LV Thạc sỹ_Improving liquidity risk management in BIDV

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM ***************************** IMPROVING LIQUIDITY RISK MANAGEMENT IN BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM BACHELOR’S THESIS IN FINANCE NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM ***************************** IMPROVING LIQUIDITY RISK MANAGEMENT IN BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM BACHELOR’S THESIS IN FINANCE TABLE OF CONTENTS ACKNOWLEDGEMENT ABBREVIATION LIST OF TABLES LIST OF FIGURES ABSTRACT CHAPTER 1: INTRODUCTION 1.1 Rationale .1 1.2 Research Objective .3 1.3 Research Methodology 1.4 Scope of Research CHAPTER 2: THEORETICAL BACKGROUND ON BANKING LIQUIDITY MANAGEMENT 2.1 Liquidity management concept 2.2 Liquidity management policy in modern bank 2.2.1 Purposes and principles of liquidity management .5 2.2.2 The process of liquidity management 2.2.3 Strategies for liquidity management 2.2.3.1 Asset liquidity management strategy 2.2.3.2 Liability liquidity management strategy 2.2.3.3 Balanced liquidity management strategy .7 2.2.4 Estimating liquidity needs 2.2.4.1 The Sources and Uses of Funds Approach .8 2.2.4.2 The structure of funds approach 2.2.4.3 Liquidity Indicator Approach .10 2.3 International experience on banking liquidity management .14 The case of Argentina in 2000-2002: 14 CHAPTER 3: LIQUIDITY MANAGEMENT IN BIDV 3.1 An introduction to BIDV 17 3.1.1 General Introduction to BIDV 17 3.1.2 History and Achievements .19 3.1.3 Organizational structure 23 3.1.4 Business performance during the period 2007-2011 .26 3.2 Liquidity management in BIDV .29 3.2.1 BIDV’s regulations on liquidity management 29 3.2.2 The organizational structure of liquidity management in BIDV 31 3.2.3 The methods used for liquidity management 33 3.2.3.1 Building liquidity gap table and demand-supply of liquidity table 33 Liquidity risk is the possibility that the bank has difficulties in performing their obligations for financial liabilities This risk arises when the bank may be unable to perform their repayment obligations when these liabilities are due at normal or difficult time To minimize liquidity risk, the bank has to mobilize from various sources beside the bank’s core capital Based on the liquidity table, the bank has a management policy of assets with high quality, flexibility, and daily monitor future cash flows and liquidity level 35 3.2.3.2 Analyzing liquidity simulation, building liquidity scenario 35 3.2.3.3 Using liquidity indicators 36 3.2.4 The process of liquidity management 40 3.2.4.1 The daily liquidity management 40 3.2.4.2 The periodic liquidity management 43 Analyze information report to 43 S Supervise 43 3.2.4.3 The process of issuing and supervising liquidity limits 45 3.3 The evaluation of liquidity management in BIDV 47 3.3.1 Achievements .47 3.3.2 Limitations 50 CHAPTER RECOMMENDATIONS TO IMPROVE LIQUIDITY RISK MANAGEMENT IN BIDV 4.1 BIDV's oriented strategy in 2011-2015 and vision to 2020 54 4.1.1 BIDV’s priority objectives 54 4.1.2 BIDV’s plan from 2011 to 2015 55 4.1.3 BIDV’s targets 56 4.2 Recommendations to improve liquidity risk management in BIDV 56 4.2.1 Complete the policy for liquidity risk management 56 4.2.2 Develop strategy for liquidity risk management 57 4.2.3 Improve financial capability .58 4.2.4 Adjust the model of liquidity risk management 58 4.2.5 Improve human resources quality 59 4.2.6 Upgrade the technology system 59 4.2.7 Enhance internal audit .60 4.3.Recommendations for SBV 60 4.3.1 Improve the legal framework 60 4.3.2.Implement monetary policy flexibly 61 4.3.3.Intensify credit institutions inspection, supervision and build a warning system 62 4.3.4.Promote the derivative security market 62 CONCLUSION REFERENCES APPENDIX ACKNOWLEDGEMENT This thesis would not have been possible without the supports of teachers, my classmates in Advanced Finance Program Intake 50, my family and others I owe my deepest gratitude to my direct instructor – PhD, Prof … whose encouragement, guidance, and support from the initial to the final level of the thesis enabled me to develop an understanding about this topic Besides, I would like to thank MsC … She has made available her support in many ways I had the chance to approach BIDV’s liquidity risk management procedure These models will be the center of my thesis She also gave me a lot of precious and rare data I am really grateful to my classmates in Advanced Finance Program 50 They helped me not only in finding related materials but also in giving advice and ideas This thesis has never been completed without their support Lastly, I offer my regards and blessings to all of those who supported me in any aspect during the completion of this graduation thesis A great love for all, ABBREVIATION ACB Asian Commercial Bank ALCO Asset Liability Management Committee BIDV Bank for Investment and Development of Vietnam BOD Board of Directors BOM Board of Management CPI Consumer Price Index IMF International Monetary Fund L/C Letter of Credit NIM Net Interest Margin ROA Return on assets ROE Return on equity SBV State Bank of Vietnam S&P Standard and Poor US The United State of America USD U.S Dollar VND Vietnam dong LIST OF TABLES Table 3.1: BIDV’s 2010 ratings Table 3.2: BIDV’s liquidity table at 31/12/2011 Table 3.3: BIDV’s static liquidity indicator at 31/12/2011 Table 3.4: BIDV’s liquidity gap ratio at 31/12/2011 Table 3.5: BIDV’s demand-supply liquidity ratio at 31/12/2011 LIST OF FIGURES Figure 3.1: BIDV’s organizational structure Figure 3.2: BIDV’s total assets during the period 2007 – 2011 Figure 3.3: BIDV’s Owner Equity during the period 2007-2011 Figure 3.4: BIDV’s Profit before tax during the period 2007-2011 Figure 3.5: BIDV’s profitability indicators during the period 2009-2011 Figure 3.6: Organizational structure of liquidity management in BIDV Figure 3.7: Daily liquidity management process in BIDV Figure 3.8: Periodic liquidity management process in BIDV ABSTRACT In the global economy, together with a strong and inevitable integration, developing countries have witnessed the gradual development of financial institutions, especially commercial banks Modern banks have to face with many risks and liquidity risk is considered to be the most unpredictable risk From that, it raises a need for all commercial banks to have a solid and efficient liquidity risk management system in order to reach the business stability and sustainable development This paper aims to assess the details of liquidity risk management in BIDV based on theoretical frame work After reviewing BIDV’s liquidity risk management, this thesis provides evaluations on the banks’ achievements and limitations in liquidity risk management It also offers some appropriate solutions to improve this profession in the bank The research finds out that BIDV has an efficient liquidity risk management system However, there are some shortcomings which the bank needs to deal with It is suggested that the bank should build a complete policy, develop specific strategies, and adjust the model of liquidity risk management Furthermore, the bank needs to improve its financial capacity, better the human resources quality, upgrade the technology system, and enhance its internal audit Finally, some recommendations are offered for the SBV so that commercial banks can apply liquidity risk management efficiently The structure of this thesis includes four main chapters: Chapter – Introduction, Chapter – Theoretical background, Chapter – Liquidity management in BIDV, and Chapter – Recommendations 54 4.1 BIDV's oriented strategy in 2011-2015 and vision to 2020 BIDV is striving to become one of top 20 banks of high quality, efficiency, and reputation in Southeast Asia in 2020 4.1.1 BIDV’s priority objectives In the period 2011-2015, BIDV will focus to complete 10 priority objectives as follows: (1) Develop and complete a model of organization and governance, improve executive competence at all levels of BIDV to create a solid foundation to grow into a leading financial group in Vietnam; (2) Focus on a comprehensive restructuring of business operations to improve efficiency and quality; proactive risk control and sustainable growth; (3) Maintain and develop the position and influence of BIDV on financial markets, strive and pioneer to perform the national currency policies effectively; (4) Enhance the capacity to manage risk; proactively apply and follow the best practices in consistency with business practices in Vietnam; (5) Develop retail banking activities, hold a large share of outstanding loans, raise capital and retail services; (6) Enhance the capacity to develop applications and technology in business operations and create breakthroughs to increase efficiency and labor productivity; (7) Rapidly develop high quality human resources, professional force, enhance labor productivity; (8) Strive to become a bank of the best credit ratings in Vietnam as evaluated by international credit rating organizations; (9) Structure to improve operations and business performance of its subsidiaries, associated companies, restructure investment portfolio focusing on core business; 55 (10) Protect, maintain and promote the core values, build corporate culture and develop the BIDV brand 4.1.2 BIDV’s plan from 2011 to 2015 Based on goals and several main financial indicators set out in the five-year strategic plan associated with business restructuring, BIDV has devised an action plan including eight main components which cover the entire business and executive management in BIDV, specifically: - Credit activities: Diversifying credit structure by industries, sectors and customers, ensuring growth of scale associated with increase credit quality; - Fund mobilization: Adjusting funding structure by deposit-term and customer segments to ensure sustainable and effective funding sources through attracting long-term funds, funds raised from individuals, ODA and increasing international capital access; - Investment activities: Reducing and terminating investments in non-financial industry and non-core business activities, improve efficiency of long-term investments and investments in affiliated companies; - Treasury activities: Products diversification and increasing market share to assert BIDV leading position of capital and money market in Vietnam; - Development of retail banking activities: Increasing technological, financial and human resources for retail banking activities, diversification of products and services as well as improving quality of services provided; - Profit and efficiency: Diversification of income sources, ensure profitability ratios (ROA, ROE) to meet international level; - Human Resources - Organizational structure: Increasing expert workforce, establishing a solid foundation for a financial holding model; - Technology: Strengthening the system of modern information technology to support management and administration activities and development of banking products 56 Each component above comes with detailed solutions and roadmap for each year, as well as defined responsibility of each business unit to implement 4.1.3 BIDV’s targets The bank set key targets for the period from 2011 to 2015 as follow: - • Scale targets: Total assets growth: 23 % per year Fund mobilization growth: 25% per year Credit growth: 22% per year • Structure targets: Outstanding medium and long term loans/total outstanding loans: 75% Total outstanding loans/total assets: 66% Total outstanding loans/total funds mobilized: 84% • Quality targets: NPLs/Total outstanding loans: 12 Uniden days - months months months months tified month maturit y 67 … II Liabilities Customer deposits Deposits and borrowings from other banks Valuable papers issued Borrowings from the SBV Borrowings from the Ministry of Finance Repo contract L/C Commitments … … III Liquidity Gap (I – II) (1) (2) (3) (4) (5) (6) (7) IV Cumulative liquidity gap (10) = (11) = (12) = (13) = (14) = (15) = (9)= (9) + (10) + (11) + (12) + (13) + (14) + (1) (2) (3) (4) (5) (6) (7) V Cumulative liquidity gap / (9)/T (10)/T (15)/T Total assets A A A (8) B Demand-Supply of liquidity table Date / /… Currency: Unit: Remaining maturity I Supply of liquidity Cash, gold Balances with the SBV Placements with and loans to other banks Valuable papers Treasury bills Government bonds, municipal bonds Other valuable papers Loans and advances … … II Demand of liquidity day – days – 1- 3–6 6-12 >12 Total days 1month months months months months 68 Reserve requirement Customer deposits Deposits and borrowings from other banks Valuable papers issued Borrowings from the SBV Borrowings from the Ministry of Finance Repo contract L/C Commitments … … III Liquidity position (1) IV Cumulative liquidity (9)= position (1) V Cumulative liquidity position/Total assets (2) (10) = (9) + (2) (9)/T (10)/T A A (3) (11) = (10) + (3) (4) (5) (6) (7) (12) = (13) = (14) = (15) = (11) + (12) + (13) + (14) + (4) (5) (6) (7) (15)/T A (8) ... Understanding the liquidity concept and the liquidity risk management in modern bank - Understanding the process and method of managing liquidity in BIDV, analyzing achievements and limitations in liquidity. .. 1990: Bank for Investment and Construction of Vietnam The bank played an important role in improving measures of supplying and managing basic investment, improving the role of credits in matching... block: Block of wholesale banking, block of retail banking, block of capital and capital trading, block of risk management, block of operation, Block of internal management, and block of affiliation