case study analyzing the bank management of orient commercial joint stock bank

Credit risks of Orient Commercial Joint Stock Bank: 24 3.2.1.. Interest rate risks of Orient Commercial Joint Stock Bank: 28 3.3.1.. Exchange rate risks of Orient Commercial Joint Stock

UNIVERSITY OF ECONOMICS AND LAW FACULTY OF FINANCE AND BANKING

CASE STUDY ANALYZING THE BANK MANAGEMENT OF ORIENT COMMERCIAL JOINT STOCK BANK

SUBJECT: BANK MANAGEMENT LECTURER: NGUYEN THI DIEM HIEN

CHAPTER 01: INTRODUCTION ABOUT ORIENT COMMERCIAL JOINT

1.1 Briefly explain the differences between transaction banking and relationship

1.2.2 Liabilities of a depository institution 12

1.3 The the fundamental differences between assets and liabilities of the bank: 14

CHAPTER 2: ANALYSIS OF PROFITABILITY OF OCB - ORIENT

2.1 Financial ratios of Orient Commercial Joint Stock Bank: 15

2.1.1 Financial ratios: ROA, ROE, NIM (and others) from 2012-2022 15

2.2 Using Dupont Model to analyze the change of OCB’s ROE 2018-2021: 17

2.2.2 Analyze the change of OCB’s ROE from 2018- 2021 18

2.4 Two ways that a bank can increase its non-interest income: 21

2.5 Two ways that a bank can decrease its non-interest expense: 21

2.5.2 Reducing processing data cost and technology cost: 22

CHAPTER 3: CREDIT RISK OF ORIENT COMMERCIAL JOINT STOCK

3.1 Credit risks of Orient Commercial Joint Stock Bank: 24

3.2.1 Charge-offs (net losses)/ Total loans: 25

3.3 Interest rate risks of Orient Commercial Joint Stock Bank: 28

3.3.1 The strengths and weaknesses of duration gap analysis: 28

3.3.2 Differences between effective duration differ from modified duration: 28

CHAPTER 4: LIQUIDITY RISKS OF ORIENT COMMERCIAL JOINT

4.1 Liquidity risks of Orient Commercial Joint Stock Bank: 36

4.2.3 Liquidity coefficient in the CAMEL model: 40

4.2 Comparing liquidity risks’ OCB with other banks’ credit risks: 414.3 Exchange rate risks of Orient Commercial Joint Stock Bank: 45

4.3.1 Disadvantages of exchange rate if bank trade foreign currency with

4.3.2 Exchange rate risk management methods: 45

4.4 The advantages and disadvantages of a bank holding less cash: 46

4.4.1 Discuss the disadvantages of holding less cash asset: 46

4.4.2 Discuss the advantages of holding less cash asset: 46

4.4.3 CAMELS model to measure bank's ability to withstand the pressure of

4.4.4 Regression model to measure liquidity risk: 48

CHAPTER 5: ORIENT COMMERCIAL JOINT STOCK BANK’S CAPITAL

LIST OF TABLES

Table 1.1: Comparison of Relationship banking and Transactional banking 10

Table 2.2: Income information of OCB, TCB, ACB, TPB from 2019 to 2021 23

Table 3.4: OCB's assets and liabilities according to the interest rate reset time 2021 31Table 3.5: Assets and liabilities of OCB according to the interest rate reset 2020 31

Table 4.2: Indicators for analyzing liquidity management of OCB 38Table 4.4: Liabilities information of OCB, TCB, ACB, TPB from 2019 to 2021 42Table 4.5: Overview of each bank's ability to withstand liquidity risk 44Table 5.1: Capital structure of OCB and changes from 2012 to 2022 50Table 6.1: Safety ratios in OCB's operations at December 31, 2021 54

LIST OF GRAPHS

Picture 1.2: Presentation of comparing OCB with ACB and TCB 13Picture 1.3: Chart of the major categories of OCB’s liabilities 14Picture 1.4: Chart of comparing OCB’s liabilities with ACB’s liabilities and TCB’s

Picture 2.1: Monitoring table of financial indicators of OCB 16Picture 2.2: Compare ROEA between OCB and Sacombank (STB) and Vietinbank

Picture 2.3: Compare ROAA between OCB and Sacombank (STB) and Vietinbank

WORK ASSIGNMENT

No Student ID Last name Name Assigned

Tasks

Implement ation progress

2 K194040543 Mã Kiệt Minh Contents of

part 3, 4, 7 100%

Submit assignments on time; Actively and well complete the assigned tasks; Submit

assignments on time

3 K194040544 Phùng Hiếu Minh Contents of

part 3,4,6,7 100%

Be present at all meetings; Fully support the team leader; Actively and well

complete the assigned tasks; Submit

assignments on time

4 K194040545 Đặng Bảo Ngân Contents of part 1,3,6 100%

Submit assignments on time; Actively and well complete assigned tasks;

5 K194040546 Lê Thùy Mỹ Ngân

Contents of part 3,4,6Synthesize and edit essay

100%

Submit assignments on time; Be positiveand complete theassigned tasks

In the current economy, the role and development of the banking system is one

of the decisive factors for the development and stability of the economy Therefore, thesubject of banking administration is really useful Our group not only gained a lot ofbanking knowledge but also had the opportunity to conduct case studies on topics inbanking activities such as liquidity banks, types of risks (interest rates, exchange rates,credit, ), profitability of a bank This important knowledge is very useful in the studyand future work of students - especially students of economics major

In the process of completing the report, we cannot avoid errors, so we hope youand your friends can understand and gain more useful knowledge from this report

CHAPTER 01: INTRODUCTION ABOUT ORIENT COMMERCIAL JOINT STOCK BANK (OCB)

1.1 Briefly explain the differences between transaction banking and relationship banking.

Relationship banking is different from transactional banking Relationshipbanking is more focused on making customers feel valued and offering an array ofbanking solutions that can solve customers’ problems

Transactional banking, on the other hand, focuses more on one-off services orproducts It’s often referred to as “hit and run” banking because it’s a calculated,transactional type of business in which the customer doesn’t really take into accounttheir relationship with the institution

Table 1.1: Comparison of Relationship banking and Transactional banking

Source: Authors' own compilation

1.2 About Orient Commercial Joint Stock Bank (OCB)

1.2.1 Bank’s Assets:

The major categories of OCB’s assets falls into 3 major categories:

Table 1.2: The major categories of OCB’s assets

Weight

2019 2020 2021 Balances with and

Source: Financial reports of OCB from 2019 to 2021

Picture 1.1: The major categories of OCB’s assets

Source: Authors' own compilation

A bank's assets are essentially the use of capital on assets for the purpose

of earning interest, which is a source of profit for the bank Therefore, as wecan see, the loan portfolio has the biggest percentage in a bank’s assets (around60% from 2019 -2021) as bank profits arise mainly from credit activities.Another important category of a bank's profitable assets is securities, especiallyInvestment Securities ( around 22% from 2019-2021), it's popular with banksdue to their profitability, high liquidity, and low transaction costs And finally isBalances with and loans to other credit institutions (approximately 12% from2019-2021), banks often open mutual deposit accounts (especially small banks(like OCB) opening accounts at large banks) to perform payment and moneytransfer services for customers, such as collection of checks, buying andselling foreign currency, securities trading,

In 2021, OCB had an increase in Customer Deposit and they issuedmore value papers The new capital coming from those activities should beused to loan customers and invest in stock, trading securities mostly Paying

attention to the structure of the Asset part, there’s increasement in respectivesections as Investment Securities, Loan to customer, as well as, Balances withand loans to other credit institutions

After a challenging year, especially after the 4th Covid-19 outbreak andprolonged social distancing, overcoming those difficulties, OCB has completedits business plan for 2021 By the end of 2021, the bank's total assets reachedVND 184,491 billion, up 21% over the same period last year In which, loans tocustomers increased by 14%, Balances with and loans to other creditinstitutions increased by 38% and Investment securities increased by 22%

Compare with other banks:

Table 1.3: Comparison of OCB with ACB and TCB:

Balances with and

It is clear that there are not many differences between the three banks above in how capital is allocated to assets The most significant category is customer loans

Picture 1.2: Presentation of comparing OCB with ACB and TCB

Source: According to the financial report of each bank

1.2.2 Liabilities of a depository institution

Liabilities are obligations of an institution that it may fulfill in futuremostly with the use of its assets Because the business object of a bank ismoney, it makes a bank's balance sheet much different from that of non-financial businesses This is reflected in the fact that the bank's operatingcapital is mainly liabilities (mobilization and borrowing), while equity onlyaccounts for a small proportion of the total capital of the bank Therefore,OCB’'s main parts of Liability falls into Deposit of customers(around 65%),Deposits and borrowings from other credit institutions (Around 17%) andValuable papers issued ( around 12%)

Table 1.4: The major categories of OCB’s liabilities

Weight

2019 2020 2021 Deposits and

borrowings from

other credit

institutions

18368865706788 22837720715725 32038024327577 17% 17% 20%

Picture 1.3: Chart of the major categories of OCB’s liabilities

Source:Financial report of OCB from 2019 to 2021

Picture 1.4: Chart of comparing OCB’s liabilities with ACB’s liabilities and TCB’s liabilities

Source: According to the financial report of each bank

Obviously, there is not much difference between the three banks in the way they raise capital The most significant category is Deposits from customers

1.3 The the fundamental differences between assets and liabilities of the bank:

Bank capital is the difference between a bank's assets and its liabilities, and itrepresents the net worth of the bank or its equity value to investors The asset portion

of a bank's capital includes cash, government securities, and interest-earning loans(e.g., mortgages, letters of credit, and inter-bank loans) The liabilities section of abank's capital includes loan-loss reserves and any debt it owes A bank's capital can bethought of as the margin to which creditors are covered if the bank would liquidate itsassets

Liabilities are items that the bank owes to someone else, including deposits andbank borrowing from other institutions Capital is sometimes referred to as “networth”, “equity capital”, or “bank equity” Bank capital are funds that are raised byeither selling new equity in the bank, or that come from retained earnings (profits) thebank earns from its assets net of liabilities

CHAPTER 2: ANALYSIS OF PROFITABILITY OF OCB - ORIENT COMMERCIAL JOINT STOCK BANK

2.1 Financial ratios of Orient Commercial Joint Stock Bank:

2.1.1 Financial ratios: ROA, ROE, NIM (and others) from 2012-2022

Picture 2.1: Monitoring table of financial indicators of OCB

Source: Authors’ own compilation

2.1.2 Comparing ratio to other banks:

- ROEA ratio:

Picture 2.2: Compare ROEA between OCB and Sacombank (STB) and Vietinbank (CTG)

Source: Authors’ own compilation

Picture 2.4: Compare NIM between OCB and Sacombank (STB) and Vietinbank (CTG)

Source: Authors’ own compilation

CONCLUSION: When comparing the financial ratios of the three banks, we can see

a clear difference due to the large capitalization CTG (48000 billion VND) andmedium capitalization OCB (13700 billion VND), STB (18852 billion VND) banks.According to state policy, lower-cap products will be more flexible in products andearn higher profits than large banks; it is easy to see that the average ROEA andROAA of STB and OCB are higher than that of large banks With STB's CTG andNIM both higher, the fact that STB's NIM is much higher than OCB's is also a policydirection of each bank With OCB, the high deposit rate and many accompanyingproducts and services, as well as the less favorable normal lending policy, As a result,the loan balance is low, and the NIM is not as high as STB's (Total loan of OCB will

be distributed in the next section)

2.2 Using Dupont Model to analyze the change of OCB’s ROE from 2018-2021:

2.2.1 Calculate factors of Dupont Model

Table 2.1: Factors of DUPONT model from 2018 to 2020

Source: Authors’ own compilation

Picture 2.5: Changes of factors in DUPONT ratio from 2018 to 2021

Source: Author’ own compilation

2.2.2 Analyze the change of OCB’s ROE from 2018- 2021

● ROEA 2019 grew by 8% compared to 2018, which can be explained by:

- Growth due to 11% increase in net profit margin, of which:

+ Profit after tax increased by ~47%

+ Revenue increased by ~32%

- Growth due to 12% increase in asset turnover, of which:

+ Revenue increased by ~32%

+ Average total assets increased by ~18.4%

- Increase financial leverage index 0.01%, in which:

+ Average total assets increased by ~18.38%

+ Average equity increased by ~18.37%

As a result:

- In general, it can be seen that the leverage ratio is fixed by the bank so thatthe fluctuation amplitude is lowest, or the main source of capital mobilized isinvested in items on the asset side

- Profit after tax increased by 47% is the main factor making ROEA increase

● ROEA 2020 is down 4% compared to 2019, which can be explained by:

- Growth due to increase in net profit margin ~26%, of which:

+ Profit after tax increased by ~37%

- Growth due to a 16% decrease in asset turnover, of which:

+ Revenue increased by ~8.7%

+ Average total assets increased by ~24.2%

This is the key factor that causes ROEA to decrease, Average Assets increase,but the revenue from these assets is low, leading to a decrease in AssetTurnover So inefficient but because of the high profit margin, it makes up for

it don't drop too much (1% off)

- Increase financial leverage index by 0.68%, in which:

+ Average total assets increased by ~24.1%

+ Average equity increased by ~23.26%

-> Leverage remains the same which shows an increased amount of equityinvested in the asset

● ROEA 2021 decreased by 8% compared to 2020, which can be explained that:

- Growth due to an increase in net profit margin of ~14%, of which:

+ Profit after tax increased by ~24.6%

+ Revenue increased by ~9%

Net profit margin increased slower than 2020

- Growth due to a decrease in asset turnover of ~9.6%, of which:

+ Revenue increased by ~9%

+ Average total assets increased by ~24.5%

- Increase financial leverage index by 0.68%, in which:

+ Average total assets increased by ~24.1%

+ Average equity increased by ~23.26%

Leverage remains the same which shows an increased amount of equity

invested in the asset

2.4 Two ways that a bank can increase its non-interest income:

2.4.1 Supply Insurance service:

Insurance serves as a foundational component of addressing customers’overall financial well-being picture However, insurance is a heavily regulatedindustry, so having an experienced partner to help banks source and provide thesolutions to their customers is an important component

Many banks find that working with an expert in marketing insurance isthe simplest and most cost-beneficial way to increase engagement with existingcustomers while simultaneously growing non-interest income

2.4.2 Fees for Premium Services:

Banks often allow customers to use a limited version of a service forfree, then upcharge for a premium service; your financial institution can followsuit Another option is to bundle services together at different price points.Consider aligning higher tech offerings, such as remote deposit capture, withpremium checking accounts Consumers understand upgraded servicescommand a higher price

2.5 Two ways that a bank can decrease its non-interest expense:

From decades ago, the non-interest costs have been one of the most importantthings that managers of the bank pay attention to Mostly, this cost is included in themanagement and technology part Non-interest expenses of banks usually focusmainly on personnel costs, data processing costs And 2 ways to effectively cut theabove fee are:

2.5.1 Reduce personnel costs:

Banks often apply this method by using temporary personnel such asinterns or outsourcing To explain this, bank employees often enjoy highbenefits due to the pressure and expertise of the job, so in low positions in thebank, most banks use temporary personnel as an intern, probationary period

salary, benefits, and bonus costs.

2.5.2 Reducing processing data cost and technology cost:

At the beginning of this way, the bank has to pay a large amount ofmoney for this technology but in the long term, this way helps cut off the staff

in these positions and then the cost for these also decreases

2.6 Three factors that affect net interest income:

Net interest income is a financial measure used to calculate the differencebetween the revenue generated from a bank's interest-bearing assets and the expensesassociated with paying its interest-bearing liabilities

There are three main factors that affect net interest income

- The composition of the assets of the bank changes

- The volume and average asset yield changes which means the portfolio mix ofearning assets changes too

- Changes in the level of interest rates so the average interest expense changes(interest-bearing liabilities)

Keeping all other factors constant, banks can reduce the volatility of netinterest income by adjusting the dollar amount of rate-sensitive assets and usinginterest rate swaps

According to OCB's financial statements, the lending interest rate was stable at10.3% and deposit cost increased by 17 bps in Q2 2022, NII rate still increased by18.7% compared to 2021

Table 2.2: Income information of OCB, TCB, ACB, TPB from 2019 to 2021

Total Income NII growth

Total Income Ratio

Source: VN banks dataset (updated August 2022)

This is mainly due to OCB's focus on yielding assets in the direction ofincreasing the proportion of assets with higher yields (such as long-term home loans)and the continuous increase in LDR to 68, 5% (up 270 bps QoQ), while customerdeposits fell 2.3% YoY

Besides, the ratio of short-term funds for medium and long-term loansincreased significantly to 32% (compared to 22% in Q4/2021) However, NII maydecrease slightly as OCB will likely reduce the ratio of short-term funding for mediumand long-term loans to approximately 30% by attracting deposits with longermaturities

In addition, net interest income will account for the largest proportion of OCB'score profit due to the lack of interest from the bond business, while fee income mayonly grow at a moderate rate Deposit fees may increase In addition, the bad debtratio will increase as real estate loans will affect credit quality and cause provisioncosts to increase when real estate values are forecast to decrease in 2023, causing NII

to decrease

CHAPTER 3: CREDIT RISK OF ORIENT COMMERCIAL JOINT STOCK BANK

3.1 Credit risks of Orient Commercial Joint Stock Bank:

3.1.1 Credit risk:

Credit risk in lending and investment activities as well as when the bankacts as an intermediary on behalf of customers or other third parties or whenthe bank provides guarantees The risk of counterparties' inability to pay debts

is monitored on a continuous basis

For OCB, the year 2020 was full of difficulties when faced with its ownloan and advance payments The most visible is the off-balance-sheet creditrisk in the form of credit commitments and guarantee, as well as a rather largeprovisioning in 2020, but the bank still maintains the desired profit growth

Measurement indicators such as: Bad debt ratio, Loan loss allowanceratio, Loan loss allowance ratio, Credit risk premium ratio, etc The ratios listedabove are represented by the indicators which are shown up in the financialstatements clearly and the purpose would be to compare the quality of loansbetween banks Instead, indicators such as the charge-off ratio and non-currentloans not only show the state of OCB's loans, but also the bank's risk appetiteand risk management approach

3.1.2 Credit risk metrics:

● Charge-offs (net losses)/ Total loans: This is the ratio showing the ratio

between the debts that were considered uncollectible but actually partiallyrecovered and the total outstanding loans The Formula: Net losses = Grosslosses - Recoveries / Total Loans

Meaning: This is an indicator for managers to compare the ratio of recovery of

bad debts to total balance based on net losses instead of gross losses - showingonly the total loss but not the income anise

● Loan loss allow/Total loans: shows the loan loss provision ratio and total loan

balance

Meaning: Helps investors or analysts see the vision of management on

provisioning for loans from Net losses compared to total outstanding loans IfALLL/Total Loans are high compared to the industry average, the opposite isnegative

● Total non current/Total loans: a measure of how much non-performing loans

and accrual loans account for the total debt Where Total noncurrent = performing loans + non-accrual loans

non-Meaning: NPLs are the uncollected principal and interest from 90 days and

over past due and are recognized during the period and NAL are the loanswithout accrual interest i.e loans that are insolvent interest and the differencebetween NPL and NAL is that in the future NPL can be converted to NALwhen principal and interest are not paid when due for Loan Losses

So this indicator shows us how much Future Losses in the near future willaccount for Total Loan, if this ratio is too high compared to the industry average, thebank faces the risk of default and reduced profits so the bank can focus on debtsettlement and reduce lending and raise the standards for granting the limit to be able

to hedge risks in the future

3.2 Application of credit risk metrics for OCB:

3.2.1 Charge-offs (net losses)/ Total loans:

Net losses do not show in the balance sheet and it also can not becalculated by the formula: Gross Loss - Recoveries, because the Recoveriesand Gross Loss are not shown in the balance sheet So Net losses will beestimated by the way Increase/Decrease ALL and PLL

Table 3.1: The charge-off ratio of OCB from 2020 to 2021

Source: Authors’ own compilation

Apply this way to calculate, The Charge-off ratio in 2020 is 1.31% and

2021 is 0.86%

The decrease in The Charge-off ratio in 2021 shows that OCB managescredit risk really well, the total Loans increase but Net losses decrease reallystrongly The explanation for this situation is that the covid-19 epidemic hasgreatly affected the debt repayment activities of Vietnamese businesses,causing the Net Loan Losses to increase sharply However, OCB can stillguarantee Net Loan losses by deducting a higher provision expense to cover thelosses Net Loan losses 2021 decrease shows that after the peak of covid-19epidemic, businesses return to normal operations as shown in the sharpdecrease in the Charge-off index

3.2.2 Loan loss allow/Total loans:

Table 3.2: Loans loss allowance ratio

Source: Authors’ own compilation

Total average Loans in 2021 are VND 95,644 billion, a 20% increaseover 2020, and OCB maintains the ALL ratio at 1.17% OCB maintains theCover risk losses ratio by increasing ALL by the same percentage.Furthermore, the decrease in Net Losses (previously present at the charge-off)clarifies OCB's ability to guarantee loan losses

3.2.3 Total non-current/Total loans:

Table 3.3: Non-current loans ratio

Source: Authors’ own compilation

Noncurrent loans ratio decreases from 2.8% to 2.14% in 2021 for therisk of default from predicting future loans is likely to decrease and alsoexplain the decrease in Net Loan Losses index, which could be explained bythe decrease in Net Loan Losses index Debts are successfully recoveredthrough OCB's debt settlement services

3.3 Interest rate risks of Orient Commercial Joint Stock Bank:

3.3.1 The strengths and weaknesses of duration gap analysis:

● Strengths: Interest-sensitive gap only looks at the impact of changes in interest

rates on the bank’s net income It does not take into account the effect ofinterest rate changes on the market value of the bank’s equity capital position

In addition, duration provides a single number which tells the bank their overallexposure to interest rate risk

● Weaknesses: There are several limitations with duration gap analysis It is

often difficult to find assets and liabilities of the same duration to fit into thebank’s portfolio In addition, some accounts such as deposits and others don’thave well defined patterns of cash flows which makes it difficult to calculate aduration for these accounts Duration is also affected by prepayments bycustomers as well as default Finally, duration analysis works best wheninterest rate changes are small and short and long term interest rates change bythe same amount If this is not true, duration analysis is not as accurate

3.3.2 Differences between effective duration differ from modified duration:

Where:

1 V–Δy – The bond’s value if yield falls by y%

2 V+Δy – The bond’s value if yield rises by y%

3 V0 – The present value of all cash flows of the bond

4 Δy – The yield change

The key difference between modified duration and effective duration iseffective duration considering the changes in price’s bonds when it changes Sothat effective duration is also more difficult then to calculate

Modified duration directly indicates how much the price of a security