Measure the interest rate risk Acase study of Vietcombank Luận văn thạc sĩ

i MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY PHAM THI XUAN LIEN MEASURE THE INTEREST RATE RISK: A CASE STUDY OF VIETCOMBANK ECONOMICS MASTER THESIS HOCHIMINH CITY, 2010 ii MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY PHAM THI XUAN LIEN MEASURE THE INTEREST RATE RISK: A CASE STUDY OF VIETCOMBANK Major: Financial and Banking Major Code: 60.31.12 ECONOMICS MASTER THESIS Supervisor: Dr. Le Thai Thuong Quan HOCHIMINH CITY, 2010 iii A A C C K K N N O O W W L L E E D D G G E E M M E E N N T T I would like to express my honest gratitude to my devoted research Supervisor, Dr. Le Thai Thuong Quan, for his assistance and valuable guidance during the course of fulfillment this thesis. I would like to thank my colleagues from Vietcombank, who have helped me in collecting data for this thesis: Ms. Nguyen Thi Minh Trang from An Giang Branch, Ms. Le Mai Trinh from Dong Thap Branch. Especially, I would like to express my sincere thanks to Ms. Ho Thi Bich Lien – chief accountant of An giang Branch for her recommendation to Ms. Phung Nguyen Hai Yen, Deputy Director of Finance and Accounting Department in Vietcombank head office. I would like to avail this opportunity to express my appreciation to Professor Nguyen Dong Phong, UEH Board of Director for conceiving the Banking Master Program in English. I also would like to express my sincere gratitude to all mu teachers at Post-graduate Faculty- University of Economics Hochiminh City for their teaching and guidance during my Master in Banking course. Finally, I would like to extend my deepest gratitude to my beloved family, special thanks to my husband, Pham Trung Khanh, my son, Tony for their endless love and great support during study period. iv A A B B S S T T R R A A C C T T With the volatility in the interest rate recent years, the interest rate more becomes a vital problem of Vietnamese bankers. Fluctuations in the interest rate since 2008 that effected sharply to the bank‟s interest income and value, making interest rate risk management decisive to its success. It is necessary to call for high degree in the asset and liability management with the duty of managing the bank‟s interest rate risk exposure through the use of various hedging strategies and instruments as well as balance sheet adjustment. This qualitative research measures the interest rate risk in Vietcombank - the leader in interest rate maker in domestic banks by using the gap model (dollar gap) also referred to as the funding gap or the maturity gap. The research shall investigate the movement of the Vietnam interest rate in financial market since 2008. Then it will analyze the gap (dollar gap) in Vietcombank financial statement to measure the interest rate risk that affected to the income of the bank. Finally, there shall be some suggested solutions in improve the gap as well as the net interest income. Keywords: Gap, Gap analysis, interest rate, interest rate risk, interest rate risk measurement, asset and liability management, Vietcombank, financial statement, SBV, VNIBOR. v CONTENTS Acknowledgement Abstract Contents List of Tables List of Figures Abbreviations Chapter 1: INTRODUCTION 1.1 Background, context and rationale for the research 1 1.2 Why is the problem worth addressing? 2 1.3 Objectives/goals of the research 3 1.4 Methodology 4 1.5 Data analysis and finding 5 1.6 Study structure 5 Chapter 2: THEORY OF INTEREST RATE RISK AND INTEREST RATE RISK MEASUREMENT 2.1 Background 6 2.2 Risks assumed by banks 7 2.2.1 Credit risk 7 2.2.2 Interest rate risk 8 2.2.3 Operational risk 8 2.2.4 Liquidity risk 9 2.2.5 Price risk 9 vi 2.2.6 Compliance risk 9 2.2.7 Foreign Exchange risk 9 2.2.8 Strategic risk 10 2.2.9 Reputation risk 10 2.3 Interest rate risk 10 2.4 The model of measuring the interest rate risk 12 2.4.1 Definition 14 2.4.2 Calculation 14 2.4.3 Limitation of gap model 17 2.5 Interest rate risk management 18 2.5.1 On balance sheet adjustment 18 2.5.2 Off balance sheet adjustment 19 2.5.2.1 Using interest rate futures to hedge a dollar gap position 19 2.5.2.2 Using forward contract 20 2.5.2.3 Using option contract 21 2.5.2.4 Using interest rate swap 22 2.6 Manage interest rate risk with dollar gap 24 2.6.1 Aggressive management 25 2.6.2 Defensive management 25 2.7 Conclusion 25 Chapter 3: I I N N T T E E R R E E S S T T R R A A T T E E M M O O V V E E M M E E N N T T I I N N V V I I E E T T N N A A M M A A N N D D V V I I T T E E C C O O M M B B A A N N K K I I N N T T E E R R E E S S T T R R A A T T E E P P O O L L I I C C Y Y 3.1 The movement interest rate in Vietnam 27 3.1.1 Interest rate before the Renovation Policy 27 3.1.2 Interest rate after the Renovation Policy 28 3.1.3 Interest rate volatility period 29 vii 3.2 Interest rate policy in Vietcombank 31 3.2.1 Background 31 3.2.2 Interest rate policy 32 3.2.3 The fluctuation in 2008 34 3.2.4 The fluctuation in 2009 36 3.2.5 The movement in first six month of 2010 37 3.3 Conclusion 38 Chapter 4: MEASURE THE INTEREST RATE RISK IN THE COMMERCIAL JOINT STOCK BANK FOR FOREIGN TRADE OF VIETNAM (VIETCOMBANK) 4.1 Introduction. 39 4.2 Research design 40 4.2.1 Data collection and analysis 41 4.2.2 Personal interview 42 4.3 Interest rate risk exposure 42 4.4 Balance sheet structure 45 4.5 Gap Analysis 47 4.6 Conclusion 54 Chapter 5: Suggest and conclusion 5.1 Conclusion 56 5.2 Conclusion related to search questions 57 5.3 Suggest for hedgeing the gap 59 5.3.1 Balance sheet adjustment 59 viii 5.3.2 Off – balance sheet 60 5.4 Limitation of the research and suggest for further research 63 References Appendix ix ABBREVIATIONS ALM Asset and Liability Management ALCO Asset and Liability Committee VCB The Bank for Foreign Trade of Vietnam SBV The State Bank of Vietnam SOCBS State Owned Commercial Bank RSA Rate Sensitivity Asset RSC Rate Sensitivity Viability FS Financial Statement SMEs Small and Medium Enterprises NRS Non Rate Sensitivity VND Vietnam Dong VAS Vietnamese Accounting Standard BOM Board of Management x L L I I S S T T O O F F T T A A B B L L E E S S Table 2.1 Exposure to interest rate Table 2.2 Classification of Assets and Liabilities by interest rate sensitivity Table 2.3 The relation in Gap, Interest rate changes and net interest income Table 2.4 Distinction incremental gap and cumulative gap Table 4.1 VCB balance sheet in 2009 Table 4.2 VCB Classification of Assets and Liabilities by interest rate sensitivity Table 4.3 VCB Gap, Relative gap, interest sensitivity ratio Table 4.4 Maturity buckt of loans and deposits from customer at 31.12.2009 Table 4.5 VCB Reprcing mismatch in 2008, 2009 and first six months in 2010 Table 4.6 The compnent of net interest income in each maturity bucket Table 4.7 The effect f changing interest rate to NII [...]... 2.4 The model of measuring the interest rate risk With the increased volatility of interest rates that occurred in recent years, financial institutions become more concerned about their exposure to interest rate risk Interest rate risk measurement aims to quantify the interest rate risk profile of a exposure is necessary to ensure proficient risk management There are several models of measuring the interest. .. On the other hands, the findings will be an evidence to manage the interest rate risk aggressively in Vietcombank 1.6 STUDY STRUCTURE The thesis shall be included five chapters which chapter one involved the theory of the research background, and presents definitions of terms, significance and scope of the study The chapter two shall present the theory of interest rate risk measurement as well as the. .. primary cause of bank failures, and it is the most visible risk facing the bank managers 2.2.2 Interest rate risk Interest rate risk is the risk to earnings and capital that market rates of interest may change unfavorably This risk arises from differences in timing of rate changes and the timing of cash flows (repricing risk) , from change of the shape of the yield curve (yield curve risk) and from... and its interest rate risk exposure 3 To analyse the gap in Vietcombank financial statement to measure the interest rate risk that affected to the income of the bank 4 And also to find out the component of net interest income according to the maturity bucket The thesis wil net interest income and the component of the interest income/expenses according to the maturity bucket which is closely to the asset... alternatives which Vietcombank can incorporate into its interest rate risk management strategy The practicality of interest rate risk measurement model will be applied in the chaos specified period and specific business circumstance, its interest rate risk position and market conditions over the specified period Furthermore, the thesis will analyze the component of the net interest income matched to the maturity... sensitivity There will be some main questions to answer in this study: 1 What are theoretically bank practices and/or solutions to deal with interest rate riks? 2 What is the extent of interest rate risk in Vietcombank? Whether or not such risk affect to its profit? 1.4 METHODOLOGY The research methodology of the thesis is a case study The case study method allows for both the generating and the testing of. .. that there are different type of risk that the impact of particular investment strategy on shareholders depend on the impact on the total risk of the organization These risks are stipulated as follows: 2.2.1 Credit risk Credit risk is one of the earliest risks recognized in banking Credit risk is the risk to earnings and capital that an obligor may fail to meet the terms of any contract with the bank... maturity bucket of Vietcombank asset and liability Recommendations will be provided on the basis of a theoretical asset and liability structure which may further aid the Vietcombank in its management interest rate risk 1.3 OBJECTIVES AND GOALS OF THE RESEARCH The objective of this thesis is to -4- 1 To investigate the movement of the interest rate in financial market since 2008 2 To analyse the Vietcombank. .. reduce the market value of that asset or liability and the opposite is true if the interest rate will decrease Ultimately, when mismatching maturities by holding longer term assets than liabilities, a rise interest rate will decrease the value of the Table 2 1: Exposure to interest rate Rate Changes of rate Lender Borrower Existing exposure Floating rate + - Rate - + Rate - + Rate Fixed Rate Rate +... net interest margin Conversely, if the interest rate could engage in a long hedge by purchasing one or more T-bills contracts for future delivery In that case, if interest rates fell, the reduction in the net interest margin would be offset by the gain on the long hedge in the futures market Of course, if interest rates increased, the gain in the net interest margin would be offset by the loss on the . involved the theory of the research background, and presents definitions of terms, significance and scope of the study. The chapter two shall present the theory of interest rate risk measurement. alternatives which Vietcombank can incorporate into its interest rate risk management strategy. The practicality of interest rate risk measurement model will be applied in the chaos specified. interest rate risk position and market conditions over the specified period. Furthermore, the thesis will analyze the component of the net interest income matched to the maturity bucket of