A swot analysis of vietnamese commercial banks,graduation thesis

Graduation Thesis Banking Academy BANKING ACADEMY Foreign Language Faculty - GRADUATION THESIS A SWOT ANALYSIS OF VIETNAMESE COMMERCIAL BANKS Student : Pham Van Anh Class : ATCC_K13 Supervisor : Ngo Tung Anh ( MA) Hanoi, 2014 Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy TABLE OF CONTENTS Page LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS A INTRODUCTION 1.1 Rationale 1.2 Aims of the study 1.3 Methodologies of the study 1.4 The scope of the study 1.5 The organization of the study B DEVELOPMENTCHAPTER 1: INTRODUCTION CHAPTER 1: THE THEORETICAL FRAMEWORK 1.1 Commercial banks 1.2 SWOT analysis 1.3 Summary CHAPTER 2: SWOT ANALYSIS OF VIETNAMESE COMMERCIAL BANKS Overview of Vietnam’s banking system SWOT analysis of Vietnamese commercial banks 2.1 Strengths Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy 2.1.1 Rapidly widened branch network and significantly growing charter capital 2.1.2 A large number of traditional customers 2.1.3 Increasingly modern technology 2.1.4 Lower banking service fees 2.2 Weaknesses 2.2.1 Weak financial capacity 2.2.2 Narrow range of products and services 2.2.3 Inferior quality of human resource in accordance with international standards 2.3 Opportunities 2.3.1 The concern of government on banking system’s activities 2.3.2 Market potentials 2.3.3 Vietnam’s WTO joining 2.4 Threats 2.4.1 Decreasing aggregate demand – an obstacle to capital absorption 2.4.2.Slow structural reformation of state-owned enterprises (SOEs), producing negative effects on banking business 2.4.3 Foreign banks’ penetration of Vietnam’s market 2.4.4 Inadequate legal environment 2.5 Summary CHAPTER 3: RECOMMENDATIONS 3.1 To the State Bank of Vietnam 3.2 To Vietnamese commercial banks Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy 3.3 Summary C CONCLUSION BIBILOGRAPHIES Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy LIST OF TABLES TABLE 1: The number of branches and transaction offices of some Vietnamese commercial banks in 2005-2013 TABLE 2: Software system applied in Vietnamese commercial banks TABLE 3: Service fees and charges of transactions conducted to individual customers of Vietcombank and Standard Chartered Bank TABLE 4: L/C fees of Vietcombank and Standard Chartered Bank TABLE 5: ROE ratio of some banking systems in 2013 TABLE 6: Own equity of some national and regional commercial banks TABLE 7: The number of correspondent bank of some Vietnamese commercial banks TABLE 8: Foreign stakes in Vietnamese commercial banks TABLE 9: SWOT analysis of Vietnamese commercial banks Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy LIST OF FIGURES FIGURE 1: The CAR of financial institutions in Vietnam as of 31/01/2014 FIGURE 2: The ROE ratio of financial institutions in Vietnam as of 31/01/2014 FIGURE 3: The Non-performing loan ratio of Vietnamese commercial banks at 31/12/2012 and 30/9/2013 FIGURE 4: The ratio of short-term capital source to be used for medium-term and long-term loan FIGURE 5: Structure of Vietnam’s population by age FIGURE 6: Customer type – lending of Vietnamese commercial bank in 2013 Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy LIST OF ABBREVIATIONS SWOT : Strengths, Weaknesses, Opportunities and Threats WTO : World Trade Organization SBV : the State Bank of Vietnam GSO : General Statistics Office of Vietnam E-banking : Electronic banking VNBA : Vietnam Banks Association GDP : Gross Domestic Product CAR : Capital Adequacy Ratio ROE : Returns On Equity NPL : Non-performing Loan CB : Commercial Bank L/C : Letter of Credit Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy A INTRODUCTION 1.1 Rationale The banking system is considered the backbone of any economy all over the world A well-developed banking system is essential for the economic growth Over the past ten years, Vietnam’s banking system has rapidly developed, which makes great contributions to the country’s economic development However, it is undeniable that in comparison with commercial banks in other countries around the world, the commercial banks in Vietnam still suffer from many drawbacks that should be overcome Vietnam officially became WTO’s 150th member since 11 January 2007, which not only gives the Vietnam’s economy in general and the banking sector in particular enormous advantages but also imposes serious challenges That the banking system has been more and more widely opened with the regulations being loosened and the authorities committed to further liberalization creates favorable conditions for foreign banks to expand business activities in Vietnam Foreign banks have more advantages than Vietnam’s ones in terms of capital, technology, management skills and especially excellent international banking products and services Moreover, along with international services, overseas banks also offer highly competitive domestic products and services, which helps them to attract more customers and increase their market share This situation requires Vietnamese commercial banks to work out long-term strategies to beat off this intense competition Therefore, the SWOT analysis about the business environment of Vietnamese commercial banks is very essential; it is the foundation for domestic banks to develop their potentials and overcome the shortcomings in order to become modern banks Pham Van Anh ATC C – K13 Graduation Thesis Banking Academy 1.2 Aims of the study The study primarily aims to identify the strengths, weaknesses, opportunities and threats of the banking system in Vietnam The analysis and the findings in the study will make practical contributions to the strategic planning work of Vietnamese commercial banks 1.3 Methodologies of the study For the accomplishment of this study, the following methodologies are employed - Statistical method: Secondary data which is collected from the published reports, articles, and documents relevant to Vietnam’s commercial banks, which are available online or in print is generalized to tables and charts - Analytical method: A SWOT analysis is used to evaluate the business environment of Vietnamese commercial banks - Comparative method: Based on the data collected, the researcher compares the figures for banking activities of Vietnam’s banks with those of foreign banks 1.4 The scope of the study The thesis covers the real situation of Vietnamese commercial banks’ operation in terms of strengths, weaknesses, opportunities and threats 1.5 The organization of the study The thesis is divided into three main chapters: - Chapter : Introduction - Chapter 2: Theoretical framework - Chapter 3: SWOT analysis of Vietnamese Commercial Banks Pham Van Anh ATC C – K13 Graduation Thesis - Banking Academy Chapter 4: Recommendations to improve the Vietnam’s banking system B DEVELOPMENT Pham Van Anh 10 ATC C – K13 Graduation Thesis Banking Academy International economic integration has given a boost to the innovation and structural reformation of Vietnam’s banking system, enhancing the state management capacity in banking sector, and improving the thinking of the legislators to promulgate more compatible laws which meet the requirements of integration  Learn from foreign banks International integration helps Vietnamese commercial banks gain beneficial experience from foreign banks’ operation This also requires domestic banks to complete themselves to draw customers’ attention 2.4 Threats 2.4.1 Decreased aggregate demand – an obstacle to capital absorption The economy’s aggregate demand tends to decrease, which makes it difficult for Vietnamese commercial banks to extent credits as well as improve the loan quality Despite the fact of positive development of credit growth from the second quarter of 2013 onwards, it seems to be hard to fulfill the objectives established before due to the weak capital absorption capacity that hinders the smooth circulation of capital flows in spite of sharply decreased interest rate This unfulfilled objective of credit growth is because of the backlog of non-performing loan resulting from the limited loan repayment ability of enterprises, which makes banks more cautious when offering loans Besides, it is also originated from the excess supply that puts enterprises in difficult situation leading to the declining business credit demand In fact, the profit of listed rubber companies in the third quarter of 2013 decreased by 30%, that of the metal and mining sector also dramatically felled by nearly 60%, and the coal and steel industry even got huge losses (Saigon Economic Times, 2013) Pham Van Anh 38 ATC C – K13 Graduation Thesis Banking Academy Therefore, in spite of lower interest rate and more incentive packages designed, it is challenging to extent credits and enhance loan quality 2.4.2 Slow structural reformation of state-owned enterprises (SOEs), producing negative effects on banking business In recent time, Vietnamese commercial banks have concentrated to investments in the poorly credit rated state-owned enterprises in weakly competitive sectors 16% of credit outstanding was allocated to state-owned enterprises (KPMG, 2013) This poses a serious risk to these commercial banks because if enterprises make losses, banks will have difficulty in loan collection FIGURE : Customer type – lending of Vietnamese commercial bank in 2013 Customer type - lending 6% State-owned enterprise 16% Coporate 28% Foreign invested enterprise Retail 2% 48% Others As of 31 December 2013 (Source : Banking survey of KPMG, 2013) Pham Van Anh 39 ATC C – K13 Graduation Thesis Banking Academy Despite being allocated abundant financial resources, state-owned enterprises not run business as well as private or foreign invested ones Therefore, economic restructuring via the equitization of state-owned enterprises is an urgent task in the context of recent economic recession Over the past two years, the equitization process has taken place slowly with the number of state-owned enterprises equitized of 13, reaching 14% of the planned figure By July 2013, this figure rose by 16, which reflected the shortcomings in the restructure policies of Vietnam’s government ( VNBA, 2013) The state-owned enterprises, therefore, not only not play the role of spurring the economic growth but also produce negative impacts on Vietnamese commercial banks’ business because these enterprises are their significant customer group who absorbs the capital in the economy and create wealth for society As a result, it is crucial to untie the knot named “state-owned enterprises” to enhance banks’ credit performance 2.4.3 Foreign banks’ penetration of Vietnam’s market The opening of the economy leads to the increase of foreign banks which have strengths of financial capacity, technology and management skills As of 30 June 2013, there was joint venture banks, five 100% foreign capital banks, 50 foreign bank branches and 50 representative of foreign banks in Vietnam ( SBV, 2013), which places domestic banks under intense pressures Overseas banks operating in Vietnam are well-known brand in the international financial market like Citibank, HSBC, ANZ and so on  Foreign has gradually got into the market of retail banking services Vietnam is a potential market, which has drawn the attention of foreign banks Therefore, their first strategy is dominating the retail banking market that has not been fully exploited by domestic banks Pham Van Anh 40 ATC C – K13 Graduation Thesis Banking Academy  In order to prepare for this strategy, ANZ Vietnam has introduced a new service called “Banking services on the spot” This is a completely free service channel satisfying the demands of the customers who not have enough time to go to the bank branch for making transactions This has been firstly launched in Hanoi and Ho Chi Minh City and will be provided to other localities in the near future Besides, in the upcoming time, ANZ will concentrate on the credit card and internet banking markets, which they considered potential  With regard to HSBC has also been permitted by the State Bank of Vietnam to provide the deposit service combined with currency options so as to encourage commercial banks and corporations to apply the derivative instruments aiming at minimizing operational and exchange rate risk as well as diversifying banking services Performing this service, the bank and customers make a deal about an ordinary depository transaction combing with an option contract  Regarding Standard Chartered, despite the current economic difficulties of Vietnam, this bank still believes in the medium-term and long-term vision of Vietnam’s market in general and the banking sector in particular, especially the retail banking market Therefore, Standard Chartered tends to provide retail banking services for individual customers and small and medium enterprises with an international network and high quality services Recently, Standard Chartered has so far succeeded in developing the chain of asset management services and the program of multiple foreign currencies deposit  Furthermore, many foreign “giants” have already entered Vietnam banking market DBS Bank of Singapore opened a representative office in Hanoi in July 2008; Commonwealth Bank of Australia has established a representative office in Vietnam for 14 years, and until now it has officially opened its branch in Ho Chi Minh City Pham Van Anh 41 ATC C – K13 Graduation Thesis Banking Academy  Other overseas banks namely ING (Netherlands), Barclays (UK), Sumitomo Mitsui Financial Group (Japan), Deutsche Bank ( Germany) , Societe Generale ( France) and Maybank ( Malaysia) still pay special attention to Vietnam’s market in spite of insignificant presence in this country  At the same time, foreign banks have bought shares of Vietnamese commercial banks Not until the Vietnam’s economy has definitely been opened, many external banks have taken part in Vietnamese financial market by buying domestic banks’ shares, thereby penetrating deeply and firmly into Vietnam’s market Table : Foreign stakes in Vietnamese commercial banks Vietnamese bank Foreign bank Techcombank HSBC SeABank VP Bank ACB AB Bank Eximbank Habubank Southern bank Pham Van Anh Societe Generale S.A (France ) OCBC (Singapore) Standard Chartered Bank Maybank (Malaysia) Sumitomo Mitsui (Japan) Deutsche Bank (Germany) UOB (Singapore) 42 Total Total assets shares ( trillion dong) 20% 51,8 15% 19,6 15% 20,4 15% 103,0 15% 15,6 15% 44,4 10% 16,5 10% 17,6 ATC C – K13 Graduation Thesis OCB Sacombank Banking Academy BNP Paris (France ) ANZ Bank ( Australia and Newzealand) 10% 10,7 10% 75,0 ( Source: https://www.vietinbank.vn/web/home/vn/research/09/nctd090224.html ) Although having modest market shares ( 10% - 15%) ( SBV, 2012), overseas banks have had an important position in Vietnam’s financial system This is because of their strong financial capacity, innovative banking management experience and modern technologies They have supplied a noticeable financial source to Vietnamese financial market Thus, Vietnamese financial experts suppose that there is a highly competitive pressure put on Vietnamese commercial banks by the overseas peers, which poses a threat to domestic banks This requires them to enhance the operation, otherwise their market shares can be easily taken over by the foreign competitors 2.4.4 Inadequate legal environment “Legal system of Vietnam is still inadequate in many regards with overlapping regulations and laws, which might cause unexpected risks for financial institutions” This is the viewpoint concurred by most of attenders in the seminar on “Legal obstacles in the activities of credit institutions” held on July 2013 Currently, Vietnamese credit institutions must comply with too many regulations of other sectors because banking operation involves in almost other fields and industries However, the legal system remains overlapping and contradictory with slow instructions of relevant authorities Meanwhile, banks need to clarify the legal problems to avoid risk and figure out solutions as soon as possible because the banking activities take place daily Some of legal problems are operating license, interest rates, debt swaps, collaterals, credit limit and so on Pham Van Anh 43 ATC C – K13 Graduation Thesis Banking Academy The typical legal issue that set obstacles to Vietnamese commercial banks’ activities is the disposal of collateral Rising non-performing loans in recent years has become a barrier to the economic growth, but the process of tackling non-performing loans is impeded by the inadequacies in regulations related to the disposal of collateral, especially real estates The Civil Code promulgated in 2005 and Circular 163 issued in 2006 seem to provide adequate legal basis for banks to handle pledged assets, removing non-performing loans by the mechanism of coordinating with customers or using collateral to replace repayment obligation However, in the actual implementation of collateral disposal, every plan has its shortcomings and difficulties For example, the appropriate author does not permit to transfer the ownership of real estate without the authorization of the property owner, which means that banks are not allow to dispose collateral unilaterally As a result, banks can dispose collateral only when they have the coordination of the asset owners who usually give evasive answer with thousands of reasons More noticeably, even when banks and asset owners have made an agreement of asset transference replacing the repayment obligation, the appropriate authorities keep refusing to conduct the transaction of ownership transference due to the lack of instructions in this administrative procedure Up to now, there has merely been the procedure of transferring, selling, donating and inheriting, but the procedures related to debt assignment or replacement of repayment obligation have not been introduced yet Thus, despite clear regulations of secured transactions, there is still a shortage of the connection with the laws on property management, which slows down the process of handling pledged real estates in banking sector 2.5 Summary Pham Van Anh 44 ATC C – K13 Graduation Thesis Banking Academy With the application of SWOT analysis, the thesis has highlighted the strengths and limitations, as well as the chances and challenges involved in the operation of Vietnamese commercial banks While the long-term relationship with a large number of traditional customers is the most outstanding advantage, the weak financial capacity constrains the development of commercial banks in Vietnam Whereas the joining of Vietnam into the World Trade Organization could bring lifetime opportunities, the increasing penetration of foreign competitors poses Vietnamese commercial banks to tough challenges In short, the SWOT analysis of Vietnamese commercial banks can be summarized as follows: TABLE 9: SWOT analysis of Vietnamese commercial banks Strengths Weaknesses Rapid widened branch network and 1.Weak financial capacity significantly growing charter capital A large number of traditional customers Narrow range of products and services Inferior quality of human resource in Increasingly modern technology accordance with international standards Low banking service fees Opportunities Threats The concern of government on banking Decreasing aggregate demand – an system’s activities obstacle to capital absorption Market potentials Slow structural reformation of state3 Vietnam’s WTO joining owned enterprises (SOEs), producing negative effects on banking business Foreign banks’ penetration of Vietnam’s market Inadequate legal environment Pham Van Anh 45 ATC C – K13 Graduation Thesis Banking Academy The above findings on SWOT analysis could help banks understand the strengths and limitations, as well as the chances and challenges in their operation, thereby conserving the strengths, minimizing the weaknesses, taking full advantage of golden opportunities and fighting off potential threats Pham Van Anh 46 ATC C – K13 Graduation Thesis Banking Academy Chapter 3: Recommendations Based on the above-mentioned strengths, weaknesses, opportunities and threats related to Vietnamese commercial banks, this chapter is to make some recommendations to the State Bank of Vietnam, which performs an essential role in domestic banks’ development, as well as commercial banks themselves in order that they can better the banking system 3.1 To the State Bank of Vietnam ( SBV)  It is time for SBV to strengthen the supervision to ensure the safety of the whole banking system and further promote public confidence, enhance brand of “ high quality Vietnamese goods” and “reasonable price”, intensify the internal audit and control aiming at monitor and prevent errors in each bank The regulations of supervision need researching and issuing in accordance with international standards  The legal system in monetary and banking should be perfected in order to create a favorable legal environment for banking operation Regarding the overlapping, contradictory, incompatible or expired regulations, the State bank need detect, handle or recommend to handle timely in an effort to ensure the legality, conformity, unity and synchronization of the legal system of banking sector  SBV needs to be more proactive and flexible when conducting monetary policies Based on the fact and the forecast of the socio-economic situation and national and international banking activities, the SBV should flexibly use the instruments of monetary policies aiming at the steady liquidity, exchange rate stability and economic promotion Pham Van Anh 47 ATC C – K13 Graduation Thesis Banking Academy  It is also important to regularly monitor banks’ credit growth and resolutely direct banks to full accounting performance of provisions for risks and to tackle risks as regulated  Moreover, SBV needs closely observe the happenings in the foreign exchange market in order to adjust the exchange rate complying with the macro-economic targets, aiming at stabilizing the value of Vietnamese currency and spurring export  It is necessary to merge or bankrupt the seriously weak commercial banks which remain a high rate of non-performing loans, a low level of liquidity and a weak financial capacity However, before merging or bankrupting those banks, SBV should prudentially handle the accounts receivable and accounts payable by hiring an independent audit firm to pricing the assets for equity contribution ( for merged banks) or to liquidate the bank’ assets to cope with accounts payable ( for bankrupted banks) 3.2 To Vietnamese commercial banks  Enhancing financial capacity Vietnamese commercial banks should actively improve their financial capacity in terms of own capital, asset quality and profitability In order to that, banks need gradually increase their charter capital and design a plan of capital supplement that is compatible with the actual circumstances in Vietnam Besides, it is crucial to set aside full provisions against risks so as to make banks’ financial capacity and risk-weighted assets clear Furthermore, when making loans or new investments, Vietnamese commercial banks must strictly comply with the procedures regulated Pham Van Anh 48 ATC C – K13 Graduation Thesis Banking Academy  Improving the effectiveness of the administrative work The management qualification in Vietnamese commercial banks is currently inferior to that in the developed countries’ ones, which means that domestic banks need to enhance the management skills in all fields of operation, namely organization, human resource, asset and loan management, liquidity risk management, exchange rate risk and interest rate management A high qualification of management enables financial institutions operate safely and effectively  Restructuring the operating network After permitted to extent the operating network, many Vietnamese commercial banks have rapidly widened their branch system without cautious calculation of the management ability and human resource quality Some banks have established enormous branches and transaction offices in the same locality, especially in major cities like Hanoi and Ho Chi Minh City, which causes an unhealthy internal competition aiming at vying for customers This has sometimes made the money market very chaotic Therefore, the central bank has required commercial banks to restructure the operating network in order to avoid the overlapping competition inside the banks However, banks need to be cautious when restructuring the network; it is necessary to examine specific cases to figure out the solutions In some cases, they should merge or dissolve surplus branches, but in other cases there should be a change in leading positions for more effective operation in order to avoid the disturbance in the human resource organization as well as customers’ confusion  Enhancing the human resource quality Pham Van Anh 49 ATC C – K13 Graduation Thesis Banking Academy Human resource is one of the key factors leading to the development of bank system Employees with limited qualification and ethics are an obstacle in the developing path of banks Therefore, the State Bank of Vietnam and commercial banks should pay special attention to the personnel issue from the recruitment, training to the appointment in order to build a team of qualified staff who have professional ethics It is important to create favorable environment for employees so that they are trained professionally, having satisfied compensations, which will improve the quality of human resource  Continuing the innovation of banking technology Although the application of new technology has been improved over the past few years, there is still a gap between Vietnamese commercial banks’ technology and that of foreign counterparts Therefore, domestic banks need to keep innovating technology aiming at further developing modern services, satisfying higher demands of customers 3.3 Summary With an aim to support the growth of Vietnam’s banking system, this chapter offers recommendations to both the State Bank of Vietnam and Vietnamese commercial banks to enhance the efficiency of the banking operation It is highly recommended that the Vietnam’s central bank should strengthen their supervision on the banking system, enhance the legal environment for banking operation, flexibly conduct monetary policies, and merge or bankrupt seriously weak commercial banks Regarding Vietnamese commercial banks, it is time for them to enhance the financial capacity, improve the effectiveness of the administrative work, restructure the operating network, better the human resource quality, and continue technology innovation to further promote their competitive ability in the international arena Pham Van Anh 50 ATC C – K13 Graduation Thesis Banking Academy C CONCLUSION In the context of economic integration, the role of Vietnam’s banking system has been increasingly affirmed Vietnamese commercial banks have made significant contributions to the stability and sustainable development of Vietnam’s economy The initial aims of the thesis is to identify the strengths, weaknesses, opportunities and threats of the banking system in Vietnam The analysis and the findings in the study will make practical contributions to the strategic planning work of Vietnamese commercial banks After doing research work, collecting information and data from various sources and analyzing, the thesis has completed some following tasks: Firstly, in the chapter of theoretical background, the thesis has clearly clarified the definition of commercial bank and its role in the economic growth as well as the SWOT analysis and its contents Secondly, based on the overview of Vietnam’s banking system and the SWOT analysis method, the thesis has pointed out some important assessments of the strengths and weaknesses, as well as opportunities and threats relating to Vietnamese commercial banks’ operation Finally, the some recommendations have been made to the State Bank of Vietnam and Vietnamese commercial banks as well so that they can promptly take specific actions to enhance the effectiveness of the whole banking system’s operation In general, the thesis has covered the real situation of Vietnamese commercial banks in terms of their strengths, weaknesses, opportunities and challenges so that readers have an overall view of Vietnam’s banking system However, there are lots of issues relating these four categories in the operation of Vietnamese commercial banks which require further research work Within a short Pham Van Anh 51 ATC C – K13 Graduation Thesis Banking Academy time and with limited knowledge of banking sector, the author could not fulfill all the relating issues and inevitably have shortcomings in doing the thesis Thus, the author hopes to receive feedbacks and advice from readers to complete this thesis Pham Van Anh 52 ATC C – K13