(Tiểu luận) topic 5 operational analysis and valuation offinancial institutions finance company

BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC KINH TẾ QUỐC DÂN BÀI TẬP NHĨM MƠN THỊ TRƯỜNG VỐN Nhóm: Thành viên: Hà Chi Mai Mai Nhật Hà Nguyễn Phương Thảo Nguyễn Thu Thảo Triệu Đạt Table of Contents I Overview of finance companies Definition and characteristics 1.1 Definition 1.2 Characteristic 1.3 Functions .3 Types of financial companies .4 2.1 Consumer finance companies .4 2.2 Sales finance companies .4 2.3 Commercial finance companies Finance companies' operations 3.1 Finance lease 3.2 Factoring .5 3.3 Consumer lending .5 Comparisons with other financial institutions 4.1 Compare with commercial banks 4.2 Compare with securities companies 4.3 Compare with mortgage companies II Fundamental analysis and price evaluation of EVN Finance Basic information .7 1.1 Development history 1.2 Core services 1.4 Opportunities and challenges: .8 Operation analysis .8 2.1 Analysis of total assets and total capitals of EVN Finance (EVF) 2.2 Analysis of profits of EVF 10 2.3 Capital mobilization and usage of capitals .11 2.4 Analysis of financial ratios 14 Calculation of stock price and recommendation about investment 17 3.1 P/E method .17 3.2 Recommendation: .18 Topic 5: Operational Analysis and valuation of financial institutions - Finance company I Overview of finance companies Definition and characteristics 1.1 Definition A finance company is an organization that gives individuals and businesses the money they need for operating its business as well as consumption demand 1.2 Characteristic A finance firm is different from a bank, particularly, it neither accepts cash deposits from customers nor offers such services like checking accounts Finance companies provide a higher interest rate compared to banks due to the sources from which they borrow money, such as the Federal Reserve System and commercial banks Finance companies especially serve the demand of borrowers with poor credit history, and are regarded as an important part of the money lending field 1.3 Functions  Offer Unsecured Loans People with bad credit histories might get personal loans from finance organizations at a higher interest rate In fact, while requesting personal loans, people frequently go to banks Banks, on the other hand, only offer personal loans to borrowers who have a solid credit history and satisfy the requirements for the loan  Offer Secured Loans Due to the significantly lower risks compared to unsecured personal loans, finance organizations prefer to offer secured loans to borrowers The finance business has the right to take possession of the collateral and sell it at public auction if the borrower doesn't repay the loan according to the agreed-upon terms  Offer Business Loans Businesses can also get loans from finance companies When a firm wishes to buy or lease office equipment like computers or machinery, for instance, it might go to a finance company for assistance The majority of financing organizations also provide businesses with factoring services  Lend to Purchase Products Customers of a select few retailers are given loans by sales-based finance companies For instance, borrowers can obtain financing from a company that is based on sales in order to buy a refrigerator from a retailer of home appliances Types of financial companies 2.1 Consumer finance companies The first category, consumer finance companies, makes small loans to consumers (individuals), typically with terms that benefit the company and are unfavorable for the consumer Direct-loan and payday loan companies fall within this category and have a poor reputation for taking advantage of people who are struggling and in need of quick cash Consumer finance companies offer loans with higher interest rates than the market average, which are called subprime loans 2.2 Sales finance companies The second category is sales finance companies, which are also called acceptance companies These finance companies offer services for businesses in a similar way that direct-loan companies offer services for individuals, with some key differences The businesses that borrow money from sales finance companies are typically large corporations with impressive credit ratings A large corporation does not need to secure its loan with collateral In addition, these businesses often receive better interest rates than they would receive from a bank 2.3 Commercial finance companies The third category is commercial finance companies, also known as commercial credit companies These finance companies offer loans to both small and large businesses, usually to help them pay for new equipment or other significant upgrades As small businesses pose greater risks to commercial finance companies, they often have to pay higher interest rates than larger businesses These subprime loans' interest rates are usually between 0.1 percent and 0.6 percent higher than the loans given by banks to more qualified customers (prime rate loans) This may appear to be a small difference, but for finance companies, this translates into thousands of additional dollars in revenue However, finance companies are more likely to have delinquent clients than a bank, so this extra money from paying customers helps mitigate these losses Finance companies' operations 3.1 Finance lease A finance lease is a sort of asset lease that varies from other types of leases in that the risks and ownership rights of the leased item are significantly altered Financial leasing is a medium- and long-term credit activity based on a financial lease contract (with the leased assets being machinery, equipment, means of transportation, motor vehicles, etc.) between the lessor (a financial leasing company (non-banking credit institution) and the lessee (customers wishing to lease are typically businesses and economic partners) The finance leasing firm owns the leased asset, and the lessee is required to pay rent (depreciation of the leased asset) to the finance leasing company At the end of the lease period, the lessee either buys back or continues to lease the asset in accordance with the lease contract terms The lessee does not have to spend the entire amount all at once to have machinery and equipment, and the lessee does not have to mortgage assets as in other loan transactions; the lessee does not bear the risks of asset devaluation, depreciation, and so on.e parties may not cancel the contract unilaterally during the leasing period 3.2 Factoring Factoring is the activity of a factoring unit that buys back receivables from customers arising from sales or service provision transactions but pay late, allowing clients to obtain payment in advance at a fixed rate of the receivable amount When the buyer makes the payment and deducts the fees, the remaining will be refunded to the consumer The financial firm offers debt collection and credit risk insurance services in addition to funding in the form of loans to customers based on accounts receivable 3.3 Consumer lending Consumer lending is a type of credit extension given by credit organizations in which banks or financial corporations make loans to people and families to meet their purchasing needs Credit institutions can give consumer loans with or without collateral, depending on the customer, loan purpose, loan size, or loan length, among other factors Individual and household consumers now utilize consumer loans to cover costs such as buying a house, buying a car, education, health care, travel, and so on Demand for consumer loans is increasing in emerging nations In Vietnam, for example, consumer loan growth has always been greater than overall loan growth during the last ten years People can access consumer financing through a variety of channels, including commercial banks, social policy banks, finance firms, people's credit funds, and Document continues below Discover more from: Thị trường vốn fin350 Đại học Kinh tế Quố… 16 documents Go to course TC B Thị trường vốn Syllabus Thi truong… Thị trường vốn None Brasil Crisis 2014 - FIn Thị trường vốn None Group Iceland Financial Crisis Thị trường vốn 15 None Trắc nghiệm thương mại điện tử Thương mại điện tử 100% (1) Correctional Administration Criminology 96% (113) English - huhu 10 Led hiển thị 100% (3) microfinance organizations The State Bank of Vietnam has licensed 16 financial businesses to provide consumer loans Comparisons with other financial institutions 4.1 Compare with commercial banks Finance firms and commercial banks differ even though they both take the form of credit lending institutions, primarily in their activities and levels of legal capital A finance company is a non-banking organization that solely performs banking tasks like lending, financial leasing, and guaranteeing However, compared to commercial banks, the working range of financing companies is considerably smaller and more constrained For instance, financial institutions are not allowed to handle individual customers' deposits or offer payment services through their accounts Furthermore, although finance firms and commercial banks both need to maintain legal capital levels, the level of the former is substantially lower than the latter Typically, finance companies may impose a higher interest rate in order to provide services that banks are unable to, including speedy loan disbursement or specialized services 4.2 Compare with securities companies Although securities companies and finance businesses are both types of financial entities, there are certain commonalities between the two Finance companies primarily perform banking activities such as lending, financial leasing, and guaranteeing, whereas securities companies specialize in the field of securities by selling securities, brokering securities, issuing and underwriting securities, advising investment, and managing investment funds The sources of profit for these two types differ as a result of the operational variances Unlike securities businesses, which primarily benefit from commissions from selling and brokering securities, finance companies make the majority of their money from the interest rates imposed on loans 4.3 Compare with mortgage companies A financial entity called a mortgage business performs comparable key functions to a finance company Mortgage and finance firms are both credit-lending organizations, and issuing loans is their primary business Mortgage businesses and financing firms, however, are two different kinds of financial institutions The main type of loans finance companies provide is consumer loans, while that provided by mortgage companies is originating home loans The main difference between these types is in the form of loan or lending conditions Whereas collaterals are required by mortgage companies, they are not compulsory in finance companies The sources of capital used by these organisations also varied The capital utilized by finance firms comes from the individuals and organizations that comprise the companies, from deposits made by individuals and organizations with the stipulated term, and through the issuance of promissory notes with certificates of deposit and precious papers In general, although finance companies have some similarities to other kinds of financial institutions, they also have several characteristics that distinguish them from the others II Fundamental analysis and price evaluation of EVN Finance Basic information 1.1 Development history EVNFinance Joint Stock Company was officially put into operation on September 1st 2008 under the financial institution model, with the mission and strategic objectives to professionally arrange and manage capital for Vietnam Electricity After more than 15 operating years, witnessing great complicated fluctuations of the world and domestic economy, under plain direction, the Board of Management and all enthusiastic employees of EVNFinance have concertedly endeavored to execute business strategy EVNFinance has step by step achieved the expected goals in the process of shaping its image and position in Vietnam financial market, paving the wave to attain other encouraging achievement in many respects 1.2 Core services 1.2.1 Business credit To meet various capital demands of enterprises, such services are provided: Investment project loans, Loans to supplement working capital, Co-financing loans, Factoring, etc 1.2.2 Capital mobilization EVNFinance receives deposits in VND or foreign currencies (USD, EUR ) from domestic and foreign Enterprises and Organizations operating under Vietnamese law 1.2.3 Easy Credit consumer loans Easy Credit provides consumer cash loans and online unsecured loans with preferential interest rates and transparency in costs 1.2.4 Loans for investment in sky-voltage power projects Meet the demand for additional capital to invest in rooftop solar power projects 1.3 Goals After more than 11 operating years, EVNFinace has grown in both quantity and quality with its reputation and position increasingly recognized in the domestic and foreign financial markets EVNFinace strives to become a modern financial institution towards integration in scale, quality and efficiency, and sustainable growth To bring the highest benefits to customers and shareholders, with the mission "The fulcrum Reliable finance, always accompanying the development of the electricity industry and customers." 1.4 Opportunities and challenges: EVF is one of the two companies in the consumer finance industry presenting on the listed floor, along with VietCredit (TIN) But both of these companies have a much lower consumer credit market share than the industry leaders, currently accounting for 80% of the market pie which are Fe Credit, HD SAISON and Home Credit Based on the capital scale, EVF's total assets are quite large compared to other companies, except for Fe Credit, EVF with its major shareholder, Vietnam Electricity Group (EVN), seems to have a favorable consumer group in the electricity field, but have not really exploited it effectively If there is no separate between "segmental" and "general" operations, businesses like EVF, even with large scale and assets, may find it difficult to thrive, especially with the growing market, when increasing competitive force appears from SMBC at FeCredit; Krungsi at SHB Finance; Mirae Asset Finance, Shinsei Bank at MB Shinsei… Operation analysis 2.1 Analysis of total assets and total capitals of EVN Finance (EVF) Table Analysis of total assets of EVN Finance (EVF) Source: Financial statements of EVF In general, the total assets of EVF has dramatically increased over the years, from 29 billions to 32 billions between 2021 and 2022, then reach 42.2 billions at the end of 2022 It can be seen that the figure of EVF’s total assets witnessed a growth of roughly 46.5% during the period We can conclude that comparing to other financial institutions, EVF has done a wonderful job in generating profit, which shows its potential development despite the COVID-19 pandemic From the graph above, during the period, the amount of cash and other equivalents skyrocketed by 166.2% in the first year, then sharply decreased by 50.5% in the next year This is due to the fact that EVN had to spend more cash on interest payment for other credit instituions on its deposits and loans, as the amount of that increased by 25.02% between 2021 and 2022 Long-term investment also shows the same figure, as it fluctuated over the two-year period The only thing which rapidly declined was the net value of investing securities, as the company has sold more and more securities throughout the year In addition, the other figures show a sharp increase The porportion taking up the most part in EVF’s assets is loans to customer, which shares around 50% in all the years It also doubled, from 12 billions to 24 billion just from 2020 to 2022 Table Analysis of total equity of EVN Finance (EVF) Source: Financial statements of EVF In general, both total liabilities and total equity went up at a significant rate While the amount of total liabilities skyrocketed in 2022, the total equity grew at a more constant pace, which is around 9% every year Like most financial institutions, most of EVF’s capital came from borrowings and debts, contributing nearly 90% in all three years As can be seen from the table above, the only figure which experienced a decline was EVF’s deposits from customers The amount of that dropped down for nearly 40% in just years, from 6.7 billions to 4.1 billions One more noticeable 10 data was the issuance of valuable papers from EVF, as it achieved billions in 2021 while standing at only 500 thousands in the previous year The number continued to outburst during the year of 2022, increasing by 70% and reached 10.3 billions, which is an appreciable number to EVF This was due to the fact that EVF’s capital mobilization has been focused and grew strongly on issuing valuable papers 2.2 Analysis of profits of EVF Profit has always been a top priority for many businesses To ensure growth and competitiveness with other financial institutions, EVF must operate with great efficiency and generate a significant amount of profit In this section, we will review EVF's income statements for the last three years and discuss its recent revenue, cost, and profit trends Table 3: Overview of EVN Finance’s income statement Source: Financial statements of EVF With EVF’s main business, which is lending to customers, the practice has consistently contributed significantly to the performance of EVF EVN Finance recorded a slight increase in net interest income year over year In 2022, net interest income reached VND 919,202 million, up 16,93% compared to 2021 and 29% compared to 2020 However, provision for credit losses has increased and decreased continuously Specifically, in 2020, provision for credit losses reached VND 317,670 million This number increased by 59,85% in 2021 and decreased by 28.81% in 2022, reaching VND 361,482 million Profit after tax still recorded an increasing trend year by year In 2020, EVN Finance's after-tax profit reached VND 228,409 million This number increased to nearly 45% in 2021 and increased by 10% in 2022, reaching nearly VND 370 million Overall, considering the fact that the first two-year had seen major negative impacts from 11 the Covid-19 pandemic, it is still a positive development by EVF that it had managed to increase its profit 2.3 Capital mobilization and usage of capitals 45,5% of the capital in 2022 came from deposits and loans from credit institutions as well as deposits from customers, as indicated and shown the capital analysis This is a sizable and significant source of funding for the business's operations The details of these sources are displayed in the table below Table 4: Capitals sources of EVN Finance through years Source: Financial statements of EVF Overall, we can observe that from VND 19,738,382 million in 2020 to just VND 16,005,196 million in 2021, less capital was raised through deposits and loans This is because, in 2021, the corporation might undergo a capital reorganization that would prioritize the issuance of valued paper over deposits There were some variations in the percentage of loans and deposits between the years 2020 and 2022 The table shows that although deposits from credit institutions contributed more than 23% and 15% in 2021 and 2022, respectively, the percentage of deposits in 2022 increased significantly to 45,67% Conversely, credit institution loans dropped to 32,87% in 2022 from 42,13% and 56,63% in 2020 and 2021, respectively As far as consumer deposits are concerned, 2022 was less than the previous two years As of 2022, non-term deposits only accounted for 0.03% of the capital source, down from 0.04% in 2021 This suggests that non-term deposits make up a relatively modest portion of the capital source A wonderful source of capital with low interest charges and a better profit margin, CASA is something that EVF should consider attracting more of by developing policies and plans In 2022, customer term deposits also declined, accounting for only 21,51% of total deposits, a fall of 6,8% from 2021 figures 12 We also need to consider the issuance of valuable papers, notably bonds and certificates of deposit, as another means of raising cash It is evident from the figures in the following figure that EVF was able to raise a sizeable sum of money in 2022 from the liabilities Figure 1: Security structure of EVN finance The table indicates that, compared to 2020 and 2021, EVF undoubtedly issued a large quantity of valuable documents with a higher value The percentage increased to 24,30% in 2022 from just 1,74% and 18,71% in 2020 and 2021, respectively Even the structure of the bonds issued and CODs may be seen to be diversified In 2020, the COD with a length of one to five years was valued at VND 500,000 million, while the COD under one year was worth zero But in 2021, EVF issued CODs of both kinds, with a term of one to five years and VND 4,560,000 million for CODs under a year With VND 100,000 million for 1-to-5year bonds and VND 1,725,000 million for over-5-year bonds, EVF issued bonds in addition to COD in 2022 to draw in additional capital However, the most popular bond was the 1-to-5-year COD, valued at VND 8,429,000 million Table 6: EVN Finance's usage of capitals 13 Source: Financial statements of EVF EVF's primary operating activities include deposits and loans to institutions There were some significant changes to the capital usage structure in these activities during the three-year period between 2020 and 2022 The table shows that while term deposits increased significantly to VND 8,279,388 VND in 2022, non-term deposits decreased by 34,47% Surprisingly, in 2022 there were no loans made to credit institutions Liquidity is probably more appealing to EVF than the potential long-term interest profit from putting money in Additionally, the company might rely more on these investment channels than on loans to credit institutions because of the high interest rate that was in place at the time 14 Figure 2: Structure of loans to customers (2020-2022) Loans to customers is the largest channel that the flow of capital is poured into EVNFinance is particularly interested in businesses in the fields of clean energy and renewable energy Therefore, the company has always improved its access to international credit funds to seek capital for domestic small and medium enterprises, contributing to promoting the development of clean energy and renewable energy With its financial capacity and reputation recognized by the market for many years, EVNFinance has directly exchanged and worked with foreign partners such as Symbiotics, Proparco, GCPF, etc And the end result was loans totaling VND 20,809,475 million made in 2022 through those investment trusts and fund sponsors EVNFinance has had to go through a fairly rigorous evaluation process and long-term talks to meet the criteria and requirements set by international standards in order to get funding from international organizations such as the ones mentioned above 2.4 Analysis of financial ratios *Total asset turnover: Used to measure the efficiency of financial firms in using assets 15 Table 5: Total asset turnover ratio (Unit: Million VND, times) Figure 3: Total Asset Turnover 2020-2022 The figure depicts the declining trend in EVF's total asset turnover following a rise to roughly 0.03 in 2021, indicating that the company is not properly utilizing its assets Furthermore, the particular number of roughly 0.02 times was still a modest level, indicating ineffective asset management *Return on sales (ROS): Used to monitor the profitability of the financial institution: 16 Table 6: Return on sales (ROS) 2022 Figure 4: Return On Sales (ROS) 2020- As seen in the figures, there is a modest decline of roughly 2% in ROS from 2020 to 2021, which might be attributed to the COVID-19 pandemic, when companies were closed and demand for financial support, which is one of EVF's main operational activities, reduced Vietnam's economy has recovered since 2021-2022, thus the figure has begun to rise steadily (9%) * Total-Debt-to-Total-Assets Ratio (TD/TA): Used to measure the autonomy of the enterprise: Table 7: Total-Debt-to-Total-Assets Ratio (TD/TA) of EVF Figure 5: Total-Debt-to-Total-Assets (TD/TA) ratio In the previous three years, EVF's TD/TA ratio has been stable at 88% total debts/total assets With this ratio reaching 88%, we can see that this proportion was not ideal and was rather high in comparison to other organizations This is usual for a financial company, as the corporations must be heavily in debt in order to have enough cash for their clients to lend and make back the interest, which is their main business * Return on assets (ROA): Used to measure profitability per unit of assets: 17 Table 8: ROA of EVN Finance Figure 6: Return on Assets (ROA) 2020-2022 During the three-year period beginning in 2020, the ratio of return on assets increased significantly before dropping down to 0.87% With a ROA ratio ranging from 0.8 to 1.02%, our estimate of EVF's capacity to generate interest based on assets was moderate, compared to a commercial bank's average ROA range of 0.16 to 2.5% *Return on Equity (ROE) used to measure the profitability per dollar of capital of the financial institution: Table 9: ROE of EVN Finance Figure 7: Return on Equity (ROE) 2020-2022 18 EVF took a significant stride forward in 2021 when its ROE improved by more than 2% With the ROE greater than the ROA, we can see that EVF is employing leverage with a favorable effect, which was turning money from the shareholder to profit, with an average of every 100 dong from shareholder's equity generating a profit of dong Calculation of stock price and recommendation about investment 3.1 P/E method In evaluation of EVF stock, we used the P/E method, which compares the firm’s P/E and compares that number to the P/E of the sector Using the data from finance.vietstock.vn, the EPS of EVF on October 07, 2023, was 1,044 per share Using market value price and EPS, we will have the formula to evaluate the EPS of EVF: Price Earnings Ratio = Market value price per shareEarning per share At the price on October 07, 2023 of VND 11,600/share, EVF is trading at a P/E ratio:  Price Earnings Ratio = 11,600/1,044 = 11.11 The financial service sector is trading at an average P/E of 10.96 and P/B of 0.91  If as of October 07, 2023, EVF's EPS is VND 1,044/share, then the fair value of EVF is 1,044 x 10.96 = 11,442 VND/share 3.2 Compare with the equivalent company - Vietcredit: 3.2.2 Introduction of Vietcredit: Cement Joint Stock Finance Company has applied to change its establishment and operation license On June 18, 2018, the State Bank of Vietnam (SBV) approved and accordingly, the company changed its name to VietCredit Finance Joint Stock Company The company provides financial activities such as: capital mobilization, credit extension, etc 3.2.3 Comparisons between TIN and EVF 19