Corporate credit analysis at joint stock commercial bank for investment and development of vietnam thang long branch,graduation thesis

The significance of the study

Commercial banks play a crucial role in the economy and financial markets by fostering economic health The growth of commercial banks serves as a key indicator of economic vitality, with a thriving banking sector reflecting a robust economy and a struggling one suggesting economic challenges.

Lending is central to commercial banking, accounting for 65% to 80% of total bank profits Banks prioritize credit quality by investing in human resources and technology to mitigate risks associated with lending While lending can be lucrative, it also poses significant risks, such as credit risk from non-paying customers and external business environment challenges, which can lead to capital erosion.

Enhancing credit quality is crucial for financial institutions, yet it poses significant challenges This study focuses on the critical stage of credit analysis for corporate customers, where banks evaluate business plans and investment projects to make informed credit decisions The research specifically examines "Corporate Credit Analysis at Joint Stock Commercial Bank for Investment and Development of Vietnam – Thang Long Branch," highlighting its practical and theoretical implications.

Aims and objectives of the study

Corporate credit analysis is crucial for commercial banks, yet many remain unclear about its processes This research aims to clarify the theoretical framework surrounding corporate credit analysis for commercial loan requests Additionally, the study evaluates the current credit analysis operations at BIDV JSC – Thang Long branch, offering a comprehensive assessment of its strengths and weaknesses, along with insights into the underlying reasons for these findings.

Graduation thesis Foreign Language Faculty

2 to limitations found Finally, the researcher offers solutions to enhance credit analysis operation at BIDV JSC – Thang Long branch and proposes possible recommendations to authorities.

Scope and subject of the study

This research analyzes corporate credit operations at BIDV JSC Thang Long in Hanoi over a four-year period from 2009 to 2012 This timeframe was selected as it provides ample data for comprehensive analysis, with information from 2009 to 2012 being more current and accessible compared to earlier years Additionally, the reliability and availability of sources during this period enhance the quality of the research findings.

Research methodology

In the thesis, the author employs a variety of research methods, including direct observation of daily operations at BIDV JSC Thang Long and conducting interviews with bank officers The data is sourced from financial statements and analyzed using several techniques such as statistical analysis, comparative analysis, trend analysis, and industry benchmarking.

Structure of the thesis

This thesis consists of four main chapters besides introduction and conclusion:

Chapter II: The introduction of Joint Stock Commercial Bank for Investment and Development of Vietnam – Thang Long branch

Chapter III: Analysis and Findings

Chapter IV: Recommendations for improvement of credit analysis operation at BIDV JSC Thang Long

Bank credit and the roles of lending to business customers

The term "credit," rooted in the Latin word "credo," meaning "trust" and "confidence," lacks a universal definition in banking In finance, credit refers to the trust that enables one party to provide resources to another, creating a debt that is repaid or returned at a later date.

This chapter explores bank credit as a crucial banking function, defining credit as a transaction involving assets—either money or goods—between a lender, such as a bank or financial institution, and a borrower, which can be an individual, business, or entity In this arrangement, the lender provides assets to the borrower for a predetermined period, and the borrower is required to repay both the principal and interest to the lender by the agreed-upon due date.

There are many classifications to bank credit, which is normally known as loans Following is some of them:

Based on lending purposes: real estate loans, commercial and industrial loans, financial institution loans, loans to individuals, agricultural loans

Based on terms of loans: short-term business loans, medium and long-term business loans

4 Based on customers' creditworthiness: secured and unsecured loans

Based on credit origin: direct loans and indirect loans

1.1.2 Types of credit to business customers

To business customers or enterprises, "business credit" is the phrase that refers to bank credit granted First of all, the definition of enterprises is a matter to concern

Under the Vietnamese Law on Enterprises 2005, an "Enterprise" is defined as an economic organization that possesses a unique name, maintains its own assets, operates from a stable office, and is officially registered to conduct business activities in accordance with legal regulations.

Business credit refers to the transaction where a bank provides funds to an enterprise for a specified period, with the understanding that the enterprise will repay the principal amount along with interest by the agreed-upon due date.

As is similar to bank credit, business credit is classified into different categories

1.1.2.2 Types of business credit a Short-term business credit

Short-term business credit refers to loans that are expected to be repaid within a year, or up to two years in certain regions This type of credit is essential for businesses to meet their immediate working capital requirements, ensuring smooth operations and financial stability.

Short-term business credit is divided into two types as follows:

 Working capital loans: including credit line and compensating deposit balances b Medium and long-term business credit

According to the State Bank of Vietnam's regulations, medium and long-term business credit refers to loans scheduled for repayment over a period exceeding one year, with medium-term credit lasting from 1 to 5 years and long-term credit extending beyond 5 years This type of credit is typically provided to finance the acquisition of depreciable assets, cover start-up costs for new ventures, or facilitate a permanent increase in working capital.

There are four types of medium and long-term business credit:

 Loans to support the acquisition of other business firms

1.1.3 Roles of bank credit to enterprises in the economy

Credit provides immediate capital to business activities of enterprises, maintains continuous business operations, supports business expansion and market takeover

In business operations, companies often face urgent capital needs despite having insufficient net worth In such situations, bank credit plays a crucial role in ensuring seamless business continuity, enabling market expansion, and allowing enterprises to capitalize on emerging opportunities.

Credit stimulates effective use of fund, enforces enterprises to avoid waste of fund; thus enhances business effectiveness

Credit is not freely provided to businesses; therefore, it is essential for operations to generate profits to ensure timely repayment of both principal and interest on loans Additionally, from a business standpoint, leveraging more debt typically leads to a higher Return on Equity (ROE) ratio, particularly in favorable economic conditions This relationship can be understood through DuPont analysis, which illustrates the components that drive ROE.

ROE = ROS x Total asset turnover x 1/(1 – Debt ratio)

As the debt ratio rises, the return on equity (ROE) also increases, indicating that leveraging debt can enhance profitability Additionally, utilizing debt rather than relying solely on net worth allows businesses to efficiently mobilize funds, minimizing transaction costs and maximizing cost-effectiveness.

Credit empowers enterprises to plan and implement business operations

Businesses may not always require funding, as they can experience fluctuations in net worth In such cases, business credit becomes essential, providing a crucial lifeline when internal capital falls short This financial support enables companies to pursue investment opportunities and improve their capacity and competitiveness in the market.

Corporate credit analysis at commercial banks

Banks encounter significant credit risk in lending, which arises when borrowers fail to fulfill their payment obligations, leading to defaulted loans and potential financial losses that can diminish the bank's capital.

To effectively manage and defend against credit risk, commercial banks prioritize assessing borrowers' creditworthiness prior to extending credit This crucial evaluation helps mitigate potential financial losses and ensures responsible lending practices.

Corporate credit analysis involves using analytical techniques to evaluate the creditworthiness and risk level of business borrowers This assessment includes examining the borrower's character, financial capabilities, the feasibility of their business plans or investment projects, collateral offered, and the effectiveness of their risk management and control strategies.

1.2.2 Objectives of corporate credit analysis at commercial banks

Credit analysis reduces the effect of asymmetric information

A significant factor contributing to credit risk is the asymmetry of information in the banking industry, where one party lacks sufficient knowledge about the other to make informed decisions When assessing loan applications, bankers face two potential judgment errors: granting credit to a borrower who later defaults and rejecting a loan for a customer who would have repaid it Both scenarios result in financial losses for the bank.

7 customer and its profits are less This problem can be resolved if banks perform careful credit analysis prior to loan approval or decline

Credit analysis helps bank assess customer's credit risk to perform risk-based pricing, take measures to manage the risk and allocate bank's resources effectively

Banks assess a customer's credit condition to determine which enterprises qualify for credit based on specific requirements Each enterprise presents varying levels of repayment capability and risk, prompting banks to implement risk management strategies such as requiring collateral, monitoring loans, or establishing provisions for doubtful debts Furthermore, credit analysis plays a crucial role in loan pricing, with higher risks leading to increased interest rates on loans.

Credit analysis helps gauge exactly financing needs of customers

Many borrowers seek loans without fully understanding their external financing needs and available internal resources Lenders must assess not only the current loan requirements but also future cash flow projections Insufficient cash flows can lead to difficulties in covering operating expenses and loan repayments, increasing default risk for banks Thus, accurately determining the appropriate credit amount is crucial for both financial institutions and businesses.

Credit analysis helps bank advice customers on how to better use the loan proceeds

Once credit is approved, loan proceeds must be utilized for legitimate business operations, such as seasonal and permanent working capital, purchasing depreciable assets, expanding physical plants, acquiring other firms, and covering extraordinary operating expenses It is crucial to avoid speculative asset purchases and debt substitution, as financing illegal activities or unprofitable ventures can lead to increased losses and diminish repayment prospects The genuine need and intended use of the loan proceeds play a vital role in determining loan maturity, expected repayment sources, and suitable collateral.

Contents of credit analysis in business credit operation

Lenders depend on external information to evaluate a borrower's character, financial status, and collateral This assessment typically starts with an examination of the details provided in the loan application.

1.3.1 Sources of information for credit analysis

Loan documentation provided by enterprises

Depending on types of loan and types of customers, particular information is requested by banks Normally, a loan application package often consists of:

 Legal documents (e.g identification card, House Registration, Book/Temporary Resident Permit, Business Registration Certificate, etc.)

 Financial documents (e.g Balance Sheet, Income Statement, Cash Flow Statement, Notes to the Financial Statement)

 Business plan and supporting documents of loan usage plan (e.g purchase contracts, invoices, receipts, etc.)

 Collateral documents (optional) (e.g car registrations, certificate of land use right, valuable papers, etc.)

Banks often reach out to other lenders to assess a customer's financial history by asking key questions, such as whether all scheduled payments on past loans were made punctually, if deposit balances were maintained at adequate levels, and if there are any records of slow or delinquent payments Additionally, they inquire about any instances of bankruptcy declared by the customer This exchange of information among banks helps in evaluating the overall creditworthiness of the individual.

Interviews of borrowers, Field visits

Credit officers conduct one-on-one interviews with clients to evaluate their character and integrity, allowing clients to articulate their credit needs This seemingly straightforward process necessitates that bankers possess a deep understanding of client motivations and financial behavior.

To conduct effective interviews that reveal customers' true character, credit officers should focus on nine key experiences Additionally, visiting borrowers' locations allows them to assess the condition of properties or collateral, including the premises, workforce, and the board of management's relationship with employees.

When assessing a credit application, loan officers should consider not only the individual borrower but also the local economy for smaller loans and the broader national or international economy for larger requests Borrowers are often significantly affected by the business cycle, making it crucial to analyze these economic factors Additionally, creating a forecast of future industry conditions is essential for all business borrowers to ensure informed lending decisions.

1.3.2 Contents of corporate credit analysis – the 6Cs + 1P

Before approving a loan, it's crucial to assess the customer's ability to repay it on time This evaluation typically involves a thorough analysis of seven key factors known as the 6Cs and 1P: character, capacity, cash, collateral, conditions, control, and purpose Each of these elements must meet the lender's criteria to ensure the loan is deemed favorable.

Character, a crucial aspect of the loan evaluation process, assesses the borrower's integrity and commitment to repaying the loan It involves a thorough examination of the business owner's personal history and background If there are any concerns regarding the customer's integrity, it is essential to reject the loan application.

Capacity refers to customer's authority to request a loan and his legal standing to sign a binding loan agreement Capacity consists of two elements:

 Legal capacity: an enterprise that meets the definition stated in term 1, article 4 Vietnamese Law on Enterprises 2005 is considered having full legal capacity

 Business capacity: the borrower's ability to perform as required in order to repay loans It refers to overall evaluation on the proposed business or project

Cash/Capital refers to whether the customer has sufficient cash flow and backup asset to repay the loan Cash helps cushion losses and reduces the likelihood of bankruptcy

10 Cash flow is the primary source of repayment for a loan Cash flow is generated from three activities:

 Cash flow from operations (CFO): is the flow of funds from normal business operations

 Cash flow from financing activities (CFF): inflows and outflows of cash associated with selling or repurchasing borrower-issued security

 Cash flow from investing activities (CFI): inflows and outflows of cash resulting from the purchase and sale of the borrower's assets

Capital refers to borrower's wealth position measured by financial soundness and market standing There are five primary financial ratio systems

 Current ratio = Current assets/Current liabilities

 Quick ratio = (Current assets – Inventory)/Current liabilities

 Cash ratio = (Cash + cash equivalents)/Current liabilities

 Inventory turnover = COGS/Average inventory

 Days inventory period = 360/Inventory turnover

 Receivables turnover = Net sales/Average receivables

 Average collection period = 360/Receivables turnover

 Fixed asset turnover = Net sales/Average fixed assets

 Total asset turnover = Net sales/Average total assets

 Debt ratio = Total debts/Equity

 Equity ratio = Equity/Total assets (Total capital)

 Long-term debt to equity = Long-term debt/Equity

 Net worth to long-term assets = Net worth/Long-term assets

 Interest coverage = (EBT + Interest expense)/Interest expense

 Profit margin (ROS) = Profit/Net sales

 Return on assets (ROA) = Profit/Average total assets

 Return on equity (ROE) = Net profit/Average equity

 Accumulated profit ratio = Accumulated profit/Net profit

 Sustainable growth rate = Accumulated profit/Average equity

Conditions encompass the economic landscape and industry-specific factors that affect a company's operations, including supply, production, and distribution Additionally, the sources of cash for repayment can fluctuate based on the business cycle and consumer demand.

PESTEL model is used to analyze business environment in terms of six categories: Political, Economic, Social, Technology, Environment, and Law/Policy

Control pertains to the relevant laws and regulations governing the character and quality of acceptable loans It focuses on issues such as the potential negative impact of legal changes on borrowers and the compliance of loan requests with the standards set by lenders and regulatory authorities for loan quality.

Collateral serves as a lender's backup for loan repayment when a borrower lacks adequate cash flow This concept is particularly significant in the relationship between banks and first-time borrowers.

Objectives of requesting for collateral:

 To secure the loan in case customer defaults or in other unforeseen circumstances

 To ensure the customer commitment to repay

 To reduce moral hazard that may make the customer divert from the direction stated in the business plan

Collateral must be assessed in terms of four criteria: value and quality, ownership, manageability, marketability

Purpose refers to appraisal of business plan or investment project

Business plan is a plan made by an enterprise to operate business activities in short term When examining the purpose of business plans, banks should focus on:

 Feasibility of business plan, including: legal capacity, sources of fund and total investment, resources and available market

 Plan's economic effectiveness measured by profit EBIT = Total Revenue – Total Cost

Investment projects are typically evaluated similarly to business plans, but they require a longer duration for operation and capital recovery, often involving substantial total investments.

For investment project, banks manage to appraise these following factors:

 The purpose and necessity of project

Credit scoring 12 1.5 Factors affecting corporate credit analysis operation at commercial banks

In credit analysis, banks have two methods to appraise customers: classical method (formerly introduced) and credit scoring system to assess accurately and quickly all aspects of credit analysis

Lenders determine a borrower's risk rating based on an assessment of their operating profile, which highlights significant trends in past performance and the present profit and risk situation in comparison to industry standards.

For enterprises, these following factors are considered in credit scoring:

 Board of managers' business capability and credibility

1.5 Factors affecting corporate credit analysis operation at commercial banks

1.5.1.1 Knowledge, experiences and personal ethics of credit analysts

Credit analysts play a crucial role in the decision-making process for banks, as their judgments significantly impact credit approvals and potential defaults A single error in credit analysis can lead to substantial financial losses for banks The essential traits for successful credit analysts include expertise, experience, and strong ethics While expertise and experience are fundamental to their role, ethics are vital for making sound decisions regarding credit approvals, ensuring that relationships with customers are maintained even when credit is denied.

1.5.1.2 Sources of information in credit analysis process

Information is essential for effective credit appraisal, with its quality, quantity, and timing significantly impacting credit analysis Relying on inaccurate information can result in poor lending decisions, highlighting the importance of reliable data in the credit evaluation process.

An updated analysis method enhances banks' credit appraisal processes, leading to more accurate decision-making Each loan type carries distinct risk levels and repayment capabilities, prompting banks to implement suitable credit rating systems to evaluate the profitability of their lending choices.

14 Updated technology and specialized computer system can save time and costs for banks in doing large amount credit analysis work Obviously, information after processed is more accurate and credible

In a thriving economy, businesses tend to expand, resulting in higher capital requirements Conversely, during economic downturns, companies adopt a more cautious approach to investments, making borrowing less appealing.

In political terms, stable political environment facilitates healthy economy thus reduces economic crisis, increases effectiveness of business operations

Deregulations from government may facilitate banking industry, especially lending activities Credit analysts may perform better work as there are fewer rules to follow

15

The establishment and development of Bank for Investment and

Development of Vietnam – Thang Long branch

The Bank for Investment and Development of Vietnam (BIDV) was founded on April 26, 1957, under Decision No 177/TTg by the Prime Minister, initially named the Bank for Construction of Vietnam Over its 56 years of development, BIDV JSC has undergone significant transformations, including several name changes.

 From 1981 to 1989: Under the name Bank for Investment and Construction of Vietnam

 From 1990 to 27/04/2012: Under the name Bank for Investment and Development of Vietnam (BIDV)

 From 27/04/2012 to now: Under the name Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV JSC)

BIDV JSC operates across various sectors, including banking, insurance, and financial investments, supported by over 16,000 qualified professionals dedicated to providing reliable services As of May 29, 2012, the bank boasts 118 branches, 500 transaction offices, and a vast network of ATMs and POS systems across 63 provinces in Vietnam With a net income of $70 million USD, BIDV JSC ranks as the top bank in Vietnam and the second largest by assets, totaling $18.8 billion USD, following Agribank Recognized in the United Nations Development Program report as the 4th largest enterprise in the country, BIDV JSC has also earned the House of the Year Award from Asia Risk Magazine for its role in advancing Vietnam's economic development through modernization.

16 risk management and developing new financial products such as energy derivatives hedges

BIDV JSC – Thang Long branch is one of 118 branches of BIDV JSC, initially established as a specialized department under the Bank for Construction of Vietnam Its primary responsibilities included managing transactions and overseeing the construction capital for the Thang Long bridge project.

In 1991, the Thang Long branch was renamed BIDV – Thang Long branch following Decision No 38 NH/QD issued by the Governor of the State Bank of Vietnam, aligning it with BIDV's organizational structure By 1994, its functions were updated to reflect those of a commercial bank under BIDV, as per Decision No 38 NH/QD – NH 9 Since early 2009, BIDV Thang Long has been located at No 8 Pham Hung Str, Cau Giay, Hanoi, a position it maintains to this day.

Organizational structure of BIDV JSC Thang Long

BIDV JSC Thang Long is organized into five key operational sections: Customer Relations, Risk Management, Operations, Business Support, and Administrative Units Each section is overseen by a member of the branch's Board of Directors, ensuring effective supervision and management.

BIDV JSC Thang Long is currently implementing the TA2 organizational model, a modern framework that supports multi-ownership and multi-sector operations This model adheres to international standards and enhances banking quality, positioning BIDV JSC Thang Long competitively among reputable banks in Southeast Asia.

Exhibit 2.1: Organizational structure of BIDV JSC Thang Long

Performance analysis by business at BIDV JSC Thang Long

Table 2.1: The result of fund mobilization by structure 2010-2012 (billion VND)

(Source: BIDV JSC Thang Long's business reports in 2010, 2011, 2012)

The average growth rate of fund mobilization was 15% per year, significantly lower than the banking industry's overall growth rate of 24.45%, amounting to 411 billion VND This growth rate was particularly low in 2010, where it only reached 0.7% The Thang Long branch, situated in the outskirts of Hanoi, faced challenges in fund mobilization, primarily relying on economic entities for funding, as individual contributions were limited due to the relatively low average incomes of local residents.

In 2011, BIDV JSC achieved total fund mobilization of 285,581 billion VND, reflecting a 6.8% increase from the previous year This figure encompasses customer deposits and borrowings from various entities, including the Ministry of Finance, State Treasury, and Vietnam Social Insurance.

2010 thanks to changes in funding structure from wholesale to retail funding

Over the years, receipts from banking services have played a crucial role in enhancing the overall business performance of the Thang Long branch, aligning with modern banking trends that emphasize a higher percentage of commissions and fees in total bank income The net gains from banking services between 2010 and 2012 reflect this positive trajectory.

Table 2.2: Net gains from banking services 2010-2012 (billion VND)

1 Gain from international and domestic payment services 3.57 5.7 7.31

2 Net gain from trade finance 3.688 3.54 2.1

3 Net gain from trading foreign currencies 7.662 1.95 2.45

7 Net gain from SMS Banking service 0.152 0.35 0.54

8 Net gain from Western Union service 0.047 0.05 0.07

(Source: BIDV JSC Thang Long's business reports in 2010, 2011, 2012)

Table 2.3: Result of credit operation 2009-2012 (billion VND)

2 Total outstanding loans at the end of year 1,763 1,979 2,069 1,712

- Short-term loans' outstanding balance 1,349 1,581 1,572 1,194

- Medium & long-term loans' outstanding balance 414 398 497 508

4 Special mention loans/Total outstanding loans (%) 26.1 13.59 21.27 7.9

(Source: BIDV JSC Thang Long's business reports 2009-2012)

Between 2009 and 2012, the growth rate of outstanding loans was consistently low at 8% per year, significantly below the industry average of 20.3% During this period, short-term loans dominated, reaching a total of 232 billion VND in 2010, while medium and long-term outstanding loans saw an increase of 74 billion VND compared to the end of 2009.

In 2012, Thang Long branch experienced a decline in outstanding loan balances, ending the term at 1,712 billion VND, which represented 98% of BIDV's business plan This drop was primarily due to a decrease in business loans Despite this, BIDV JSC's total outstanding loans reached 274,304 billion VND, reflecting a 15.7% increase from 2010 The non-performing loan (NPL) ratio remained low at under 3%, below the industry average To mitigate risks, the loan portfolio was regularly monitored to identify customers at risk of financial distress, allowing for timely adjustments and tailored solutions.

Exhibit 2.2: Credit structure by types of customers

(Source: BIDV JSC Thang Long's business reports 2009-2012)

In line with BIDV JSC's strategic direction, the Thang Long branch successfully boosted individual loans for both consumption and business activities The outstanding balance of individual loans rose from 220 billion VND in 2008, representing 12.5% of total loans, to 248 billion VND in 2010, which accounted for 12% of the overall loan portfolio.

21 outstanding loans, an increase of 28 billion VND as opposed to 2008 In 2011, Thang Long branch promoted the development of retail credit according to new business strategy applied to the period 2011 – 2013

Current situation of corporate credit analysis at JSC Bank for

3.1.1 Credit analysis process at BIDV JSC Thang Long

According to BIDV JSC's regulations, the process of corporate credit analysis at BIDV JSC Thang Long is as follows:

Exhibit 3.1: Flow chart of credit analysis process at BIDV JSC Thang Long

Step 1: Corporate Banking's officer instructs customers on preparing loan application package

Step 2: Corporate Banking's officer receives application package

Rule: Only original documents are accepted unless customer has only 01 original, copies must be notarized by authorities

Loan application package consists of Legal documents and Economic documents as presented as follows:

Legal documents (for enterprises operating under Law on Enterprises)

(iv) Practicing certificates or other certificates (if necessary)

(v) Members' certificate of capital contribution

(vi) Minutes on appointment of members of Board of Management, Chairman; general director, director, chief accountant appointment document

(vii) Tax identification number registration

(viii) Customer's signature and seal application form

(i) Financial documents of at least 03 consecutive years (Balance Sheet,

Income Statement, Cash Flow Statement, Notes to the Financial Statement) (ii) Business plan and supporting documents of loan usage plan

Step 3: Credit analysis and assessment

Pursuant to customer's application package and other sources of information such as CIC, corporate banking officers study, appraise and analyze these following contents:

A comprehensive evaluation of the customer encompasses various critical aspects, including their character, legal and business capacity, and organizational structure It also involves assessing the labor force and the management capabilities of the board of directors Additionally, analyzing the results of business operations, cost management strategies, material supply chains, distribution networks, sales performance, and profitability is essential Understanding the customer's potential is crucial for informed decision-making and strategic planning.

 Financial analysis (based on financial ratios)

 Assessment of business plan, investment project, repayment capability

 Overall risk assessment and precautions

At the branch level, the head officer of the corporate banking department reviews the credit proposal report, provides remarks, signs it, and submits it to the deputy director If the credit request falls within the branch's authority, the deputy director approves it, and the credit proposal report along with the loan application package is forwarded to the corporate banking department for further processing or to BIDV JSC Headquarters for a final credit decision In the event of a credit decline, the customer's application package is returned to the corporate banking department for notification of the decline.

The Risk Management Department at the branch evaluates credit proposals and portfolios received from the Corporate Banking Department and Transaction Offices A Risk Management Officer assesses the associated risks and prepares a comprehensive risk appraisal report, which is then submitted to the head officer for final decision-making.

3.1.2 Some remarks on the effectiveness of corporate credit analysis operation at BIDV JSC Thang Long

The credit analysis process at the Thang Long branch is efficient, timely, and tailored to each step, ensuring rapid disbursement This allows customers to access immediate capital for their business operations.

Second, according to BIDV JSC's regulations, credit request must go through risk appraisal except for several cases This enhances quality of credit and minimizes credit risk for the bank

Highly qualified credit officers possess extensive knowledge and experience in their field Additionally, the staff benefits from favorable working conditions, including specialized computer systems, internal software, photocopiers, telephones, and fax machines.

The credit analysis process is meticulously managed and supervised at each stage, ensuring that credit officers engage with customers in a manner that fosters satisfaction Additionally, customers receive thorough guidance on the lending procedures, types of loans available, and the associated conditions, enabling them to gain a clearer understanding of their financial needs.

The board of head officers promptly evaluates credit proposals from their staff, ensuring timely decision-making They pay special attention to changes in the economic and social environment, with credit officers striving to conduct thorough and accurate appraisals.

Credit officers may overlook critical information in the legal documents of regular customers when processing loan applications, often due to subjective judgment This oversight can create opportunities for dishonest businesses to engage in fraud and misappropriate funds.

Second, some credit officers still make mistakes in paperwork and loan procedure, making important financial indicators to be overlooked

Third, sources of information from outside resources are insufficient; credit officers are not flexible enough to acquire information.

Illustration to corporate credit analysis operation

This thesis explores corporate credit analysis, focusing on the short-term commercial loan request of Alpha Joint Stock Company The proposed loan amount is 9,500,000,000 VND, with a repayment term of six months.

Alpha JSC was selected for analysis due to its strong financial health, robust business practices, and regular transactions with BIDV JSC Thang Long This case effectively illustrates the real-world application of corporate credit analysis in commercial banking.

(Applied to working capital financing, guarantee, discount loan, L/C application)

 Name of company: Alpha Joint Stock Company

 Address: 84 Tran Nhan Tong str, Hai Ba Trung dist, Hanoi

- Civil engineering construction, irrigation and transportation

- Infrastructure, hydropower construction and investment

- Construction machinery and equipment rental and leasing

 Purpose of loan: To finance immediate working capital need

 Proposed interest rate: As applied by BIDV JSC's regulations

 Method of payment: Bank transfer

The collateral for this agreement is outlined in Mortgage Contract No 131, which was recorded in Book No 02/TP/CC-SCC/HDGD on April 5, 2012 This contract pertains to Land Use Right No S589375, as documented in Certificate of Land Use Right No 0976.QSDD/HD, issued by the Ha Dong People's Committee on April 18, 2003.

3 Company's structure, Board of Managers and Executive Committee

27 Alpha JSC operates under business registration certificate No 1039475639 issued March 14 th , 2003 by Hanoi Authority for Planning and Investment

Alpha JSC's Board of Management includes:

 Chairman cum General Director: Mr Luong Minh Tu, appointed on February 15 th ,

2004 Mr Luong Minh Tu is person of business success and credibility in Vietnam

He graduated from Foreign Trade University of Hanoi He earned an MBA degree in Business Management in 2000

 Chief Accountant: Mr Hoang Minh Duc, appointed on April 17 th , 2010 Mr Hoang Minh Duc graduated from Hanoi Academy of Finance

 Independent auditor: Baker Tilly Auditing and Consulting Co., Ltd

Findings: The company has compatible organizational structure and independent auditor which enhances the credibility of financial information disclosed

II Relation with BIDV JSC Thang Long

Alpha JSC is a frequent customer which has accounts at BIDV JSC Thang Long As of 31/12/2012, short-term loan's outstanding balance with BIDV JSC Thang Long was 2,998,079,362 VND

III Relation with other credit institutions

As of 31/12/2012, total outstanding loans of Alpha JSC with other credit institutions are as follows:

 JSC Vietnam Prosperity Bank: 22,500,000 VND

In 2012, construction industry met serious difficulties along with the whole economy According to Ministry of Construction, debt-to-equity ratio of construction firms remains high, especially state-owned enterprises'

Decree 11 remains in effect, leading to cuts in investments for public projects and a notable reduction in work opportunities, which has left employees struggling to afford their labor insurance.

During the project tender phase, building material prices had not yet risen; however, once construction commenced, there was a significant increase in both material and labor costs, leading to a surge in overall project expenses.

There are 02 subsidiaries to Alpha JSC located in the middle and southern areas of Vietnam: Alpha JSC – Ho Chi Minh branch and Alpha JSC Representative Office –

Da Nang, thanks to which the company has widespread distribution network This enhances the opportunity of supplying services to a wide range of customers in spite of industry's difficulties

Table 3.1: Income Statement for Alpha JSC, 2010-2012 (unit: VND)

3 Net sales from operating activities 30,080,257,979 16,480,421,669 12,038,328,589

In 2012, Alpha JSC experienced a remarkable 182% increase in net sales from operating activities compared to 2011, highlighting the effectiveness of the company's business strategies Despite a significant 101% rise in input material costs, the quantity of services provided surged by 180%, indicating that the company's sales growth was primarily driven by enhanced operational performance.

Cost management analysis reveals that Alpha JSC experienced an unreasonable increase in the Cost of Goods Sold (COGS), rising by 90.13%, which outpaced net sales Despite a reduction in workforce from 366 to 263 employees, administrative expenses saw a slight increase, indicating potential flaws in the company's cost management strategies unless investments were made in a more qualified labor force On a positive note, net income surged by 173% from 2011 to 2012, reflecting overall positive business performance over the three-year period, though attention to cost management strategies remains essential.

Table 3.2: Balance Sheet for Alpha JSC, 2010-2012 (unit: VND)

Net working capital (NWC) analysis reveals that NWC, calculated as current assets minus short-term liabilities, has remained positive over the past three years for Alpha JSC This indicates that the company possesses adequate short-term liabilities to effectively finance its short-term assets, with a portion of current assets supported by long-term capital Such a structure of assets and liabilities reflects a strong financial position and stability.

In 2012, the company's asset composition saw a significant rise in cash and cash equivalents, reflecting a strategic shift towards liquidity Additionally, this year marked the first instance of investments being made, contrasting with the absence of such activities in the two preceding years.

31 while inventory slightly decreased This increases asset's liquidity of Alpha JSC which means the company has better repayment capability

Capital structure: The ratio of debt-to-total assets is relative high, namely 65.6% in

In 2012, Alpha JSC exhibited a greater reliance on debt compared to its own capital, indicating a pressing need for business expansion Fortunately, the majority of its debts are short-term, allowing the company to maintain flexibility in its financial operations.

Table 3.3: Financial ratios for Alpha JSC, 2010-2012

9 Long-term debt to equity

Liquidity ratios: Overall, Alpha JSC has sufficient short-term debts to finance current assets The company has acceptable liquidity position

Asset turnover ratios have shown a positive trend over the years, particularly for receivables and inventory, indicating a quicker turnover of assets within the business cycle and resulting in increased sales Despite a significant reliance on debt, this dependence is justifiable given Alpha JSC's operational context.

32 a long history of operating in the industry For experienced companies like Alpha JSC, the more debts, the higher the financial leverage

Profitability ratios indicate that while the rates of Return on Equity (ROE) and Return on Assets (ROA) have shown improvement, the Return on Sales (ROS) ratio has decreased over the past two years This decline is attributed to ineffective cost management strategies previously discussed.

VI Appraisal of business plan

Table 3.4 Business plan for Alpha JSC in 2013 (unit: million VND)

1- Net sales from operating activities

17,915 2- Total costs of operating activities

- Depreciation cost of machinery, equipment and vehicles

12,703 2- Expected working capital turnover for 2013

1.5 3- Total appropriation costs and own costs

Alpha JSC's business plan demonstrates significant potential, projecting a profit of 1,066 million VND BIDV JSC Thang Long estimates that Alpha JSC requires financing of 9,756,000,000 VND, which exceeds their proposed loan amount by 256,000,000 VND Consequently, the bank is poised to provide the necessary funding.

33 amount of 9,756,000,000 VND so as to assure that Alpha has sufficient cash flow for business operation and for loan service

Mortgage Contract No 131, documented in Book No 02/TP/CC-SCC/HDGD, was signed on April 5, 2012, and pertains to Land Use Right No S589375 This land use right is officially recorded in Certificate of Land Use Right No 0976.QSDD/HD, issued by the Ha Dong People's Committee on April 18, 2012.

VIII Credit policy from BIDV JSC

Table 3.5: Credit scoring for Alpha JSC by BIDV JSC Thang Long

Credit rating AA Risk level: Low

Alpha JSC is rated AA with low risk level, according to which BIDV JSC Thang Long applies specific credit policy to this type of customer

2 Assessment on credit policy applied to customer

In accordance with BIDV JSC's regulation on credit policy applied to customers rated

In the case of working capital financing, AA requires collateral amounting to 30% of the credit value However, Alpha JSC, with a debt ratio below 2.5 and a strong repayment capacity, is exempt from providing collateral To further enhance its credit quality, Alpha JSC has secured the loan with a mortgage contract from the local People's Committee This arrangement boosts the credibility of both Alpha JSC and BIDV JSC Thang Long, suggesting that the bank should leverage its relationship with such reliable clients.

BIDV JSC Thang Long has approved a loan of 9,756,000,000 VND to Alpha JSC following a thorough credit analysis Alpha JSC demonstrated a stable financial position, an effective business plan, and strong operational performance Additionally, the company voluntarily provided collateral, highlighting its commitment to loan repayment and its intention to foster a long-term relationship with the Thang Long branch.

3.3 Evaluation on corporate credit analysis operation at BIDV JSC Thang Long

On the basis of case analysis and actual interviews with credit officers at BIDV JSC Thang Long, the author arrives at the following evaluation

The corporate credit analysis process at BIDV JSC, particularly at the Thang Long branch, is governed by strict policies that ensure effective implementation This rigorous approach includes a thorough risk assessment phase, contributing to a high standard of credit quality, making BIDV JSC and its Thang Long branch among the safest banks in the industry.

In recent years, advancements in the appraisal process and enhanced working facilities have significantly reduced the time required to analyze a customer's creditworthiness For large enterprises with clear credibility and business capability, credit decisions can be made in just one week However, at BIDV JSC, special attention is given to risk assessment, necessitating more time for evaluating new customers or large loans, particularly when appraising collateral.

At BIDV JSC Thang Long, credit analysis is conducted exclusively by the specialized corporate banking and risk management departments, ensuring a high level of qualification This focused approach makes the credit analysis process both efficient and cost-effective.

Sources of information for analysis were relatively passive, dependent on information provided by customers

Analyzing market fluctuations is challenging due to various influencing factors such as politics, weather, and traditions Timely information collection is crucial for accurate assessments While there are numerous information sources available, most credit analyses rely heavily on the data provided by the applicants themselves.

There is a shortage in the number of credit analysts

The Thang Long branch faces a significant workload for its credit officers due to a shortage of experienced staff with expertise in business and credit analysis, resulting in an increased average workload for each officer.

Collateral serves as a secondary repayment source for banks when assessing loan applications, which can lead to the exclusion of potential borrowers and a reduction in credit for corporate clients Additionally, the evaluation of collateral may often be flawed in terms of both its value and legal standing.

Amount of overdue loans in commercial loan requests is on the increase recently

Exhibit 3.2: Overdue loans in corporate lending (unit: billion VND)

(Source: Thang Long branch's reports, 2010-2012)

Although the amount of overdue loans declined in 2011 as opposed to 2010, it then climbed to reach a peak of 289,33 billion VND in 2012

NPL in corporate lendingTotal NPL of the branch

3.3.2.2 Causes to aforementioned problems a Subjective factors

The analysis of customer credit is hindered by a lack of timely and high-quality information sources Establishing a private internal database is essential for accurate and credible data collection to streamline credit analysis However, credit officers frequently face the challenge of verifying the credibility of information independently, which demands significant time and effort without any compensation.

The current credit framework is incompatible for credit officers, as it assigns a single officer to manage the entire analysis process—from receiving loan applications and gathering information to conducting credit analysis and drafting proposals This all-encompassing responsibility diminishes the effectiveness of credit analysis.

Credit monitoring by officers is often lax, leading to potential misuse of loans for purposes not disclosed in the application This lack of oversight makes it challenging for credit officers to track the use of loan proceeds, resulting in ineffective management of the lending process.

Fourth, most loans are secured loans Therefore, credit officers have the tendency to overvalue the importance of collateral without having a broader view in repayment capability of customers b Objective factors

Inconsistent government policies and regulations hinder banks' ability to operate effectively, as laws are often scattered and conflicting, such as those related to investment and civil matters The absence of a standardized regulatory framework for specific business sectors leaves banks reliant on vague financial indicators for comparison, ultimately making them passive in their operations.

Vietnam's macroeconomic environment is currently facing significant challenges, characterized by high potential risks The undervaluation of accounting and statistics policies, along with the incorrect implementation of accounting standards, exacerbates the situation Additionally, the ineffectiveness of the internal audit scheme further undermines economic stability.

37 while there is a high cost for independent audit procedure which makes small enterprises hesitant This matter is the root to incorrect financial statements provided to banks

The CIC is inadequately developed, leading to overlooked credit situations for commercial banks due to limited access to reliable customer information, which hampers effective communication and exchange between banks.

Fourth, most collateral is land and attached assets to land, machinery, equipment… whose prices fluctuate heavily along with market prices Hence, it is difficult to price collateral correctly

In 2011 and 2012, Vietnam faced economic challenges characterized by high inflation and rising unemployment, which negatively impacted the population's income and diminished their ability to repay loans Consequently, the proportion of overdue loans in relation to total loans granted increased significantly in 2012, severely affecting the effectiveness of credit analysis.

Many customers provide insufficient, outdated, or inaccurate information regarding their business plans and financial situations, which poses significant challenges for banks in conducting corporate credit analyses Furthermore, some customers exhibit a fraudulent mindset, intentionally seeking to misrepresent their circumstances to secure capital This issue critically undermines the integrity of the lending process.

Improvement of the credit analysis personnel in terms of quantity

The outcomes of corporate credit analysis stem from the evaluations conducted by credit officers, who utilize varying theoretical frameworks and analytical standards Consequently, the efficiency of operations is contingent upon the qualifications of the staff responsible for managing or executing credit analysis at both central and local levels Therefore, personnel involved in this process must meet specific requirements to ensure effective operation.

Staff in the banking sector must possess higher education qualifications and a strong understanding of market economics, banking, finance, and relevant laws Credit officers, in particular, need to have in-depth knowledge of their corporate clients and the various services and products, such as investment loans, consumer loans, lines of credit, and bank guarantees, that they typically engage with Additionally, it is essential for these professionals to stay updated on new credit analysis tools and techniques adopted from other banks to ensure effective and timely application in their work.

Second, about experience: Credit officers directly supervise and manage several projects, and actively learn from other fields to support their own profession

Credit officers must embody essential ethical qualities, including fidelity, responsibility, discipline, enthusiasm, commitment, and a strong desire for self-improvement It is crucial that they prioritize the collective interests of their clients and the organization over their personal gains.

To have such personnel, BIDV Thang Long shall strengthen and improve credit officers in the following ways:

 Improvement of recruited credit officers’ qualification through selection process

 Proactively and regularly improve professional knowledge and others which possibly support the operation

To enhance operational efficiency, it is essential for credit officers to possess professional competence Managers should focus on recognizing the unique skills and strengths of their staff, allowing for flexible task assignments that optimize overall performance.

 Training programs specializing in corporate credit analysis for credit officers shall be continued and extended

 Credit officers shall be supported with self-training policies, like tuition and material sponsor, or time preference

 Excellent credit officers shall be facilitated with proper preference and reward policy Awareness of professional ethics for them shall be raised by setting examples of good cases

 Guidelines and standards of credit officers’ qualification shall be established for further employment and training programs

 Capable credit officers shall be employed additionally for the departments of corporate banking and risk management to reduce loan tellers’ workload.

Equitable organization and administration of credit analysis

To establish organization and administration of credit analysis operation effectively, BIDV Thang Long should have specific solutions as follows:

 The credit analysis operation should follow a unified process with principles in every practice

 The operation should be more and more streamlined; focusing on improvement in terms of quality and quantity to reach its proposed targets

 Credit officers should be assigned to deal with clients in specific fields as their projects are very diversified regarding industry and risks

 The bank should strengthen internal inspection, control, and supervision of credit officers’ compliance with the State laws and the guidelines of credit analysis operation

Upgradation of information quality to ensure accuracy, sufficiency

To solve this problem, it is necessary to build a comprehensive information system in depth, as follows:

 Improving information systems, internal reporting to ensure smooth and complete communication

To effectively manage economic risks and capitalize on market fluctuations, it is essential to implement a robust information collection system focused on the economy, markets, and customer behaviors This system will enable accurate predictions of potential risks and allow for timely adjustments to interest rates in response to variations in capital supply and demand during different periods.

 Collecting contact information of known customers to build database for useful reference sources for credit analysis operation

 Reconciling and requesting explanation for suspect documents from responsible customers to secure the accuracy of information disclosed

BIDV JSC Thang Long can collect information from these following sources:

To ensure the accuracy of loan application information, credit officers must conduct fidelity checks on customer-supplied data, which can be highly subjective Additionally, they are required to gather information from external sources, such as Credit Information Companies (CIC) and news outlets, to verify the records.

Second, from banks' database Credit officer should utilize resources from banks' database to offer precise credit decision

Third, from interviews with borrowers Information which is collected from this source ensures high level of accuracy at relatively low cost However, credit officers should:

 Understand customers' profile prior to the interview;

 Create open questions to gain more information from customers;

The quality of gathered information largely depends on the professional experience and interviewing skills of credit officers Typically, new bankers lack the experience needed to effectively engage with large customers, who may be adept at navigating such discussions or may even attempt to commit fraud Therefore, it is crucial for young credit officers to receive guidance from their more experienced colleagues to prevent erroneous credit decisions.

Credit officers should utilize a variety of resources, including books, magazines, and specialized materials, as well as data from the General Statistics Office and market research agencies, to enhance their knowledge Additionally, they are encouraged to conduct their own surveys and investigations on relevant topics to stay informed.

Application of information technology into corporate credit analysis,

especially modern computers and specialized software

The manual calculations performed by credit officers can be time-consuming and may not ensure accurate credit results Implementing specialized software in banking operations can effectively address these challenges To rapidly modernize their information systems, banks should focus on investing in information technology to automate their payment and accounting processes.

Solutions to collateral valuation

To ensure accurate pricing of assets that experience significant market fluctuations, such as real estate or machinery, BIDV JSC Thang Long should seek guidance from professional firms for evaluation recommendations This approach helps mitigate the risk of misvaluing collateral and ensures compliance with legal standards.

Development of standardized system to evaluate the effectiveness of

Currently, there is no standardized measurement to evaluate the effectiveness of corporate credit analysis operations, such as determining the appropriate costs or understanding how credit analysis impacts the lending operations of commercial banks As a result, the quality and effectiveness of credit analysis are diminished.

Recommendations to authorities

First, the government should enhance the operation of credit scoring and corporate pricing offices, especially trademark pricing

The lack of a credible domestic organization for corporate ranking and trademark pricing has led to reliance on expensive foreign firms, as domestic results are often unreliable Commercial banks view the appraisal process as subjective, heavily influenced by the credit officers' experience Establishing a professional domestic organization would significantly reduce moral risk costs and time for commercial banks, ultimately enhancing the efficiency of corporate credit analysis.

The government should effectively communicate comprehensive socio-economic development plans, detailing specific sectors and regions over designated timeframes Additionally, it is essential to outline strategic orientations and solutions aimed at stimulating supply and demand at appropriate times.

These policies enable commercial banks to develop tailored credit plans for medium and long-term needs, addressing client demand while fostering economic growth and mitigating risks Additionally, they provide a framework for credit officers to evaluate the justification behind loan applications.

Third, the government should reinforce the operation of consultancy and information center

To align with economic growth, it is essential for companies and organizations to specialize in corporate information collection, consulting, evaluation, and trading These entities can be either state-owned or private, targeting various economic sectors Furthermore, establishing a robust legal framework governing transactions between consultancy firms or information centers and commercial banks is crucial for ensuring compliance and security.

Fourth, the role of government in credit management should be heightened

44 Adequate legal documents and stable legislations on credit operation of banks should be completed quickly The government should also reinforce the management of commercial banks’ operation

To foster a fair business environment, it's essential to provide both state-owned and non-state-owned companies with equal opportunities, ensuring that state-owned enterprises operate with greater freedom while non-state-owned entities benefit from supportive policies Additionally, government oversight of state-owned companies is crucial to eliminate inefficiencies and advance their equitization process.

The government should refrain from excessive interference in the credit operations of commercial banks, allowing them the freedom to enhance their services Investment decisions must rely on the banks' independent evaluations rather than external pressures Additionally, there should be a clear separation between government-allocated credit and the investments made by banks.

4.3.2 To related ministries, sectors and offices

All ministries and sectors are strongly encouraged to organize internal information systematically to produce comprehensive reports on their performance and development, highlighting growth rates and advancements within their respective fields.

The Ministry of Finance must establish a standardized accounting system for commercial banks, along with mandatory auditing practices and policies for public information disclosure.

4.3.3 To the State Bank of Vietnam

The State Bank must implement periodic economic development strategies to effectively regulate the credit operations of commercial banks To achieve this, it is essential for authorities to exercise control and supervision through appropriate regulatory frameworks, enabling commercial banks to align their business activities, including corporate analysis, with macroeconomic planning.

The State Bank should establish standardized categories to enhance the analysis process, ensuring consistency across the banking system and improving overall effectiveness Additionally, these categories must remain adaptable and be updated regularly to meet evolving needs.

To enhance the efficiency of commercial banks, the State Bank should prioritize the modernization of technology, updating information systems, and providing comprehensive training for credit officers Regular training sessions led by experts from the State Bank and the IMF are essential for equipping key personnel with the necessary skills and knowledge.

To enhance the role of credit information, the State Bank must implement solutions to upgrade its Credit Information Center (CIC) Currently, the CIC provides company information, but it fails to meet demand By regularly updating data and improving the information transfer system, commercial banks will be able to access credit information quickly and conveniently.

CIC must enhance staff quality and integrate new technologies to modernize and automate production processes, thereby boosting productivity and efficiency Additionally, CIC should collaborate with authorized entities like the Ministry of Planning and Investment and the General Statistics Office to gather diverse information and conduct in-depth research for effective credit rating, forecasting, and risk hedging.

Inspectors from State Bank and branches should check the operation and report of credit institutions and apply suitable punishment

First, completing regulatory documents on credit operation such as credit process, client ranking, categories in corporate financing analysis and collateral…

Second, orienting development plans and strategies for branches to hedge the risks from adverse economic and social current issues

Third, enhancing staff training in all branches starting from recruitment, intensive training to encouraging them to sharpen their skill

Fourth, coordinating with risk management offices, credit information centers and helping branches to improve technology and infrastructure

Fifth, enhancing supervision and management the operation of branches as well as punishing fraud of officers and other interior negative practices

To enhance the credit scoring system and customer rankings, it is essential to implement detailed categories tailored to specific sectors Given the dynamic nature of the socio-economic environment, banks must prioritize flexibility and regularly update their systems to maintain relevance and accuracy.

Vietnam is undergoing significant integration into the international market, leading to substantial benefits; however, this transition also presents inevitable challenges, particularly for the banking industry, which is highly sensitive to market fluctuations.

Tiêu đề	Corporate Credit Analysis At Joint Stock Commercial Bank For Investment And Development Of Vietnam – Thang Long Branch
Tác giả	Le Kieu Oanh
Người hướng dẫn	Tran Thi Hai Ly, M.A
Trường học	State Bank of Vietnam Banking Academy
Chuyên ngành	Foreign Language Faculty
Thể loại	graduation thesis
Năm xuất bản	2013
Thành phố	Hanoi

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