CHAPTER II: LOAN MANAGEMENT ACTIVITIES IN VIETCOMBANK
2.2. Lending Performance in Vietcombank during the period 2005-2008
Table 2.1: Some major financial highlights of Vietcombank in the period 2005 - 2008 (Unit: Millions VND)
Indices
Year
2005 2006 2007 2008
Return/Assets
(ROA) 0.95% 1.43% 1.45% 0.60%
Return/equity (ROE) 15.4% 21.35% 21.1% 9.73%
Income for the year - Gross income - Pre-tax profit - Net earnings
4,280,351 1,759,883 1,292,553
5,039,557 3,877,256 2,397,667
5,763,393 3,192,119 2,859,181
5,116,144 1,654,708 1,341,595
Other indices - Total assets - Lending - Income from lending
136,720,611 61,043,981 3,951,958
167,127,832 67,742,519 5,132,909
197,408,036 97,531,894 7,072,918
221,950,448 107,436,481
7,973,687
Source: Vietcombank’s financial statements of 2005 to 2008 and other internal sources As we can see from the table above, the business results of Vietcombank in the period of 2005 - 2007 have been quite impressive. All financial indices increased year on year. Total assets Vietcombank rose rapidly, reaching VND 197,408,036 million in 2007 with an increase of 64.5% compared to that of 2004. The net earnings of the Bank even saw a more fantastic increase of 259% in only 3 years.
The return on equity (ROE) and return on asset (ROA) of the Bank is also at high level and keep increasing over the years, making the bank “The top level bank with high profit rate”. Then in 2008, the net earnings of Vietcombank saw a dramatic slowdown due to the bad effect of global financial crisis. The increase in bad debts
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required a huge number of capital for provisions which is the main cause for reduction in net earnings. Despite such a deep reduction, Vietcombank is still the most profitable bank in Vietnam in 2008.
Early 2005, Vietcombank started implementing the policy of “Credit expansion based on improving the quality and following the international standards”. The Bank has strengthened its credit risk management, improved control over its credit risk, set credit limits for certain branches and notably reduced credit limits of customers having inadequate financial performance. Vietcombank has paid attention building up lending categories by customers and industries, seriously implementing regional credit growth policy as well as settling bad loans.
Then, following the policy of “Intensifying customer relationship and improving credit quality toward international standards”, Vietcombank implemented a new credit procedure throughout the bank in August 2006 as being advised under the Technical Assistance Project sponsored by the Royal Dutch Government via the World Bank. Credit risk management quality was improved with the segregation of Customer relationship, Credit Risk and Debts management. Customer relationship and sales development was also specialized at the Corporate banking Department.
Besides, Vietcombank continued to complete and amend regulations on credit procedure in line with international best practices. The front – middle – back office credit procedures advised by Technical Assistance Project has been applied widely in the whole Bank’s system. At the same year, Loan Management Department was established in August by sub-division Credit Management Department into Credit Policy, Credit Risk Management and Loan Management.
The implementation of the advanced credit has leaded Vietcombank to develop on a stable basis in the credit market. The Bank’s loans and loan turnover over the past 4 years kept going up robustly even in the year of financial crisis 2008, which has been proved in the Chart below:
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Chart 2.2: Outstanding Loans and Income from Lending from 2004-2008 Unit: million VND
Over recent years, special considerations were paid to the aspects of selective credit expansion as well as solutions to strengthen credit risk management for the ultimate objective of enhancing the Bank’s portfolio quality. The Bank aimed at a diversified and healthier loans portfolio. In the past 5 years, the targeted customer of Vietcombank is the general corporations and giant businesses without enough attention and credit given to individual customers as well as other economic entities.
Since late 2006 and early 2007, the Bank has issued several new credit package and service to attract the small and medium sized as well as individual customers. The effort has been compensated partly as the Bank’s credit portfolio is becoming healthier; loan amount given to individuals and SMEs is increasing year on year.
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Table 2.2: Outstanding Loans by Type of Customers.
Unit: million VND
Enterprises
2005 2006 2007 2008
Loan % Loan % Loan % Loan %
State-owned 25,467,696 41.7 26,346,515 38.9 47,123,489 48.3 52,727,097 47.2 Limited
liability 19,498,392 31.9 14,402,055 21.3 14,132,512 14.5 15,780,958 14.1 Cooperative
& private 3,306,204 5.4 2,235,136 3.3 2,715,917 2.8 2,468,561 2.2 Foreign
invested 4,309,462 7.0 9,380,333 13.8 11,675,679 12.0 9,601,676 8.6 Individuals 4,245,834 6.9 5,785,046 8.5 9,246,674 9.5 10,859,295 9.7 Others 4,316,393 7.1 9,593,434 14.2 12,637,623 13.0 20,205,247 18.1
Total 61,143,981 100.0 67,742,519 100.0 97,531,894 100.0 111,642,834 100.0
From the table 2 above, we can see several changes in the loan credited to each type of customers. In general, there is not a fixed trend but fluctuation in the loan value channeled to each type of customer, the year 2005 and 2006 see a downtrend in most of customer type except for the limited liability enterprises. In 2007, thanks to the high economic growth rate, credit value in all customer category rose robustly compared to the previous years.
Outstanding loans by industry also saw many changes during the last 4 years. More percentage of credit was given to Manufacturing and processing, Construction, Hospitality and Transportation. Nevertheless, less credit applied for Trade and service while mining and Agriculture, forestry and aquaculture witnessed fluctuations.
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Chart 2.3: Outstanding Loans by Industry
Although the Bank’s loan portfolio by both Customer and Industry has saw little improvement over the past years, the Loan/debt management operations has received more attention and effort. Specifically, loan review and loan classification has been done perfectly with an effort to reduce credit risk, improve debt quality, and handle problem debt.
Since the issue of Decision 493/2005QD-NHNN dated 21 April, 2005 by the state bank of Vietnam on the loan classification, provision for credit losses calculation and utilization to settle credit risks in the Bank’s operation, Vietcombank’s loans are graded using the following classification: current, special mention, substandard, doubtful and loss. Let’s have a quick view at the figure in Table 3 for more information on the situation of the Bank’s loans.
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Table 2.3: Bank’s Loan Classification and Loan Loss Provision under Decision 493 Unit: million VND
Classification
2005 2006 2007 2008
Loans Total
provision Loans Total
provision Loans Total
provision Loans Total provision 1 Current 48,464,753 363,485 62,688,007 470,160 92,309,211 656,865 105,968,29
0 797,762
2 Special
mention 6,849,539 285,834 5,475,925 229,189 1,991,561 63,513 3,049,231 117,772 3 Substandard 494,513 86,232 546,512 80,546 901,417 138,281 718,050 77,209 4 Doubtful 343,978 142,001 437,093 158,534 669,911 278,660 638,220 142,007 5 Loss 1,254,176 4,048,880 887,095 681,599 1,640,301 961,680 2,987,495 2,478,836
Total 57,406,959 4,926,432 70,034,632 1,620,028 97,512,401 2,098,999 113,361,28
6 3,613,586 6 Guarantees &
commitments 294,480,722 220,861 47,122,670 437,152 40,041,773 504,901 36,057,265 669,083 Total 351,887,681 5,147,293 117,157,30
2 2,057,180 137,554,17
4 2,603,900 149,418,55
1 4,282,669
Net loan exposure for each customer is calculated by subtracting from the loan balance the related determined value of collateral which is subjected to certain accepted discount rates in accordance with Decision 493. Under Decision 493, Vietcombank is required to completely create provision for credit losses corresponding to loan classification within 5 years from the effective date of the Decision. However, Vietcombank is one of the first banks to complete the provisions, general and specific, not so long after the date of Decision 493. Besides, the Bank also has completely recorded provision for defaulted letters of credit and settlement of service.
Among the loans classified above, Substandard, Doubtful and Loss are considered non-performing loans (or bad debts). Bad debt ratio is the basis for consideration of credit quality. The targeted bad debt ratio per year of Vietcombank is under 3% of
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total loans while the number in practice from 2005 to 2007 is: 2.8%; 2.8%; 2.66%
and 2.6%, respectively. It can be said that Vietcombank has succeeded in controlling the bad debt ratio, which is always under the targeted ratio of 3%/year and keep decreased year on year. As a result, the Bad debt written off each year is also at low level. However, the financial year 2008 turned out to be so hard on banking sector.
The bad debt in amount of the Bank has been doubled comparing to that number of 2007. Bad debt ratio also reached a peak level of 4.6% of the last 4 years, leaving behind the target number of 3%.
Table 2.4: Bad Debts Written off
2005 2006 2007 2008
Non-performing ratio (%) 2.8 2.66 2.6 4.6
Bad debt in amount (million VND) 2,092,667 1,870,700 3,211,629 6,873,353 Bad debt written off (million VND) 831,801 258,708 288,022 592,802 Bad debt written off over Total Bad debt (%) 39.75 13.83 8.97 8.62
The Bad debt written off each year since 2004 only took a modest percentage of total bad debt and much lower than the corresponding provision for loan losses. Then the Bank is totally proactive to react to unexpected loan loss and can minimize the bad effect of debts that are uncollectible.