LV Thạc sỹ_Financial analysis customer in Vietinbank hanoi branch

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM BACHELOR THESIS FINANCIAL ANALYSIS CUSTOMER IN VIETINBANK HANOI BRANCH TABLE OF CONTENT NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM BACHELOR THESIS FINANCIAL ANALYSIS CUSTOMER IN VIETINBANK HANOI BRANCH CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS OF BORROWER CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN VIETINBANK HA NOI BRANCH .8 CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH CHAPTER 10 FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS 10 OF CUSTOMER 10 CHAPTER 28 CURRENT FINANCIAL ANALYSIS OF CUSTOMER IN VIETINBANK HA NOI BRANCH 28 CHAPTER 59 RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH 59 3.1 Direction for development of Vietinbank Ha Noi branch 59 3.2 Recommendation for improving the financial analysis of customers in the branch 62 3.2.1 Human Resource recommendations 62 Employees are crucial for any company, and Vietinbank Ha Noi branch is not exception Loan officers directly conduct analysis and make the loan; they are the directly sources creating profit for the bank Good loan officers will be benefit for the branch They will directly improving the quality of the banking activity In order to build a good group of staff, there are three ways the branch can apply: 62 3.2.2 Recommendations for improving the content of FAC in Vietinbank Ha Noi Branch 66 3.2.3 Recommendations for improving database used for FAC .71 3.2.4 Other recommendations 73 CONCLUSION 74 REFERENCES .75 Original Z-score Component Definitions Variable Definition Weighting Factor 83 [edit] Z-score estimated for private firms 83 [edit] Z-score estimated for Non-Manufacturer Industrials & Emerging Market Credits 84 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 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 INTRODUCTION Rationale 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 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 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 CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN VIETINBANK HA NOI BRANCH CHAPTER 3: RECOMMENDATION FOR IMPROVING FINANCIAL OF BORROWER IN VIETINBANK HA NOI BRANCH 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 Source: Crafting and Executing Strategy (Thompson, Strickland & Gamble) 3.2.3 Recommendations for improving database used for FAC Collecting customer’s documents: Beside all documents that the branch uses, loan officers should require customer to submit cash flow statement and the production plan of the company These statements will be useful for the loan officers predict the future cash flow of the borrowers In case, customers not submit all these documents, the branch needs to require them to so; if not, there will be no lending Moreover, loan 70 officers should ask borrowers to submit all these documents in as many years as possible, at least three years with current financial performance If the firm is start up, loan officers can accept less than three years submit but require more attention on these loans Collecting other information: Information about industry and other firm industry also need to collect This information can be collected from many sources such as newspaper, magazines, media, internet, etc If the branch has good financial conditions, the branch can hire an organization to supply this information In additions, the branch should collect information in other branch within Vietinbank system If the branch has good relationship with other financial institutions or tax department, the branch would ask for information from these channels Storing and up-dating information: Collected information should be carefully stored to limit the damage, lost or change In all the case, information should be stored in both soft-copy and hard copy, and information need to categorize to ease loan officers in searching and adding Information is more useful if it is regularly up to date Therefore, the branch should have the plan to up date information periodically In the current situation of the branch, it’s better to collect information weekly Improving the accuracy of the information: In enhancing the accuracy of the information, firm can: 71  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 CONCLUSION 74 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 REFERENCES 75 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 USAID-Funded Economic Governance II Project (2006) Credit Process Credit Workshop - Intermediate (pg 01-06) BearingPoint 76 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 - 77 78 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 79 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 80 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 Working capital 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 Gearing Borrowing (all long-term debts + normal overdraft) /Net assets (or shareholders' Funds) Times-interestearned (or coverage) ratio Liquidit y ratios Stability ratios 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, 81 predictable cash flows Interest cover 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? 82 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: 83 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 84 ... FINANCIAL ANALYSIS CUSTOMER IN VIETINBANK HANOI BRANCH CHAPTER 1: FUNDAMENTAL CONCEPTS OF FINANCIAL ANALYSIS OF BORROWER CHAPTER 2: CURRENT FINANCIAL ANALYSIS OF BORROWER IN VIETINBANK... Situation of finance analysis of customer in Vietinbank Ha Noi FAC in Vietinbank Ha Noi is doing in three steps: Step 1: Gather information Information sources relevant to borrower include Financial... including: - Vietinbank Ha Noi branch is on the road to become the main branch level one - Vietinbank Ha Noi branch continues to maintain and develop good banking products and services to customers