groups assignment joint stock commercial bank for foreign trade of vietnam

Importantly, with a growth scale of more than VND 100,000 billion in outstanding loans in 2020, Vietcombank was officially recognized as the bank with the largest credit growth in bankin

PEER EVALUATION FORM

Mark Team members ID Task given (in written form) performanc

e Introduction

Dang Hoang Lan Scenario analysis of capital and income 100% 8

Conclusion Credit Risk 7 180404006

Neuyén Thi Khanh Linh Interest rate risk 100%

5

Table of Contents

T VAÀ IV) 0)0009 005077 7 5-34 3 I (0 0.4.30./)00609))00)49:90)11 ã.ã.ãaaa 4 1 Macroeconomic condifion chen nhu Hà HH HH nh HH HH 4 2 Banking indus(ry ch nh HH HT HH KH TH TT TH ky 5 TH CREDIT RISK ern rn ri neni HH Hà HH HH kết 8 IV INTEREST RATE RISTK nh nh nh Hà HH TH HT KH KH 9 V LIQUIDITY MANGEMENTT nh nh Hà Hà HH HH HH TH Triệt 10 1 Net liquidity Øap: cuc HH Hà Hà Hà Hà Hà HH HH HH HH KH KT HH 11 2 Structural lÏquidi€y: cách nh Hà Hà HH Hà Ho Hà HH HH HH HH HH HH Hi 12 KT) .:.a 12 VI SCENARIO ANALYSIS ON THE IMPACT OEF INCOME AND CAPITAL 13 HINH) nHd 13 1.1 Changes in Interest lafe cà nhà HH HH Hàn Hi Hot 14 2 Capital Ïmpac( HH nà Hà Hà Hà HH HH Hà HH HH KHE EHỢ 15 2.1 Changes in LIQUidIfy nh nh nh nh HH Hà HH Ho kg hon 16 VH HEDGING PROPOSAL cer nr en nhà Hà Hành Hà HH HH HH kkrt 17 VII CONCLUSION nh HH HH HH HH HH HH HH HH hệt 18 R€Í6T€TCGS nh HH nh HH HT HT KH TH TT KH TT TT TH ĐK KHE TK KT KT 19

I INTRODUCTION

Joint Stock Commercial Bank for Foreign Trade of Vietnam, also known as Vietcombank, was

originally the Foreign Exchange Bureau under the National Bank of Vietnam established according to Decree No.443/TTg dated January 20th, 1955 of the Prime Minister Ever since its establishment, Vietcombank has been developed remarkably and results in many breakthroughs not only in domestic market but also in foreign one Recent years have witnessed the comprehensive shifts for Vietcombank as this bank continually achieved impressive results from its effective performance

In 2018, the comprehensive risk management according to international standards was initially implemented by executing Basel, made Vietcombank become the first bank in Vietnam officially recognized as Basel IJ compliant by the State Bank of Vietnam and allowed to apply Circular No 41 one year earlier than required The Bank also increased investment into modernization of IT platform and simultaneously implemented many transformation projects geared towards global standards and best practices

Notably, in 2019, Vietcombank's operations continued to make an impressive breakthrough, set a new record, became the first Vietnamese bank to reach the profit milestone of 1 billion USD and in Top 200 most profitable financial and banking institutions globally

By the end of 2020, Vietcombank’s charter of capital has reached VND 37,089 billion, increasing

about VND 1,111 billion compared to the previous year In the same year, Vietcombank's credit balance reached VND 845,128 billion, up 14% compared to 2019, completing 103.6% of the year plan, including growth sectors highlights such as the high growth of retail credit, reaching 20.4%; credit loans at transaction offices increased by 25.3% compared to the end of 2019 The outstanding loans for FDI increased by 16.7% with the end of 2019 Importantly, with a growth

scale of more than VND 100,000 billion in outstanding loans in 2020, Vietcombank was

officially recognized as the bank with the largest credit growth in banking industry in Vietnam

Furthermore, with the effective risk management, Vietcombank has marked the lowest NPL ratio

in many last year By the end of 2020, Vietcombank's NPL ratio is only 0.62% Therefore, this result named Vietcombank as the credit stitution with the lowest NPL ratio as well as the best asset quality in Vietnam With outstanding business performance, Vietcombank continues to maintain its position as an enterprise has the largest scale of remittance to the State budget VCB shares have risen to become shares with the largest market capitalization on Vietnam's stock market (~VND 370,000 billion, equivalent to USD 16 billion) Also in this year, Vietcombank was highly appreciated by many prestigious regional and global magazines and honored in many categories of great awards The bank was also upgraded to regional and world levels by ranking 937" on the list of the largest listed company in the world (according to Forbes) and 403” (leader of banks in Vietnam) in the ranking of The Banker

In presence, banking is still a major industry in Vietnam and banks act as an essential role in providing investment capital for development activities Therefore, treasury management, a crucial department in each banking sector, aims at managing the liquidity and mitigating the impact of operational, financial and reputational risk, ensuring the firm’s stability in its operation

In this study, we will analyze the influence of current credit risk, interest rate risk, liquidity risk

on the performance of Vietcombank as well as the scenario analysis of capital and income and some hedging proposal that this bank has applied in the period from 2017 to 2020.

Il CURRENT CONDITION 1 Macroeconomic condition

From 2017 to 2020, the global economy has shown some remarkable highlights, especially in the financial growth By late 2017, the extraordinary policy support, regulatory enhancements, and the cyclical upturn in growth were reported to continuously strengthen The capital and liquidity buffers were improved, regulation and scrutiny were tightened, leading to the stronger global bank balance sheets[ CITATION GFS17 \1 1033 J] In addition, by linking financial conditions to the probability distribution of future GDP growth and applying it to a set of 20 major advanced and emerging market economies It implies that changes in financial conditions change the whole distribution of future GDP growth Higher inflation may lead central banks to respond more aggressively than expected, which could lead to a sharp tightening of financial conditions The year 2018 has witnessed complicated developments, unpredictable of global economy and financial market Although the momentum of global economic growth continues to maintain, however, the speed has slowed down since the second half of the year On global scale, commodity prices fluctuate strongly under the escalating tension of trade conflict between some major economies Moreover, the cyclical nature of riskiness of corporate credit allocation at the global and country levels as well as its sensitivity to financial conditions, lending standards were documented as short-term and medium-term implications for downside risks to growth and

financial stability in credit allocation[CITATION GFS18 \1 1033 ] In 2019, the global economy

grew slowly under the influence of trade tensions between major countries, the probability that Brexit would not reach an agreement, geopolitical risks in many areas; the global trade declined The inflation rate and world commodity prices were lower compared to the same period of previous year (average WTI oil price in 2019 decreased 12.6%), the dollar appreciated slightly

on the international market[ CITATION SBV19 \1 1033 ] The October 2019 Global Financial

Stability Report points out new vulnerabilities in the global financial system such as the rise of corporate debt and increase in illiquid assets holding by institutional investors These factors, as a result, implied medium-term risks to the growth of economic finance

However, the overall situation has been affected significantly by the coronavirus (COVID-19) pandemic The pandemic led to an economic slowdown when world GDP growth rate kept declining over the period In other words, the outbreak shows a negative impact to both financial and non-financial firms Firm’s cash flows experienced a sharp decline along with the current economic status The financial distress posed a threat to more vulnerable firms such as small and medium-sized enterprises (SMEs) and those with weaker solvency and liquidity position than large corporations as these firms would have fewer access to capital markets The outlook remains uncertain and the risks are rising Noted that even though the global banking system is well capitalized, some banking systems may encounter capital shortfalls in an adverse scenario,

even with the currently deployed policy measures

The economy of Vietnam shares the same current situation with other countries, however, there were many potential opportunities in this market before the great impact of the pandemic

Looking at some data in Vietnam, over the period, it has maintained the domestic growth

momentum and kept the GDP growth rate at high level, compared to world and region According to the World Bank data, while the world GDP growth rate declined gradually from

3.30% in 2017 to 2.36% in 2019 as well as the East Asia and Pacific, which was 4.76% in 2017 and 3.78% in 2019 Vietnam shows a significant increase in GDP growth rate, from 6.18% in the

first year of the period to 7.02% in 2019 Another macroeconomic factor that has influence on

the banking sector is inflation Inflation is important for banks because they typically deal in

nominal financial instruments, that is, instruments denominated in fixed dollar amounts[ CITATION GJS86 \1 1033 ] Vietnamese government continues to tame inflation rate at

4%, they were on the right track to control this rate over the period In addition to addressing the economic concerns, the government would key on stabilizing the macroeconomy by paying more attention to prices of goods and inflation as well as way to facilitate business

activities| CITATION Ngo20 \1 1033 ] Some studies have illustrated that the development of a

banking sector will have a positive effect on economic growth if it lessens financial constraints

of firms and increases the efficiency of fund allocation to firms with valuable investment

opportunities[ CITATION Jit18 \1 1033 ] Besides, foreign exchange rate fluctuation is also one

of the reasons to affect banks both directly and indirectly Because banks’ holding of assets (or

liabilities) with net payment streams denominated in foreign currency, meaning the direct effect, this can cause the foreign exchange risk when the value of assets in domestic currency is altered by any variation As a result, the foreign exchange risk may be linked to other types of market

risks, such as interest risk because these determinants often move simultaneously[ CITATION

Pop96 \ 1033 | However, the daily fluctuation of the exchange rate is still under control of the Central Bank and the increase of economy’s foreign reserves will reduce the risks for the exchange rate risk[ CITATION VNS18 \1 1033 ]

Under the negative impact of the global pandemic, the productivity growth and efficiency have been weakened and at odds with the economic growth of pre-COVID periods[ CITATION Kas20 \1 1033 ] In terms of the second quarter of 2020, the most affected period by COVID-19, the

economic downturn has indeed been extremely severe to some countries For example, the

output of the economy in the second quarter of Spain or the UK was more than 20% smaller than in the same period last year which was 4 to 5 times larger than any other quarterly decrease on record for these countries[ CITATION Joe20 \1 1033 ] Some other countries witnessed the same impact for GDP growth rate However, the economic impact has been much more modest Particularly, Vietnam experienced a GDP fall of about 6% while Lithuania and South Korea all saw decline in their GDP of around 5% or less[ CITATION Joe20 \I 1033 ]

2 Banking industry

The macroeconomic factors not only affect the economy as a whole but also in banking industry

Having a closer look at the banking condition in Vietnam from 2017 to 2020, credit growth rate was slow down but showing some recovery signs According to the State Bank of Vietnam (SBV), credit growth rate in 2018 was 9.89%, recorded as the lowest growth rate in the past 3

years However, Vietcombank, HD Bank and TP Bank were able to keep their credit growth

around 15% Additionally, this figure was quite far from the SBV's 17% growth target for the whole year in 2018 However, it shows sign of speeding again when the credit growth rate reached to 13.7% in 2019 before falling to 7.93% at the end of 2020 due to the impact of COVID-19 About deposit growth rate in the same period, the deposit demand mobilization in some commercial banks has been gradually increasing towards the end of 2020, even though there was a slight decrease by 100-120 bps from the beginning of 2019[CITATION VCB20 \l 1033 ] As mentioned above, COVID-19 has generated significant instability and high volatility in financial markets and the global banking sector throughout 2020 In addition to slow credit growth, bad debt is likely to begin to appear in as well the next period when the economy is affected by the epidemic Bad debts of the whole banking industry were estimated to increase from 1.89% to 3.67%[ CITATION Phạ20 \I 1066 ] Banks, therefore, play an essential role in maintaining a healthy credit system In particular, the areas that are likely to be most impacted by

this pandemic are profitability and credit management (cost of risk), securitization landscape, customer relationship and commercial models and high volatility in stock markets depressed banks’ valuation[ CITATION KPM20 \1 1033 ] Banking institutions are strained with various operational issues, including exceptional losses due mainly to high loan impairments, risk management and the funding as well as liquidity management Understanding that banking industry is one of the major industries in Vietnam, as being the first state commercial bank chosen for pilot privatization by the government In this study, we consider the operation of Vietcombank with respect to the performance of a typical bank in Vietnam from 2017 to 2020

Profitability ratios

NIM 2.5% 2.7% 3.0% 2.8% ROA 1.0% 1.4% 1.6% 1.4% ROE 18.1% 25.5% 25.9% 20.5% Key risk indicators

Figure 1 VCB’s financial indicators (in %)

Vietcombank has marked impressive breakthroughs over the period Considering some highlights of developing path of this bank, we observed the changes in total assets, total equity as well as the net interest margin (NIM) and other significant financial indicators The total asset of

VCB increased significantly from VND 1,035,293 billion in 2017 to VND 1,326,230 billion in

2020 However, along with that, there was a slowdown of this growth rate as the figure fell from 31% to only 9% in 2020 Opposite to the downturn of total asset growth rate, total shareholder’s equity growth rate reached 30% in 2019 (more than three times the level of beginning year) before it decreased to 22% in 2020

According to VCB annual report, they were on the right track to reach their key financial and operating targets: Loan growth: ~15-16%; Deposit growth: ~14-15%; ROA: ~1%; ROE: ~15% and NPL: below 1.5% Credit growth had a strong breakthrough in the last quarter of 2020 with a 7% increase, leading to VCB's credit growth for the whole year reach 14% VCB said the increase was derived from the increased demand for loans and disbursement activities NIM of most banks in 2019 is unlikely to increase due to the following reasons Firstly, deposit rates were under pressure while lending rates need to keep at a low level to ensure competitive advantage The other reason for this trend was that banks need to improve capital structure to

meet safety ratios in accordance with Circular 06 (the short-term capitals for medium-term loan ratio is maximum 40% applied from 2019)[CITATION VCB19 \I 1033 ] The average NIM in

2020 was 2.76%, down 22 bps compared to that of 2019 NIM of VCB decreased in the two middle quarters of the year due to the impact of the Covidl9 epidemic, there was a sharp improvement in the fourth quarter of 2020 thanks to a sharp decline in capital costs.

ROE of VCB has continuously gained after hitting the floor in 2013 and reached 25.2% in 2018, ranking no.2 in the sector (after ACB) In the previous years, the expansion of ROE was strongly supported by credit stimulation and continuous leverage raise amid rebounding economic conditions and high growth rates Meanwhile in 2018, although leverage plunged from 19.7x to

16.8x, ROE still climbed from 18.1% to 25.5%, thanks to the impressive recovery of ROA from

1% in 2017 to 1.4% in 2018 Furthermore, ROA surged thanks to three main forces: 1) Revenue surged thanks to better yield from retail lending and strongly increasing NonNII; 2) Operating cost was well-managed as CIR decreased from 40.4% to only 34.6%; 3) The cost of provision for credit losses (PCL) remains stable after boosting provision before 2016

203

194 = +25 20 +

+2

15 +

1.5 10 +

Figure 2: Comparison of profitability of some banks (in %)

The total value of restructured loans has dropped sharply from 10.4 trillion at the end of Q3 to 5 thousand billion at the end of Q4/2020 VCB's non-performing loan ratio (NPL) also fell sharply to 0.62% and was the lowest in banking history at current moment The decrease in NPL ratio is

mainly the recovery of the solvency customers (in 2020, VCB only wrote off the amount of VND

2,806 billion of bad debts, this was a sharp decrease compared to the write-off rate in 2019 which was VND 4,502 billion)[ CITATION BVS21 \l 1033 | In the scenario of great impact of

COVID-19, beside the downturn scale of credit growth rate, the increase in bad debt level was a

primary concern to the whole banking system Bad debts of banks in the beginning of 2020 generally only increased slightly compared to the beginning of the year Accordingly, the total bad debt according to the newspaper, listed commercial banks' reports reached 1.62%, up from

1.45% at the end of 2019 However, VCB has significantly decreased their bad debt level through years, from 1.14% in 2017 to only 0.62% in 2020[ CITATION BVS21 \I 1033 J].

According to Circular No 41/2016/TT-NHNN, the time of application of Basel II for domestic

creditinstitutions will start from 01.01.2020 Thus, in 2019, banks will need to improve their

technologysystems to calculate safety indicators as well as prepare capital to be ready for Basel IL Among the Basel II indicators, the minimum capital adequacy ratio (CAR) is one of the core requirements Leverage ratio at the end of 2018 of VCB was 16.8x, one of the highest levels in the banking sector This is a commonplace in state-owned banks as private banks have more difficulties in raising shareholder’s equity, which makes the capital base of these banks heavily depend on annual profit However, the current leverage ratio of VCB is still relatively lower than that of BIDV or Vietinbank, and if VCB can keep the current profitability, VCB will probably maintain stable credit growth[ CITATION KBS19 \1 1033 ] By increasing capital, Vietcombank successfully pulled up CAR to 9.56%, up 22 bps compared to previous year

1H,.CREDIT RISK

Vietcombank's credit risk management framework includes organizational structure, policies, processes, credit risk quantification models, credit limit and risk report Some results in credit risk management in recent years can be mentioned as follows:

¢ Effective operation of the early warning signal frame system (“EWS”), to evaluate and identify early enterprise customers which are potentially risky, thereby improving quality of the Bank's credit portfolio by the regular assessment of customers after lending, timely take measures to minimize damage to the Bank Identifying customers is built on the

basis of quantitative analysis of data on the core banking system, credit rating system

internally combined with a set of qualitative questions in order to assess credibility, credit history, credit relationship history as well as operational status of business production and

the ability to repay debts of customers

* Regularly review and timely adjust the system of documents policy on credit risk management, including: (1) policy (credit risk management; (ii) regulation on credit limit against one customer / group of customers; (111) regulations on credit approval authority; (iv) guarantee policy Credit; (v) regulations on lending/guaranteeing/buying business bonds / factoring; (vi) set of credit processes according to each type of customer in accordance with legal regulations law, risk appetite as well as meeting business requirements of the bank

* Building and completing credit risk quantification models used under Basel II; step by step put into application in credit risk management policies and regulatory activities business practice

* Continuing to improve the quality and timeliness of: (1) reporting Management of wholesale credit portfolio and retail credit portfolio; (11) develop sector reports as a basis for determination industry risks, from which there is a credit extension orientation industry depending on the level of risk of each industry; (111) information about the customer group that has the relationship to decentralize credit granting authority for each group of customers that have a related relationship, ensure customer groups have higher influence must be authorized by higher authority credit approval

* Develop, monitor and manage credit risk limits, including: (1) Credit limit by customer, industry, the economic sector on the basis of the customer's ability to repay debts, credit risks of economic sectors and fields; (11) Grant limit credit by product, form of guarantee on a basis credit risk of the product, form of guarantee

Credit risk management:

NPL of Vietcombank from 2017 to 2020

As can be easily seen from the table, NPL of Vietcombank was really small Moreover, this ratio

decreased in four consecutive years, from 2017 to 2020 Starting the period with 1.1% NPL in 2017, Vietcombank became the bank that had lowest NPL in banking sector This ratio declined

to under 1% (0.97% in detail) in 2018, making Vietcombank the first commercial bank in Vietnam to achieve this, in accordance with international standard Vietcombank’s NPL continue

dropping in 2019 and ended up with 0.62% in 2020 This result helped Vietcombank register as the credit institution having the lowest NPL and the highest assets quality despite the significant impacts of COVID-19 In short, Vietcombank has developed an outstanding credit management strategy in recent years, which can be proved by the figures above This also demonstrates the healthy and stability that Vietcombank has achieved and maintained

IV INTEREST RATE RISK

Along with liquidity risk, foreign exchange risk, investment risk, capital risk and operational risk; interest rate risk is considered as one of the most important risks that banks need to pay a

close attention on This can be simply explained by the core activity of a bank, which is a

financial intermediation[ CITATION Rey 18 \1 1033 ] In details, a commercial bank uses funds from depositors to make loans to other customers and profit comes from the spread between the interest rate they offer depositors and the one that they receive from borrowers As a consequence, changes in interest rate have significant impacts on a bank’s profit, safety and

sustainability

As stated in the Banking book, interest rate risk is defined as the situation in which banks make

losses because of unfavorable variation in market interest rates There are several sources of

interest rate risk, namely gap risk, basis risk, net interest position risk, embedded option risk,

yield curve risk, price risk and reinvestment risk Gap analysis (using dollar gap) and duration analysis (using duration gap) are two popular approaches to measure interest rate risk of a bank However, in the case of Vietcombank, our paper just focuses on the dollar gap to evaluate the interest rate risk because the durations of assets and liabilities to calculate duration gap are tough to collect

As we have studied, dollar gap is the difference between risk-sensitive assets (RSA) and risk- sensitive liabilities (RSL) When the dollar gap is positive (RSA>RSL), an increase in market interest rate will enhance the bank’s net interest income In the opposite situation, the bank’s net interest income will decline due to a growth in market interest rate if the dollar gap is negative

(RSA<RSL) The dollar gaps of Vietcombank taken from the annual reports from 2018-2020 are

as follow:

2018 6-12

<1 month 1-3 month | 3-6 month | month l-5 vears | >5 years

27515285 | 16249124 12768408

RSA 347221336 1 0| 85065018 8 39077038 13158594 | 11752993

RSL 595788028 2 7 | 128070854 | 17407843 1204652 (248566692 | 14356690 (43005836 | 11027624

Net position ) 9| 44961303 ) 5 37872386 2019

32403035 | 18395109 14270283

RSA 378122207 3 1} 115149137 6 33955881 19348923 | 13596098

RSL 614987199 9 8 | 142520366 | 23578422 1204653 (236864992 | 13054111 (27371229 | 11912441

Net position ) 4| 47990103 ) 4 32751228 2020

30328735 | 23751894 18032047

RSA 421708157 7 9 | 12916719] 7 16564396 18709838 | 10915806

RSL 712815464 1 5 | 174928301 | 13518959 1384590 (291107307 | 11618897 | 12836088 | (45761110 | 16680151

Net position 6 4 8 15179806

Figure: Dollar gaps of Vietcombank from 2017 to 2020 (in million VND)

It can be easily seen that Vietcombank’s dollar gap positions of different maturities in the last three years are not the same The gaps with maturity of less than 1 month and from 6-12 months are negative while the ones with other maturities are positive These positions remain unchanged from 2018-2020 These figures also indicate that with the risk-sensitive assets and risk-sensitive liabilities maturing in less than 1-month period, Vietcombank’s profit will decrease if the interest rate increases Following opposite direction, profit of the bank will rise in case the interest rate grows with other four maturities

In order to manage the interest rate risk, Vietcombank has applied appropriated derivatives to minimize the influences of interest rate fluctuations on the bank’s profit Moreover, they have

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