Treasury Report On Joint Stock Commercial Bank Forforeign Trade Of Vietnam Vietcombank.pdf

HANOI UNIVERSITY FACULTY OF MANAGEMENT AND TOURISMTREASURY REPORT ON JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM Hanoi, 29 May 2020 th... Risk management in banking refers t

HANOI UNIVERSITY FACULTY OF MANAGEMENT AND TOURISM

TREASURY REPORT ON

JOINT STOCK COMMERCIAL BANK FOR

FOREIGN TRADE OF VIETNAM

Hanoi, 29 May 2020 th

Abstract 4

I INTRODUCTION 5

1 General introduction 5

2 Vietcombank’s risk management committee 5

II LIQUIDITY REPORT 6

1 Minimum capital adequacy ratio CAR: 7

2 Cash stas index 8

3 Lending capital ratio 8

4 Loan-to-deposit ratio (LDR) 9

5 Deposit structure index 10

III IRR REPORT 10

IV SCENARIO ANALYSIS OF CAPITAL AND INCOME 12

1 Scenario analysis of capital 12

2 Scenario analysis of Income 14

V CURRENT CREDIT 15

1 Capital and mobilized capital analysis 15

2 Mobilized capital analysis 16

VI CREDIT SITUATION ANALYSIS 17

VII HEDGING PROPOSAL 18

1 Supporting tools that VCB are using to minimize credit risks 18

2 Credit derivatives are used by VCB to mitigate the credit risk 19

VIII CONCLUSION 20

REFERENCES 21

Risk management in banking refers to the practice of scientific and systematic risk approach toidentify, control, prevent and minimize the potential losses and negative impacts that risk bring.How a scheme is rationally developed and executed to manage potential losses is thecharacteristics of risk management Therefore, this paper is dedicated to the purpose of giving abrief look about the risk management procedures of Vietcombank and providing the differentialanalyses about Current credit, Liquidity, IRR of Vietcombank and Scenarios analysis on theimpact of income and capital, Hedging proposal Hopefully, this paper will give an overview ofthe risk management of Vietcombank

I INTRODUCTION

1 General introduction

Join Stock Commercial Bank for Foreign Trade of Vietnam, formerly known as Bank for Foreigntrade of Vietnam – Vietcombank It was established on April 1, 1963 from the Foreign ExchangeBureau (of the State Bank of Vietnam) Vetcombank has been constantly developing withexcellent business achievements and considered as the highest ratings among Vietnamese banks

by international credit rating firms with its total assets of over VND 1 quadrillion (US$43.1billion) by the end of 2018 Moreover, in 2009, this bank was officially listed on the Ho ChiMinh Stock Exchange (HOSE) with the code VCB (Annual report 2018) In addition, it’s profit

in 2018 approximated 18.4 trillion VND which increased 63.5% from 2017 In 2019,Vietcombank successfully raised charter capital to VND 6,200 billion, surpass Vietinbank to takethe lead among Vietnamese banks

Vietcombank has not only a wide working network with 537 branches and transaction officesthroughout the country but also develop a huge system of 2105 correspondent banks over 131countries and regions Vietcombank has also developed an autobank system with over 2.300ATMs and more than 43,000 merchants nationwide and gained the trust of more than 10 millionretail customers and nearly 30.000 corporate customers Thanks to the process of building thebanking system as well as developing and upgrading services, Vietcombank has achieved thetrust of customers as well as the prestigious awards today

2 Vietcombank’s risk management committee

Vietcombank’s risk management committee is established of Board of Directors for the aim ofapproving appropriate policies and directions with regard to various types of risks such as creditrisk, market risk and operational risk in each period, including defining ratios, limitation and riskappetite of the Bank Vietcombank’s risk management committee is led by Mr Nguyen ManhHung- a member of BOD

Liquidity is the ability to respond immediately to customers' demand for withdrawals at any timeand it is an important factor determining the safety of the operation in any credit institution Itcan be said that liquidity is a very sensitive issue in business activities of banks If the bank fails

to meet customers' demand for withdrawals in time, the unfavorable information will spreadquickly, leading to a series of customers rushing to withdraw money As a result, this might causeinsolvency or that bank might face a risk of bankruptcy, affecting the operational stability of thewhole system

In order to estimate the liquidity management activities at Vietcombank, we base on thesecriteria:

1 Minimum capital adequacy ratio CAR: Measures ratio of Equity / Assets converted

according to different risk levels

Capital adequacy ratio represents the amount of equity available to support the bank's businessoperations Currently, the minimum capital adequacy ratio under Circular No 41/2016 / TT-NHNN takes effect on January 1, 2020 is 8% which was 9% before Accordingly, CAR of thebank period 2012-2018 was:

:Car ratio 2012-2018

(Source: Documents for investors Q4/2019 Vietcombank)

In fact, on November 28, 2018, VCB was officially approved by the State Bank of Vietnam toapply Circular 41 one year earlier than the effective period that makes it to be the first bank tomeet Basel II standards in Vietnam Hence, this ratio in 2019 was 9.6% In general, the averageCAR of the bank is in compliance with the regulations and tends to increase

2 Cash status index: calculated by (Cash + demand deposits at the State Bank (SBV) +

demand deposits at credit institutions (CIs)) / total assets The higher this index is, thebetter the liquidity

Cash status index 19.64% 19.52%

Cash status index 2018 - 2019 (Unit: million VND)(Source: Summary of the 2019 consolidated financial statements VCB)

In 2018 and 2019, VCB's cash index was almost unchanged This demonstrates that the bank has

a firm ability to handle immediate cash requirements However, if this ratio is too high, it is also

a sign that the capital efficiency is not high because the bank will have to spend manyopportunity costs, which reduces the bank's profits

3 Lending capital ratio: Calculated by outstanding debt / total assets, reflecting the loan

level on the bank's total assets The higher this ratio is, the lower the liquidity

Outstanding loans 631,866,758 734,706,891

Total assets 1,074,026,560 1,222,718,858

Lending capital ratio 58.83% 60.09%

Lending capital ratio 2018-2019 (Unit: million VND)(Source: Summary of the 2019 consolidated financial statements VCB)VCB's loan capacity in 2018 was 58.83%, slightly rising in 2019 to 60.09% It can be seen thatmaintaining the loan ratio helps banks limit liquidity risks to ensure profitability and safety forthe bank's operations

4 Loan-to-deposit ratio (LDR): Outstanding loans / deposits to customers This indicator

reflects how much the bank lends compared to the mobilized capital, showing theefficiency of the bank's mobilized capital

Loan-to-deposit ratio (LDR) 2018-2019 (Unit: million VND)

(Source: Summary of the 2019 consolidated financial statements VCB)According to the old regulations in Circular 36/2014 / TT-NHNN, the maximum LDR ofcommercial banks is 90%; Joint stock commercial banks, joint venture banks, banks with 100%foreign capital are 80% The higher this ratio, the lower the liquidity and the higher the level ofliquidity risk Therefore, when the LDR ratio increases, the liquidity of banks decreasesaccordingly The data in Table 3 shows that VCB's LDR has been stable in 2018 and 2019, wellcomplying with the State Bank's regulations on the ratio of loans to mobilized capital

5 Deposit structure index: This index shows the percentage of deposit mobilization compared to

term deposits at commercial banks, which accounts for what percentage

2018 2019

Deposit structure index 2018-2019 (Unit: million VND)

(Source: Summary of the 2019 consolidated financial statements VCB)

Deposits are the most important part of the liquidity supply component of commercial banks.The index of the bank has remained at 40% which shows that the demand for liquidity is alwayshigh As customers can withdraw at any time, so the bank must prepare liquidity to ensuresufficient supply of customer needs in each period In addition, term deposits of banks tend toincrease over the years, this also confirms customer confidence and appropriate bank policies

In general, over the past years, the organization and implementation of safety in businessactivities in accordance with the regulations of the State Bank were also relatively clear, effective

in the management of liquidity risk reflected in the treatment of banks managing liquidityrequirements arising at a reasonable cost, thereby, the reputation and brand of VCB weremaintained and promoted in the domestic and foreign financial markets

IRR or interest rate risk is the risk that the future cash flows of a financial instrument willunexpectedly fluctuate due to changes in market interest rates Risk exposure exists wheneverthere is a maturity date mismatch between assets and liabilities, or between principal and interestcash flow Interest rate risk is not necessarily a negative thing when changing in interest ratescould increase the net asset value of a banking institution would be regarded as positive.Vietcombank could face the risk generated by negative changes of interest rate on income, assetvalue, value of liabilities and value of off-balance sheet For interest rate risk management, there

are two ways to measure, for instance, gap analysis and duration analysis In this report, we willbase on gap analysis measurement since it is challenging to find figures for the duration analysis(focused on changes between economic value and position that occur given a small change in thelevel of interest rate) Basically, gap analysis or simple maturity schedules can be used togenerate simple indicators of interest rate risk sensitivity of both earnings and economic value tochanging interest rates Therefore, the maturity gap method can be generated by grouping RSA(rate sensitive assets) and RSL (rate sensitivity liabilities) For banking, RSA are bank assets,mainly bonds, loans and leases, and the value of the following assets is sensitive to changes ininterest as well as either repriced or revalued as interest rates change On the other hand, RSL arebank liabilities, mainly interest-bearing deposits and other liabilities, and the value of theseliabilities is sensitive to changes in interest rates and these liabilities are also repriced or revalued

as interest rates change The table below shows the figures for gap analysis that given by theannual report of Vietcombank in 2018:

From 3 months to 6 months

(VND million)

From 6 months to

12 months (VND million)

been a positive gap which caused a decline for both the market interest rates and in NII.Subsequently, the dollar gap can pose a significant threat to Vietcombank’s earnings and capitalbase In 2018, Vietcombank became one of the first banks to apply interest rate risk managementtools and limits to daily management activities (management of the difference in reprising thegap between RSA and RSL, NII sensitivity and economic value of equity (EVE sensitivity)) Atthe same time, Vietcombank also uses appropriate derivative products to minimize the negativeimpact of interest rate fluctuation For the efficiency of interest rate risk management,Vietcombank is implementing ALM/ FTP software system for enhancing the level of automation.

Scenario analysis is a method of predicting future values of portfolio investments based onpotential events In other words, it’s a method of estimating what will happen to portfolio values

if a specific event happens or doesn’t happen If this happens, then what? This process is alsoused in company operations outside of the investment world Most managers perform scenarioanalysis in their business decision-making process to determine the best course of action to takefor the organization to maximize profits (best-case scenario) They also use this technique toexamine the worst possible solution (worst-case scenario) and anticipate potential losses andoperational problems In this part, we will discuss how the changing in capital and income ofVCB

1 Scenario analysis of capital

Total asset 787.935 1.035.293 1.074.027 1.222.7

19Shareholder’s equity 48.102 52.558 62.179 80.883Total deposit/Total

assets ratio

58,5% 52,5% 58,8% 60,1%

Non-interest income 6.352 7.469 10.870 11.153Total operating income 24.886 29.406 39.278 45.730

Source: Annual report of Vietcombank from 2016 to 2019According to general report, ending the year 2019, Vietcombank achieved profit before taxamounting to more than 23,000 billion, an increase on the 80% compared to the year 2018 andnearly tripled in comparison with the scale of the profits the year 2016-the year the Bank began

to move to business restructuring phase texture Moreover, profit of Vietcombank putting on thegrowth in total assets and credit growth is lower than in previous years, as well as from

a commercial bank with policy interest rates heading the lowest on the market The scale ofprofits more than 23,000 billion comes on also far beyond the predictions from 20,000-21,000billion that some investment organizations launched in the year 2019

Specifically, end of 2019, total assets of Vietcombank only increased 4%; credit growth does noteven run out of targets of the State Bank allowed, only 14.9% increase According the table, most

of index have trend to increase significantly from 2016 to 2019 About shareholder’s equity, itgrows by 32 billion through 4 years to demonstrate that it can remain and ensure daily activities

of the bank Meanwhile, the sharply rising of non- interest income between 6.352 billion and11.153 concludes that it promotes the operation of the service, diversifies bank’s revenue sources

in recent times to reduce dependence on credit Vietcombank can gain this amount from servicesactivities, foreign exchange trading and interest income from other activities Vietcombank isbecoming to change ability of customers into credit that can reduce the risk of their account

2 Scenario analysis of Income

2015 2016 2017 2018 CAR 11.35% 11.04% 11.13% 11.63%

Market capitalization 116.994 127.514 195.359 92.440

EPS 1.626 1.566 2.526 3.584

DPS 1.000 800 800 800

Source: Annual report of Vietcombank from 2015 to 2018

On 28/12/2018, Vietcombank has officially been approved by the Government to increase capitalthrough the sale of shares for foreign investors, with the total transaction value amounted to6,168 billion The successful sale stock for GIC- the Fund Singapore Government has affirmedthe prestige, status and the potential development of Vietcombank and the increased confidence

of investors with regard to foreign bank operations in Vietnam The capital increase successfullyleading to raise capital for safe standards of Vietcombank and bring back the surplus resourcesfor the State amounting to 3,783 billion Moreover, Vietcombank has been approved to bethe first bank in Vietnam meets safety standards under Basel II by Vietnam Government Bank

We can see that CAR ratio of bank is approximately 11%, which is suitable with it ofrequirement with big bank, 9% The numbers of share also increase until 4 years from 2665 to

3597 and remaining at 3597 in 3 years In contrast, Dividend payout ratios reduce by 2% tocompare with 10% in 2015 Both share price and market capitalization have positive trend togrow substantially, especially in 2017 but these amounts reduce at final year Earnings per share

of Vietcombank also develop strongly during 4 years However, Dividend per share has oppositeside with earning per share Briefly, Vietcombank is one of the biggest banks with strong Incomeand Capital in Vietnam

1 Capital and mobilized capital analysis