SOME SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PETROVIETNAM FINANCE CORPORATION (PVFC)

VIETNAM NATIONAL UNIVERSITY, HANOI HANOI SCHOOL OF BUSINESS PHAN THU HA SOME SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PETROVIETNAM FINANCE CORPORATION (PVFC) Major: Business Administration Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS SUPERVISOR: DR NGUYEN VIET DUNG HANOI - 2012 ACKNOWLEDGEMENTS I would like to express my deepest gratitude to my supervisor, Dr Nguyen Viet Dung for his constructive suggestions, for his patience, enthusiasm, immense knowledge, and also continuous encouragement throughout my research I would like to take this opportunity to express my faithful thanks to all members at Hanoi School of Business for their incessant support during my study I also deeply appreciate their great contribution to the success of the highly qualified MBA course which provided me invaluable knowledge and assistance to complete my research topic Last but not least, I owe my loving thanks to my parents for supporting me spiritually throughout my life Without their encouragement and understanding it would have been impossible for me to finish this work 28/08/2012 Phan Thu Ha i ABSTRACT SOME SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PETROVIETNAM FINANCE CORPORATION (PVFC) Phan Thu Ha MBA candidate, 2009-2011 Hanoi School of Business – Vietnam National University, Hanoi Supervisor: Dr Nguyen Viet Dung August 2012,104 pages Currently, many State Economic Groups have established their finance company aiming at a more efficient use and allocation of capital However, the operation in practice still demonstrates the insufficient capital use In the context of the overall restructuring the economy, the restructuring of the entire financial and banking system is considered a key issue For a large-scale finance company as PVFC, there is a the big question about how to enhance the performance of capital use in PVFC to contribute to the development of the Group, thereby contributing to common national economic development goals in the context of economic integration The study includes the following contents:  This Thesis has presented the theoretical framework of the capital using activities in finance companies and described some assessment criteria on the performance of those activities At the same time, this Thesis has explained the different types of risk which affect the capital using process, together with the quantitative indicators in order to develop proper assessments on the concerned risks  Providing detailed analysis on the status of current activities of capital use in PVFC, besides some achievements, author’s analysis has proven the weaknesses in performance of PVFC, which can be observed through the increasing NPL ratio, ii poor liquidity, strong reliance on inter-bank market, inappropriate assets-liabilities structure  Making proposal of some solutions including specific solutions for capital mobilization, credit, and investment activities, besides, the author has presented the overall solutions, for instance, improvement and innovation in technology, enhancement of management capability and internal control, marketing, human resources solutions and a number of recommendations to improve the efficiency of the capital use in PVFC iii TÓM TẮT MỘT SỐ GIẢI PHÁP NÂNG CAO HIỆU QUẢ SỬ DỤNG VỐN TẠI TỔNG CƠNG TY TÀI CHÍNH CỔ PHẦN DẦU KHÍ VIỆT NAM (PVFC) Phan Thu Hà Khoa Quản trị Kinh doanh- Đại học Quốc gia Hà Nội Hướng dẫn: Tiến sỹ Nguyễn Việt Dũng Tháng năm 2012, 104 trang Hiện nhiều Tập đoàn Kinh tế Nhà nước thành lập cơng ty tài nhằm mục đích sử dụng nguồn vốn hiệu Tuy nhiên, thực tế hoạt động cho thấy vấn đề hiệu sử dụng vốn nhiều bất cập Trong bối cảnh tái cấu trúc tổng thể kinh tế, nội dung tái cấu trúc hệ thống tài ngân hàng xem vấn đề trọng tâm Đối với cơng ty tài có quy mơ tài sản lớn PVFC, câu hỏi lớn đặt để tăng cường hiệu sử dụng nguồn vốn PVFC để góp phần vào phát triển tồn Tập đồn, từ góp phần thực mục tiêu phát triển kinh tế quốc gia thời kỳ hội nhập kinh tế Đề tài nghiên cứu bao gồm nội dung sau đây:  Luận văn làm rõ khung lý thuyết tảng hoạt động sử dụng vốn cơng ty tài đưa nhóm tiêu đánh giá hiệu hoạt động này, đồng thời làm rõ yếu tố rủi ro ảnh hưởng đến q trình sử dụng vốn cơng ty tài với tiêu định lượng để đánh giá loại rủi ro  Đưa phân tích cụ thể thực trạng hoạt động sử dụng vốn PVFC, bên cạnh số kết đạt được, phân tích tác giả chứng minh hiệu hoạt động yếu PVFC thể qua tỷ lệ nợ xấu tăng, tính khoản thấp, lệ thuộc vào thị trường liên ngân hàng, cấu tài sản- nguồn vốn chưa hợp lý iv  Đề xuất giải pháp bao gồm giải pháp cụ thể hoạt động huy động vốn, tín dụng, đầu tư, bên cạnh giải pháp tổng thể giải pháp đổi hoàn thiện công nghệ, nâng cao lực quản trị- kiểm soát nội bộ, marketing, giải pháp nguồn nhân lực… số khuyến nghị nhằm nâng cao hiệu hoạt động sử dụng vốn PVFC v TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT ii TÓM TẮT iv TABLE OF CONTENTS vi LIST OF FIGURES ix LIST OF TABLES x LIST OF ABBRIVIATIONS xi INTRODUCTION .1 CHAPTER 1: LITERATURE REVIEW ON THE PERFORMANCE OF CAPITAL UTILIZATION IN FINANCE COMPANY 1.1 Introduction to finance company .5 1.1.1 The definition and classification of finance companies .5 1.1.2 The role of finance companies 1.1.3 The major activities of finance company 1.2 Improve the performance of capital use in finance companies 12 1.2.1 Definition of capital efficiency 12 1.2.2 The needs to improve the performance of capital use in finance companies 14 1.2.3 Assessment on the performance of capital use in finance company 15 1.3 Factors affect the performance of capital use in finance company 24 1.3.1 The impacts of State policies and regulations 24 1.3.2 Impacts of the development strategies and mechanism of the parent company 25 1.3.3 The internal factors of the finance company 27 vi CHAPTER 2: ASSESSMENTS ON THE PERFORMANCE OF CAPITAL UTILIZATION IN PVFC .31 2.1 Overview of PetroVietnam Finance Joint Stock Corporation (PVFC) .31 2.1.1 Company introduction 31 2.1.2 Scope of business .33 2.1.3 Business performance of PVFC in recent years .35 2.2 Assessment on the performance of capital utilization in PVFC 43 2.2.1 Assessment of capital mobilization activities 43 2.2.2 Assessment of capital utilization 47 2.2.3 Analysis of performance indicators of capital efficiency .55 2.3 Achievements, limitations and causes .67 2.3.1 Achievements 67 2.3.2 Limitations and causes .68 CHAPTER 3: SOLUTIONS TO ENHANCE THE PERFORMANCE OF CAPITAL UTILIZATION IN PVFC 74 3.1 Opportunities and challenges for PVFC and its development orientation 74 3.1.1 Opportunities and challenges 74 3.1.2 PVFC’s development orientation .76 3.2 Solutions to improve the efficiency of capital use at PVFC 76 3.2.1 Solutions to enhance capital mobilization activities 76 3.2.2 Solutions to improve the performance of credit activities .80 3.2.3 Solutions to improve the performance of financial investment, project investment 87 3.3 The overall solutions for PVFC .90 3.3.1 Investment, innovation, improvement in banking technologies 90 3.3.2 Improve the capability of assets- liabilities management 91 3.3.3 Enhancing the capacity of the internal control system 92 vii 3.3.4 Marketing solutions 93 3.3.5 Focus on developing human resources 94 3.4 Recommendations .95 3.4.1 Recommendations for SBV 95 3.4.2 Recommendations for PVN .97 CHAPTER SUMMARY 99 CONCLUSION 100 BIBLIOGRAPHY 102 viii LIST OF FIGURES Figure 2.1: The structure of capital contribution of PVFC .31 Figure 2.2: The chartered capital of finance companies under Vietnam economic groups 32 Figure 2.3: Growth of total assets over the years 36 Figure 2.4: Asset structure of PVFC in 2011 36 Figure 2.5: Capital structure of PVFC in 2011 37 Figure 2.6: PVFC’s revenue growth and structure over the years 40 Figure 2.7: PVFC’s growth of profit before tax over the years 40 Figure 2.8: Growth of mobilization activities from customers’ deposits and issuance of valuable papers .44 Figure 2.9: Growth and structure of loans by term over the years 50 Figure 2.10: Growth of investment activities over the years 51 Figure 2.11: Profit/ loss of PVFC’s investment activities over the years 51 Figure 2.12: Growth of total assets and ROE of PVFC, VPB, and SHB .57 Figure 2.13: Loan classification by quality in 2011 61 ix With respect to the investment in securities, PVFC always focus its attention on the optimal measures to minimize risks PVFC should diversify the security portfolio and select the items with high liquidity The diversification has a positive effect when the market shows pessimistic fluctuation These selected items shall be linked with some specific economic sectors based on some certain criteria If there are unfavorable changes related to one of these sectors, the increase of share price in other sectors will offset and positively impact the overall portfolio This has effectively limited the risks Moreover, high-liquidity stock options also help PVFC effectively alter its stock portfolio, quickly response to the daily fluctuation of the market 3.3 The overall solutions for PVFC 3.3.1 Investment, innovation, improvement in banking technologies Finance and banking industry is a sector of the most extensive and effective IT applications Along with the diversification of its business operations, modern banking technology has provided invaluable support for the banking and financial institutions in their business activities, which contributed significantly in raising operational capability Today, any new products or services provided by credit institutions are developed based on modern software platform Although PVFC has made lots of effort in applying information technology in their system, however, compared to the current technology of commercial banks in Vietnam or in the developed countries, banking technology in PVFC still exposes shortcomings and slow progress of updating new technologies For example, in 2009, the Core Banking technology has been widely adopted throughout the system of commercial banks, however, only in 2010, PVFC plans to deploy this software and in 2011, it’s officially applied throughout the system Information technology is an indispensable factor to improve competitiveness of each credit institution To implement the modernization of information technology, PVFC should determine the development roadmap of this activity 90 First, focus investment on modernization and upgrade for headquarter and its branches The transaction offices and branches in major cities shall be prioritized in the modernization and product-diversification process Second, conduct research on the technological development in the world, purchase solution packages from the most advanced software developers in banking technology sector Software packages are usually fully documented and userfriendly to deploy, shall be in accordance with international standards which has been localized to suit the domestic market and consistent with the management policy of the Government, the SBV Third, upgrade computer platforms, developing modern server systems equipped with data processing center while building backup systems to ensure no interruptions occur during the transactions Fourth, organization of information systems shall be consistent, updated, accurate and secure To regularly perform analysis and business operations through the automation of information processing To promote positive forms of e-commerce, to apply thoroughly online transactions in the exchange of information with customers, perform electronic transactions in order to save time and costs, improving the customer service quality 3.3.2 Improve the capability of assets- liabilities management With current scale of assets, PVFC should stay focus on strengthening the functions of the assets-liabilities management in order to centralize and improve the quality of assets-liabilities management Recognizing the importance of efficient assetliabilities management, the capacity building of this matter has become very popular in the commercial bank and also is an essential trend to maintain safety and efficiency Firstly, the management of liquidity risk and interest rate risk, management maturity differences of each currency, ensuring the appropriate acceptance level of 91 risk in accordance with safety regulations of risk management policies in PVFC and the provisions of SBV Secondly, this department should implement and manage funds transferred internally between member companies to encourage performance against waste or unnecessary capital shortages Thirdly, developing the policy on the balance-sheet structure management, formulating financial indicators to effectively and promptly manage liabilities and assets, prescribing the liquidity reserve levels; determining the capital structure and capital sources, the interest rate policy; conducting the business performance analysis; determining the safety ratio on the basis of maximizing profits and minimizing risks 3.3.3 Enhancing the capacity of the internal control system In order to ensure activities in PVFC are secure, and minimizing the risks, PVFC is required to apply effective internal control system Enhancing the inspection and supervision in order to ensure all activities must be checked before, during and after the implementation for examining that all operations are carried out in accordance with legal regulations, and in accordance with the procedures and regulations stipulated by PVFC to minimize risk The mission of the Board is to examine and supervise the activities of the member units for checking the compliance with laws and regulations of the Government and the SBV as well as the rules and procedures of PVFC Thereby, the internal control system makes assessments on the quality of administration and operation of each unit, on that basis, the proposal of solutions to overcome weaknesses and minimize risks Board of supervisors should develop internal procedures to monitor, evaluate, and establish the organizational structure with the clear assignments of responsibilities, authority and obligations between each unit, department, and individual in order to avoid overlaps which lead to inefficient operation 92 In activities of capital use, risk controlling and assessment in the credit procedure plays an important role in improving the quality of lending operations In controlling process of lending activity, starting from receiving loan application, making appraisal and lending decision as well as loan monitoring, the board of supervisors should control the level of compliance of the regular process, expanding relationships with relevant industries to facilitate the accurate assessment Supervisors should pay attention to the initial signs of risk in the lending process, for instance, the inaccurate assessment and classification of credit risk made by credit officers, ambiguity in drafting of binding conditions in the lending agreement, incomplete credit contract, inadequate compliance or non-compliance with current regulations of the lending process In addition, PVFC shall inspect and reevaluate the collaterals in order to limit the risk while market prices often fluctuate 3.3.4 Marketing solutions In business activities of finance companies, when offering the new products and seeking new market, marketing activities need to be carried out In order to implement the marketing activities, especially to perform diversified forms of capital mobilization and utilization, PVFC should establish marketing department at headquarters, with a clear marketing policy and should convey the detailed marketing plan to the branches and transaction offices throughout the system in order to implement comprehensive marketing solutions to build image and boost confidence of customers The main tasks of the marketing department include: Firstly, organizing the investigation and research on market and customers including traditional customers and potential customers Then proceed to classify customers to find potential needs, and then propose the appropriate policies Secondly, conduct research on the products of commercial banks and other credit institutions To carry out constantly research, innovation and pay close attention to the competitors because their business strategy is constantly changing 93 Thirdly, elaborating strategies and measures to expand and develop new products to build a series of policies such as product policy, pricing, promotion policy communication, customer policies PVFC should build a flexible price policy, paying attention to each customer group including prioritized customer group and traditional customers To allow customers free or low-fee support services attract larger transactions which can produce higher gross margin Fourth, to deploy new products and services based on conducted research 3.3.5 Focus on developing human resources The two most important internal factors to decide the success or failure of any financial institution those are technology and human factors One of the causes for our less development, not been appreciated and low reliability than the developed countries and the international community is the under-qualified workforce, not keep up with extensive development of the world economy Therefore, the training or re-training programs in order to prepare the workforce with the essential knowledge of the new economic mechanism is an indispensable mission In PVFC, many people are trained in the old mechanism; they usually not have a proper understanding the experience of credit institutions in advanced countries Although PVFC has organized training program for employees, however the number is very limited, not enough to handle the new and modern business In the coming years, to further improve the organization of staff, PVFC needs to implement the following measures: - Training program: provide additional knowledge by combining multiple forms of self-study and class, workshops, field study tours together with textbooks… - Training contents: To focus on raising the qualifications of banking sector, banking technology, information technology and foreign languages 94 - To promote a training plan for young managers and executives in a comprehensive manner because this is the core workforce which plays an essential role in directing the development of PVFC - Selection of credit officers: The nature of this work is to communicate with a wide range of businesses, many economic sectors, thus, the selection of credit officers is crucial Personnel responsible for this position shall be honest, knowledgeable, qualified, and has deep understanding on economic and financial system, with seniority working experience in banking sector To establish the specialized credit officers to be responsible for different sectors - To retrain staff, expand site training, for instance, organizing the conference with local or international experts in the banking sector in general and credit in particular, in the field of social economics, business administration, marketing, and organizing short-term courses - To establish the rewards for the most qualified credit officers to motivate the company employees On the basis of the basic salary fund, build and implement of the incentives for credit officers in order to promote the credit expansion, and also promote the individual responsibility In additional, there should be penalties to treat poor-qualified staffs PVFC may hold annual contest for credit officers 3.4 Recommendations 3.4.1 Recommendations for SBV Early complete the legal system of economic groups, commercial banks and other credit institutions to create a favorable business environment and implement proactive roadmap for global economic integration To complete models of corporate organization, corporations, economic groups, finance and banking groups, particularly, clarifying the organizational structure and operations of finance companies in the system of credit institutions, relationship between the parent 95 company and subsidiaries, relationship between the board of directors and general director… Improving the business autonomy, the entitlement to decide the allocation and the use of capital Finance company is a non-banking credit institution with many characteristics different from commercial banks and other credit institutions, therefore, the SBV should soon launch plans and issue documents related to the finance companies in Vietnam The SBV needs to reconsider to allow finance companies to perform a number of activities, for instance, finance companies under the state economic groups can play the role as the focal point for the investment projects by state economic groups or affiliates The SBV shall be in coordination with the government to build management mechanism in order to control and prevent the financial crisis, where the severe consequences of the crisis in 2008 still remained, new crisis as the debt crisis in the European countries taking place causing considerable impact on the world economy, through the evolution of the financial activities in the banking sector in Vietnam recently, in order to limit the impact of the economic crisis, Vietnam needs to develop rules and regulations for banking sector and management ensure the establishment of a sustainable financial system The experience in building management regulations of different countries in the world have been summarized, suggesting that the regulations should include: - Regulations on standards to enter the banking sector - Regulations on the level of capital needs to ensure safety - Regulations on asset diversification - Regulations on loans to internal employees and other related stakeholders - Regulations of allowed or prohibited behaviors 96 - Regulations on asset classification and provisioning - Regulations on the scope, frequency and content of the audit program - Regulations on the implementation of the delegation and empowerment - Regulations on measures to address the shortcomings in the banking sector 3.4.2 Recommendations for PVN To allow PVFC to rise charter capital When the charter capital is increased, on the one hand PVFC becomes more financially independent, providing more “cushion” to prevent the financial shocks and large charter capital also increases the prestige of PVFC on the financial market Increasing charter capital helps PVFC gain confidence from customers; improve the reliability of solvency; helps PVFC enhance competitiveness in financial markets Higher capital level also support PVFC to expand lending capacity, specifically, the law prescribed that the maximum level of loans provided for a customer is equal 15% of charter capital and the maximum capital contribution is equal 40% of the charter capital While oil and gas projects often require huge capital Thereby increasing capital assists PVFC better meet the capital needs of the project of the Group as well as member companies Officers in PVFC mostly come from young workforce that is enthusiastic and highly qualified however there is a lack of experience, especially the understanding of the nature of oil and gas industry With many years of experience in the oil and gas industry, PVN can support PVFC in training staffs The training program may be organized by PVN leaders or the company may approve the oversea training courses in order to form a competent team of experts who have in-depth knowledge about modern technology in the world To support PVFC in term of stimulating financial independence To fully develop business activities for the overall development objectives of the Group PVN should 97 consider giving responsibility to manage the funds and temporarily idle capital for the parent company and its unit members Entrust PVFC to be on behalf of the PVN to perform tasks on mobilizing capital from local and foreign credit institutions, assign to PVFC as the focal point to deploy the plans for mobilizing social capital from all sources, all international sources to implement the projects of PVN and affiliates, particularly the performance as a bond issuance agency for PVN and its members 98 CHAPTER SUMMARY The final chapter’s objective is offering some practical solutions to assist PVFC improving its capital mobilization activities, credit activities, and investment activities to confront with the challenges and take the opportunities in the context of integration and competition parallels By taking actions to enhance the capital mobilization channel, appropriate interest rate policies, rational capital structure, credit quality, credit risk management, client orientation, customer evaluation, the methods for dealing with specific types of risk, PVFC will be able to better improve the business performance and gain confidence from the customers and foreign partners for ensuring sustainable development along the roadmap of transforming into commercial bank’s model Some general solutions are also proposed to improve the overall performance of PVFC, of which the solution for technology enhancement and the management capability are the most substantial factors 99 CONCLUSION In the context of rapid development of market economy and economic integration process, particularly with the penetration of foreign financial organizations which have numerous advantages in terms of experience, advanced technology, management level, highly qualified human resources the credit institutions in general and PVFC itself shall recognize the imperative needs to enhance its performance to meet the competition challenges The thesis “Some solutions to enhance the performance of capital utilization in PetroVietnam Finance Corporation (PVFC)” proposes the direction and suggestions in solving the current weaknesses of PVFC Based on the theoretical framework discussed in the first chapter of this thesis, by addressing the performance evaluation of the major activities in PVFC including the capital mobilization, credit, and investment using a set of indicators of profitability, quality of loans, liquidity, and risk management, the main weaknesses has been revealed as following: (1) The capital mobilization structure remains inappropriate, seriously dependent on the interbank market (2) The term mismatching problem, the medium and long term mobilization only plays a minor part of total capital; An improvement on assets-liabilities management is an essential mission in the future if PVFC wants to stay competitive with commercial banks (3) bad debts and overdue debts tended to increase over time, much greater compared with commercial banks of similar scale, suggesting a high credit risk and low level of credit risk management (4) Investment portfolio was not developed rationally, it still suffers losses on trading securities affected by the common market situation The thesis also develops a wide range of practical solutions addressing the above mentioned issues as following: (1) Enhancement of the mobilization activities consists of: expanding mobilization channels; applying appropriate interest rate policy; improving the capital structure (2) Improvement of the credit activities includes: improving credit quality and credit risk management; completing the 100 information system for customer appraisal; further improving the credit scoring system; improving the capability of analysis and evaluation of customers; and dealing with different types of risks like liquidity and interest rate risks (3) Some useful measures to improve the investment activities (4) General solutions can be applied to enhance the overall performance of PVFC including the banking technology advancement, capability of assets-liabilities management, internal control system, marketing, and human resource PVFC’s operating scale is rapidly expanding This leads to increasing the pressure on management, administration and challenging the use of capital in a secured and efficient manner Besise applying the solutions discussed within the scope of this thesis, PVFC needs to develop its concrete business strategy which both promotes its advantages and adapts the lessons learnt from the experience of foreign financial organizations as well 101 BIBLIOGRAPHY Vietnamese materials Dang Duy Cuong (2010), “Mot so van de ve quan tri rui ro sau cuoc khung hoang tai chinh toan cau”, Banking Magazine, Issue no 20, pp 18-20, Hanoi Tran Cong Dieu (2002), Nhung giai phap nham hoan thien va phat trien cong ty tai chinh o Viet Nam, Ph.D Thesis, Banking Academy, Hanoi The Governor of State Bank of Vietnam (2005), Decision No 493/2005/QDNHNN on the issuance of regulation on the debts classification, provisioning and use of provisions against credit risks in the banking activity of credit institutions, Hanoi Minh Hoa (2010), “Tong Cong ty Tai chinh Co phan Dau Viet Nam, Dinh che tai chih quan cua PVN”, Banking Magazine, Issue no 19, pp 16-17, Hanoi Dam Van Hue, Phan Thu Ha (2010), Quan tri ngan hang thuong 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www.ebank.vnexpress.net www.kinhtevadubao.vn www.pfvc.com.vn www.pvn.vn 103 www.riskglossary.com www.sbv.gov.vn www.tapchiketoan.com www.vneconomy.vn English materials 21 Richard A Brealey, Stewart C Myers (2003), Principles of Corporate Finance, McGraw-Hill, Boston 22 Stephen G Cecchetti (2006), Money, banking, and financial markets, McGraw- Hill, Boston 23 Jeff Madura (2006), Financial Markets and Institutions, South Western Educational Publishing, USA 24 Peter S Rose (2002), Commercial bank management, McGraw – Hill, Boston 104 ... improve the performance of capital use in finance companies 14 1.2.3 Assessment on the performance of capital use in finance company 15 1.3 Factors affect the performance of capital use in finance. .. practical solutions to promote its performance in order to contribute to the development of Petrovietnam, I choose the topic ? ?Some solutions to enhance the performance of capital utilization in PetroVietnam. .. 1.2.3.1 The criteria for evaluating the performance of capital use in finance company Profitability indicators To evaluate the performance of capital use in a finance company, when analyzing the