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
Rationale of study
VID Public Bank, a collaboration between the Bank for Investment and Development of Vietnam and Malaysia's Public Bank Berhad, was founded in May 1992 After 19 years of operation, it has expanded to include a Head Office and seven branches located in major Vietnamese cities.
VID Public Bank, as Vietnam's first joint venture bank, benefits from a dedicated and well-trained workforce, along with substantial management support from Public Bank Malaysia This collaboration has positioned VID as one of the most profitable and prudent banks in the country However, the early development stage of Vietnam's financial markets means that the management practices at VID and other Vietnamese banks still lag behind global best standards.
In 2008, the Bank faced significant challenges due to fluctuating market interest rates and the global financial crisis, revealing weaknesses in its business and risk management practices A critical factor contributing to the profit decline in the first half of 2009 was the Bank's asset-liability mismatch in terms of volume, maturity, and interest rates, stemming from inadequate bank-wide Asset-Liability Management (ALM) Consequently, VID Public Bank must reassess and enhance its asset and liability management to improve its risk-return profile and achieve its primary ALM objectives: maximizing interest income and the net present value of assets minus liabilities This thesis aims to explore and address these pressing issues.
Research objectives
The research has 3 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?
- 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 atVID Public Bank?
Research methodology
Banks utilize various models in Asset Liability Management (ALM) to assess liquidity and interest rate risks, including liquidity gaps for liquidity risk, and repricing gaps, duration gaps, and simulations for interest rate risk This thesis focuses on empirical research using liquidity gaps, repricing gaps, and duration gaps due to the challenges associated with simulation methods Additionally, it aims to provide descriptive evidence regarding the current ALM practices of banks and identify any deficiencies in their approaches.
The thesis structure
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
THEORETICAL FRAMEWORK
Asset and Liability management overview
I.1.1 Definition of Asset and liability management
Asset and liability management (ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities of the bank (WIKIPEDIA).
Mismatches in financial portfolios lead to significant risks, primarily interest rate risk and liquidity risk Interest rate risk can be categorized into two types: the first involves fluctuations in interest income due to changes in interest rates, affecting the revenue and costs associated with all balance sheet assets and liabilities The second type arises from embedded options in banking products, such as the prepayment option that allows borrowers to renegotiate their loan rates when interest rates decrease (Bessis, 131).
Asset and Liability Management Committee (ALCO) is the unit in charge of managing the interest rate risk and the liquidity risk of the bank (Bessis, 131)
The objective of Asset Liability Management (ALM) is to optimize net interest income and the Net Present Value (NPV) of assets minus liabilities Essentially, future interest income fluctuates with the NPV, which encompasses the complete range of future cash flows from the portfolio, while interest income pertains to specific time periods.
ALM exposures are inherently global, arising from mismatches in the volumes of assets and liabilities, as well as interest rate discrepancies The concept of a 'gap' is fundamental to ALM, encompassing liquidity gaps—where assets and liabilities differ, leading to either a deficit or surplus of funds—and interest rate gaps, which reflect mismatches in the sizes of assets and liabilities tied to the same reference interest rate Additionally, the net present value (NPV) highlights the discrepancies between the values of liabilities and assets, with its sensitivity to interest rate fluctuations stemming from variations in these values Consequently, ALM effectively addresses the overall aggregated and netted exposure from the outset.
Sections I.1-I.4 of this chapter extensively reference the works of Bessis (2002), Gup & Kolari (2005), Sauders & Cornett (2003), Uyemura & Deventer (1993), and Peter & Sylvia (2008) The entire balance sheet is affected by implicit options embedded in banking products, which introduce further complexities to Asset Liability Management (ALM) risk.
I.1.2 Asset and Liability Management Departments
Three key financial departments play a crucial role in asset and liability management: the Controllers Department, the Budgeting (or Financial Planning) Department, and the ALM (or Financial Analysis or Forecasting) Department Each department has distinct responsibilities that contribute to effective financial oversight and strategic planning.
Controllers: Reports historical financial performance, and therefore establishes the current base balance sheet and income statement from which all risk analysis will be determined.
Budgeting sets the financial objectives for the bank for the current year, focusing on balance sheet volumes, revenues, and expenses based on realistic assumptions about interest rates, market trends, and local economic cycles This process typically follows a bottom-up approach, where individual units establish specific financial goals, and their collective contributions shape the overall objectives of the bank.
ALM plays a crucial role in forecasting a bank's balance sheet, cash flows, and income statement by analyzing potential variances in budget assumptions It simulates financial outcomes when base case assumptions prove incorrect, which is often the reality This process assesses the sensitivity of the bank's earnings and balance sheet, focusing on asset quality, liquidity, and capital ratios, in response to unexpected changes in interest rates or market conditions Equipped with this insight, the bank's management can proactively prepare for adverse situations, ensuring they are ready to respond effectively.
I.1.3 Asset and Liability Management Process
Policies and guidelines establish the operational limits for managing risk and return trade-offs that a bank can safely navigate, defining the organization's risk tolerance It is essential that asset-liability management (ALM) risk limits and policies are clearly articulated and approved by the board of directors, with recommendations provided by the Asset-Liability Committee (ALCO).
Analyzing a bank's current risk position involves assessing its status across various risk dimensions and forecasting future trends The key concern is whether the bank is presently exceeding its risk limits or if projections indicate a potential breach of these boundaries in the future.
The bank's Asset-Liability Committee (ALCO) is responsible for making critical decisions when the bank is outside its risk limits or is projected to exceed them To address this, ALCO can choose to adjust the bank's current or future risk profile by adopting new securities positions or modifying the maturity structure of the balance sheet through strategic pricing and investment decisions Ultimately, the goal is to reshape the bank’s balance sheet to ensure that risk measures remain within acceptable limits.
It is essential for banks to periodically assess whether their existing risk limits remain suitable, as the Asset and Liability Committee (ALCO) may advise the Board to adjust these limits—either temporarily or permanently—based on evolving circumstances Regular reviews of risk limits ensure that they align with current conditions and effectively manage potential risks.
When the Asset-Liability Committee (ALCO) decides to change the bank's risk profile, it typically requires adjustments through incremental securities or off-balance sheet positions In these cases, the treasury, funding, or trading units are usually tasked with executing these transactions Various departments interact with the markets to carry out these activities on behalf of the bank or its clients.
The effectiveness of adjustments made to a bank's risk profiles is assessed in a timely and objective manner This evaluation is typically conducted by the Asset Liability Management (ALM) department or the Controller's Department.
Liquidity Risk Management
I.2.1 Definition of Liquidity Risk Management
Liquidity risk refers to the potential inability to secure funds to fulfill demands such as deposit withdrawals, credit requests, and other financial obligations without incurring excessive costs Essentially, it highlights the risk of facing increased funding expenses due to unforeseen financial needs.
A liquidity gap refers to the disparity between the terms of assets and liabilities within a financial institution When liabilities surpass assets, it results in an excess of funds, leading to interest rate risk due to the unpredictability of returns on those excess assets Conversely, when assets exceed liabilities, a deficit occurs, indicating that the bank's long-term obligations are not fully supported by its available resources This situation creates liquidity risk, as the bank may struggle to secure necessary funds in the future to align with its asset size, potentially facing difficulties in accessing liquidity in the market and incurring higher costs to fulfill these requirements.
Liquidity gaps expose organizations to interest rate risk, creating future funding needs or requiring the investment of surplus funds These financial transactions occur at unknown future interest rates unless they are hedged in advance As a result, liquidity gaps contribute to the uncertainty surrounding interest revenues or costs associated with these transactions (Bessis, 140).
Liquidity gaps can be categorized into two types: static gaps and dynamic gaps Static gaps reflect a bank's liquidity position based on existing assets and liabilities, illustrating potential future gaps if all new business ceases, which can lead to a gradual deterioration of the balance sheet In contrast, dynamic liquidity gaps incorporate projected new credits and deposits into the existing asset and liability profiles, resulting in a comprehensive gap analysis that shows an increase in total assets and liabilities While both existing and new assets are essential for assessing overall fund excesses or deficits, it is common to initially focus on existing assets and liabilities to determine the gap profile Ultimately, it is important to recognize that a dynamic gap is always present, as financial positions fluctuate daily.
Funding risk is influenced by the market's perception of the issuer and its funding policies Institutions that frequently seek unexpected funds can send negative signals, which may deter lenders Additionally, the cost of funds is closely tied to a bank's credit standing; a decline in perceived creditworthiness results in higher funding costs This issue goes beyond liquidity, as funding costs significantly impact profitability Therefore, a bank's credit rating plays a vital role in determining its funding expenses.
Market liquidity is closely linked to liquidity crunches, which occur due to insufficient trading volume This can lead to significant price volatility and steep discounts from par value when counterparties hesitate to engage in trades Consequently, funding risk increases, resulting in elevated costs of borrowing, primarily driven by market conditions rather than individual banks Ultimately, market liquidity risk manifests as a diminished capacity to secure financing at a reasonable cost.
Asset liquidity risk arises from the inherent liquidity characteristics of assets rather than the overall market liquidity Maintaining a pool of liquid assets provides a safeguard against market fluctuations, enabling banks to fulfill short-term obligations without needing external funding.
Liquidity risk poses a significant threat to banking portfolios, as severe liquidity shortages can lead to bankruptcy, making it a critical concern Often, these extreme conditions arise as a consequence of other underlying risks.
I.2.2.1 Asset Liquidity Management (or Asset Conversion) Strategies
Asset conversion, also known as stored liquidity management, is the oldest method for addressing liquidity needs This strategy involves holding liquidity in the form of assets, primarily cash and marketable securities When cash is required, specific assets are liquidated to meet all cash demands effectively.
Liquid assets, such as Treasury bills, interbank market loans, and certificates of deposit, are commonly used by banks but come with significant costs These assets typically yield lower returns compared to less liquid investments, and selling them results in lost future earnings Additionally, asset sales incur transaction costs and may occur in declining markets, heightening the risk of losses This strategy can also negatively impact the bank's balance sheet, as selling low-risk government securities may undermine the perceived financial strength of the institution Ultimately, while liquid assets provide immediate liquidity, they often offer the lowest returns, causing banks to miss out on potentially higher earnings from other investment opportunities.
Banks can enhance their liquidity by borrowing in the money market This strategy, known as borrowed liquidity management, involves acquiring readily available funds to meet all expected liquidity needs.
Borrowing liquid funds offers several advantages for banks, allowing them to access necessary liquidity without the need to maintain a constant reserve of liquid assets, which can diminish potential returns This approach enables financial institutions to keep their asset portfolios intact while meeting liquidity demands, unlike selling assets, which reduces their overall size Additionally, banks can effectively manage their borrowing through interest rates; increasing the offer rate attracts more funds when needed, while lowering it can reduce the influx when less capital is required.
The principal sources of borrowed liquidity for a depository institution include interbank market borrowings, negotiable certificate of deposits, repurchase agreements, and borrowings from the discount window of the central bank.
Borrowing liquidity is a high-risk strategy for addressing liquidity issues, yet it offers the potential for significant returns due to fluctuating interest rates and the swift changes in credit availability Financial service providers often find themselves needing to acquire liquidity during challenging times, facing both high costs and limited access The uncertainty of borrowing costs further complicates earnings projections Additionally, banks in distress typically require borrowed liquidity the most, especially as news of their troubles spreads, prompting customers to withdraw funds Consequently, other banks become increasingly reluctant to lend to the struggling institution due to the associated risks.
Financial firms often adopt a balanced liquidity management strategy to mitigate the risks associated with relying solely on borrowed liquidity and the costs of storing liquidity in assets This approach involves maintaining a portion of expected liquidity demands in marketable securities while securing lines of credit from potential fund suppliers for additional support To address unexpected cash needs, firms typically turn to near-term borrowings, while longer-term liquidity requirements can be strategically planned by allocating funds in short-term and medium-term assets, ensuring cash availability when needed.
I.2.3.1 The Sources and Uses of Funds Approach
The sources and uses of funds method for estimating liquidity needs is based on two fundamental principles: liquidity increases when deposits rise and loans decrease, while liquidity decreases when deposits fall and loans increase.
Interest rate risk management
Interest rate risk refers to the potential effects, both negative and positive, on a bank's earnings and net asset value due to fluctuations in interest rates.
The volatility of interest rates significantly affects a bank's net interest income and the market value of its assets and liabilities, making the measurement and management of interest rate risk a critical concern for modern bank managers Banks can utilize various methods to assess their exposure to risks arising from mismatched maturities between assets and liabilities in an environment characterized by fluctuating interest rates.
2 Sections I.3.2 are drawn heavily on Sauders & Cornett (2003) (page 162 to page 231)
This thesis examines three models for assessing a bank's asset-liability gap exposure: the repricing (or funding gap) model, the maturity model, and the duration model.
The repricing or funding gap model is a cash flow analysis that evaluates the difference between the interest income generated from a bank's assets and the interest expenses on its liabilities, known as net interest income, over a specified timeframe.
Banks typically categorize the repricing of their assets and liabilities into several maturity buckets: one day, over one day to three months, over three months to six months, over six months to twelve months, over one year to five years, and over five years.
The repricing gap approach allows banks to assess the rate sensitivity of their assets and liabilities by analyzing the gaps within each maturity bucket This involves calculating the rate sensitivity of each asset (RSA) and liability (RSL) on the balance sheet, indicating that these financial instruments are repriced at or near current market interest rates within a specified time horizon.
A negative gap (RSA < RSL) suggests that an increase in short-term interest rates would reduce a bank's net interest income, as it has more rate-sensitive liabilities than assets Consequently, if interest rates rise equally for both rate-sensitive assets (RSAs) and liabilities (RSLs), the bank's interest expenses will grow more significantly than its interest revenues.
NIIi = change in net interest income in the ith bucket
GAPi = the gap between the book value of rate-sensitive assets and rate-sensitive liabilities in the ith bucket.
Ri = The change in the level of interest rates impacting assets and liabilities in the ith bucket
To assess the effect of interest rates on a bank's interest income by the end of a specific period, bank managers calculate cumulative gaps (CGAP) across different repricing categories or buckets.
If Ri is average interest rate change affecting assets and liabilities that can be repricing within the period, the cumulative effect on the bank’s net interest income is:
If rate change on RSAs differs from rate change on RSLs and is R RSA and
R RSL respectively, the cumulative effect on the bank’s net interest income is:
NII= (RSA X R RSA )– (RSL X R RSL )
The repricing gap enables banks to strategically align their assets and liabilities or utilize off-balance-sheet strategies to capitalize on anticipated interest rate fluctuations Nevertheless, the repricing gap model has significant limitations in effectively assessing interest rate risk.
1 Market value effects: Interest rate changes have a market value effect in addition to an income effect on assets and liabilities values The repricing model ignores the market value effect – implicitly assuming a book value accounting approach As such, the repricing gap is only a partial measure of the true interest rate exposure of a bank.
2 Overaggregation: The problem of defining buckets over a range of maturities ignores information regarding the distribution of assets and liabilities within those buckets The shorter of bucket is, the less weakness on overaggregation of the repricing model is Today, with the development of banking information technology, banks can set buckets as shorter as they want Therefore, the model is more useful
3 The problem of runoffs: In the simple repricing model discussed above, we assumed that all consumer loans matured in 1 year or that all conventional mortgages mature in 30 years In reality, the bank continuously originates and retires consumer and mortgage loans as it creates and retires deposits.This runoff cash flow component of a rate-insensitive asset or liabilities is itself rate sensitive The bank manager can easily deal with this in the repricing model by to estimating cash flow that will run off and add to the value of rate-sensitive assets and liabilities.
4 Cash flow from off balance sheet activities: The RSAs and RSLs used in the repricing model generally include only the assets and liabilities listed on the balance sheet Changes in interest rates will affect the cash flows on many off-balance-sheet instruments as well
The maturity model utilizes the market value accounting approach, highlighting how fluctuations in interest rates affect the overall market value of a bank's assets and liabilities, ultimately influencing its net worth or equity.
By analyzing the relationship between interest rate and market value, maturity of bank’ fixed-income asset and liabilities, the model finds out the following rules:
- A rise (fall) in interest rates generally leads to a fall (rise) in the market value of an asset or liability.
- The longer the maturity of a fixed-income asset or liability, the larger the fall (rise) in market value for any given interest rate increase (decrease).
- The fall in the value of longer-term securities increases at diminishing rate for any given increase in interest rates.
The general principles applicable to individual assets and liabilities can also be applied to a portfolio of assets and liabilities within a bank In this context, let MA represent the weighted-average maturity of the bank's assets, while ML denotes the weighted-average maturity of the bank's liabilities.
MA=WA1MA1 + WA2MA2+ WA3MA3+ + WAnMAn (1)
ML=WL1ML1 + WL2ML2+ WL3ML3+ + WLnMLn (2) Where
MA : the weighted-average maturity of a bank’s assets
ML : the weighted-average maturity of a bank’s liabilities
WAi: the importance of each asset in the asset portfolio as measured by the market value of that asset position relative to the market value of all the assets.
WLi: the importance of each liability in the liabilities portfolio as measured by the market value of that liability position relative to the market value of all the liabilities.
MAi : the maturity of the ith asset
MLi : the maturity of the ith liability
Asset and Liabilities Management Model
ALM simulations are essential for modeling balance sheet behavior across different interest rate scenarios, allowing for the assessment of risk and expected values of key metrics like interest income and market value Without these simulations, the ALM Committee (ALCO) lacks comprehensive visibility into future profitability and risk, hindering the establishment of effective business policies and hedging strategies.
The scope of ALM simulation encompasses both interest rate risk and business risk, with policies designed for the medium term This approach takes into account changes in the banking portfolio resulting from new business over a period of at least 2 to 3 years The simulations yield a variety of outputs.
- They provide projected values of target variables for all scenarios.
- They measure the exposure of the bank to both interest rate and business risk.
- They serve to ‘optimize’ the risk and return trade-off, measured by the expected values and the distributions of the target variables across scenarios.
Simulation techniques enable the exploration of various combinations of interest rate scenarios, business conditions, and alternative hedging strategies, aimed at optimizing the risk-return profile of banking portfolios Consequently, comprehensive Asset Liability Management (ALM) simulations involve multiple sequential steps.
- Select the target variables, interest income and the balance sheet NPV.
- Build business projections of the future balance sheets
- Project margins and net income, or the balance sheet NPV, given interest rates and balance sheet scenarios
- Consider optional risk by making interest income, or balance sheet NPV, calculations dependent on the time path of interest rates.
- Combine all steps with hedging scenarios to explore the entire set of feasible risk and return combinations.
- Jointly select the best business and hedging scenarios according to the risk and return goals of the ALCO.
After generating risk–return combinations through multiple simulations, it's essential to evaluate the most effective hedging policies based on their ability to enhance the risk–return profile and align with management objectives The final step involves employing a robust technique to manage the extensive simulations produced A straightforward and efficient method is to simulate expected profitability and its volatility for each hedging policy under business risk, which helps identify optimal solutions This technique is applicable to both interest income and NPV as target variables.
Figure 1.1 Overview of ALM simulation process
Technical tools for exploring potential outcomes include simple gaps and comprehensive simulations While gaps are appealing, they have limitations due to uncertainties surrounding future asset and liability volumes, which are linked to business risks, and they fail to account for risks from options embedded in banking products In contrast, simulations address these limitations by accommodating various business scenarios and directly calculating target variable values, independent of gaps, when interest rates fluctuate.
ALM simulations concentrate on key target variables such as interest margins, net income, and the mark-to-market value of the balance sheet (NPV) For a comprehensive long-term perspective, NPV is the most effective target variable, as it encapsulates the total future interest income stream While both short and long-term insights are essential, utilizing interest income as a target variable for the near future and NPV for the long-term analysis is a strategic approach.
ASSET–LIABILITY MANAGEMENT
Overview of VID Public Bank
VID Public Bank (VIDPB) was established on September 30, 1991, as a joint venture, equally owned by the Bank for Investment and Development of Vietnam (BIDV) and Public Bank Berhad of Malaysia (PBB).
BIDV, established on April 26, 1957, is one of Vietnam's four largest state-owned commercial banks Currently, it boasts an extensive network of over 113 branches, more than 500 transaction offices, and thousands of ATMs and POS terminals across the country Additionally, BIDV has formed international banking relationships with over 700 banks globally.
Founded in 1966, Public Bank has grown to become a premier financial services provider in Malaysia, serving over five million customers Recognized as the top brand in the country's financial sector, it ranks as the third largest banking group by both balance sheet and market capitalization Starting from a single branch, Public Bank now boasts 250 branches in Malaysia and a significant regional presence, with 118 branches and 3 representative offices across 8 Asian countries The bank has successfully expanded its overseas operations by implementing best practices from Malaysia Moody's Investor Service has reaffirmed Public Bank's long-term deposit rating of A3 and short-term deposit rating of P-1, reflecting its stable outlook The bank's commitment to sustainable performance and exceptional management has earned it numerous awards, including best bank and corporate governance accolades from international finance and banking publications in 2010.
VIDPB, a joint venture between two leading banks from Vietnam and Malaysia, has leveraged the strengths of its parent companies to establish itself as a formidable commercial bank in Vietnam Officially commencing operations, VIDPB has positioned itself as a key player in the financial sector.
Established on May 18, 1992, in Hanoi, the organization expanded its branch network to Ho Chi Minh City in April 1993, followed by Da Nang in April 1994, Hai Phong in May 1996, Binh Duong Province in November 2003, Cho Lon Branch in June 2006, and Dong Nai Branch in July 2007.
II.1.2 Banking products and services
VIDPB is presently offering a wide range of products and services to its customers, which are under 3 broad categories: deposits, loans and advances and other services. a Deposit products
VIDPB accepts both demand and fixed deposits in VND and USD from individuals and legal entities, but unlike other local banks, it is not permitted to mobilize savings accounts Instead, VIDPB issues Certificates of Deposit to attract customer funds A key component of the bank's business strategy is to increase its share of low-cost demand deposits Additionally, VIDPB offers a variety of loan and advance products to meet customer needs.
Loans and advances are classified as direct advances (i.e with outflow of cash when utilized) and indirect advances (i.e utilized without any cash outflow). Direct advances include:
- Trade financing: including two main types, namely Trust Receipt (TR - for import financing) and Foreign Bills of Exchange Purchased (FBEP - for negotiation of export bills).
Term loans are categorized into two primary types: fixed loans (FL), which can be utilized for short or medium/long-term financing of investment projects and consumption, and revolving credit (RC), designed for short-term needs primarily to support working capital.
- Letter of credit (LC) and
- Shipping guarantees (SG). c Other services
Other services presently provided by VIDPB include payment and remittance (inward / outward) services, foreign exchange transactions, cashing of travelers' cheques (TC), ATM services, etc
The Bank's organization structure is depicted in Appendix 1.
The Board of Directors (BOD) serves as the highest management authority of the Bank, comprising four members who represent the joint venture parties in proportion to their capital contributions The BOD is responsible for formulating the Bank's business plans and medium to long-term strategic objectives, as well as approving the annual budget Additionally, the BOD conducts regular reviews of the progress made by various operating divisions against their budgets and evaluates the action plans and performance of business units against set targets Furthermore, the BOD establishes minimum standards and policies for managing credit risks and other critical areas of the Bank's operations.
The Standing Committee (SC) serves as the Bank's top operational authority, tasked with managing all operational matters within its jurisdiction as designated by the Board of Directors (BOD) Each party involved will appoint one representative from their Board members to the SC, ensuring that no Standing Member also holds the position of Chairman of the Board.
The General Director, supported by Deputy General Directors, is accountable to the Board of Directors for the Bank's daily operations He oversees the Hanoi Head Office, which comprises ten functional departments: Credit, Accounts and Finance, Administration, Treasury, Correspondent Banking, Personnel, Marketing & Product Development, Operations & Methods, IT, and Internal Audit.
The Controllers' Committee (CC) serves as a vital support unit for the Board of Directors (BOD) and the Supervisory Committee (SC) by analyzing new regulations and legal updates It issues internal guidelines to facilitate the Bank's smooth operations and monitors the Bank's activities to ensure compliance with existing laws and regulations.
Branches are managed by a branch manager (BM) supported by deputy managers and consist of five key functional departments: the Deposit Department, which handles current accounts, fixed deposits, and cash transactions; the Bills/Remittance Department; the Credit Department; the Marketing Department; and the Accounts/Administration Department.
II.1.4 Overall Financial Performance of VID Public Bank
A summary of the bank's business performance in the last 5 years is under Table 1 below
Table 2.1: Brief financial performance of VID Public Bank, 2006 - 2010
Total Loans & Advances (USD m illion)
Total loans & advances (USD million)
After tax Profit (USD million)
After tax Profit (USD million)
Source: VID Public Bank, Annual reports 2006- 2010
Figures 2.1: Brief financial performance of VID Public Bank, 2006 - 2010
Source: VID Public Bank, Annual reports 2006- 2010
Over the past five years, VIDPB has experienced significant growth across all metrics The bank's total assets surged by 121.3%, rising from $176.10 million in 2006 to $389.66 million in 2010, with an impressive average annual growth rate of 24.25% Additionally, shareholders' equity saw a remarkable average annual growth rate of 38.78%, tripling by 2010 compared to 2006 Furthermore, VIDPB's after-tax profits skyrocketed by 178.1%, increasing from $2.6 million in 2006.
In 2010, the bank reported $7.23 million in after-tax profit, reflecting an average annual growth rate of 35.62% However, since 2009, the growth rate of after-tax profit has decelerated, with 2009 profits reaching only 66% of the bank's target This slowdown can be attributed to rising deposit interest rates coupled with declining lending rates, as the State Bank of Vietnam imposed a maximum lending rate limit of 150% of the deposit rate.
Asset and Liability Management at VID Public Bank
II.2.1 Liquidity Management at VID Public Bank
As a joint venture bank with capital contributions in USD, VIDPB typically experiences a surplus in USD funds and a deficit in VND funds Consequently, the bank consistently meets the liquidity requirements set by the State Bank of Vietnam (SBV) for USD, while its VND liquidity ratios are often close to the required levels However, the bank faces significant challenges in managing its VND liquidity This section of the thesis will therefore concentrate on analyzing the bank's VND liquidity management practices.
II.2.1.1 Organization & Internal Liquidity Management Procedures a Liquidity Management Organization
As for VIDPB’s procedures, liquidity management has been concentrated at the Treasury Department of the Head Office and Bills & Remittance Departments of Branches
- Functions of Head Office’s Treasury Department: The Treasury
The Head Office Department oversees the bank's liquidity risk management, ensuring compliance with SBV regulations regarding liquidity ratios and statutory reserves It also manages the balance of nostro accounts to support payment activities while maintaining reasonable funding costs.
- Functions of branches’ Bills & Remittance Department: Branches’ Bill &
Remittance Departments play a crucial role in managing the balance between sources and uses of funds across branches They facilitate the deposit of surplus funds or the borrowing of funds from the Head Office to address deficits Additionally, these departments are responsible for ensuring that branches maintain adequate balances in their nostro accounts to meet their payment requirements Effective liquidity management procedures are essential for optimal financial operations.
VIDPB's liquidity management practices are currently basic and do not align with global best practices The focus is primarily on adhering to SBV regulations regarding reserve requirements and liquidity ratios, lacking internal procedures and limits for liquidity management Additionally, the bank relies on static analysis, assessing its liquidity position solely based on existing data without considering future forecasts for liquidity supply and demand.
II.2.1.2 Analysis of VIDPB’s Sources of Funds and Uses of Funds a Sources of Funds
There are two main sources of funds which heavily affect the bank’s liquidity They are deposits by customers (individuals and entities) and deposits by other credit institutions
Deposits from non-bank customers are the primary funding source for VIDPB, comprising small and medium-sized enterprises (SMEs), foreign investment enterprises, and individuals A notable characteristic of VIDPB is its reliance on a limited number of large institutional depositors, which introduces potential instability to its funding sources Typically, the total outstanding deposits from the 15 largest depositors account for approximately 45% of the bank's total VND deposits As a joint venture bank, VIDPB faces restrictions on establishing a wide network of transaction offices, which hampers its ability to attract deposits from a broader base of individual customers.
Deposits from non-bank customers consist of demand deposits and fixed deposits, with demand deposits typically representing 25%-30% of the total Historically, these deposits were viewed as the most advantageous source of funds for banks due to their low interest costs However, in recent years, factors such as the global financial crisis, fluctuating monetary policies, heightened competition within the banking sector, and restrictions on short-term funds for medium and long-term lending have diminished the stability of demand deposits, making them less favorable for banks.
Due to the frequent fluctuations in VND interest rates and the appeal of alternative investments like gold, securities, and real estate, Vietnamese depositors increasingly favor shorter-term deposits, typically under one year, which constitute 84%-88% of total deposits In contrast, deposits with a maturity of one year or more represent only 12%-16% Additionally, in Vietnam, early withdrawal of deposits allows customers to earn interest at the nearest shorter-term rate As interest rates rise, banks like VIDBP encounter liquidity and interest rate risks, as customers withdraw funds to take advantage of higher rates, forcing banks to increase deposit interest rates while their lending rates remain unchanged.
The Bank utilizes deposits from other credit institutions to facilitate broker transactions and provide business loans during periods of fund shortages In Vietnam, many commercial banks have allocated credit quotas to VIDBP, allowing for easier access to funds in a stable money market However, challenges in raising funds occur when liquidity is low, making this funding source relatively high-cost and unstable.
VIDBP primarily allocates its funds to various activities, including offering loans to customers, facilitating trade finance through import and export documentation, making deposits with other banks, and investing in bonds and treasury bills.
Cash: VIDPB has the policy to maintain only enough cash for daily requirement in order to ensure the safety of the bank while maintain profitability.
In cases of surplus funds, VIDPB has the option to deposit these funds at other credit institutions Typically, these deposits are short-term, lasting under six months, and are executed through the money market.
Deposits at the State Bank: VIDPB deposits a part of its funds at SBV for main purposes of meeting reserve requirement and payment purpose through SBV’s clearing payment system
Lending is the primary use of funds and a key profit driver for banks, with total outstanding loans representing over 60% of their total assets Of these loans, 40% are denominated in VND and 20% in USD Additionally, medium and long-term credits, which exceed 12 months, constitute 55% of total VND credits and are subject to repricing every six months.
VIDPB does not maintain a policy for holding or trading investment securities as liquid assets for immediate liquidity needs Currently, the bank possesses only a minimal amount of bonds held as collateral for low-value payments mandated by the State Bank of Vietnam (SBV) and only purchases treasury bills and bonds upon SBV's request, as was the case in 2008.
II.2.1.3 Evaluating Liquidity Management of VID Public Bank
Currently, SBV’s regulations on reserve requirement and liquidity ratios are as follows:
Compulsory reserves are the reserves that credit institutions have to maintain at deposit accounts at SBV
Reserve computation formula is as follows:
The reserve requirement is calculated by multiplying the daily average of outstanding reservable deposits by the required reserve ratio Reserves are determined based on the daily average of each type of reservable deposit throughout the computation period, alongside their respective reserve ratios, which are influenced by the prevailing monetary policy stance Currently, the applicable reserve ratios are established according to these guidelines.
Table 2.2: Current required reserve ratios
Required reserve ratio for VND deposits with maturities of less than 12 months
Required reserve ratio for VND deposits with maturities from 12 months or more
Required reserve ratio for USD deposits with maturities of less than 12 months
Required reserve ratio for USD deposits with maturities from 12 months or more
If a bank’s daily average balance of deposit at SBV during maintenance period is lower than the reserve requirement, it will have to pay a penalty.
SBV’s regulations on liquidity ratios
Currently, as stipulated by Circular No.13/2010/TT-NHNN of State Bank of Vietnam, the bank is required to comply with the following ratios:
Table 2.3 Liquidity ratio limits required by SBV
No Type of ratio Limit
1 Current liquidity ratio = the ratio between the value of total outright receivable Asset and total Liabilities
2 Liquidity ratio within 7 days = the ratio between total
Asset maturing within 7 subsequent days from the next day and total Liabilities maturing within 7 subsequent days from the next day applicable to VND, EURO,
GPB, USD (including USD and other foreign currencies converted into USD at inter bank rate at the end of each
3 The maximum ratio of short term funds used for medium term and long term lending
The bank typically adheres to the State Bank of Vietnam's (SBV) reserve and liquidity ratio requirements while fulfilling customer needs for deposits and loans during stable money market conditions However, in challenging economic times, tighter monetary policies, or heightened payment demands during the traditional New Year Holiday, the bank experiences liquidity shortages that hinder its ability to meet SBV's VND liquidity ratio standards For instance, from November 30, 2009, to early 2010, the bank saw a significant decline in total mobilized VND funds, dropping from VND 3,389 billion to VND 2,632 billion, a reduction of 22.3% This liquidity shortfall made it difficult for the bank to satisfy customer demands and comply with SBV requirements, with the bank failing to meet these standards on four out of five days in the first quarter of 2010 To address the funding gap, VIDPB resorted to borrowing from the interbank market at elevated interest rates, utilizing SBV's refinancing window, and engaging in foreign exchange swap transactions with the SBV.
VID Public Bank adheres to the required asset-liability ratio; however, it faces a maturity gap that necessitates borrowing from other banks To meet this ratio, the bank invests borrowed funds in the money market with shorter maturities, which incurs costs due to the interest rate differential For instance, on October 31, 2010, the bank borrowed VND371 billion for three months at an interest rate of 11.5% per annum, while lending to other banks at rates ranging from 6% to 9% per annum for overnight and one-week terms Consequently, this strategy resulted in an estimated cost of VND1.8 billion.
EMPIRICAL RESULTS AND ECONOMIC ANALYSIS
Liquidity Risk Exposure of VID Public Bank
In order to measure liquidity gap, based on the characteristics of the bank’s assets and liabilities we assume that in the next 1 year:
- 2% demand deposits will be withdrawn on the next day, 4% in 2-7 days,7% in 1 week to 1 month, and 20% in 1 month to 3 months.
- 20% fixed deposits by customers due next week will be withdrawn
- 30% fixed deposits by customers due in from 1 week to 1 month will be withdrawn
- 45% fixed deposits by customers due in from 1 month to 3 months will be withdrawn (because of New Year holiday and Tet holiday)
- 15% fixed deposit by customer due in from 3 months to 1 year will be withdrawn
- 25% fixed deposit by customer due in over 1 year will be withdrawn
- 80% of loan due will be collected
- 100% of interbank lending and borrowing will be collected or paid
In the next three months, new deposits will be categorized by maturity: those under three months will constitute 5% of total mobilized funds, deposits maturing between three to six months will account for 8%, and those with a maturity of six to twelve months will represent 13%.
In the upcoming three months, new loans will be categorized based on their maturity periods, with loans maturing in less than three months accounting for 5% of total outstanding loans Loans with maturities ranging from three to six months will represent 10%, while those maturing between six and twelve months will constitute 13% of the total outstanding loans.
Based on these assumptions the liquidity gap can be calculated as follows:
Table 3.1 Liquidity gap estimation, from November 2010 – October 2011
1 Deposit and borrowing from other banks 90 0 371 0 0 0 0
Cumulative liquidity gap 400 435 232 -323 193 -161 244 Source: Author’s calculation
Table 3.1 shows that, based on cash inflow and outflow forecasts, the bank would have surpluses of about VND 400 billion on the first day of November,
VND 435 billion in the next 2-7 days, VND 232 in the next month The surpluses would reverse to a liquidity deficit of VND 323 during the next 1-3 months
The bank aims to strategically invest surplus funds in assets with optimal maturities to enhance profitability, while also maintaining liquidity through liquid assets to address short-term deficits Additionally, the bank is actively seeking funding sources with suitable maturities and competitive pricing to effectively manage future fund shortages.
On January 11, 2010, the bank had the opportunity to invest a surplus of VND 400 billion across various maturities, ranging from overnight to one month, rather than solely investing the entire amount overnight Additionally, the VND 323 billion deficit for the one-month period could be addressed through funding sources with maturities spanning from one to three months.
From the fourth to the sixth month, the bank anticipates that its deficit will be eliminated due to increased cash inflows To address liquidity needs effectively, the bank will implement strategies based on its projected cash inflows and outflows, alongside forecasts of market interest rates and conditions.
- To increase deposit interest rate offer for relevant maturity to mobilize funds from customers
- To borrow funds from money market.
VID Public Bank's lack of liquid assets, such as treasury bills and bonds, limits its ability to sell off assets to address liquidity shortages This deficiency highlights a significant weakness in the bank's liquidity management that must be addressed to ensure financial stability in the future.
III.2 Interest Rate Risk Exposure of VID Public Bank
III.2.1 Interest Rate Risk Measurement
One of the ways to describe the VIDPB’s interest rate risk position is to describe the repricing structure of its assets and liabilities.
VIDPB is characterized by its liabilities being more sensitive, as they mature and reprice faster than its assets This situation necessitates the remobilization of new funding to cover maturing liabilities until the assets reach maturity Consequently, the bank faces heightened interest rate risk in a rising interest rate environment, since the new funding may incur higher rates compared to the returns generated from its assets.
The VIDPB interest rate repricing mismatch at 31 October 2010 is presented in Table 3.2.
Table 3.2 Repricing mismatch report as of 31/10/2010
Loans and advances to customers - 46 188 148 346 381 224 1,515 - - 2848
The report highlights that the bank's static repricing model, combined with the fact that most of its loans are repriced every six months, has resulted in significant repricing mismatch gaps, totaling VND1,187 billion over the five months following October 2010 This gap is expected to improve considerably after this period Consequently, if market interest rates were to rise during these five months, the bank's net interest income would decline; for instance, a 1% increase in interest rates would lead to a reduction in net interest income.
Using the management report data from the Bank as of October 31, 2010, we performed a duration analysis to assess the bank's equity exposure to fluctuations in interest rates The duration of VND assets was measured to evaluate this exposure effectively.
0.24 year; the duration of VND liabilities was 0.13 years Due to the difference between duration of assets and liabilities, the bank would have suffered a loss in equity by VND4.19 Billion if there had been a sudden and sustainable rise in interest rates by 1%.
If there had been a sudden and sustainable rise in interest rates by 1%, the bank would have suffered a loss in equity by:
Thus 1% increase in interest rate make shareholders’ equity would have reduced by VND4.19 billion
If interest rates had risen by 3%, the bank would have faced a decline in net interest income and net worth amounting to VND14.82 billion and VND12.57 billion, respectively, resulting in an overall loss of VND27.39 billion without effective measures to mitigate interest rate risk.
III.2.2 VND Interest Rate Cycle 2008-2010
Figure 3.1 VNIBOR 3-month and overnight, 2008-2011
Between 2008 and 2010, VND interest rates experienced significant fluctuations primarily due to the State Bank of Vietnam's (SBV) monetary policy Following an expansionary monetary policy in 2007, which resulted in an M2 growth rate of 46.1%, inflation surged to over 9% in early 2008 In response, the SBV implemented measures to tighten monetary policy, including raising rediscount and refinancing rates, increasing required reserve ratios, and issuing compulsory bills to commercial banks These actions led to a rapid decrease in market liquidity, causing a notable rise in market interest rates, with the interbank market's 3-month interest rate (VNIBOR) exceeding 20% in August 2008, and even surpassing 30% on some days However, following this contractionary phase, the economy faced recessionary pressures.
In response to the 2008 global financial crisis, the State Bank of Vietnam (SBV) implemented an expansionary monetary policy, leading to a significant decrease in interest rates during the last quarter of 2008, which persisted throughout most of 2009 However, this policy resulted in rising inflation, prompting the SBV to tighten monetary policy starting in November 2010 Concerned about the potential negative impact of contractionary measures on economic growth, the SBV set lending interest rate ceilings at 150% of deposit rates and later capped deposit interest rates at 14%, causing the interest rates announced by banks to diverge from actual market rates.
In Vietnam's volatile monetary policy landscape, banks encounter significant fluctuations in interest rates, leading to substantial interest rate risk To navigate this challenging environment effectively, it is crucial for banks to implement robust strategies for managing interest rate risk.
III.2.3 Interest Rate Risk Management
In section III.2.1, we assessed the bank's exposure to interest rates and examined how fluctuations in VND interest rates impact the bank's net interest income and overall net worth Section III.2.2 highlighted the frequent and significant fluctuations of market interest rates in Vietnam, exposing the bank to considerable interest rate risk To mitigate potential losses, VID Public Bank should implement effective interest rate risk hedging instruments.
III.2.3.1 Duration Gap Management Instruments
Duration gap management is method that banks alter the mix and volume of financial assets and liabilities in order to minimize their duration gap
Interest Rate Risk Exposure of VID Public Bank
- Current yield rate: 10% current market price is VND82,330
- 1 month forward rate: 12% 1 month forward price is VND77,400
- Assume that interest rate had increased 3%; market value price of the bond would have dropped to VND68,700.
If the bank want to hedge 50% of the losses or VND10.16 billion, it would have taken an off-balance-sheet hedge by selling the bonds for forward delivery in
1 month’s time with VND117 billion face value (.16/(77.40-68.70)) at VND77,400 for every VND100,000 face value of 20-year bond or receive VND90.53 billion
If the anticipated 3 percent increase in interest rates had materialized, the bank would have incurred a loss of VND20.32 billion However, upon the maturity of the forward contract, the bank purchased VND117 billion in face value of 20-year bonds at a spot market price of VND68,700 per VND100,000 face value, totaling VND80.37 billion Consequently, the bank profited from the forward transaction by delivering these bonds to the buyer.
VND90.53Bil - VND80.37Bil = VND10.16Bil
(price paid by forward buyer to forward seller)
(cost of purchasing bonds in the spot market t = month 1 for delivery to the forward buyer)
The bank effectively hedged 50% of its interest rate risk exposure by utilizing interest rate forwards, offsetting an on-balance-sheet loss of VND 10.16 billion with an equivalent off-balance-sheet gain of VND 10.16 billion.
RECOMMENDATIONS TO IMPROVE ASSET AND LIABILITY
Setting up the Asset and Liability Management Committee (ALCO)
The Bank must establish an Asset and Liability Committee (ALCO) responsible for managing liquidity and interest rate risks ALCO will collaborate with relevant departments on asset and liability management Its key responsibilities include organizing and administering the bank's treasury activities safely and effectively.
- Managing and taking full responsibilities for the outcome of banking book.
- Constructing and developing ALM policy in order to magnify the effectiveness of bank’s treasury usages in accordance with specific periodical business plan.
- Authorizing treasury balance and usage scheme in short term.
- Deciding the limits of structure and scale of balance sheet, assuring the success of business targets, provided that they do not exceed bank risk acceptance.
- Supervising the state of balance sheet and net income of the main products
- Authorizing the bank’s pricing policy on main products, assuring that the cost of these products has included market risk.
- Deciding the limits of liquidity risk and market risk while allocating these limits to all branches without exceeding the risk acceptance.
- Supervising the limits of the liquidity risk and market risk periodically to ensure that all ALCO’s decisions are abided.
- Taking responsibilities for the pricing system of internal fund transfer and application tools.
- Supervising the compliance of relevant departments and branches on ALM risk limits.
The relevant departments have responsibilities to support ALCO in:
- Forecasting variation of interest rate and defining interest rate scenarios.
- Forecasting local and national economic scenarios.
- Building business projections of the future balance sheets, given the local and national economic scenarios.
- Projecting margins and net income, or the balance sheet NPV, given interest rates and balance sheet scenarios.
- Recommending hedging scenarios to explore the entire set of feasible risk and return combinations.
- Implementing the decisions of ALCO on asset and liabilities managements. b ALCO members include:
- Deputy General Director in charge in Finance and Treasury - Chairman of the committee,
- Manager of Account and Finance Department,
The ALM Information and Analysis Department is a newly established unit designed to assist the Asset and Liability Committee (ALCO) in generating local and national economic forecasts, interest rate projections, and balance sheet analyses This department will focus on developing simulation models to assess risks, propose effective risk management strategies, and calculate internal fund transfer prices, thereby enhancing the organization's financial decision-making capabilities.
The Chief Internal Audit emphasizes the importance of frequent ALCO meetings to effectively monitor VID Public Bank's risk exposures During periods of market instability, these meetings may be held daily, whereas, under normal business conditions, they should occur once or twice a week.
Formulating Asset and Liability Management Policy
In addition to establishing the Asset and Liability Committee (ALCO) and issuing its operating regulations, the bank must implement a liquidity risk management policy, an interest rate risk management policy, and internal fund management guidelines to effectively support and guide Asset Liability Management (ALM) activities.
IV.2.1 Establishing Liquidity Management Policy
VID Public Bank currently lacks an internal guideline for liquidity management, resulting in several shortcomings as outlined in Chapter II Establishing a comprehensive internal guideline is essential for effective liquidity management, and it should encompass key principles and strategies to enhance the bank's operational efficiency.
To effectively manage liquidity, banks should apply a cash flow approach to estimate future liquidity needs The centralized database at the Head Office, along with banking software, facilitates the development of a reporting system for liquidity forecasting Accurate forecasts and reports depend on daily submissions of projected future fund requirements from all branches, the credit department, and the operations department.
To ensure the bank's liquidity, it is essential to establish limits for key liquidity ratios The cash position indicator should maintain a minimum of 5% for each currency to mitigate foreign exchange rate risk, particularly due to fluctuations in the USD/VND rate The loans to deposit ratio (LDR) currently stands at around 100%, necessitating borrowing from the money market, which poses a liquidity risk during market crises; therefore, a maximum LDR of 80% for the entire bank is recommended, with tailored limits for individual branches based on their specific characteristics, such as a 40%-45% LDR for the Ho Chi Minh City branch Additionally, the bank should improve its liquidity management by holding liquid securities, such as treasury bills or bonds, instead of relying solely on borrowed liquidity; a minimum liquid securities indicator of 5%-7% is advisable to ensure adequate liquidity and facilitate open market operations.
These limits should be reviewed periodically to suitably reflect the development of the bank and the market.
- Conducting stress testing to predict the bank’s position and status in bad scenarios/crisis and building contingency plan to cope with them.
Effective liquidity management should be a shared responsibility among the Treasury Department, Credit Department, and branches, rather than solely resting with the Treasury Department These units will implement ALCO decisions to ensure liquidity indicators and ratios remain within established limits while maintaining adequate statutory reserves with the State Bank of Vietnam (SBV) Concurrently, the Accounting and Finance Department, along with Internal Audit, will oversee reporting and monitoring compliance, thereby enhancing the effectiveness and objectivity of liquidity management activities.
IV.2.2 Formulating Interest Rate Risk Management Policy
Chapter III revealed that VID Public Bank is susceptible to interest rate risk and currently lacks measures to mitigate this risk To initiate effective interest rate risk management, the bank must develop and implement a comprehensive policy This policy should encompass essential strategies for safeguarding the bank against potential interest rate fluctuations.
The duration gap model and repricing gap model are widely utilized by banks to assess interest rate risk exposure, as they effectively align with the banks' balance sheet components and information systems.
The bank should establish prudential limits on individual gaps with the approval of the Board or Management Committee Given the bank's lack of experience in interest rate risk management, these limits must be set for testing and reviewed frequently to ensure they are reasonable and effective.
- Based on the interest risk measurement, the bank finds suitable solutions to hedge against the risk by applying duration management strategies and using financial derivative instruments.
- Same as liquidity management, interest rate risk management should be responsibility of all relevant departments Treasury Department, Credit
The Department and its branches are responsible for implementing ALCO decisions on interest rate risk management, ensuring that the duration gap and interest rate risk exposure remain within established limits The Accounting and Finance Department, along with Internal Audit, will oversee reporting and monitoring compliance across these departments Additionally, the ALM Information and Analysis Department will handle local and national economic forecasts, interest rate predictions, balance sheet forecasts, risk exposure measurements, and the recommendation of risk management solutions.
IV.2.3 Applying Fund Transfer Pricing System (FTP) in Internal Fund Management
Currently, bank branches independently manage their funds, either placing surplus funds or borrowing to cover shortages from the Treasury Department at the Head Office, based on their preferred maturities This system complicates the bank's ability to effectively manage liquidity and interest rate risks, as the maturities of deposits and borrowings between the Head Office and branches do not accurately represent the overall maturities of the bank's surpluses and shortages.
FTP is an internal system that facilitates fund transfers between units, managed through the Asset-Liability Management (ALM) unit, which centralizes the procurement of resources from business lines This system enables the bank to accurately calculate interest income based on transfer prices, ensuring that the total interest income from all units, including ALM, aligns with the overall accounting interest income of the banking portfolio Additionally, FTP centralizes liquidity and interest rate risks, transferring them from individual business units to ALM for more effective management.
Enhancing Deposit Structure
Chapter II's evaluation of VID Public Bank's liquidity management reveals a significant shortcoming: an imbalanced deposit structure Over 80% of the bank's total deposits are comprised of short-term funds, indicating a heavy reliance on a small number of large depositors.
In order to solve this issue, the bank needs to increase its customer base, number of customers etc by:
To enhance its liquidity position, VID Public Bank should expand its network by opening additional branches, transaction offices, and subsidiaries in economically promising areas such as Hanoi, Ho Chi Minh City, Can Tho, and Vung Tau This strategic expansion will not only increase the bank's customer base but also improve fund mobilization, thereby reducing its reliance on large clients.
To strengthen its marketing activities, the bank should develop a realistic marketing plan featuring a dedicated team aimed at boosting deposits through enhanced courtesy and personalized services A proactive approach towards both existing and potential customers, particularly through targeted Deposit Campaigns, is essential Additionally, focusing marketing efforts on individuals and SMEs that favor medium and long-term deposits will help maintain strong relationships with current customers, foster loyalty, and attract new clients, ultimately increasing medium and long-term funding.
To improve the bank's service quality, we are implementing ongoing monitoring of staff performance, particularly for both corporate and traditional customers This initiative includes the launch of a Staff Courtesy Campaign aimed at enhancing customer interactions Additionally, we are closely tracking the Standard Processing Time for key transactions, such as cash withdrawals, account openings and closures, and foreign currency exchanges, to ensure efficiency and satisfaction.
To enhance competitiveness and boost fund mobilization, particularly for medium and long-term resources, VID Bank should diversify its deposit offerings by introducing products like floating rate deposits and medium to long-term deposits with a fixed interest rate for the first year, transitioning to a floating rate thereafter Additionally, to mitigate interest rate and foreign exchange rate fluctuations, the bank should actively promote and advise customers on innovative financial instruments such as swaps, forwards, caps, and floors.
Strengthening Staff Capacity in ALM Areas
Banks in Vietnam are in the early stages of Asset and Liability Management (ALM), with many commercial banks initiating ALM activities only after the introduction of Circular 13 This has led to a lack of experienced professionals in the market To effectively establish an Asset and Liability Committee (ALCO) and implement ALM, VID Public Bank should focus on enhancing its human resources and developing a structured approach to ALM practices.
The bank is prioritizing the professional development of its selected staff by facilitating training in Asset and Liability Management (ALM) and the establishment of an Asset and Liability Committee (ALCO) This initiative includes valuable learning experiences from its parent banks, Public Bank and BIDV, both of which have demonstrated strong expertise in ALM practices.
- Inviting trainers from Public Bank Malaysia to train all involved staff on ALM knowledge and skills.
- Recruiting professionals for key ALM positions if necessary.
Developing ALM Software
The ALM model, cash-flow model, repricing model, and duration model are intricate frameworks that require extensive data input for effective implementation To leverage these models successfully, banks must rely on robust information technology support However, the high cost of existing ALM software limits its accessibility primarily to larger banking institutions Moving forward, it is crucial for banks to capitalize on their skilled workforce to navigate these challenges.
The IT team is tasked with creating ALM software tailored to the bank's size and budget Additionally, the bank must develop FTP software to support the FTP mechanism outlined in section IV.2.3.
Bank asset and liability management (ALM) involves strategically managing liquidity and interest rate risks stemming from discrepancies between a bank's assets and liabilities The primary objectives of ALM are to optimize net interest income and maximize the Net Present Value (NPV) of the bank's assets relative to its liabilities Effective ALM practices hinge on accurate measurement and management techniques, alongside reliable interest rate forecasts and business projections.
VID Public Bank's liquidity management weaknesses stem from its lack of measurement for liquidity and interest risk, failing to consider future cash flows and reserve liquid assets The application of repricing gap and duration gap models indicates that the bank is typically liability sensitive, exposing it to significant losses in the event of rising interest rates, with no proactive measures taken to mitigate these risks.
Establishing an Asset and Liability Management Committee (ALCO) is essential for banks to enhance their Asset and Liability Management (ALM) activities The bank should implement a cash-flow approach along with repricing gap and duration gap models to effectively assess liquidity risk and interest rate risk exposures By analyzing these metrics, the bank can develop appropriate strategies to manage associated risks As the economic and policy landscapes stabilize and the bank's technology advances, it should explore simulation techniques to evaluate various interest rate scenarios, business conditions, and alternative hedging strategies, ultimately improving the risk-return profile of its portfolio.
Due to time constraints, insufficient information, and the complexity of simulation methods, the thesis did not perform empirical research utilizing a simulation model that encompasses two critical components of the ALM model: the development of interest rate scenarios and business scenarios.
The current study utilized a single gap model for Asset Liability Management (ALM) without incorporating interest rate and business forecasts to create comprehensive scenarios Future research could enhance this approach by integrating simulation models, allowing the ALM Committee (ALCO) to gain complete visibility into future profitability and risks This improvement would facilitate the establishment of effective guidelines for business policies and hedging strategies.
1 BESSIS, J., 2002 Risk management in banking (2e) John Wiley and Sons. Clementi Loop, Singapore 792.
2 CHOUDHRY, M 2007 Bank Asset and Liability Management: Strategy,Trading, Analysis John Wiley and Sons Clementi Loop, Singapore 1415.
3 GUP, B.E and KOLARI, J.W., 2005 Commercial banking: the management of risk (3e) New Jersey: John Wiley and Sons Clementi Loop, Singapore.
4 MAHSHID, D and NAJI, M.R., 2003 Managing interest-rate risk – a case study of four Swedish savings banks Masters Thesis Hửstterminen: School of Economics and Commercial Law, Gửteborg University.
5 PETER S.R, SYLVIA C.H 2008 Bank management & financial services
(7) McGraw-Hill/Irwin New York, Americas 722.
6 SAUNDERS, A.; CORNETT, M 2003 Financial institutions management: a risk management approach McGraw-Hill/Irwin New York, Americas. 778.
7 Sinh Nguyen Duy, 2009 Assessment effectiveness of liquidity management in Vietnamese commercial banks Masters Thesis University of Economics Ho Chi Minh City.
8 UYEMURA, D.; DEVENTER, D.; 1993 Financial Risk Management in Banking: The Theory and Application of Asset and Liability Management
(1) McGraw-Hill/Irwin New York, Americas 361.
9 VID PUBLIC BANK 2007 Annual Report for the year ended 31 December, 2007 Unpublished report Hanoi, Vietnam.78.
10 VID PUBLIC BANK 2008 Annual Report for the year ended 31 December, 2008 Unpublished report Hanoi, Vietnam.82.
11 VID PUBLIC BANK 2009 Annual Report for the year ended 31 December, 2009 Unpublished report Hanoi, Vietnam.126.
12 VID PUBLIC BANK 2010 Annual Report for the year ended 31 December, 2010 Unpublished report Hanoi, Vietnam 128.
13 WIKIPEDIA, 2010 Asset and liability management [Online].Available:www.en.wikipedia.org [Accessed 10 December 2010].
Appendix 1: Organization Chart of VID Public Bank