rate ceiling, deposit turnover concerning interest rate floor and leave them their plan a Lu n That concluded the interview Kindly give me a favor for more information about the thesis n va y te re ac th - 74 - ng hi INTERVIEW QUESTION WITH SOME BRANCHES OF VIETCOMBANK ep w n lo The interviews were conducted in Treasury and Accounting Department of some branches: An Giang, Dong Thap, Chau Doc ad y th I About the branches and the deposit and lending interest policy ju yi pl What is the deposit and lending volumes in your branch? Do you have flexible decision in deposit and lending interest rate? How long you change your interest rate policy? n ua al n va II About the Gap fu ll How long you analyze the Gap in your branch? Do you equip enough to that? What the shape of your Gap? Are they positive or negative and why? oi m at nh z III About the net interest income z k jm ht vb How long you keep track of the interest income and interest expenses? Do you actively manage your net interest income or follow the target from Head Quarter? What is componet of net interest income in your branch? How can your branch manage the GAPs? n n va What instruments that your branch use to improve the GAPs? a Lu Does your branch have an active hedging policy? om l.c gm IV Managing the GAPs y te re ac th Thank you for your answer Kindly give me a favor for more information about the thesis