treasury management report analysis of joint stock commercial bank for investment and development of vietnam

In this paper, we provide an analysis and evaluation of BIDV’s risk management based on many criteria such as current conditions, credit risk, interest rate risk, liquidity risk.. In ter

HANOI UNIVERSITY FACULTY OF MANAGEMENT AND TOURISM

TREASURY MANAGEMENT

REPORT Analysis of Joint Stock Commercial Bank for

Investment and Development of Vietnam

BIDVS

Instructor: Prof Dao Thi Thanh Binh Tutor: MBA Nguyen Thi Minh Hang Class TRM TUT 2 — Group 4

Students:

Nguyễn Thu Huyền — 1704040047

Ngô Thị Thanh Hương — 1704040050

Nguyễn Thị Ngọc Diễm — 1704040020 Phạm Hương Quỳnh — 1804040096

GROUP CONTRIBUTION

TABLE OF CONTENTS

4.2 Credit Risk Management 12

ABSTRACT

Banks and other financial institutions are the core of the credit intermediation route between savers and investors They provide services to individuals, enterprises and large corporate firms in order to run their business in both domestic and international channels However, as well as any companies in the current competitive business world, banks face risks In fact, these risks that banks incur are not only in terms of the banks' money and reputation but are also various types of financial

and non-financial risks that are taken by the economy as a whole Therefore, Risk Analysis and

Risk Management has become the foundation for banks’ sustainable operation Understanding and managing the risk means foreseeing and being able to deal with the challenges and threats that banks confront in the future In this paper, we provide an analysis and evaluation of BIDV’s risk

management based on many criteria such as current conditions, credit risk, interest rate risk,

liquidity risk These information are gathered from the annual report and official website of the bank, alongside with calculations and other related techniques to gain better insights and conclusions Our analysis witnessed BIDV as an outstanding bank although sometimes it fell into minor troubles because of changes in management methods This report is restricted due to the

limitation of public information, thus there may be some parts that are not consistent with the actual situation of the bank

1 Introduction

1.1 Overview of BIDV Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) was established on 26 April 1957 as the Bank for Construction of Vietnam, then changed its name to the Bank for Investment and Construction of Vietnam The bank adopted its present name on 14th

November 1990 At the present, BIDV owns 1,000 branches and transaction offices, over 15,000 ATMs/POS, and more than 24,000 professional and trained staff Moreover, BIDV not only

develops the domestic banking network but also owns many branches such as non-banking networks in Vietnam and foreign businesses in some countries such as Laos, Cambodia, Myanmar,

Russia, Czech, etc After more than 62 years of development, BIDV has become one of the “Big four” banks in

Vietnam and continued to be assigned high credit ratings by international rating firms, taking a place in the top 100 Asia’s banks By the end of 2020, BIDV has been the largest lender in Vietnam

with total assets hitting over 1.49 million VND, which is 1.5 times higher than 2016, the average growth rate of 10.4% per year in the 2016-2020 period (Le Phuong, 2021) These achievements

show BIDV’s significant position in the Vietnam financial market 1.2 Main services

BIDV is an investment and development bank in all fields, with great successes In each field, BIDV always tries to create and launch services and products with many features to meet the needs

of customers BIDV’s main services are banking, insurance, securities, and financial investment In terms of financial investment services, this is the outstanding field of activity of BIDV and has

built a brand name in the investment market in Vietnam BIDV has set up many businesses based on capital contribution to invest in projects, demonstrating its leading and coordinating role Some national projects can be mentioned as Expressway Development Company - BEDC; Aviation rental

Joint Stock Company - VALC, investment in the construction of Long Thanh International

Airport, Regarding banking services, BIDV is a leading experienced bank providing a full range of modern banking products and services such as Card Services, Personal Loans, Deposit Services, Foreign Exchange and Capital markets, Treasury, Digital banking, Payment and transfer About insurance services, the bank provides life insurance and non-life insurance products that are suitably designed in the overall package of BIDV products to customers BIDV operates in the securities sector and provides products to promptly meet the financial needs of customers such as

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Stockbroker; Securities services include customer transaction services, financial services, depository services, and bond settlement services; Securities transactions; Derivative securities

1.3 BIDV’s ALCO

The Asset-Liability Committee, also known as ALCO, is a bank committee whose primary goal is

to maximize benefit while minimizing risk; it promotes and handles financial and credit metrics in accordance with SBV's requirements ALCO maintains the asset-liability balance to ensure that the

bank has enough assets to cover its liabilities; additionally, ALCO manages the asset-liability

balance to ensure that the bank has enough assets to cover its liabilities ALCO also assists in the monitoring of liquidity, liquidity risks, and market risk in the face of exchange rate and interest rate volatility by designing appropriate risk management profiles and risk strategies ALCO is undeniably essential in ensuring owner equity effectiveness ratios and the long-term viability of

BIDV

ALCO councils have been managing liquidity and interest rate risk since 2004, and ALCO's operational structure has strengthened dramatically Controlling asset and liability is always a major challenge for any bank when establishing Basel, according to Mr Phan Duc Tu — BIDV Board of management Being aware of this problem, BIDV has built a group to evaluate debt asset and asset management (ALM) In order to build modern credit risk measuring tools, the project has helped BIDV improve the efficiency of the entire credit process chain following advanced practices from the pre-lending evaluation stage to the post loan management in order to credit approval time This is also a basis for determining interest rates and fees collected from customers correctly based on risks and characteristics of customers, thereby increasing profits for banks

2 Current conditions 2.1 Macroeconomic Conditions

In general, the 2016-2020 period is the convergence of Vietnam's highest and most comprehensive

socio-economic development achievements Overall, Vietnam's economy was still on the way to

maintain good expansion by receiving positive signs from macroeconomics indicators Vietnam has created a myth in poverty reduction Average GDP in the period 2016 - 2020 is about

5.9% per year and the total factor productivity (TFP) will increase from 33.6% in the 2011-2015

period to 45.2% in the 2016-2020 period The average growth rate of labor productivity, in the 2016-2020 period, is 5.8% per year The ICOR coefficient drops to about 6.1 By 2020, Vietnam's economy will be the 40th in the world, 4th in ASEAN, and 6th in average per person in ASEAN The export market is expanded and diversified; many enterprises deeply participate in the regional and global value chains; In particular, the continuous trade surplus from 2016-2020 and by 2020 reached more than 19.1 billion USD The proportion of high-tech product exports to the total merchandise export value will increase to about 50% by 2020

Moreover, Vietnam's Consumer Index Price (CPD recorded an all-time high of 118.09 points in

January 2020, meanwhile, Vietnam witnessed the lowest inflation rate of 4.87% in March 2020 since November 2019.In particular, in 2020, the outbreak of the coronavirus and African swine

fever is expected to slow down the global economic growth, Vietnam is still among the few

countries that still maintain the growth rate 2, 91% of GDP; considered one of the 16 most

successful emerging economies in the world and rapid V-shaped economic recovery, with forecast growth from more than 6% to 11.2% in 2021

In general, by 2020, Vietnam will emerge as a remarkable and proud spot for self-control, resilience, and success in controlling the spread of Covid-19; flexibility and efficiency in policy response and market response to support businesses; actively participating in bilateral and multilateral trade agreements; exploit opportunities from shifting and repositioning regional and international supply chains, promoting organizational and technology restructuring, digital transformation, paradigm shifts, and deeper engagement global value chains and towards rapid and sustainable growth In terms of prospects, Vietnam still maintains macroeconomic stability and is in a V-shaped recovery trend; is one of the fastest growing economies in the region and the world

2.2 Banking industry

According to the State Bank of Vietnam, inflation rate and credit growth is projected at 4% and

14%, respectively, in order to stabilize macroeconomics condition, ensure the stability of both

monetary and foreign exchange markets However, it is expected that 2020 will be a challenging year for the banking industry since this 1s the transition period for achieving Basel II requirements and preparing for Basel III Meanwhile, only a half of 35 banks in Vietnam have met Basel II standards Specifically, it is forecasted that capital demand in 2020 will increase significantly as

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Basel II requirements will raise risky assets by 60% in comparison with 2017, equaling VND463 trillion for Vietnam’s banking system

As of December 31, 2020, total bank assets reached VND 1.49 million, 1.5 times higher than 2016,

average growth of 10.4% / year for the 2016-2020 period, continuing to affirm its position as a joint stock commercial bank with the largest total assets in Vietnam

Total outstanding credit and investment reached 1.43 million billion, up 9% compared to 2019; of

which credit balance reached 1.19 million billion VND, 1.92 times higher than 2016, up 8.8%

compared to 2019, accounting for an average of 13.5% of the credit market share of the whole industry, leading the market share of credit as well as the size of outstanding loans to economic organizations and individuals

In 2020, BIDV recorded a decrease in profit compared to 2019 Specifically, consolidated profit

before tax reached VND 9,017 billion, down about 16%, individual profit reached VND 8,515

billion, down 17.3% BIDV's leaders said that the reason for the decline in profits was because the bank actively reduced income by more than 6,400 billion dong to implement debt structure, lower interest rates and exempt interest and fees to support businesses and people under the direction of

the State Bank of Vietnam

In 2021, BIDV sets a target of 9% growth in total assets at the end of the period, 12% increase in credit balance, 12-14.8% increase in capital mobilization, and a guaranteed bad debt ratio of less

than 1.6%

3 Liquidity risk management

Liquidity risk is the risk that arises when the bank is unable to fulfill its obligations to pay debts when due or can fulfill debt obligations when due but must pay higher costs than average costs market according to the internal regulations of the commercial bank BIDV has fully implemented the contents to manage liquidity risks in accordance with the current regulations of the State Bank, at the same time studied and applied appropriate advanced practices Document system was issued synchronously including policies, regulations, guiding documents BIDV also identifies, measures, monitors, controls risks, and reports following the State Bank's regulations, and meets internal govemanice requirements In addition to ensuring liquidity safety ratios and ratios under the State

Bank's regulations, BIDV also develops internal liquidity risk management indicators, a set of indicators to identify liquidity stress, building customer behavior models Liquidity tolerance tests are also periodically carried out to determine the bank's resilience against liquidity stress

conditions, from which there are preventive measures fit In 2020, although it is affected by Covid-

19, the liquidity situation of BIDV is still stable, the payment obligations to customers are always guaranteed on time BIDV always follows market developments, customers' payment needs and anticipates unfavorable situations to prepare appropriate capital balance management scenarios

3.1 Loan-to-deposit ratio:

The loan-to-deposit ratio (LDR) is used to assess a bank's liability by comparing a bank's total loans to its total deposits for the same period The LDR is expressed as a percentage If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund

requirements Conversely, if the ratio is too low, the bank may not be earning as much as it could

be To calculate the loan-to-deposit ratio, we divide a bank's total amount of loans by the total amount of deposits for the same period You can find the figures on a bank's balance sheet Loans are listed as assets while deposits are listed as liabilities

Total Loans LDR = ————\ Total Deposits

From the above formula, we can calculate the Loan-to-deposit ratio of BIDV as the following table:

LDR 81.43 % 81.99 % 87.40 %

Figure 1: Loan-to-deposit ratio of BIDV from 2018 to 2020

Looking at the table, we can see that the loan-to-deposit ratio increased slightly in 3 years from 2018 to 2020 and peaked at 87.40 percent in 2020 The figure 87.40 percent was higher than the State Bank of Vietnam's (SBV) limit of 70 percent and in the range of ideal ratio (80%-90%), which means BIDV had enough liquidity to cover any unforeseen fund requirements

3.2 Liquidity ratio Liquidity ratios are an important class of financial metrics used to determine a debtor's ability to pay off current debt obligations without raising external capital Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the current ratio and also loan to deposit ratio:

Current asset Current ratio = ——_—_—_

Figure 2: Current ratio of BIDV from 2018 to 2020 Looking at the table, we can see that the current ratio of BIDV peaked at 1.1143 in 2020, which is higher than the previous years (1.0859 and 1.0100 respectively) However, this ratio was quite low because BIDV has focused on liquidity for long-term It should reserve more liquid assets to satisfy the demand of customer’s withdrawal in the short-term As one of 10 commercial banks selected by the State Bank to implement Basel II advanced management model, over the past time, BIDV has continuously strived to make fundamental changes to shape its construction Asset management framework, liquidity risk management (liquidity risk) as usual, striving to apply Basel II according to the schedule of the State Bank Liquidity risk is centrally managed by BIDV at the Head Office With the full participation of all components (protection layers, implementing units, advisors) to ensure the management of Liabilities - Assets in general and management of liquidity risk at BIDV is implemented BIDV operates liquidity risk on the first priority principle to ensure liquidity safety, comply with the regulations of the State Bank, towards international practices, balancing capital to increase the bank's operational efficiency At BIDV, the Board of Directors implemented strategic direction of risk management, including liquidity risk and approved overall risk management strategy, including risk tolerance or risk appetite

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4 Credit risk management Credit risk is the possibility of loss due to a borrower defaulting on a loan or not meeting contractual obligations, this risk drives from the lending, investing activities and in case the bank acts as intermediary or issue guarantees The possible consequences can be an interruption of cash flows and the increase in costs for collection Therefore, one of the most important goals for bank managers is how to manage credit risk

4.1, Indicators of credit risk 4.1.1, Non-performing loans ratio

2015 2016 2017 2018 2019 | Overall banking

industry (2018) Non-performing 1.68% | 1.95% | 1.44% 1.9% 1.75% 2.4%

loans ratio

Source: Vietstock Figure 3: Non-performing loan ratio of BLDV and banking industry (2018)

Non-performing loan ratio of BIDV and banking industry (2018)

Non-performing ratio is one of the most important indicators of credit risk management in a financial institution It measures income-generating assets, including loans, which are past due for 90 days or more Therefore, high NPL ratio depicts poor bank performance In 2015, the bad

debt rate of the whole industry was 2.9%, BIDV was 1.68%, in 2016, the bad debt rate of the

whole banking sector decreased slightly to 2.8%, the debt ratio of BIDV was at 1.95% in 2018,

in 2019 it was 1.75%, the industry rate decreased to 2.4%, BIDV's debt ratio was 1.9% and the

last 3 years were always within the allowable limit (less than 2%) However, BIDV's bad debt is not stable This is a worrying signal in the problem of credit risk management of the bank in terms of controlling credit sources for lending