report on vietcombank

Therefore, the goal of this paper is to provide a brief overview of the risk management practices of Vietcombank as well as differential analyses of the bank's current credit, liquidity,

HANOI UNIVERSITY FACULTY OF MANAGEMENT & TOURISM

REPORT ON VIETCOMBANK

Course: TREASURY MANAGEMENT Tutor: Ms Nguyen Thi Minh Hang

Members: Tran Thi Minh Hop_2004040043

Tran Cong Minh_2004040075 Dao Quang Anh_ 2004040002 Nguyen Thi Bich Phuong_2004040090

Hanoi, 29/04/20223

Table of Contents ABSTRACT iiaaaiâă4ẢẼŸẢŸẢỀẼẼ 4 LT INTRODUCTION ooo cccceccsecnsceaeeseesecaessecsesaececsseeseenseeseecnsaeeeaeeesas 5 II v0 5 Aã 5 2 Risk management commnit(ee of Vietcombank - c0 2c vn nhe 6

2 Mobilized capital amalysis 00.0.000000ccccccccccccccscccesscecenseeeeseeeecessaeeseeensestieeeeseene 16 VI CREDIT SITUATION ANALYSIS 00o0 ooo cccccccecccncceeeeeensenseetsetaeeneesaeeaes 17 VI HEDGING PROPOSAL C20021 11211111121 12111111011 11 01111111111 181 nh 18

3 Forward rate agreement (ERA) Q2 12 21102 1001110111101 111111 x che ray 20

ABSTRACT The practice of a scientific and systematic risk strategy is known as risk management in the banking industry It aims to identify, control, prevent, and minimize potential losses and the negative effects that risk may have The traits of risk management include the rational development and execution of a plan to manage prospective losses Therefore, the goal of this paper is to provide a brief overview of the risk management practices of

Vietcombank as well as differential analyses of the bank's current credit, liquidity, and interest rate risk as well as a scenario analysis of the potential effects of a capital hedging proposal's income Hopefully, this paper will give an overview of the risk management of Vietcombank

L INTRODUCTION 1 General introduction Joint 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

been constantly developing with excellent business achievements and is considered as the highest ratings among Vietnamese banks by international credit rating firms with its total assets of over VND 1 quadrillion (US$43.lbillion) by the end of 2019 Moreover, in 2009, this bank was officially listed on the Ho Chi Minh Stock Exchange (HOSE) with the code VCB (Annual report 2018) With total assets over VND 1 quadrillion (US$43.1 billion) by the end of 2019, Vetcombank has been steadily growing with good business accomplishments and is regarded as the top-rated Vietnamese bank by foreign credit rating firms Additionally, Vietcombank was formally listed on the Ho Chi Minh Stock Exchange (HOSE) in 2009 with the code VCB In addition, its profit in 2019 was estimated to be 23.3 trillion VND, gaining 27.06% from 2018 With a successful charter capital increase of VND 6,200 billion in 2019, Vietcombank overtook Vietinbank to take the top spot among Vietnamese banks

In addition to having 537 branches and transaction offices spread out around the nation, Vietcombank has developed an extensive network of 2105 correspondent banks across 131 countries and regions Vietcombank has also developed an autobank system with over 2.300 ATMs and more than 43,000 merchants nationwide and earned the trust of more than 10 million retail customers and nearly 30.000 corporate clients Vietcombank has today earned both major accolades and the trust of its clients as a result of the process of constructing the banking system as well as developing and enhancing services

2 Risk management committee of Vietcombank

The Board of Directors of Vietcombank established its risk management committee with the goal of approving appropriate policies and directions with regard to various types of risks, such as credit nsk, market risk, and operational risk in each period, including defining ratios, limitations, and risk appetite of the Bank Vietcombank’s risk management committee is led by Mr Nguyen Manh Hung - a member of the BOD

I LIQUIDITY REPORT

Akey element in ensuring the safety of the operation of any credit institution is liquidity, which is the capacity to act quickly in response to clients' demands for withdrawals at any moment In the business operations of banks, liquidity can be stated to be a very sensitive problem If the bank is unable to process clients' withdrawal requests in a timely manner, negative rumors will spread quickly and cause a wave of customers to rush to withdraw cash As a result, this might cause in solvency or that bank might face a risk of bankruptcy, affecting the operational stability of the whole system We use the following criteria to estimate the liquidity management operations at Vietcombank:

1 Minimum capital adequacy ratio CAR 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 business operations Regarding the risk management requirements, the SBV officially approved VCB for the application of Circular 41 on November 28, 2018, one year before the validity term By this event, VCB had become the first bank to meet Basel II standards in Vietnam Currently, the minimum capital adequacy ratio under Circular No 41/2016 / TI-NHNN takes effect on January 1, 2020 is 8% which was 9% before Accordingly, CAR of thebank period 2018-2021 was:

Table 1: Capital adequacy ratio (CAR) (Annual Report of VCB from 2018-2022)

| % |

As mentioned above, on November 28, 2018, VCB was officially approved by the State Bank of Vietnam to apply Circular 41 one year earlier than the effective period that makes it to be the first bank to meet Basel II standards in Vietnam Therefore, this ratio in 2019 is 9.34% and increases to 9.56% in 2020 CAR 2021 has decreased slightly to 9.31% In general, the average CAR of the bank 1s in compliance with the regulations of SBV

2 Cash status index Cash status index is calculated by (Cash + demand deposits at the State Bank (SBV) +demand deposits at credit institutions (CIs)) / total assets The higher this index 1s, the

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spend many opportunity costs, which lowers the bank's profits The decrease in cash status index demonstrates that the bank has a firm ability to handle immediate cash requirements

3 Lending capital ratio Lending capital ratio is 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

lable 3: Lending capital ratio 2019 - June 30, 2020 (Unit: million VND) (Source: Summary of the 2019 - June 30, 2020 consolidated financial statements VCB) VCB's loan ratio in 2019 was 60.09% and increased to 63.32%, 67.68% and 68.49%

respectively from 2020 to June 30, 2022 It can be seen that keeping the loan ratio stable aids banks in reducing liquidity risks to guarantee profitability and security for the bank's operations

4 Loan-to-deposit ratio (LDR) Calculated by outstanding loans / deposits to customers This indicator reflects the ability of banks to repay funds withdrawals made by depositors by relying on loans given as a source of liquidity, in other words how far credit is extended to credit customers A higher ratio indicates that the loans disbursed are more than the deposits and vice-versa

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(LDR) lable 4: Loan-to-deposit ratio (LDR) 2019-June 30,2022 (Unit: million VND)

(Source: Summary of the 2019 - June 30, 2020 consolidated financial statements VCB) According to the old regulations in Circular 36/2014/TT-NHNN, the maximum LDR of commercial 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 of liquidity risk Therefore, when the LDR ratio increases, the liquidity of banks decreases accordingly The data above shows that VCB's LDR in 2019 to 2021 were smaller than 90%, well complying with the State Bank's regulations on the ratio of loans to mobilized capital However, in the first 6 months of 2022, we see that VCB's LDR exceeded the maximum LDR limit by 91.28%

5 Deposit structure index Calculated by Demand deposits/Term deposits This index shows the percentage of deposit mobilization compared to term deposits at commercial banks, which accounts for what percentage

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(Source: Summary of the 2019 - June 30, 2020 consolidated financial statements VCB) Deposits are the most important part of the liquidity supply component of commercial banks The bank's index has stayed between 40% and 50%, demonstrating the constant high demand for liquidity Because consumers can withdraw at any time, the bank must prepare liquidity to ensure that there is always enough to meet customer demand Additionally, banks’ term deposits have a tendency to rise over time, a trend that attests to both customer confidence and appropriate bank policies In general, over the past years, the organization and implementation of safety in business activities 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 liquidity requirements arising at a reasonable cost, thereby, the reputation and brand of VCB were maintained and promoted in the domestic and foreign financial markets

IIL INTEREST RATE RISK (IRR) Interest rate risk (IRR) is defined as the change in a bank’s portfolio value due to interest rate fluctuations It is the potential loss from unexpected changes in interest rates, which can significantly affect a bank’s profitability and market value of equity Interest rate risk in banking is originated by a mismatching of assets and liabilities maturities and interest rate repricing on assets and liabilities When the interest rate changes in the financial marketplace, the sources of revenue and their expenses must also change (Raad Mozib Lalon, Md Bazlul Kabir, 2017)

The interest sensitivity gap was one of the first techniques used in asset liability management to manage interest rate nsk The interest rate sensitivity gap classifies all assets, liabilities and off-balance sheet transactions by effective maturity from an interest rate reset perspective The interest rate sensitivity gap compares the amount of assets and liabilities in each time period in the interest rate sensitivity gap table This comparison gives an approximate view of the interest rate risk of the balance sheet being analyzed If management feels its institution is excessively exposed to interest rate risk, it will try to match as closely as possible the volume of assets that can be repriced as interest rate change with the volume of deposits and other liabilities whose rates can also be adjusted

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with market conditions during the same time period (Raad Mozib Lalon, Md Bazlul Kabir, 2017) When the amount of repriceable assets does not equal the amount of repriceable liabilities, there is a gap between these interest-sensitive assets and interest- sensitive liabilities The Interest-Sensitive Gap is determined by taking the Interest- sensitive assets minus the Interest-sensitive liabilities The financial firm is considered to have a positive gap and be asset sensitive if the volume of interest-sensitive assets in each planning period (day, week, month, etc.) exceeds the size of interest-sensitive liabilities subject to repricing In the other scenario, assume the liabilities of an interest-sensitive bank are greater than its interest-sensitive assets This bank is then deemed to be liability sensitive since it has a negative gap The table below shows the figures for gap analysis that given by the annual report of Vietcombank in 2020:

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Therefore, VCB is a liability sensitive institution and they will lose when the interest rate increases According to annual report of VCB (2020), for interest rate risk management on bank books, Vietcombank has established a system of policies, procedures, and deadlines comprehensive level to identify, measure, monitor and control Risk control and reporting in accordance with international practices such as Basel II as well as such as complying with the regulations of the State Bank of Vietnam April 13/2018/TT-NHNN Vietcombank is one of the first banks to apply interest rate risk management tools and limits to daily management activities (management of the difference in repricing gap between rate sensitive assets and rate-sensitive liabilities, the sensitive of net interest income (NII sensitivity) and the sensitive of economic value of equity (EVE sensitivity)) In addition, Vietcombank also uses appropriate derivative products to minimize the negative impact of interest rate fluctuations In 2020, Vietcombank continued implementing the ALM/FTP software system to improve the automation and efficiency of interest rate risk management

IV SCENARIO ANALYSIS OF CAPITALAND INCOME

Scenario analysis is the process of determiming the expected value of a portfolio after a specified amount of time, assuming certain changes in the values of the assets in the portfolio or the occurrence of important circumstances, such as an interest rate shift Moreover, scenario analysis can be used to assess a potential worst-case scenario as well as to estimate changes to a portfolio's value in response to a negative event For the purpose of trying to decide the best course of action for the company to move forward so as to maximize profits (best-case scenario), the majority of managers nowadays use scenario analysis in their business decision-making process They also employ this technique to look at the worst-case scenario and foresee probable losses and operational issues We will talk about how Vietcombank's capital and income have changed in this section Scenario analysis of capital

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1 Scenario analysis of capital

2019 2020 2021 2022 Total Asset 1,219,254,043 | 1,320,802,577 | 1,406,833,614 | 1,593,398,717 Shareholder Equity 79,342,806 92,188,196 106,523,079 120,064,340 Deposit 928,530,404 | 1,032,263,551 | 1,136,759,508 | 1,195,549,727 Total deposit/Total asset ratio 76.16% 78.15% 80.80% 75.03%

Total operating expense (15,747,767)| (15,611,575) (9,326,563) (10,110,054) Net operating income before loan loss provision 29,375,131 32,457,846 18,522,433 21,918,865 Loan loss provision (6,568,033) (9,931,677) (5,501,201) (5,000,408) Profit before tax 22,807,098 22,526,169 13,021,232 16,918,547 Corporate income tax (4,534,401) (4,482,424) (2,602,362) (3,378,145) Net profit after tax 18,272,697 18,043,745 13,540,312 10,418,870

TABLE 7: Analysis of capital (unit: million) Source: Annual report and financial report of Vietcombank from 2019 to 2022 The information in the table above indicates that Vietcombank's profit before tax tends to decline slightly over the 4-year period, from 2019 to 2022 By the end of 2022, profit had dropped by around 25.82% from 2019 It is clear that the Covid 19 pandemic's negative effects on the world economy are the primary causes of this abrupt fall, together with the rapid rise in risk provisions and operating costs

Despite the negative effects of the real estate and corporate bond markets, as well as the fluctuation of interest rates and currency exchange rates on the global market, most indexes have a tendency to rise significantly between 2019 and 2022 When compared to 2021, the amount of capital mobilized by customers in market 1 will rise by roughly 9.1% in 2022 The CASA, or average capital demand movement, amounted to 34% Credit expansion reached 1.15 trillion dong, a 19% increase from the end of 2021 19.4% more wholesale credit was issued in 2022 than in 2021 In addition, credit quality is also well controlled, the ratio of provision for bad debts was quite stable despite facing many fluctuations of domestic and foreign markets In terms of equity, it increased about 40.7 billion over 4 years to prove that 1t can maintain and ensure the daily activities of that

bank

2 Scenario analysis of Income

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