Basic Criteria for Evaluating the Competitiveness of Commercial Banks

Thus, it can be understood that the competitiveness of a business is its attractiveness to customers. Or the competitiveness of a business is the strength and advantage that a business can mobilize to maintain and improve its position compared to competitors in the market in the long term to gain increasing benefits for its business. In competition, competitors do not necessarily have to eliminate each other.

1.1.2. Concept of commercial bank competitiveness

1.1.2.1 Concept of banking

Article 4, Law on Credit Institutions No. 47/2010/QH12 passed by the 12th National Assembly of the Socialist Republic of Vietnam, 7th session on June 16, 2010, clearly states: “ A bank is a type of credit institution that can perform all banking activities according to the provisions of this Law. According to the nature and objectives of operations, types of banks include commercial banks, policy banks, and cooperative banks”.

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The Law on Credit Institutions clearly states: "Banking activities are monetary business activities and banking services with regular contents of receiving deposits, using this money to grant credit and providing payment services".

1.1.2.2 General characteristics of banks

- In essence:

A bank is a special enterprise in the market. It is an enterprise because a bank operates like other enterprises, has its own capital, buys and sells, has expenses and income, pays taxes, can make a profit or lose money, can get rich or go bankrupt, etc. It is a special enterprise because it does not trade in common goods and services of industrial, agricultural, commercial, transportation, service, and tourism enterprises, but it specializes in trading in special goods, currency, gold, silver, securities, providing services related to currency, precious metals, gemstones, and securities.

- In terms of function:

According to the Law on Credit Institutions in Vietnam (Law No. 47/2010/QH12, Chapter IV, Section 2), the operational functions of commercial banks:

- Receive demand deposits, term deposits, savings deposits and other types of deposits.

- Issue certificates of deposit, promissory notes, treasury bills, and bonds to mobilize domestic and foreign capital.

- Providing credit in the following forms: Lending, Discounting, rediscounting of negotiable instruments and other valuable papers, Bank guarantees, Issuing credit cards, Domestic factoring; international factoring for banks licensed to make international payments, Other forms of credit after being approved by the State Bank.

- Open payment accounts for customers.

- Providing means of payment.

- Providing the following payment services: Providing domestic payment services including checks, payment orders, payment authorizations, collections, collection authorizations, letters of credit, bank cards, collection and payment services; Providing international payment services and other payment services after being approved by the State Bank.

1.1.2.3 Competitive characteristics of commercial banks

The business objects of banks are mainly financial services, related to money, systematic activities and quite closely linked, so competition in banking activities has some differences compared to competition in other fields. Those differences are:

- Competition under the strong influence of the State's financial and monetary policies. Competition under the impact of macroeconomic fluctuations such as inflation, interest rates, domestic and foreign economic growth.

- Competition in the banking and finance sector does not necessarily mean eliminating the opponent, it is not a life-or-death battle, on the contrary, banks can only develop in conditions where the banking system and financial institutions develop healthily and stably. A bankrupt banking institution can have a very bad impact that spreads to other banks, causing disaster for the economy of a country, even for an entire region.

- A bank that is both competitive and cooperative is most clearly shown in payment products and services, ATMs, etc. A bank can only perform well when it is associated and cooperative.

with other banks. Thus, even though they compete with each other to achieve higher growth rates, larger market shares, etc., banks still have to cooperate with each other.

- Competition in the banking sector is not only a driving force for banks themselves to develop but also creates conditions for businesses in the economy to develop. Banking competition will improve product quality, quickly meet customer needs, and competition in interest rates will help businesses access capital with lower interest costs.

- Competition in the banking sector is reflected in the provision of banking services in terms of price, quality and convenience to customers.

- Competition of each bank: shows the adjustment to changes in market conditions to maintain market share, increase business activities according to market development, and ensure increased profits over time.

1.1.2.4 Competitiveness of commercial banks

Commercial banks are enterprises, but banking activities are a special type of business, which is the business of currency and related financial services. Therefore, if based on the WEF's classification of competitiveness levels, the competitiveness of banks is considered based on the competitiveness level of enterprises. An enterprise is considered to be competitive when it has the ability to dominate the market, attract many customers by providing products and services of good quality and convenience, creating customer satisfaction, creating prestige and reputation in the market, and at the same time earning enough profit to ensure sustainable development of the enterprise.

From the above concepts, it can be seen that there are many different approaches to competitiveness, but these concepts are all related to two aspects: market domination and profit. The same is true for the banking industry, banks must find every way to provide high-quality services with many benefits for customers, along with convenience, speed, accuracy, reliability in banking transactions at the lowest service price, meeting space and time requirements to attract customers and expand market share.

For commercial banks, because the products of the Bank are specific (trading in special goods, especially currency), the competitiveness is also specific. However,

However, commercial banks are also businesses and must also consider the ability to maximize profits. Therefore, it can be defined: "The competitiveness of commercial banks is the ability to mobilize, manage and use limited resources for the purpose of diversifying and improving the quality and convenience of banking financial services, thereby ensuring the maintenance of profits and market share".

1.2. Basic criteria for assessing the competitiveness of commercial banks

To evaluate the competitiveness of commercial banks most accurately, a system of evaluation criteria must be used. In this thesis, the author would like to present some of the most basic indicators.

1.2.1. Financial capacity

Financial capacity of commercial banks is core capacity, demonstrated through many criteria but mainly focusing on: capital, payment capacity, profitability of investment capital, risk level.

1.2.1.1. Equity

In theory, charter capital and equity capital play a very important role in the operations of banks. High charter capital helps banks gain prestige in the market and public trust. Low equity capital means weak financial strength and poor ability to withstand business risks. According to Regulation No. 13/2010/TT-NHNN of the State Bank dated May 20, 2010 on Regulations on safety ratios in the operations of credit institutions, the equity capital of commercial banks must reach at least 9% of the total assets of that bank. This is a condition to ensure safety for the business operations of banks.

1.2.1.2. Scale and ability to mobilize capital

The ability to mobilize capital is one of the indicators to evaluate the business performance of banks. On the one hand, it depends on the banks' own capital. On the other hand, the ability to mobilize capital also shows the efficiency, dynamism and prestige of that bank in the market. Good ability to mobilize capital means that the bank has used products, services and capital mobilization tools effectively, attracting customers. When a bank has good ability to mobilize capital, it also means that the bank is creating for itself good and strong financial potential.

1.2.1.3. Bank liquidity

According to international standards, a bank's solvency is expressed through the formula: 19

In which, assets that can be immediately liquid include cash, deposits at the central bank and other banks, and marketable securities. This indicator shows whether the bank can meet the demand for immediate withdrawal or payment in large quantities or not.

Thus, liquidity can be understood as the ability of an organization to fulfill its financial obligations. In banking, adequate liquidity means the ability of a bank to meet the withdrawal requests of depositors at any time or the ability to provide all credit loans or cash loans to borrowers.

According to international practice, a level of liquid assets above 40% of total outstanding deposits can be considered safe.

1.2.1.4. Bank profitability

This is an indicator that reflects the bank's performance and also partly reflects the bank's competitive performance. The profitability indicator can be analyzed through specific indicators such as the absolute value of profit; profit growth rate, profit structure (indicating where profit is generated, from normal business activities or from extraordinary income); return on equity (ROE), return on total assets (ROA), indicators of profitability in relation to costs, etc.

Profitability can be analyzed through the following indicators:

- ROE: This ratio shows how much profit each dong of equity will bring to the bank. A bank is considered to have high profitability if the ROE is higher than the expected profit with investment stocks in that market. Formula:

- ROA: This ratio shows how much profit each asset will bring to the bank. A bank is considered highly profitable if this ratio reaches over 0.5%. Formula:

Well-performing banks usually have ROE targets of 13%-16% and ROA targets of 1.3%-1.5%. However, Vietnamese banks, especially joint stock commercial banks, have their own characteristics associated with a developing economy, small-scale banks and are in the rapid growth phase of the banking cycle, so these targets usually have to be higher.

1.2.1.5. Risk level

The risk level of banks is measured by two basic indicators: Capital Adequacy Ratio (CAR) and Credit quality (overdue debt).

- Capital adequacy ratio CAR :

According to the provisions of Article 4, Circular No. 13/2010/TT-NHNN dated May 20, 2010 of the State Bank of Vietnam, credit institutions, except foreign bank branches, must maintain a minimum capital safety ratio of 9% between equity capital and total “With” risk assets of the credit institution (individual capital safety ratio). The formula for the individual capital safety ratio is determined as follows:

Individual Capital Adequacy Ratio (CAR)=

Equity

Total Risk-Bearing Assets

In there:

- Equity capital: is the total of tier 1 capital and tier 2 capital minus the deductions according to regulations, specifically:

+ Tier 1 capital includes: Charter capital (granted capital, contributed capital), Reserve fund to supplement charter capital, Investment fund for business development, Undistributed profits, Share premium calculated into capital according to the provisions of law, minus the portion used to buy treasury stocks (if any).

+ Tier 2 capital includes: 50% of the balance in the fixed asset revaluation account according to the provisions of law, 40% of the balance in the asset revaluation account according to the provisions of law, Financial reserve fund, Convertible bonds issued by credit institutions.

+ Deductions according to regulations include: 100% of the debit balance of the fixed asset revaluation account according to regulations of law and 100% of the debit balance of the financial asset revaluation account according to regulations of law.

- Total risk-bearing assets: is the total value of risk-bearing assets determined by the level of risk and the corresponding value of off-balance sheet commitments determined by the level of risk. It is the ratio of equity to total risk-bearing assets. Starting from the date

05/20/2010, the minimum capital safety ratio according to Circular No. 13/2010/TT-NHNN, the CAR index must reach at least 9%. The higher this ratio, the stronger the financial capacity, the more prestige, trust and peace of mind it creates for customers. Previously, in Decision No. 457/2005/QD-NHNN, CAR was only regulated at 8%.

- Credit quality : Credit quality is mainly reflected through the ratio of overdue debt/total debt. Calculation formula:

According to Circular No. 15/2010/TT-NHNN dated June 16, 2010 of the State Bank, customer credit balances of banks are classified from Group 1 to Group 5, corresponding to the types of Standard Debt (Group 1), Debt requiring attention (2), Substandard Debt (3), Doubtful Debt (4) and Debt with potential loss of capital (5). Debts classified from Group 3-5 are considered bad debt, the bad debt ratio at the allowable level is below 5%.

The bad debt ratio indicates the quality and risk of a bank's loan portfolio, how many dong are classified as bad debt per 100 dong of loans.

A ratio that is high compared to the industry average and tends to increase may be a sign that the bank is having difficulty managing the quality of its loans. Conversely, a ratio that is low compared to previous years indicates that the quality of its loans is improving. Or the bank may have a policy of writing off bad debts or changing the classification of debts.

1.2.2. Product and service capacity

According to economist Petes S. Rose: "A bank's success depends entirely on its ability to identify the financial services that society demands, to produce those services efficiently, and to sell them at a competitive price."

1.2.2.1. Products and services

With the unique characteristics of the banking industry, where products and services are almost undifferentiated, banks can promote their competitiveness not only through the quality and basic functions of their products and services, but also through the uniqueness, convenience and diversification of their products and services. Banks must create products and services that are highly convenient, have many additional utilities, and are suitable for many customer groups.

In addition, banks often attract customers with accompanying products and services, ancillary products and services: for example, when customers withdraw money upon request, the bank will return the money to the customer, provide periodic account statements, financial consulting products and services to customers.

It can be said that the uniqueness and diversity of banking products and services is one of the very effective weapons in enhancing competitiveness not only in the banking industry but in all business sectors. However, to create uniqueness and diversification in the banking industry is quite difficult because this is a field where products and services are easily imitated. Moreover, to be able to create uniqueness and diversification, it is necessary to have modern technology and also depends on financial factors, qualifications... which not all banks can do.

1.2.2.2. Ability to diversify products and services and service quality

In general, commercial banks have the same products and services, but why are some banks operating very well, while others are still weak? Some banks have a lot of customers, but others cannot attract customers? To answer this question, there are many related factors, but it must be affirmed that diversifying banking products and services and improving the quality of those products and services play a very important role in improving operational efficiency, improving competitiveness, and gaining market share, making banks develop more and more.

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