analysis of joint stock commercial bank for investment and development of vietnam

CONCLUSION 20 ABSTRACT This analysis report focuses on the financial performance of the Bank for Investment and Development of Vietnam BIDV in the years 2017, 2018, 2019, 2020, and 2021.

HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

2004040037

GROUP CONTRIBUTION

Nguyễn Thị Hường -

2004040054 Duong Khanh Thuy Linh - 2104040001

Nguyén Thi Thao Van -

1904040125

Full name Student ID Contribution Hoang Thi My Hanh 2004040037 100% Neuyén Thi Huong 2004040054 100% Duong Khanh Thuy Linh 2104040001 100% Neuyén Thi Thao Van 1904040125 100%

Table of Contents

1 TNTRODUCTION TO BIDVY Q0 1122112112111 5121112112 5111 1111211111111 15 11x TH xe 3 2 BIDV?s ALCO Q Q Q0 0222121222222 1151212121221 n1 n1 HH He 4 Il CURRENT CONDITIONS 4 1 TMMACROECONOMIC ENVIRONMENNT 0 022222112211 2112111211101 1115111550151 011 1118112115111 Ek TH rệt 4 2 797.4000313 2 2ˆ 5

Ill CREDIT RISK MANAGEMENT 6

1 TNDICATORS OE CREDIT lÑISK 022222211 221121 1511122122115 212 2121112111112 2110 11H xxx 6 2 CREDIT RISK MANAGEMENT Ú 2 0201122222121 1 21121512111 11251111111 T15 H5 1111201511511 15x trệt 6 3 2001.1611 ĐH 8

IV LIQUIDITY RISK MANAGEMENT 10

1 IFo.0o0192)))0),/9)00.1 900905000) 10 2 00-1175 0:70029 22 ll

VY CAPITAL MANAGEMENT 12

1 77 12 2 BASEL Th cccccccecceeecseeeccee suse cscs seceseesesesessecasessesieseseeesecascsscssesseseseeceessaseeeseeeussestectenseee 14 VI SCENARIO ANALYSIS: 15

1 CHANGE IN LIQUIDITY POSITION, Q0 0022121211222 1 22115 211122122112111 1 15 n1 xnxx như 15

2 CHANGE IN [NTEREST ÑATES 2 022 2212211211221 155351 11 11 2112112212012 111 2111012115111 0111115021 xe 16

VI HEDGING PROPOSAI 18

1 ` ccc cceceneeceecetcsecse cea cases saseecseciesesacisessetsaesiteseescsssseeseseessseenecsiseseeneeeeeeeseeneentanes 18 2 ¡211 32 2 HH 19 3 FORWARD RATE AÁGREEMENNT Q2 2 221221211121 121 15511 1115312112112 151111715 5111015101111 ve 20 4 0119 II 20 VOI CONCLUSION 20

ABSTRACT

This analysis report focuses on the financial performance of the Bank for Investment and Development of Vietnam (BIDV) in the years 2017, 2018, 2019, 2020, and 2021 The report examines key financial ratios, such as loan loss provision ratio, capital adequacy ratio, and dollar gap, to provide insights into BIDV's credit risk management and capital management strategies Additionally, the report analyzes BIDV's use of financial instruments, such as forward rate agreements, futures contracts, options, and swaps, to manage interest rate and foreign exchange risks The analysis is based on the information provided in BIDV's annual reports and financial statements, as well as other relevant sources of information The report is structured to provide a comprehensive overview of BIDV's financial performance and risk management practices, including an overview of the bank's history, governance structure, and business model Overall, the analysis suggests that BIDV has a solid credit risk management framework, as evidenced by its consistent loan loss provision ratio over the years However, the bank faces challenges related to its capital adequacy ratio, which has fallen below the regulatory requirement in recent years The report also highlights BIDV's use of financial instruments to manage risks, with a focus on its swap operations The findings of this analysis report may be useful to various stakeholders, such as investors, analysts, regulators, and others interested in BIDV's financial performance and risk management practices The report aims to provide insights that can inform investment decisions, risk assessments, and other strategic decisions related to BIDV

L Introduction

1 Introduction to BIDV

The Bank for Investment and Development of Vietnam (BIDV) is one of the largest commercial banks in Vietnam BIDV was established in 1957 as the Bank for National Reconstruction and Development and later changed its name to BIDV in 1990 Since its inception, BIDV has played a key role in Vietnam's economic development by providing financial services to individuals, businesses, and the government

BIDV is a state-owned bank and is considered one of the four largest state-owned commercial banks in Vietnam, along with Vietcombank, Agribank, and VietinBank The bank operates in various segments of the financial sector, including retail banking, corporate banking, investment banking, and asset management BIDV offers a wide range of products and services, including loans, deposits, credit cards, insurance, securities trading, and investment advisory services

BIDV has a strong presence in the Vietnamese market, with a network of more than 1,000 branches and transaction offices across the country The bank has also expanded its operations internationally, with representative offices in various countries, including China, Laos, Cambodia, Myanmar, and Russia BIDV has also established strategic partnerships with several

international financial institutions, such as JPMorgan Chase, Bank of America, and Credit Suisse

BIDV's mission is to provide comprehensive financial services to meet the diverse needs of its customers and contribute to Vietnam's economic development The bank's vision is to become a leading financial institution in Vietnam, offering innovative and high-quality products and services to its customers BIDV's core values include customer focus, professionalism, teamwork, innovation, and social responsibility

In recent years, BIDV has focused on digital transformation and innovation, introducing new digital banking services and platforms to enhance its customer experience The bank has also been investing in technology infrastructure and talent development to support its digital transformation efforts BIDV's digital banking platform, MyBIDV, offers a range of services, including account opening, fund transfers, bill payments, and loan applications

2 BIDV’s ALCO The Asset-Liability Committee, or ALCO, is a bank committee with the primary objective of maximizing benefits while limiting risk It supports and manages financial and credit metrics in compliance with SBV's standards ALCO controls the asset-liability balance as well as the asset-liability balance to make sure the bank has enough assets to pay its liabilities ALCO maintains the asset-liability balance to make sure the bank has enough assets to cover its liabilities By developing suitable risk management profiles and risk strategies, ALCO supports the monitoring of liquidity, liquidity hazards, and market risk in the face of fluctuating exchange rates and interest rates Unquestionably crucial to maintaining owner equity effectiveness ratios and the long-term stability of BIDV is ALCO

Since 2004, when ALCO councils began addressing liquidity and interest rate risks, the organization's operating framework has significantly enhanced Managing assets and liabilities is always a key difficulty for every bank when creating Basel, according to Mr Phan Duc Tu - BIDV Board of Management Seeing this issue, BIDV formed a division to review debt assets and manage assets (ALM) In order to construct contemporary credit risk measurement tools, the project assisted BIDV in improving the efficiency of the whole credit process chain, from the pre-lending evaluation stage to post-loan management in order to credit approval time This is also a basis for appropriately estimating interest rates and fees received from consumers based on risks and client profiles, hence enhancing bank earnings

II Current Conditions

1 Macroeconomic Environment Experienced many fluctuations during the Covid-19 epidemic along with the considerable interest rate difference in the foreign exchange market On the whole, in the last few years, Vietnam's macro-economy has made remarkable progress despite facing immediate difficulties

Specifically, economic growth recovered positively, developed well, and evenly across all 3 regions, GDP in 2022 is estimated to increase by 8.02% Exports and imports of goods grew quite well and had a positive surplus In general, in 2022, the total import and export turnover of goods is estimated at 732.5 billion USD, around 9.5% compared to 2021, of which exports increased by 10.6%; imports increased by 8.4%; estimated trade surplus of 11.2 billion USD

Inflation is under control, the average consumer price index (CPI) in 2022 raised by 3.15% compared to 2021, lower than the increase of 3.54% and 3.23% in 2018 and 2020; higher than the growth rate of 2.79% and 1.84% in 2019 and 2021 The average core inflation in 2022 increased by 2.59%,

However, there are still many problems that need to be solved For instance, in terms of the monetary system, specifically the budget expenditure, although it tends to decrease, is still at the highest level compared to 16 countries in the region Spending too much on state consumption (60-70%) while development investment only accounts for 20- 25% of budget revenue This situation leads to a rapid increase in public debt The rate of public debt increased higher and faster than economic growth when it averaged 11.3%/year The ratio of public debt to GDP tends to decrease, but the ratio of public debt to budget revenue increases

In 2023, it is forecasted that the world situation will continue to develop rapidly and with unpredictable complexity in terms of politics, security, economy, and society Vietnam's economic growth in the incoming year would mostly rely on three main divisions: domestic consumption; export and disbursements of FDI, and public investment The important task is to perform well the disbursement and improve the quality of the public investment plan, which has a key meaning in improving the quality of infrastructure, which is an economic lever and a driving force

2 Banking Industry

In the past few years, the Vietnamese economy - as a whole and the banking sector - in particular, has faced many difficulties due to the severe COVID-19 pandemic and global political instability In 2022, in order to

7

control inflation, the State Bank of Vietnam (SBV) raised its policy rates by around 2%, leading to a decrease in the overall Net Interest Margin (NIM) The Vietnamese dong (VND) was also recorded to depreciate by 3.8% against the USD Fortunately, according to the SBV, the banking sector has contributed significantly to the economy, as the inflation rate was controlled at a low level of 3.2% per annum, the economic growth recovered to a high level of around 8% and the credit growth reached 12.87% comparing to 12.53% in 2021 Along with the Vietnamese stock market, the banking sector shrank by 21%, but still outperformed the VN Index by 12% This year, there were various banks increasing their charter capital For instance, OCB and ACB charter capital increased by around VND 59 trillion and VND 7 trillion respectively The Vietnamese average capital adequacy ratio (CAR) also met the Basel Il requirements, with the compliant state-owned and private sector banks CAR of 9.2% and 11.4% respectively Besides, according to diverse banks’ reports, many of them earned high profits in the previous year Specifically, Vietcombank recorded a pre-tax profit of more than VND 37.3 trillion, an increase of 36% compared to 2021 Techcombank also gained over VND 25.5 trillion in profit, rising by nearly 10% compared to the preceding year Among banks with high profits, BIDV reached its highest-ever pre-tax profit of VND 23 trillion, going up by nearly 70% Generally, the Vietnamese banking industry went through ups and downs in the previous year, but most opportunities, which would positively affect Vietnamese banks in the industry

Ul Credit Risk Management 1 Indicators of Credit Risk

One of the most vital and popular indicators of credit risk is non- performing loans (NPLs) It is a bank loan subject to late installment by the borrower for more than 90 days Non-performing loans could lead banks’ revenue from credit activities to decrease and also negatively affect banks’ investment, hence, weakening the profitability of banks Therefore, a high proportion of NPLs ratio implied that banks performed poorly

According to World Bank, the non-performing loans ratio can be calculated as:

Non — performing loans NPLs ratio = Non ~ performing loans

Total Loans

In which, the total loan also includes the non-performing loans before deducting the provisions to loan losses

As for BIDV, its non-performing loans (NPLs) ratio during 2017 - 2021 period is shown below:

2 Credit Risk Management Credit risk management is carried out continuously and synchronously across all three lines of defense, from policy formulation to review, appraisal, approval, and credit management to ensure compliance with State Bank regulations and relevant laws, approach international practices, and respond quickly to changes in the domestic and foreign business environment The objective is to comprehend the bank's risk status and its risk management policy, and to implement measures that prevent and address losses, thus enhancing the efficiency and security of the bank's operations

BIDV has developed a system of policies, strategies, documents, and credit risk management tools in accordance with SBV's regulations, internal governance requirements, and international practices, including: risk appetite by the Board of Directors for each period, including indicators reflecting BIDV willingness to take risks such as capital adequacy ratio, RAROC, ROE, and so on The Board of Directors' Credit Risk Management Strategy contains the key points of the bank's credit risk management in each period, such as the target bad debt ratio, the principles of applying risk mitigation measures, and so on Credit risk limits vary by industry, product, customer, and so on

Before and during credit granting, all clients/loans are assessed for credit risk using an internal credit rating system in conjunction with credit analysis, evaluation, and appraisal The internal credit rating system is built on statistical methods that combine expert methods and is regularly

9

reviewed and adjusted to ensure efficiency as well as reality and current law regulations BIDV has also conducted a credit risk stress test to alert managers to the extent of the impact of various risk factors and to estimate the amount of capital required to compensate for a crisis event/risky event

The loan loss provision ratio is a key indicator of a bank's credit risk management practices.The ratio is calculated as follows:

Pretax income + Loan loss provision

Net charge — offs

It represents the amount of money that a bank sets aside to cover potential losses from loans that may default or become delinquent A higher loan loss provision ratio typically indicates that a bank is being more proactive in managing its credit risk According to BIDV's financial statements, the bank's loan loss provision ratio was as follows:

10

3 Dollar Gap The variance in a bank's portfolio value caused by interest rate variations is referred to as interest rate risk Interest rate volatility may have a negative impact on the economic and financial statements by affecting assets, liabilities, and off-balance-sheet positions relating to interest rates As a result, if the exposure is not adequately managed, it can diminish both profitability and shareholder value

One of the fundamental metrics used to gauge the impact of interest rate risk on banks' net interest income is the dollar gap The difference between the amount of interest-bearing assets (such as short-term securities, variable-rate loans, and short-term loans) and interest-bearing liabilities (such as money market deposits, short-term savings, and central bank funds borrowed) over a given period of time is referred to as the interest sensitivity gap This comparison reveals the part of the balance sheet that is impacted by interest rate risk

Dollar gap = Interest-sensitive assets(RSA) - Interest-sensitive liabilities(RSL)

The following table describes BIDV's Interest-Sensitive gap in the last five years

Year RSA RSL Interest Sensitive Gap

2017 40,696,798 925,047,682 -884,350,884 2018 3,116,197 1,046,967,118 -1,043,850,921 2019 9,390,718 1,162,119,227 -1,152,728,509 2020 12,775,100 1,268,327,205 -1,255,552,105 2021 52,938,248 1,419,670,998 -1,366,732,750

Source: BIDV Js annual report

II

All of the figures in the above table are negative, indicating that from 2017 to 2021, BIDV had a negative gap Hence, an increase in interest rates will be disadvantageous since it is likely that it will result in a decline in bank profits The net interest margin (NIM) should be considered to assess the performance of BIDV's investment choices compared to its debt condition Net interest margin (NIM) reveals the amount of money that a bank is earning in interest on loans compared to the amount it is paying in interest on deposits NIM is one indicator of a bank's profitability and growth As mentioned in the performance part, the net interest margin is calculated as follows:

NIM= (Interest income-Interest expense)/ Average earning assets

Source: BIDV Js annual report

The growth in the Net Interest Margin from 2017 to 2018 can be observed in the table, where the NIM increased slightly (from 2.57% in 2017 to around 2.64% in 2018) Financing rates have been aggressively lowered by BIDV

12

from 2019 to 2020 to assist businesses impacted by the Covid-19 pandemic The NIM of BIDV rose in 2021 as a result of improving retail lending and perhaps stopping off-balance sheet tracking estimate payments connected to restructuring loans

IV Liquidity Risk Management

Liquidity risk is delineated as the risk that the banks would not have enough money to fulfills its financial requirements on time Liquidity risk also indicates how quick the bank could transform an asset to cash without damaging its market price Usually, this kind of risk happens when a bank is unable to generate cash to cope with a decline in deposits/liabilities or

increase in assets

According to a report by the General Statistics Office, on September 20th, 2019, the total mobilized capital of credit institutions increased by 8.68%, higher than the credit growth of 8.4%, showing liquidity of the banking sector's accounts are abundant The bank's liquidity has shown signs of excess right from the beginning of September 2019, the most obvious manifestation of this liquidity excess is the fact that the SBV continuously issues large-volume bills to attract money

However, in the first 9 months of 2022, the money market was reported to lack liquidity, the banking industry would struggle to mobilize deposits if the low interest rate environment is maintained

To deal with liquidity risk, lately, BIDV has progressively transitioned from static liquidity management to dynamic liquidity management, which has taken into account factors affecting liquidity such as seasonal factors, customer behavior, changes in operating policies of the state bank, business environment, and test building crisis test models

The bank has implemented basic tools to manage liquidity risk and risk ratio such as: interest rate sensitive gap (GAP), change in net interest income (NII), time gap (DGap), etc It also regularly updates (monthly) to ensure full provision of information for risk management of the Board of Directors In 2022, BIDV was awarded the "Most innovative risk management bank of Vietnam in 2022" by International Business Magazine (IBM)

1 Loan-to-Deposit ratio (LDR) The bank's Loan-to-Deposit ratio (LDR) is used to assess its liquidity by comparing total loans to total deposits for the same period The LDR is represented as a percentage Theoretically, LDR is in the range of 0 - 100%,

13

but this index can increase to more than 100% because the amount of loan to customers sometimes exceeds the level of capital mobilization The higher this ratio, the more money the bank lends out compared to the mobilized capital Therefore, if banks have difficulty in liquidity, it will be more difficult to mobilize cheap capital sources, it could result in reduced liquidity Nevertheless, in contrast, if this ratio is terribly low, it shows that the banks mobilize a lot of capital but lend less, indicating poor credit service quality and the bank may not be earning as much as it could be

According to economic experts, the safety level of LDR of a bank should stop at 80% or 90% Circular 36 stipulates the LDR ratio for joint-stock commercial banks should be around 80%

The LDR ratio is calculated by the following formula:

Total Loans

LDR = ———

Total Deposits

2017 2018 2019 2020 2021 LDR 90.4% 86% 87.95% 85% 83.36%

Table 3: LDR ratio of BIDV (2017-2021) As attested by the table above, we could see that the LDR of BIDV has fluctuation during the period from 2017 to 2021 In general, in the past 5 years, BIDV all had higher LDR ratios than allowed for joint stock commercial banks (80%) Especially in 2017, when the rate exceeded 90% However, over the years BIDV has been and gradually adjusted this ratio to a reasonable threshold

From 2017 to 2018, it can be seen that this rate decreased significantly from 90.4% to 86% However, in 2019, there was a slight increase This is explained by the peaking Covid-19 wave and the economic recession People tended to deposit their money in the banks while investors were less likely to borrow cash from banks to expand their business during this time

Although the LDR was quite high compared to the expected ratio, BIDV managed the inflow and outflow of cash quite well Particularly, in 2019, the ALCO Council of BIDV marked its innovation and improvement in operational effectiveness, associated with the standardization of regulatory documents and perfecting operating tools capital Capital management is carried out smoothly, ensuring safety - efficiency, and compliance strictly following the direction and management of the State Bank At the same time, the bank achieves its goals in the direction of construction, building a stable capital

14