Analysis of Current Competitiveness of Vietnamese Commercial Banks

also creates a richer competitive environment, domestic commercial banks can also rely on this penetration to improve themselves and take advantage of cooperation to learn from the experience of international banks.

c) Banking services compete mainly when integrating into international finance

In recent times, domestic commercial banks still account for the majority of the banking services market share, especially traditional services.

of Vietnamese commercial banks in 2006

Chart 2.1: Market share of capital mobilization

Chart 2.2: Lending market share of

Vietnamese commercial banks in 2006

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2006

7.1%

1.0%

1.4%

21.8%

68.7%

State- owned commercial banks Joint-stock commercial banks Foreign-owned commercial banks Other

2006

8.04%

3.83%

3.48%

21.16%

63.49%

State- owned commercial banks Joint-stock commercial banks Foreign-owned commercial banks Other

Source: Annual Report of State Bank of Vietnam 2006

The division of market share among different types of commercial banks has not changed much in recent times, but the dominance of domestic commercial banks in the market is not necessarily due to the competitiveness of domestic commercial banks themselves, but also due to the following reasons: the protection of the Vietnamese Government for the domestic commercial banking system; the Vietnamese financial market is not yet developed, so the demand for banking services is not diverse, still focusing on traditional products and long history, local understanding helps domestic commercial banks gain the trust of customers.

However, along with the financial commitments that Vietnam has signed, especially the commitment to join the WTO, foreign banks will be loosened and lead to the complete elimination of previous restrictions on providing banking services such as: foreign banks will be equal with domestic banks in mobilizing VND, in card issuance services, etc.

Therefore, in the coming time, it is forecasted that the division of service market share of commercial banks in Vietnam will take place as follows: domestic commercial banks continue to promote their strengths in providing traditional products and services (deposits, loans) and developing retail products; while foreign banks have and will continue to focus on high-end customers, global services and modern services.

Competition between domestic commercial banks and foreign banks will mainly take place in high-tech retail products and services such as transaction services via E-Banking, Home-Banking, Mobile-Banking; card issuance and payment services; import-export; foreign currency trading; with the main competitive customers being large enterprises.

* In short, Vietnam is opening its financial market, which is an opportunity for foreign banks to penetrate the Vietnamese market more deeply in many forms. Domestic commercial banks will have to compete with foreign banks that have strength in capital, technology, management capacity and the main competitive field is modern products. Therefore, commercial banks need to re-evaluate their operational capacity and have appropriate preparations for the full integration period in the coming time.

2.2 ANALYSIS OF THE CURRENT STATE OF COMPETITIVENESS OF VIETNAMESE COMMERCIAL BANKS

Along with the general development trend of the economy, the Vietnamese banking industry has also made preparations for the international integration process. These are great efforts of the entire banking industry. Analyzing the competitiveness of Vietnamese commercial banks will re-evaluate the current performance of commercial banks in the past, based on the comparison with foreign banks operating in Vietnam and analyzing the factors affecting the competitiveness of Vietnamese commercial banks today such as the business environment of the banking industry, the demand for banking services and the development of industries related to the banking industry, thereby drawing conclusions about the competitiveness of Vietnamese commercial banks today and analyzing the causes leading to this result.

2.2.1 Current status of competitiveness of Vietnamese commercial banks

2.2.1.1 On human resource quality

Over the past year, most domestic commercial banks have expanded their operations, leading to a rapid increase in the number of employees. Meanwhile, foreign banks are still limited in their networks, so there have not been many changes in personnel.

Chart 2.3: Labor growth at commercial banks

2892

2126

1392

1025

800

400

VCB

ACB

STB

EIB HSBC*

647

182

380

654

2005

2006

Source: Annual reports of commercial banks, data from HSBC according to website www.vnexpress.vn on November 29, 2007

However, the rapid growth in the scale of domestic commercial banks has not been accompanied by growth in labor quality and there are a number of issues that need to be considered such as:

(i) Human resource preparation of domestic commercial banks cannot keep up with the pace.

expand in scale of operations

In 2006 alone, domestic commercial banks opened 152 more branches and transaction offices, an increase of 31% compared to 2005. Opening these branches is part of the market development plan to compete, but most commercial banks do not have a specific roadmap and do not have corresponding personnel preparations in advance. Even at large banks such as ACB and Sacombank, preparing personnel for a new branch is sometimes just preparing a branch director from new recruits or taking people from old branches, then this director recruits staff for his own branch. Therefore, new branches are continuously established but the staff lacks uniformity and is difficult to achieve professionalism. This expansion can help commercial banks "gain a place" in the market in the short term, but in the long term, if the quality of labor is not improved, the benefits of scale will be calculated.

of domestic commercial banks will no longer exist and foreign banks will be the place to attract customers with professional staff and better service.

(ii) Employees of domestic commercial banks are considered less professional than employees of foreign banks.

The professionalism of the bank staff must be demonstrated through the ability to perform tasks quickly and accurately, and more importantly, the ability to advise customers and handle problems arising during transactions. To do this requires either experienced or well-trained staff and a support process.

This issue is thoroughly implemented by foreign banks. All working processes are standardized with specific regulations on implementation, authority of each level of staff in transactions, and handling methods of some common specific cases. These processes are disseminated to all employees in the bank, becoming the bank's business culture. Therefore, the staff of foreign commercial banks are assessed as highly professional and good at serving customers.

Meanwhile, at domestic commercial banks, the issue of professional training for employees is not taken seriously, most of the employees learn from each other. If coming to do transactions at a domestic commercial bank, the transaction staff mostly only knows their own business but has no knowledge of other businesses, so they are not able to advise customers as well as stimulate customers' needs. Regarding the ability to handle situations, in addition to their normal tasks, employees are only responsible for transferring to superiors to resolve. In fact, most Vietnamese commercial banks have business processes but they are still sketchy and have not become standards for training, so the support for operations is not high. In addition, with the current expansion rate, newly opened domestic bank branches hardly perform all banking operations, so they pay less attention to the issue of comprehensive training, and most of the employees are new, so they do not have operational experience or the ability to advise or handle situations.

(iii) The working environment and remuneration policies of domestic commercial banks have not attracted and retained good employees.

The brain drain phenomenon has been a headache for state-owned commercial banks recently. The salary mechanism at state-owned commercial banks is limited by regulations of state-owned enterprises such as salary must be approved by ministries and branches, salary is divided according to profit ratio, salary increase is only allowed once every 3 years, the difference in salary coefficient between management and employees is insignificant. Due to the salary equality, at state-owned commercial banks, the reality is that new employees who have just graduated from school have a high salary compared to the average of joint-stock commercial banks (about 4 million VND compared to 2 million VND), but after working for 2, 3 years or in a higher position, the salary is much lower than that of joint-stock commercial banks. It is inevitable that, as a Vietcombank leader said, Vietcombank is becoming a training place for employees of other banks . After working at a state-owned commercial bank for a few years and gaining experience, employees at these banks move to joint-stock commercial banks or foreign banks with higher positions and salaries. In addition, the promotion mechanism at state-owned commercial banks is also very rigid, mainly based on “living long to become a veteran”, so it does not encourage young, creative, highly qualified workers to stay and work, and also considers many relationship factors when promoting. This leads to the problem that the human resources of state-owned commercial banks are less competitive than other banks.

At joint stock commercial banks, the strategy of retaining talented people is undergoing strong changes. These banks do not hesitate to spend large salaries and incentives to attract capable people from other banks to work. However, salary is not everything to retain capable people to stay with the bank because if this bank pays high salaries, other banks can also pay higher salaries to attract them. Therefore, in addition to salary factors, banks must also create a good working environment for employees such as happy relationships, fair treatment, and mechanisms to encourage creativity and dedication of employees to create motivation for employees to stay long-term and these factors must become the organizational culture of the bank. This is something that no bank in Vietnam has been able to do, including joint stock commercial banks, but it is the strength of foreign banks.

2.2.1.2 On the management and executive capacity of the bank's leadership team

Commercial banks have recently experienced remarkable growth in both scale and business results. This growth partly reflects the good management capacity of commercial banks.

Chart 2.4: Pre-tax profits of commercial banks in Ho Chi Minh City

2 9 5 4 9 5

1199

1882

2648

3002

2004

2005

2006

2007

152

202

1438

1535

262

770

2639

311

1272

4182

State-owned commercial banks Joint-stock commercial banks Branches of foreign-owned commercial banks

Source: Statistics of the State Bank of Vietnam (2007 figures are estimates)

However, recent years have been favorable for the development of commercial banks such as: stable macro environment; high economic growth rate; the banking industry has received strong support from the Government through the issuance of more open regulations for commercial banks to operate autonomously, developing financial institutions such as the stock market, insurance, creating more favorable conditions for the business activities of commercial banks.

Meanwhile, the real management and administration capacity must help the bank not only develop in good times but also overcome difficulties in challenging periods. This requires not only the management capacity of an individual in the bank but also the coordination of the operation of the entire bank. This capacity is partly demonstrated through the current management organization model of commercial banks.

According to international practice, the organizational model of commercial banks is centralized and customer-oriented . Centralization (especially for operational activities) is to take advantage of efficiency according to scale and maximize the capacity of technological infrastructure. Although following the centralized model, foreign banks still have a clear mechanism for dividing responsibilities between departments and have appropriate remuneration.

Diagram 2.2: Organizational chart of commercial banks according to international practices

Board of Directors

Risk Council

Board of Control

Board of Directors

Risk Management Department

Internal Audit

Credit Department

Help Desk

Technology Department

Wholesale business

Treasury and Business

Retail and network

Inefficient asset management

Deputy General Director in charge of Risk Management

Deputy General Director in charge of Operations

Deputy General Director in charge of Finance

The branch system of foreign banks is also designed in a customer-oriented manner through the decentralization of branches to serve different customer segments such as large corporate customers, small and medium-sized corporate customers or individual customers, with specific regulations on products sold at each branch level. The branch system is designed with the main purpose of selling products, limiting on-site transaction processing while internal processing cycles will be centralized at the head office. Meanwhile, domestic commercial banks have not yet applied the international standard organizational model but still apply the old organizational model. The organizational model at VCB and ACB can be taken as an example.

Figure 2.3: Organizational chart of VCB

VCB Central Board of Directors

Board of Control

VCBTW Board of Directors

Finance Departments

Departments in charge of Trade Finance, Cards

Departments in charge of payment and treasury

Departments of the credit block

Departments in charge of capital business

Information Technology Centers, Training, ...

Transaction Office and 58 Branches

Finance and Accounting Department

P. Import-export payment

Departments of the credit block

Foreign Exchange and Capital Trading Department

Internal Audit Department

Domestic subsidiaries

Overseas units

Joint Ventures

State-owned commercial banks still apply the business product-based organizational model , meaning that one customer will be served by many departments. The organizational form at State-owned commercial banks is decentralized: there is no real separation according to business channels or functions; operations are still scattered and ineffective; there is no standard model for the branch system. The branch network operates largely independently from the Head Office in attracting and serving customers.

Regarding joint stock commercial banks , the organizational system is mostly similar to that of state-owned commercial banks. However, some large joint stock commercial banks such as ACB and Sacombank have reformed their organizational structure closer to foreign management models, towards customers and centralized risk management, but in general, the organizational model of these banks has not systematically segmented customers by scale and operational activities are still scattered.

Board of Directors

Office of the Board of Directors

General Director

Governor

The Councils

Figure 2.4: ACB's organizational chart

General meeting of shareholders

Board of Control

Guest block

Guest Block

Block

Block transmitter

Block Supervisor

Block Management

Public Block

fish shop

Business

Echo

economic development

source value

technology

core

career

Fund

business

onion

force

believe

Asset Valuation Board

Control Board

Quality Assurance Department

Strategy Board

P. International Relations

Credit Risk Management and Policy Department

Transaction Office, Card Center, Branches and Transaction Offices.

Affiliated Companies: Securities Company, Debt Management and Asset Exploitation Company

From the above organizational models, we can recognize some management characteristics of domestic commercial banks as follows:

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