LV Thạc sĩ_Enhancing the corporate credit rating system at Vietinbank

TABLE OF CONTENTS Table of Contents Acknowledgement Executive Summary List of Tables List of Diagrams List of Abbreviations Introduction Rationale Research objectives Research methodology Research scope Research structure CHAPTER I : FUNDAMENTALS OF CREDIT RATING SYSTEM AT COMMERCIAL BANKS 1.1 Bank credit 1.1.1 Concepts of bank credit 1.1.2 Forms of bank credit for enterprises 1.1.3 The role of bank credit 1.1.4 Bank credit risk 1.2 Credit rating at commercial banks 1.2.1 Concepts of credit rating at commercial banks 1.2.2 The necessity of corporate credit rating 1.2.3 Principles of corporate credit rating 1.2.4 Credit rating models 1.2.5 The process of corporate credit rating Page 1.3 Factors affecting credit rating operations 1.3.1 Quality of information sources 1.3.2 Level of banking technology 1.3.3 Capacity and knowledge of credit officers CHAPTER II: CURRENT CORPORATE CREDIT RATING SYSTEM AT VIETINBANK 2.1 Overview of Vietinbank 2.1.1 History and development 2.1.2 Organizational structure 2.1.3 Operational status of Vietinbank in the past 2.1.3.1 General situation 2.1.3.2 Capital mobilization 2.1.3.3 Credit operations 2.1.3.4 Business operation results 2.1.3.5 Favorable factors 2.1.3.6 Challenges facing the bank 2.2 Application of the corporate credit rating system at Vietinbank 2.2.1 Overview of the credit rating system at Vietinbank 2.2.2 Credit rating process at Vietinbank 2.2.3 Application of corporate credit rating at Vietinbank 2.2.4 Evaluating the corporate credit rating operations at Vietinbank 2.2.4.1 Achievements 2.2.4.2 Limitations and reasons CHAPTER III: ENHANCING THE CORPORATE CREDIT RATING SYSTEM AT VIETINBANK 3.1 Orientation of the credit rating operations at Vietinbank 3.2 Solutions to enhance the credit rating system at Vietinbank in the future 3.2.1 Improving the efficiency of the collecting and processing information operations 3.2.2 Perfecting the corporate credit rating operation 3.2.3 Promoting information technology 3.2.4 Improving competencies of employees 3.2.5 Building customer relationship 3.3 Some recommendations 3.3.1 To the Government 3.3.2 To the National Bank Page 3.3.3 To Vietinbank ACKNOWLEDGEMENT First of all, the author would like to give his sincere gratitude to Professor Hoang Lan Huong for her support, advise and encouragement from the initial to the final level of the thesis Also, the preparation of this thesis would not have been possible without the enthusiastic guidance from the corporate customer office’s staff at Vietinbank, Hoang Mai branch Lastly, the author offers his regards to all of those who supported him in any respect during the completion of the thesis Page EXECUTIVE SUMMARY Page LIST OF TABLES Table 1.1 Moody’s credit rating symbols table Table 2.1 Vietinbank’s mobilized capital structure Table 2.2 Enterprises’ scale table Table 2.3 Calculating financial indicators Table 2.4 Vietinbank’s credit rating table Table 2.5 Enterprise’s scale scoring Table 2.6 Enterprise’s financial ratios scoring Table 2.7 Credit scoring based on cash flow Page Table 2.8 Credit scoring based on capacity and management experience Table 2.9 Credit scoring based on credibility in doing business with the bank Table 2.10 Credit scoring based on business environment Table 2.11 Credit scoring based on other operational characteristics Table 2.12 Final credit scores LIST OF CHARTS & GRAPHS Chart 2.1: Organizational structure of Vietinbank Chart 2.2: Organizational structure of Vietinbank’s branch Graph 2.1 Interest incomes from customers in period 2007-2009 Graph 2.2 Credit loans according to business types in period 2007-2009 Graph 2.3 Credit loans according to business sectors in period 2007-2009 Page LIST OF ABBREVIATIONS Vietinbank: Joint Stock Commercial Bank for Industry and Trade of Vietnam SBV: State Bank of Vietnam VND: Vietnam Dong SOEs: State-owned enterprises JSC: joint-stock company CIs: Credit institutions CIC: Credit information center Page INTRODUCTION RATIONALE Since a long time ago, banks have always been the most essential financial intermediaries that provide capital to the whole economy of a country and help the finance market run more smoothly Because of this immensely importance of banks, it is needed to manage all risks that can happen to a bank and keep them in control to ensure the safety of the economy, especially when Vietnam is still a developing country with a considerably high growth rate On the other hand, among all operations of a typical commercial bank, credit operation is considered the most crucial one as it is not only the highest source of income but also the one associating with the most numerous major risks that a bank can face, for example reducing the liquidity of the bank, downgrading its credit rating, so on and so forth Therefore, with the risks of banks in general and of credit operations in particular, it is a challenging task for managers of banks to build an efficient credit rating system to control the risks well Page Recently, with the rapid growth of Vietnam’s economy and global integration, credit operations are becoming more and more popular as capitals are increasingly needed for business, investment, expansion, et cetera This is a great opportunity for banks to further increase their profit from credit operations but it also contains potential risks that need to be manage with a properly built credit rating system Since founded in 1988, Vietinbank has developed rapidly and at the moment is one of the four biggest banks in Vietnam with a chartered capital of more than 15,000 billion VND However, the larger the bank’s scale is, the more risks it will have to face and Vietinbank is no exception Therefore, Vietinbank has been exerting itself to create a credit rating system and it has brought in certain successes for Vietinbank Nonetheless, the system still exposes a number of flaws that need to be improved and after a period of internship at Vietinbank, Hoang Mai branch, the author has decided to research about the thesis of “Enhancing the corporate credit rating system at Vietinbank” RESEARCH OBJECTIVES The thesis concentrates on the following main issues at Hoang Mai branch of Vietinbank:  Reviewing of the theoretical and empirical literature of commercial banks, bank credit and credit rating system  Analyzing the current situation of credit and the credit rating systems currently used at Vietinbank  Proposing solutions to enhance the credit rating system for corporate customers at Vietinbank RESEARCH METHODOLOGY Page The type of instrumentation and data collection procedures used is the analyses of secondary sources such as:  Statistical records: the bank’s annual reports, financial statements, etc  Textbooks: Commercial bank management…  Other documents RESEARCH SCOPE The thesis’ scope is to research enhance using the bank’s data from 2007 to 2009 and other sources to enhance the credit rating system for corporate customers at Vietinbank RESEARCH STRUTURE The research structure consists of the following main parts:  Chapter I: Fundamentals of credit activities and credit rating of commercial banks  Chapter II: Current corporate credit rating system at Vietinbank  Chapter III: Enhance the corporate credit rating system at Vietinbank Page 10 strength of the enterprise since it is put in the leveraging ratios category Also market ratios such as P/E, P/B… are also needed for a better assessment of the enterprises  For non-financial indicators, there are some that are not very accurate in the task of grading enterprises, such as the working time of the enterprises’ managers, income from export, and especially the diversification of the enterprises In fact many enterprises diversifying their business sectors not operate effectively in their main sector, and the other sectors are also weak, thus reducing the overall capacity of the enterprises A notorious example of this issue is Vinashin Page 67 CHAPTER III: ENHANCING THE CORPORATE CREDIT RATING SYSTEM AT VIETINBANK Orientation of the credit operations at Vietinbank  Credit is the main business operation, competing according to market regulations Therefore credit structure needs to be adjusted reasonably and consistently with the strength of Vietinbank The bank needs to strengthen its credit risk management, ensuring that bad debts account for less than 3% Credit investment activities on financial markets need to be diversified to keep the orientation role of the bank in the market, and also help improve the efficiency of capital usage and liquidity management of the bank  Implementing the orientation of Vietinbank’s Board of Directors and the State Bank, the credit operations of Vietinbank are continuing to be developed on the basis of a reasonable balance between growth objectives and risk management Investment portfolio’s structure is maintained in harmony, giving priority to key economic sector with high potential growth in compliance with economic development policies of the Government In loan structure, Vietinbank keeps focusing the investment on key economic sectors, having high stability such as processing and commerce, followed by industries such as construction, electricity production and distribution, gas and water In its credit policy, Vietinbank seeks to minimize the lending to industries that are highly speculative with high potential business risks such as real estate and Page 68 securities Vietinbank’s preferred customers continue to be the ones having strong financial potential, possible projects, high operational efficiency and guaranteed capacity of paying debts Customer structure is more diversified throughout all components of the economy, providing them with package services with characteristics suitable to each type of customer  With the policy of restructuring credit portfolio towards safety, along with the issuance of a system of policies prescribing the credit operations, especially credit risk management, in recent years, Vietinbank’s average growth of credit has been at 17-18% a year - a level lower than the average of the sector In 2009, with a foundation of management experience, expansion of network scale and macroeconomic policies encouraging economic investment, Vietinbank’s target for credit growth is 28.9% By the end of April 2009, credit growth has reached more than 10% Some major credit projects that Vietinbank has signed and conducted disbursement plan in 2009 include: Dung Quat oil refinery, aluminum bauxite project in Lam Dong, thermal electric power project in Quang Ninh, Hai Phong Thermal Power, Vietnam Steel in Ho Chi Minh City, Bitexco building projects in Ho Chi Minh City  Vietinbank’s credit target in 2010 is to increase mobilized capital by 20% (about 265,000 billion VND), loans to the economy by 25% (about 204,000 billion VND) and keep bad debts under 2.5% .2 Solutions to enhance the credit rating system at Vietinbank in the future First of all, the need for the enhancement of Vietinbank’s credit rating system is to help control the credit risks more efficiently, when better credit rating results can help reflect the risks of the credit portfolio more properly, therefore help the bank to make more accurate decisions on credit loans Besides, the credit rating system also must be able to help Vietinbank predict possible loss for each customer category, helping it build appropriate credit strategy and policy Page 69 In addition, if banks base solely on credit rating model for risk assessment of borrowers, the results may still be far from reality due to fluctuations in business conditions, and there is not any analytical methods or any complex system that can completely replace the experience and professional assessments of operational staff, therefore Vietinbank still needs close collaboration between human resource factors and technology in the credit rating operation in order to manage credit risk in an effective way .2.1 Improving the efficiency of the collecting and processing information operations  Enhancing the task of examining customers; improving the information collecting process so that information about customers’ changes in business can be collected in time in order to adjust the credit policy reasonably Urging and encouraging enterprises to comply with the law on accounting and auditing so that the bank can get the best credit rating results and minimize credit risks  In addition, besides the documents that credit officers get directly from enterprises, they also need to research information from other sources which may come in handy They can get information from the enterprises’ customers, their employees, business partners…Also it is recommended that the staff utilize information from the CIC center, which is extremely useful, as CIC center is the place keeping all the basic and necessary information about enterprises, it allows credit officers to collect additional information, compare and cross-check with the information they currently have and an overall assessment of the enterprises  Vietinbank needs to develop information systems about credit risk management, ensuring that information is provided fully, accurately and is regularly updated to cater for the assessment and grading customer credit rating The bank also needs to establish information exchange channels with other banks on the basis of competition, but cooperation to achieve common goals is to prevent and Page 70 minimize risks in credit operations Use of information technology advances in information management is one of the key factors for the development of customer databases .2.2 Building customer relationship This is an important task that in the author’s opinion Vietinbank need to improve as it will help the credit rating process Having a good relationship means that the enterprise will be more willing to cooperate with the bank in providing information, thus with more information the bank can assess the enterprise’s credit risk more accurately Vietinbank can this by:  Giving favors to customers that have been dealing business with the bank for a long time, such as lessen the paperwork procedures, giving various interest rates, more free added-value services…  Providing enterprises consultations so that they can get the best from credit loans, such as help them to improve their business operations, business plans and financial plans so they can get a better credit rating, advice them on the type of credit, the credit limit they should choose…  Continuing to improve the bank’s image on media to build a good reputation  Giving more flexible interest rates, researching on new service products .2.3 Perfecting the corporate credit rating operation  Supplementing the financial indicators Besides the analysis of the current ratios, the author recommends that Vietinbank should also put the market ratios in use, which are contributory in the assessment of joint stock companies that have issued stocks to the public These ratios measure investor response to owning a company's stock and also the cost of issuing stock Some notable ratios are: Page 71 o Price-earnings ratio: The price-to-earnings ratio (P/E ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share P/E reflects the capital structure of the company in question P/E is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio and companies with high P/E ratio are more likely to be considered risky The P/E ratio implicitly incorporates the perceived risk of a given company's future earnings For a stock purchaser, this risk includes the possibility of bankruptcy For companies with high leverage (that is, high levels of debt), the risk of bankruptcy will be higher than for other companies Assuming the effect of leverage is positive, the earnings for a highly-leveraged company will also be higher In principle, the P/E ratio incorporates this information, and different P/E ratios may reflect the structure of the balance sheet However, it is usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E P/E ratio = Where Earnings per share = o Market to book ratio Market/book ratio, sometimes called price-to-book ratio, is a way of measuring the relative value of a company compared to its stock price or market value At its most Page 72 simple, market/book ratio measures the market capitalization (expressed as price per stock) of a business divided by its book value (the value of assets minus liabilities) The book value of a company refers to what would be left if the business paid its liabilities and shut its doors, although, of course, a growing business will always be worth more than its book value because it has the ability to generate new sales Market/book ratio is a useful way of measuring a company’s performance and making quick comparisons with competitors It is an essential figure to potential investors and analysts because it provides a simple way of judging whether a company is under or overvalued Since a firm's book value reflects historical cost accounting, this ratio indicates management's success in creating value for its stockholders Market to book ratio = Where Book value per share =  Supplementing the non-financial indicators In recent years non-financial indicators have become more and more important as researches have proven that these indicators can help improve the performance of an organization However, non-financial indicators are qualitative; information about these indicators does not only come solely from enterprises’ financial statements, but it is also gathered from various sources inside and outside the enterprises Therefore the choice of indicators in this criterion is varied among banks However, in the author’s opinion, Vietinbank needs to add some more indicators for a better assessment of the enterprises Page 73 o Besides income growth rate, it is necessary to add asset growth rate and sales growth rate Income growth alone is not enough to determine where the source of income comes from and to assess the strength of the enterprise o About the business environment, besides external factors, the bank should also consider the internal factors of the enterprises, such as whether the type of company structure is hierarchy or flat, the degree of employees’ empowerment and so on o The products that the enterprise is doing business in need to be considered The enterprise may have a highly competitive rank in the market but if the product can be easily replaced by other substitutes then the enterprise still faces danger in competition  Classifying loans Current Vietinbank is still classifying loans for credit risk management according to Article of Decision 493/2005/QD-NHNN on May 22, 2005, while all other three banks in the top four, namely BIDV, Agribank and Vietcombank, have already switched to Article Vietinbank is hesitating to change because of new method will increase its bad debt ratio and reduce the bank’s profit However, according to experts, despite lower profits, Vietinbank should still apply this loan classification method because it comes with the development and application of an internal credit rating system This is a tool for advanced credit management which has been commonly used in banks worldwide .2.4 Promoting information technology Vietinbank needs to consider the application of information technology as a key factor, supporting all business development activities Synchronized, modern, and safe information technology systems with consistent-integrated- highly stable characteristic are also necessary for the bank Page 74 In fact, in 2010, Vietinbank already plans to continue actively implementing the second phase of the bank modernizing project to create breakthrough technologies and products, ensuring that the bank can compete with domestic and foreign banks Specifically, the bank will carry out investment, upgrading and putting to use the treasury module, credit risk management, operational risk management, financial management, Internet banking Vietinbank’s target is to build the strategy for information technology development until 2015 to ensure its access to advanced standards in the world These improvements in the information technology will help all the business operations of Vietinbank, especially the credit rating operation as it is one operation that needs a huge amount of work Credit officers always have to work on a great deal amount of information They have to update the information regularly and process it carefully so that they can give accurate credit decisions Technology will lessen the workload for these credit staff, help them store the information and credit ratings results, update them and the staff can access them when needed .2.5 Improving competencies of employees In the operation of credit rating, the knowledge and capacity of the staff is the decisive factor of the operation’s quality Therefore it is necessary to improve these employees, give them training so that the bank can get the best results from its credit rating operation Practical experience already shows that no method or analysis tools that can entirely replace skilled and experienced credit analysts  Vietinbank needs to implement its recruitment task well, build an appropriate recruitment policy with minimum requirement about experience and qualification to ensure that the new employees can satisfy the bank’s need  Currently, Vietinbank is the only bank in Vietnam having a system of training and human resource development schools on its own With this advantage, Vietinbank needs to continue investing in building and developing the training system to improve the effectiveness of training in its internal systems, and enhance the knowledge and capability of the whole Vietinbank’s personnel Page 75 system For credit staff, they need to focus on training about the analysis of corporate finance, cash flow, liquidity, financial ratios and accumulate knowledge about business and industry analysis  Vietinbank also needs to continue performing regular work assignments, evaluation, planning, appointment in accordance with the capacity and qualifications of staff Continue to implement Vietinbank’s corporate culture and labor regulations, construct work environment and culture promoting principles, discipline to create good motivation for raising the efficiency of banking operations The personnel system needs to be trained so that they have enough qualifications, capacity, ethics and responsibility to meet the development needs of the bank during the period of international integration  Raise the awareness of the bank’s managers about the role of credit rating tools in risk prevention and the establishment of an effective loan portfolio Credit rating tools should be applied in combination with other measures such as collaterals, risk provision… Some recommendations 3.1 To the Government  Implementation of mandatory audit regime To help the Bank approved customers’ loan applications accurately, the financial statements of the customers must correctly reflect the real situation At the same time, the bank’s information collection must proceed smoothly and accurately For this to happen, the Government need to promulgate necessary financial and business accounting regulations to non state-owned sector, thereby strengthening the legal effect, ensuring uniformity and standards of the accounting operation, allowing the credit officers to make accurate conclusions about the financial and business operational situation of the enterprises To improve the efficiency of the audit operation and act as a basis for the credit rating operation, the immediate need is to have an Page 76 agreement among the audit agencies in Vietnam and specifying the audit standards to conform to the rules of international audit  Supporting banks in the information collecting operation Because information collecting is nearly the most important step in the credit rating process and the quality of information that banks can get largely determine the results of the credit rating process, therefore it is the Government’s duty to help banks in getting the information they need The Government can create new legal framework supporting banks’ task of collecting information, so that the information banks get will be more transparent, more accurate and fuller, such as: o Demanding the enterprises to have their financial statements audited every year o Promoting the operations of credit rating agencies in Vietnam o Improving the relationship between banks and Government agencies, such as tax agency, statistic agency… o Helping the State Bank improve the quality of CIC  Strengthening the management of banks’ credit operation Credit operation is one of the most important operations of banks as it is their highest source of income but also carries the most numerous risks Credit risks are severe and when occur will cause great impact on the economy of the country Therefore it is necessary for the Government to keep an eye on banks’ credit operations to ensure that the credit risks are minimized The Government should create teams of inspectors that would regularly check on the credit operations of banks so that actions can be taken to avoid errors and risks in the operations .3.2 To the State Bank  Improving the quality of its information Page 77 One of the causes of risks in the credit operations of commercial banks is the lack of necessary and accurate information from customers, from the market Therefore, for the operations of commercial banks to achieve high efficiency, the State Bank needs to further improve the operational quality of the CIC and the credit information departments at its branches in order to provide the most accurate, newest information about enterprises, fluctuations in the market Especially, The CIC is an important source of basic information about enterprises, therefore the State Bank need to pay much attention to it The State Bank needs to expand CIC’s information database, update it regularly about changes in enterprises, new enterprises in the market, fluctuation in the business sectors, apply new technology for better operational efficiency…On the other hand the State Bank also needs to urge the enterprises to submit their information to the CIC on a regular basis and the information must be accurate and full  Helping banks improve their staff’s capacity The State Bank can regularly organize training sessions, inviting top class, experienced teachers, especially the ones from developed countries for the credit staff from banks throughout the country to take part in so that they can improve their capacity and knowledge Every year it should help a meeting for the whole banking system, so that each bank can share their experience for the others to learn, thus the overall quality of the credit operations can be improved .3.3 To Vietinbank Vietinbank needs to adhere to the planning of socio-economic development of the Government to develop the business strategies of Vietinbank in general and Vietinbank’s branches in particular in the future The bank’s credit policies should be consistent, stick to the real situation to improve the efficiency of the credit operations, as well as raising funds to ensure the best capacity for all of the bank’s activities Page 78 On the other hand, the bank needs to consider all the suggestions that have been given out by the author above It needs to improve its collecting information operation, ensuring that the information that the credit officers get from the enterprises are full and accurate Vietinbank also needs to improve the credit rating process, such as supplementing the financial indicators as well as the non-financial indicators, applying modern technology in the form of credit rating software…Finally, since the most important factor in the credit rating process is the credit officers as they are involved in every step of the process and give the final credit decision, Vietinbank needs to improve their capacity and knowledge through various ways, such as training, promulgating rules and regulations… CONCLUSION The credit operations of banks are playing a more and more essential role nowadays with the increasing importance of banks in the financial market Therefore, the enhancement of banks’ credit rating system, which helps improving the efficiency and minimizing credit risks, is crucial to banks’ credit operations On the basis of theory, the research thesis “Enhancing the corporate credit rating system at Vietinbank” has accomplished the following contributions:  The thesis has systematized the fundamentals of the credit rating operations at commercial banks in general  The thesis has analyzed and assessed the current situation of the credit rating operations at Vietinbank, thereby indicating the achievements that the credit rating system has obtained as well as the limitations that needed to be improved in accordance with the fast changing of the business environment nowadays Page 79  On the other hand, the thesis has also offered various solutions for Vietinbank to improve the quality of its credit rating system and also recommendations to the related parties such as the State Bank, Government…to help in the enhancement of the credit rating system Generally, the thesis has been able to point out the issues existing in Vietinbank’s credit rating system and suggest solutions to enhance it However, due to various objective and subjective reasons, such as the limitation of time and knowledge of the author, limited accessibility to the bank’s data, the thesis still remains mistakes that cannot be avoided, therefore the author sincerely apologies for them and hopes that he will have the opportunity to further improve the thesis in the near future REFERENCE Vietinbank’s documents  Vietinbank’s prospectus  Vietinbank’s annual report 2009  Vietbank’s financial statements from 2007 to 2009  Vietinbank’s internal credit rating process Other documents  “Bank management & financial services”, th edition by Peter S Rose and Sylvia C Hudgins  “Moody’s rating symbols and definitions”, June 2009  “Giáo trình tín dụng ngân hàng”, Nhà xuất thống kê 2001 Page 80 Website  www.icb.com.vn  www.moodys.vn  www.cafef.vn  www.investopedia.com Page 81 ... of the credit rating system at Vietinbank 2.2.2 Credit rating process at Vietinbank 2.2.3 Application of corporate credit rating at Vietinbank 2.2.4 Evaluating the corporate credit rating operations... at Vietinbank 2.2.4.1 Achievements 2.2.4.2 Limitations and reasons CHAPTER III: ENHANCING THE CORPORATE CREDIT RATING SYSTEM AT VIETINBANK 3.1 Orientation of the credit rating operations at Vietinbank. .. limited Page 47 2.2 Application of the corporate credit rating system at Vietinbank 2.2.1 Overview of the credit rating system at Vietinbank Purpose  The system consists of the process for detailed