LV Thạc sỹ_Financial analysis of customer in Vietinbank

TABLE OF CONTENT ACKNOWLEDGEMENT EXECUTIVE SUMMARY INTRODUCTION .6 Rationale .6 Research questions Research objectives .8 Research methodology Research scope Research structure CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS .10 OF CUSTOMER 10 1.1 Concept of finance analysis of customer in commercial bank .10 1.1.1 Definition 10 1.1.2 Position in credit process 10 1.2 Role of finance analysis of customer in credit process 11 1.3 Rules and method in customer financial analysis 13 1.3.1 Rules in FAC 13 1.3.2 Methods using in FAC 14 1.4 FAC process 21 1.4.1 Gather the information: .21 1.4.2 Perform the analysis: 22 1.4.3 Supply the result in order to make decision: 23 1.5 FAC Experience among commercial banks 23 1.5.1 International commercial banks .23 1.5.2 Domestic commercial banks .27 CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF CUSTOMER IN VIETINBANK HA NOI BRANCH 28 2.1 Overview of Vietinbank Ha Noi 28 2.2 Situation of finance analysis of customer in Vietinbank Ha Noi 37 2.3 Evaluating the result of customer finance analysis in Vietinbank Ha Noi branch 52 2.3.1 Result 52 2.3.2 Limitations and causes 54 2.3.2.2.2 Objective 56 CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH 58 3.1 Direction for development of Vietinbank Ha Noi branch 58 3.2 Recommendation for improving the financial analysis of customers in the branch 61 3.2.1 Human Resource recommendations .61 3.2.2 Recommendations for improving the content of FAC in Vietinbank Ha Noi Branch 65 3.2.3 Recommendations for improving database used for FAC 69 3.2.4 Other recommendations 71 3.3 Petitions 72 3.3.1 Petitions to Vietinbank 72 3.3.2 Petition to SBV .73 3.3.3 Petition to other related departments 73 CONCLUSION 75 REFERENCES 76 ACKNOWLEDGEMENT ◊.◊.◊ “First of all, I would like to thank National Economics University (NEU), especially Advanced Program, for providing much precious opportunities to know real nature of the banking activities through this internship Secondly, during data collecting period, Ms…, a loan officer in Vietinbank Ha Noi branch, and her colleges helped me greatly, especially on collecting financial analysis data Without this useful data, I wouldn’t finish this research For that reason, I would like to describe my cordial thanks to her and her colleges Finally, as a student in Advanced Class, I was very happy because I could work on this study with Prof I would like to send him big thanks for guiding and making useful comments to help me finishing this research Also, I would especially like to thank all my friends in Advanced Class for all their encouragement and intellectual support that has made this report possible Any mistake is my own responsibility.” ABBREVIATION Vietinbank Vietinbank Ha Noi branch BS Balance Sheet CFS Cash Flow Statement CIC Credit Information Center FA Financial Analysis FAC Financial Analysis of customer IS Income Statement NPL Non-Performing Loans Pl Plan SBV State Bank of Vietnam SMES Small and Medium Enterprises EXECUTIVE SUMMARY ◊.◊.◊ This research discusses the details of conducting a comparison and analysis of several model used in Financial Analysis of customer in the commercial banks The purpose of this comparison and analysis was not to identify the “best” model of FAC, but rather to identify varying levels of targets or indicators used in each method, and to identify unusual or distinct trends, patterns of FAC It is hoped that these findings will illustrate the strengths, weaknesses, and current issues of each model which in-turn will leads to improvements in future FAC The models utilized in this research include Ratio model, Comparison model, ZAltman model, DuPont model, and Credit Scoring model The time period for this research is from 2009 to 2011 Preliminary results of this research indicate that a good FAC depending on the method of estimation, the experience of loan officers, the regulations of the commercial banks and SBV, the availability of public information, and the strength of information system Finally, it is recommended that content of FAC should be updated and adjusted to bring the most effective and efficient It is also recommended that focused human resources be highly concerned; training and recruitment are necessary to improve FAC INTRODUCTION Rationale What is the situation? Financial Analysis of customer is a very important process in banking activities FAC is a part of credit process, and also one of the sources help the banks determines the creditworthy of the loan applicants In Vietnam, although the general model for FAC is the same for all banks, the detail is often different Even in the same banks, the process varies to each branch based on the role and position of that branch Therefore, the quality of the loan or the way to determine customer as creditworthy is quite different among banks It raises the need for the improvement in FAC Why I this research? As we all know that credit process is essential in banking activities This is the base for the loan officers make the decision Credit process also helps the bank improve credit quality and minimize credit risk In which, FAC is the main contribution I want to this research to understand more about the role of FAC and how FAC is applying in Vietinbank Ha Noi Branch In additions, the change in technology and expanding of customer’s demand impact on customer financial analysis in some dimensions These impacts might be positive or negative This raise in me the desire to research on these impacts All above reasons lead me to the final decision to this research What are the issues? Customer financial analysis is a complex process and requires high skill creditors In a report funded by USaid (2006), it was said that analysis of the financial condition of the borrower may require an extensive effort, depending on the size and complexity of the borrower’s business The more complex the borrower, the more difficult it will be to analyze the financial statements and understand the interrelationship among the balance sheet, income statement and cash flow statement If the borrower is part of a larger corporate structure, it will require an experienced lender, perhaps even a team of lenders, to fully understand the borrower’s financial condition Because of this characteristic, there is often the gap between experience and less experience loan officers The lack of expertise can lead to the wrong loan decision or other bad effects Besides, in some banks, this process is not considered as important as it would be The under estimated this process can lead to risk taking that could otherwise be detect from doing financial analysis Also, as I mention earlier, up to date of the technology and the more popular in the using of applied knowledge in financial analysis lead the need for improving financial analysis Research questions This study will aim at answering three questions: What is financial analysis? What are the issues of financial analysis in Vietinbank Ha Noi? What are recommendations for improving the finance analysis in Vietinbank Ha Noi? Research objectives The purpose of this research is to analyze the issues in financial analysis and how to make this process more effective in Vietinbank Ha Noi Research methodology Data: Secondary: regulations, newspaper, websiteVietinbank Ha Noi branch’s reports Method analysis: In this research, I will use the comparison method, descriptive method, and statistic, horizontal and vertical analysis Also, I will take consider some popular analysis methods that are using in my developed country These are DuPont Ratio Analysis and Comparative Altman Z-Scores method Research scope In this research I just pay attention on Vietinbank, Ha Noi Branch and analysis is just focus on business customer analysis Moreover, all data will be analyzed in years from 2009-2011 Research structure CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS OF BORROWER This chapter aims at providing readers all information related to financial analysis of borrower Information is collected from many sources that I thought would be useful I just describe without any further analysis After reading this chapter, readers will understand what financial analysis of borrower is, and how it is done Also, experiences from both international and domestic commercial banks in FAC mentioned at the end of the chapter will be useful for understanding current situation of FAC CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN VIETINBANK HA NOI BRANCH This chapter aims at providing readers all information related to FAC in Vietinbank Ha Noi branch All information is collected and observed when I had an internship in the branch In this chapter, I not only describe but also analyze to interpret the issues, pros and cons of FAC After reading this chapter, readers will understand how FAC is done in the branch and how this process differs from theory model that I mention in chapter CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH This chapter will discuss about how to solve the limitations and issues in the chapter Also, several petitions to Vietinbankb, SBV, and related department will be given in order to facilitate the improvement of FAC CHAPTER FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS OF CUSTOMER 1.1 Concept of finance analysis of customer in commercial bank 1.1.1 Definition FAC (also referred to as financial analysis of customer) refers to an assessment of the viability, stability and profitability of a business, sub-business or project It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports Then, these reports are usually presented to top management as a base for making business decisions Based on these reports, Loan officers may make decisions regarding investing or lending (Wikipedia) 1.1.2 Position in credit process There are six steps in the lending process in commercial bank These are: Step one: Finding Prospective Loan customers Step two: Evaluating a prospective customer’s character and sincerity of purpose Step three: Making site visits and evaluating a prospective customer’s credit record Step four: Evaluating a prospective customer’s financial condition 10  Increasing the direct interviews with customer, not only during analyzing process but also after the loan is made Loan officer can directly visit the side to collect and check the information  Co- operating with authority departments for dual checking information For example, the borrowers often need to submit several financial statements, one for the bank, one for the tax department, and one for planning and investment department If three institutions can co-operating with each other, there will be benefit to all party by limiting the unethical behavior of the borrowers to submit make up financial statements for cheating 3.2.4 Other recommendations About management, the branch managers should encourage the loan officers in doing financial analysis Managers should empower them in doing their works, and let’s them free in contribute the ideas, method to improve FAC Every contribution of loan officers should be highly appreciated and took in to considerations If it’s useful, manager can apply the ideas About organization, the branch should step-by-step building separated functional departments For example, the current multifunctional department can divided into business credit department, personal credit department, planning department, and international trade department In which, business credit department should be reorganize to facilitate the work of loan officers Mangers can consider each loan officer focuses on specific job rather doing the whole work FAC could be better done when a loan officer or a group of loan officer pay more time on doing this task My idea can be illustrated in diagram 3.1: 72 73 Diagram 3.1: Sample structure of business credit department Business Credit Department Department manager Lending Operations Unit Analysis Unit (FAC) Control and Supervising Unit 3.3 Petitions 3.3.1 Petitions to Vietinbank Due to limited funding, Vietinbank Ha Noi branch can not establish a fully diversified information storage system itself Thus, Vietinbank center should build a system of information storage system to provide information for all system including main branches and transaction centers These system also need to be updated periodically (day by day), and each branch can easily access or change the information in this system Vietinbank should build a general guide for FAC, and regularly revise and adjust if necessary to fit the current situation and demand Besides,Vietinbank need to apply new methods in FAC from other banks Vietinbank can send loan officer training abroad to update new technical or expertise in this field Moreover, Vietinbank needs send the trained loan officers to the main branches and transaction centers for directly guide to apply new process or methods Vietinbank may circularly change loan officers between branches to better learning and to help the loan officer copes with different lending situations in different places 74 Vietinbank can apply new technology in order to facilitate the FAC New technology can apply first in several branches to test the efficiency If the result is good, then applying broadly in all branches and transaction centers New technology can be new computer systems, new software or new supporting system 3.3.2 Petition to SBV SBV should quickly promulgate the specific regulations in terms of content and process in financial analysis activities for credit assessment, especially the work of credit scoring and credit rating In fact, most banks build their own financial process, the contents, the grading criteria, the benchmark rate, etc In the case, customer submit loan applicant to several banks He or she may be assessed simultaneously, but the credit results among banks sometimes highly differ from each other This situation shows the inconsistencies on credit risk assessment among domestic banks Also, it is the difficulty for domestic banks to approach global standard which are very strict and tight State Bank should gradually strengthen the ability to store and manage credit information of national information center (CIC), CIC should improve its efficiency in operation by focus on its functions and duties prescribed by clearly specify the responsibilities of the unit member credit institutions in joint activities Also the cost should adjust to reasonable price, so that banks and financial institutions can easily and quickly access and use of this information 3.3.3 Petition to other related departments The government should promulgate regulations and mandatory audit settlement for public enterprises The audit must be conducted periodically, and the 75 financial statements of enterprises must be audited prior to provide to the banks Also, fine should be clearly stated for businesses trying to provide false data to fraudulent bank loans In reality, due to the loose in the accounting management, many enterprises intentional create fraud financial reporting, inappropriate information that highly affecting the result in financial analysis Thus, the State should promulgate regulations along with the remedies to ensure truthfulness and clarity in the financial statements; fully reflect all activities business of the enterprise Ministry of Finance in conjunction with relevant departments needs to build groups of industry’s financial indicators that commercial banks can use in FAC This system of indicators will be adjusted periodically to suit the new situation and be widely published for many any people whom may concern Government should quickly develop and promulgate a standard framework to allow credit rating organizations formally established and participate in the economy These organizations aim to develop and perfect credit ratings for customers in general and for businesses in particular 76 CONCLUSION Financial analysis of customers is an important task in banking activities This is the tools that many banks used in making lending decision, and in risk management Through this research, I really hope that readers have a broad view on FAC and learn more about is important roles In this research, I have described and analyzed to help readers understand more about financial analysis of customers, especially how it’s applied in Vietinbank Ha Noi branch This research has answered three questions that I mentioned in the introduction part First, this research has given the readers overview of FAC including definition, roles and position, rules in FAC, models, content and procedure Second, this research has described and analyzed the situation of FAC in Vietinbank Ha Noi branch in three recent years 2009, 2010, and 2011 Moreover, the research has provided the readers what loan officers in the branch done, result and limitations of FAC activities Thirdly, based on the real situation, the research has mentions several recommendations and petitions for improvement In doing this research, I have applied all my knowledge in finance and banking, and intensively researched to give the best I could; however, limitations are unavoidable The limit of time and information sources are the most constrain Besides, the gap between Vietnam and English terms also a limit in doing this research Finally, although the research is based on a relatively small sample of accounts, this has not undermined the importance of the findings in contributing to the development of a FAC model It simply reinforces the need for further research 77 REFERENCES Vietnamese: Vietinbank chi nhánh Hà Nội Báo cáo tài năm 2009, 2010, 2011; Hồ Diệu, Lê Thẩm Dương, Lê Thị Hiệp Thương, Phạm Phú Quốc, Hồ Trung Bửu, Bùi Diệu Anh (2001) Giáo trình Tín dụng Ngân hàng.Hanoi: Nhà xuất Thống Kê Nguyen Minh Kieu (2008) Hướng dẫn nghiệp vụ cấp tín dụng thẩm định tín dụng.Hanoi: Nhà xuất Thống Kê English: Beneda & Nancy (2006) Industry ratio analysis and the commercial loan review process Credit & Financial Management Review Kuen-Chor Kwan & Julia Tan (n.d) Credit scoring for commercial loans: the case of Singapore Retrieved from Springerlink database Perter S.Rose & Sylvia C Hudgins (2008) Bank Management & Financial Services New York:The McGraw-Hill Thompson, Strickland & Gamble (2010) Crafting and Executing Strategy New York:The McGraw-Hill Tracy L Penwell (n.d) The credit Process: A guide for small business owners Federal Reserve Bank of NewYork 78 USAID-Funded Economic Governance II Project (2006) Credit Process Credit Workshop - Intermediate (pg 01-06) BearingPoint 10.Website: - http://en.wikipedia.org/ - http://www.goftp.com/qna/Why_do_banks_check_business_credit_ before_giving_a_loan-qna73300.html - http://guidebook.dcma.mil/27/guidebook_process.htm - http://loanofficerrecruiting.com/recruiting-blue-print/ - http://tutor2u.net/business/accounts/main_ratios.htm - http://forum.brokeroutpost.com/loans/forum/2/225115.htm - http://humanresources.about.com/od/retention/a/more_retention.htm - http://www.allbusiness.com/personal-finance/credit-cards-creditprofile/763872-1.html - 79 80 APPENDIX Table 1.1: Ratios Used in FAC Ratio Profitability ratios Gross profit margin Operating profit margin or Return on Sales Net profit margin How Calculated What it Shows (Revenues-Cost of goods sold)/Revenues Shows the percentage of revenues available to cover operating expenses and yield a profit Higher is better, and the trend should be upward Shows the profitability of current operations without (Revenues-Operating Expenses)/Revenues regard to interest charges and income taxes Higher is better, and the trend should be upward or Operating income/Revenues Profits after taxes/Revenues Shows after-tax profits per dollar of sales Higher is better, and the trend should be upward Or net return on sales A measure of the return on total investment in the enterprise Interest is added to after-tax prodits to form Return on total assets (Profits after taxes +Interest)/Total assets the numerator, since total assets are financed by creditors as well as by stockholders Higher is better, and the trend should be upward Return on stockholder's equity (Profits after taxes)/Total stockholders'equity Shows the return stockholders are earning on their investment in the enterprise A return in the 12-15 percent range is average, and the trend should be upward Earnings per share Profits after taxes /(Number of shares of common stock outstanding) Shoes the earnings for each share of common stock outstanding The trend should be upward, and the bigger the annual percentage gains, the better 81 Leverage ratio Debt-to-assets ratio Total debt/Total Asset Measures the extent to which borrowed funds have been used to finance the firm's operations Low fractions or ratios are better high fractions indicate overuse of debt and greater risk of bankruptcy An important measure of creditworthiness and balance Long-term debt-to-capital ratio Debt-to-equity ratio Long-term debt-to-equity ratio Long-term debt /(Long-term debt+Total stockholders ‘equity) Total debt/Total stockholders' equity Long-term debt/Total stockholders' equity sheet strength indicates the percentage of capital investment which has been financed by creditors and bondholders Fractions or ratios below 25 or 25% are usually quite satisfactory since monies invested by stockholders account for 75% or more of the company's total capital The lower the ratio, the greater the capacity to borrow additional funds Debt-tocapital ratios above 50% and certainly above 75% indicate a heavy and perhaps excessive reliance on debt, lower creditworthiness, and weak balance sheet strength Should usually be less than 1.0 High ratios (especially above 1.0) signal excessive debt, lower creditworthiness, and weaker balance sheet strength Shows the balance between debt and equity in the firm's long-term capital structure Low ratios indicate greater capacity to borrow additional funds if needed 82 Operating income/Interest expenses Measures the ability to pay annual interest charges Lenders usually insist on a minimum ratio of 2.0, but ratios above 3.0 signal better creditworthiness Current ratio Current assets/current liabilities Shows a firm's ability to pay current liabilities using assets that can be converted to sach in the near term Ratio should definitely be higher than 1.0; ratio of or higher are better still Quick ratio (or acid-test ratio) (Curent assets-Inventory)/Current liabilities Shows a firm's ability to pay current liabilities without relying on the sale of its inventories Current assets-Current liabilities Bigger amounts are better because the company has more internal funds available to (1) pay its current liabilities on a timely basis and (2) finance inventory expansion; additional accounts receivable, and a larger base of operations without resorting to borrowing or raising more equity capital Times-interestearned (or coverage) ratio Liquidit y ratios Working capital 83 Gearing Stability ratios Interest cover Borrowing (all long-term debts + normal overdraft) /Net assets (or shareholders' Funds) Measures the proportion of assets invested in a business that is financed by borrowing In theory, the higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not "optional" in the same way as dividends However, gearing can be a financially sound part of a business's capital structure particularly if the business has strong, predictable cash flows Operating profit before interest / Interest This measures the ability of the business to "service" its debt Are profits sufficient to be able to pay interest and other finance costs? 84 Original Z-score Component Definitions Variable Definition Weighting Factor T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z Score Bankruptcy Model: Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + 999T5 Zones of Discrimination: Z > 2.99 -“Safe” Zone 1.8 < Z < 2.99 -“Grey” Zone Z < 1.80 -“Distress” Zone [edit] Z-score estimated for private firms T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z' Score Bankruptcy Model: 85 Z' = 0.717T1 + 0.847T2 + 3.107T3 + 0.420T4 + 0.998T5 Zones of Discrimination: Z' > 2.9 -“Safe” Zone 1.23 < Z' < -“Grey” Zone Z' < 1.23 -“Distress” Zone [edit] Z-score estimated for Non-Manufacturer Industrials & Emerging Market Credits T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z-Score Bankruptcy Model: Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 Zones of Discrimination: Z > 2.6 -“Safe” Zone 1.1 < Z < -“Grey” Zone Z < 1.1 -“Distress” Zone 86 ... IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH 58 3.1 Direction for development of Vietinbank Ha Noi branch 58 3.2 Recommendation for improving the financial analysis of customers... questions: What is financial analysis? What are the issues of financial analysis in Vietinbank Ha Noi? What are recommendations for improving the finance analysis in Vietinbank Ha Noi? Research... given in order to facilitate the improvement of FAC CHAPTER FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS OF CUSTOMER 1.1 Concept of finance analysis of customer in commercial bank 1.1.1 Definition