Current liquidity ratio liquid assets/total liabilities as at 31/10/201040 Trang 7 Figure 2.1: Brief financial performance of VID Public Bank, 2006 – 201032Figure 3.1: VNIBOR 3-month an
SOLVAY-BRUSSELS SCHOOL OF ECONOMICS AND MANAGEMENT NATIONAL ECONOMICS UNIVERSITY Vietnam – Belgium Master Programs MASTERS IN BUSINESS MANAGEMENT FINAL PROJECT Asset and Liabilities Management in VID Public Bank Prepared by: Le Thi Thu Hien Supervisor: Phd.Tran Dang Kham Hanoi 2011 FINAL PROJECT ACKNOWLEDGEMENT First of all, I would like express my deepest thank to Professor Tran Dang Kham, my academic supervisor for his invaluable guidance, advice and comments during the whole process of thesis writing My special thanks go to Professor Eric De Keuleneer and Professor Hugues Pirotte for their lectures on Banking and Financial Market without which I would not have been able to finish the study In additions, a special acknowledgement is made to the faculty members of Université Libre de Bruxelles and National Economics University, Deans, Professors, Executives and Teachers for their supports They all gave me the honour of attaining such a great program I would also like to express my particular thanks to Deputy General Director in charge in Treasury and Finance of VID Public Bank for his guidance and support on banking experience Last but not least, thank you very much my family members, especially my mother and my older sister for their support and encouragement without which I could not complete my thesis Hanoi, 2011 Le Thi Thu Hien FINAL PROJECT EXECUTIVE SUMMARY The thesis aims to evaluate current VID Public Bank’s asset and liability management Based on the evaluation, in accordance with Asset-Liability Management theories, the thesis proposes recommendations for VID Public Bank to improve its Asset-Liability Management activities Asset and liability management (ALM) includes liquidity risk management and interest rate risk management For the liquidity management of the bank, background’s description showed that liquidity management activities of VIDPB are very simple and base on static analysis without taking into account forecasts of future liquidity supply and demand As such, in special circumstances such as unstable business environment, tight monetary policy, etc., the bank usually lacks liquidity and has difficulties in conforming to SBV’s VND liquidity ratio requirements The study also explored the shortcomings of the activities The study then used the cash-flow based approach to calculate the liquidity gap of the bank in the future In accordance with theoretical framework, the study found out suitable actions that the bank should take in this situation Regarding to the interest rate risk management in VID Public Bank, the study showed that the bank has not really managed interest rate risk yet The empirical results of duration gap model and repricing gap model calculated the bank’s repricing gaps and overall duration gap and showed that the bank is liabilities sensitive If interest rates increase 3%, the bank may supper high losses of VND27.39 Billion Another analysis on VND interest rate movements from 2008 to 2010 was conducted and indicated that market interest rates in Vietnam fluctuate frequently and significantly, subject banks to substantial interest rate risk In order to hedge the bank’s losses, the author employed the duration gap management instruments and forward contract (which is available in Vietnamese market currently) to demonstrate the usefulness of interest rate risk hedging instruments With these result, the thesis proposed recommendations for VID Public Bank on Asset and liabilities Management activities as well as ALCO’s functions and organization TABLE OF CONTENTS FINAL PROJECT ACKNOWLEDGEMENT .i EXECUTIVE SUMMARY .ii TABLE OF CONTENTS .iii LIST OF TABLES v LIST OF FIGURES vi LIST OF ABBREVIATION vii INTRODUCTION viii Rationale of study viii Research objectives viii Research methodology ix The thesis structure ix CHAPTER I: THEORETICAL FRAMEWORK I.1 Asset and Liability management overview I.1.1 Definition of Asset and liability management I.1.2 Asset and Liability Management Departments I.1.3 Asset and Liability Management Process I.2 Liquidity Risk Management I.2.1 Definition of Liquidity Risk Management I.2.2 Strategies for Liquidity Management .5 I.2.2.1 Asset Liquidity Management (or Asset Conversion) Strategies I.2.2.2 Borrowed Liquidity Management Strategies .6 I.2.2.3 Balanced Liquidity Management Strategies I.2.3 Estimating Liquidity Needs I.2.3.1 The Sources and Uses of Funds Approach I.2.3.2 The Structure of Funds Approach I.2.3.3 Liquidity Indicator Approach I.2.3.4 Maturity Ladder (Cash-Flow Based) Approach 11 I.2.4 Liquidity management 12 I.2.4.1 Required reserve management 12 I.2.4.2 Liquid asset management .12 I.2.4.3 Liability management 13 I.3 Interest rate risk management 13 I.3.1 Interest rate risk overview 13 I.3.2 Interest rate risk measurement 14 I.3.2.1 The repricing model 14 I.3.2.2 The Maturity Model 16 I.3.2.3 The Duration GAP Model (DGAP) .18 I.3.3 Interest Rate Risk Management Methods .23 I.3.3.1 Duration Gap Management or Matching Strategy 23 I.3.3.2 Derivative instrument 24 I.4 Asset and Liabilities Management Model 27 CHAPTER II: ASSET–LIABILITY MANAGEMENT 30 FINAL PROJECT II.1 Overview of VID Public Bank 30 II.1.1 Corporate Profile 30 II.1.2 Banking products and services .31 II.1.3 Organizational Structure 32 II.1.4 Overall Financial Performance of VID Public Bank 33 II.2 Asset and Liability Management at VID Public Bank 34 II.2.1 Liquidity Management at VID Public Bank 34 II.2.1.1 Organization & Internal Liquidity Management Procedures 34 II.2.1.2 Analysis of VIDPB’s Sources of Funds and Uses of Funds 35 II.2.1.3 Evaluating Liquidity Management of VID Public Bank 37 II.2.1.4 Shortcomings of Liquidity Management at VIDPB and Causes of the Shortcomings: 43 II.2.2 Interest rate risk management at VID Public Bank 45 CHAPTER III: EMPIRICAL RESULTS AND ECONOMIC ANALYSIS 48 III.1 Liquidity Risk Exposure of VID Public Bank .48 III.1.1 Liquidity Gap .48 III.1.2 Liquidity Management 50 III.2 Interest Rate Risk Exposure of VID Public Bank 50 III.2.1 Interest Rate Risk Measurement 50 III.2.2 VND Interest Rate Cycle 2008-2010 53 III.2.3 Interest Rate Risk Management 54 III.2.3.1 Duration Gap Management Instruments 54 III.2.3.2 Derivative Instruments 55 CHAPTER IV: RECOMMENDATIONS TO IMPROVE ASSET AND LIABILITY MANAGEMENT IN VID PUBLIC BANK 57 IV.1 Setting up the Asset and Liability Management Committee (ALCO) 57 IV.2 Formulating Asset and Liability Management Policy 58 IV.2.1 Establishing Liquidity Management Policy 59 IV.2.2 Formulating Interest Rate Risk Management Policy 60 IV.2.3 Applying Fund Transfer Pricing System (FTP) in Internal Fund Management 61 IV.3 Enhancing Deposit Structure 61 IV.4 Strengthening Staff Capacity in ALM Areas 63 IV.5 Developing ALM Software 63 CONCLUSION 64 REFERENCES 66 APPENDIX .68 LIST OF TABLES FINAL PROJECT Table 2.1 Brief financial performance of VID Public Bank, 2006 – 2010 32 Table 2.2 Current required reserve ratios 36 Table 2.3 Liquidity ratio limits required by SBV 37 Table 2.4 Liquidity ratio within days report as of 31/10/2010 39 Table 2.5 Current liquidity ratio (liquid assets/total liabilities) as at 31/10/2010 40 Table 2.6 Liquidity ratios/indicators of VID Public Bank 2007-2009 41 Table 2.7 VID Public Bank’s yield analysis 2008-2010 45 Table 3.1 Liquidity gap estimation, from November 2010 – October 2011 Estimated on 31/10/2010 48 Table 3.2 Repricing mismatch report as of 31/10/2010 50 LIST OF FIGURES Figure 1.1 overview of ALM simulation process 28 FINAL PROJECT Figure 2.1: Brief financial performance of VID Public Bank, 2006 – 2010 32 Figure 3.1: VNIBOR 3-month and overnight, 2008-2011 52 LIST OF ABBREVIATION ALCO ALM Asset and liability management committee Asset and liability management FINAL PROJECT BIDV BM BOD CC CDs CGAP DGAP FD FI FTP NII NIM NPV RSA RSL SBV VIDPB Bank for Investment and Development of Vietnam Branch Manage Board of Directors Controller Committee Certificates of deposit Cumulative gap Duration gap Fixed Deposit Financial Institution Fund Transfer Pricing Net interest income Net interest margin Net present value Risk sensitivity of asset Risk sensitivity of liability State Bank of Viet Nam VID Public Bank INTRODUCTION Rationale of study FINAL PROJECT VID Public Bank is a joint venture bank between Bank for Investment and Development of Viet Nam and Public Bank Berhad, Malaysia The Bank was established in May 1992 and after 19 years in operations; it now has one Head Office and seven branches in major cities of Viet Nam Being the first joint venture bank in Vietnam with enthusiastic & well-trained staff force and enormous support from Public Bank Malaysia in term of management skills, VID Public Bank has been one of the most profitable and prudent banks in Vietnam However, given the early stage of development of financial markets in Vietnam, management of Vietnamese banks in general and of VID in particular still falls behind world’s best practices In 2008, facing the fluctuation of market interest rates and the effect of global financial crisis, the Bank has shown several weaknesses in business and risk management Especially, the Bank’s mismatch between asset and liability in term of volumes, maturity and interest rate due to its lack of proper bank-wide AssetLiability Management (ALM) was the main reason of profit decrease in the first month of 2009 These and many other situations showed that VID Public Bank needs to re-examine, reassess and improve its asset and liability management in order to enhance the risk-return profile of the bank’s portfolio, thus maximize two main targets of ALM, namely the interest income and the net present value of assets minus liabilities The thesis attempts to address these issues Research objectives The research has main objectives: Review theoretical framework about Asset-Liability Management that are applicable to the practical business Evaluate current VID Public Bank’s Asset-Liability Management activities Based on the study and evaluation, in accordance to Asset-Liability Management theories, the research will propose recommendations for VID Public Bank to improve its Asset-Liability Management activities Therefore, studies conducted throughout this thesis are mainly intended to answer the following questions, the answers to which are important for improving ALM of the Bank: - What is Asset and Liability Management? FINAL PROJECT - How does VID Public Bank conduct Asset and Liability Management currently? Why does VID Public Bank need to improve its Asset and Liability Management? What can be proposed to improve Asset-Liability Management at VID Public Bank? Research methodology Models that banks use in ALM are liquidity gaps for liquidity risk; and repricing gaps, duration gaps and simulations for interest rate risk Due to the lack of information and the sophistication of simulation method, the thesis will conduct empirical research using the three other methods, namely liquidity gaps, repricing gaps and duration gaps The thesis will also attempt to find descriptive evidence about the bank’s current ALM methods or the lack of them The thesis structure Introduction Chapter I: Theoretical Framework Chapter II: Asset and Liability Management at VID Public Bank Chapter III: Empirical Results and Economic Analysis Chapter IV: Recommendations to improve Asset and Liability Management in VID Public Bank Conclusion