Current Status of Medium and Long Term Credit Risks at Vietnam Bank for Agriculture

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Here are some highlights of the Bank's business operations.

2.1.2.1. Capital mobilization activities

Capital mobilization is an extremely important activity for

any Bank, because on the basis of mobilized capital, the Bank can perform its operations such as lending, guaranteeing, financial leasing... to serve the capital needs of the economy. The State Bank is not outside that rule, in order to perform its functions and tasks, the State Bank has attracted and concentrated temporarily unused monetary capital sources of enterprises, social classes, and economic organizations into the Bank.

Table 01: Capital mobilization situation at Vietnam Joint Stock Commercial Bank for Industry and Trade in 2003-2006

Unit: billion VND

Capital mobilization

2004	2005	2006
1.Local currency	48 106	59 936	79 057
1.1. Mobilization from tt 1	31 631	48 586	36 990
TG of the TCKT	18 663	27 208	28 852
TGTK and promissory notes	12 969	21 378	8 138
1.2. Mobilization from tt 2	16 475	11 350	42 067
2. Foreign currency (converted to VND)	75 243	79 450	92 805
2.1. Mobilization from tt1	41 614	59 383	86 310
TG of the TCKT	22 055	30 285	69 911
TGTK and promissory notes	19 558	29 098	16 399
2.2. Mobilization from tt 2	33 630	20 067	6 495
Total VND	123 350	139 385	171 862

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Source: Business performance reports from 2003-2006

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- T T 1: market 1 includes economic organizations and residents

- TT 2: Market 2 includes the State Bank, State Treasury, and other credit institutions.

- Foreign currency converted to VND is calculated according to the exchange rate posted by the State Bank on the date.

December 31 every year.

Based on the table above, we can see that by the end of December 2006, the total capital mobilized by the State Bank of Vietnam reached 171,862 billion VND, an increase of 23.3% compared to the end of 2005; an increase of 39.32% compared to 2004. This shows that the capital mobilization capacity of the State Bank of Vietnam has been increasing and becoming more effective over the years, although in recent years, the capital mobilization market has had many fluctuations, such as the increase in the consumer price index, fluctuations in the currency market due to the impact of increasing interest rates in the international market, the race for VND interest rates in the domestic market, especially in 2006, there were always erratic fluctuations in gold prices, real estate prices, stock prices, and USD exchange rates. That is thanks to flexible policies, the management of interest rates is carried out dynamically according to market signals, the management mechanism and capital concentration of the whole system are gradually promoting efficiency, the forms of capital mobilization are increasingly diverse, bearing the characteristics of the National Bank (ladder interest rates, promissory notes "explore the world with VCB", ladder savings interest rates...). The units with many efforts in capital mobilization are the National Bank, Ho Chi Minh City, Quang Ngai and Tan Thuan.

However, the total capital mobilized from economic organizations and individuals (market 1) at the end of 2006 was 123,300 billion VND, an increase of only 14.2% compared to the end of 2005. This growth rate is lower than the growth rate of 28% of the entire banking industry, the main reason is the decrease in market share of foreign currency capital mobilization (from 49.6% in 2005 to only 37.2% in 2006), especially the decrease in foreign currency deposits from economic organizations. Capital mobilized from the interbank market (market

2) reached 48,562 billion VND, an increase of 1.5 times compared to the end of 2005, in which the increase mainly focused on VND. The capital structure of VND/Foreign currency in the total mobilized capital in the two markets currently reached 46/54 - quite a change compared to previous years: 39/61 at the end of 2004 and 43/57 at the time.

end of 2005

Thus, in the coming time, NHNT needs to pay attention to research to create products that are more suitable to the needs of economic customers with foreign currency deposits, especially in the increasingly fierce competitive environment in banking activities.

2.1.2.2. Lending activities

If capital mobilization plays an important role for banks, lending plays a vital role for banks. Currently, lending is still the main activity of Vietnamese commercial banks, accounting for the largest proportion of commercial bank operations, bringing income to banks and determining the existence of banks. In the context of fierce competition between banks, commercial banks have had appropriate strategies in expanding and growing credit, controlling safety, and shifting credit structure.

Table 02: Total outstanding credit balance of Vietnam Bank for Agriculture and Rural Development

Unit: billion VND

Year

Credit balance	Credit growth rate
2003	36 850	35.6%
2004	48 786	32.39%
2005	56 065	14.92%
2006	62 400	11.30%

Source: NHNT's business performance report 2003-2006

Looking at the table above, it can be seen that the credit supply to the economy over the years tends to increase rapidly, each year is higher than the previous year, and credit forms are also increasingly expanded and developed more diversely. In 2004, the total outstanding credit balance of the State Bank reached 48,786 billion VND, an increase of 32.39% compared to 2003.

Compared to 2003, 2005 reached 56,065 billion VND, an increase of 14.92% compared to 2004, and by 2006 reached 62,400 billion VND, an increase of 11.3% compared to 2005. It can be seen that although the turnover of the following year is higher than the previous year, the growth rate of outstanding loans tends to decrease. This trend is in the direction of strengthening risk control and improving credit quality of the entire banking system, in line with the slowing growth rate of the industry and 04 state-owned commercial banks.

In recent years, credit activities have gradually shifted in a more positive direction and in line with capital sources. In credit activities, the State Bank of Vietnam always emphasizes the strict implementation of the Law on Credit Institutions, regulations and rules of the State Bank of Vietnam. The State Bank of Vietnam is gradually restructuring credit activities to suit the general situation and efficiency, expanding the search for loans to small and medium-sized enterprises, promoting loans to non-state economic sectors, diversifying types of loans, and spreading risks to avoid concentrating credit on one type of enterprise.

At the same time, the strategy of the Bank for the past 3 years is "to increase credit growth based on concentration and improve quality towards international standards". The Bank for the past 3 years has applied many measures to strengthen risk management such as: Regulation, process of business, in June 2006 the Bank for the Past applied a new credit process, had a system of rating enterprises, built a method of determining credit limits, the credit institution rating scoring system was introduced since the end of 2004, introduced a method of managing investment portfolios by industry and investment field, credit policy focused on economic sectors and customer groups.

2.1.2.3. Other activities

 Payment activities

 International payment is a traditional business field that NHNT always maintains and affirms its leading position in the entire industry. In the past

Over the past year, the country's export turnover has continuously grown at a high rate, creating favorable conditions for import-export payment activities through commercial banks (in 2006, total export turnover increased by 22% and import turnover increased... compared to 2005). In terms of total import-export turnover, in 2006, commercial banks achieved turnover of 22.8 billion USD, an increase of 9% compared to 2005 (much lower than the 28% increase in 2005) and accounted for only 27% of the country's market share, a decrease of 3.2% compared to last year (in 2005, the market share for import-export payment reached 30.2%).

 Interbank payment: Interbank payment activities have had important changes with the NHNT truly becoming the center for processing VCB-MONEY transactions of the entire system, providing electronic payment services to customers who are financial institutions and enterprises (VCB-MONEY channel accounts for 97% of transactions). By constantly improving service quality, increasing utilities for customers such as online credit reporting service, salary payment with unlimited number of transactions, OTP authentication security system, up to now, there have been 120 financial institutions and 175 economic organizations using payment services through this channel. In 2006, 928,000 transactions were carried out with a value of up to 332,750 billion VND and 21 billion USD.

 Card business

In recent years, the card issuance and payment service of NHNT has developed at a very fast pace. By the end of 2006, NHNT had issued 20,907 international cards, bringing the total number of international cards in circulation to 72,500 cards with total card usage reaching 1,012.6 billion VND, an increase of 36.5% compared to 2005. Of which, the international debit card - VIETCOMBANK MTV after 9 months of issuance (from March 2006) has reached 11,576 cards. The total number of Connect 24 cards reached 1.5 million cards, in 2006 alone, NHNT issued 580,000 cards, an increase of 63% compared to 2005.

International card payment turnover in 2006 reached 6,200 billion VND (386.3 million USD), an increase of 22.8% compared to 2005. Connect 24 card usage turnover reached a very high level: cash withdrawals of nearly 2,000 billion VND/month (an increase of 64%), transfers of more than 335 billion VND/month (an increase of 67.5%) and transactions of goods and services at card accepting units of more than 1.5 billion VND/month (an increase of 50%). The remarkable growth in ATM service turnover in 2006 (an increase of 73.3%) was a direct result of the expansion of the ATM network (705 machines), and the promotion of billing payment services with service providers such as insurance, electricity, post offices, and mobile telecommunications companies.

In 2006, NHNT issued a number of new cards such as: VIETCOMBANK SG24 and developed the V-CPB e-commerce service. 2006 marked a step forward for NHNT in the field of cooperation with domestic and foreign partners with a series of cooperation programs with VISA, MASTERCARD, AMERICAN EXPRESS and VIETNAM AIRLINE, CHINA UNION PAY (CUP).

 Foreign exchange trading

During the period 2004-2006, VIETCOMBANK's foreign exchange business had many advantages: import-export turnover increased sharply, remittances were abundant, and the USD/VND exchange rate increased steadily. In 2006, the total foreign exchange turnover of the State Bank of Vietnam reached 19 billion USD, an increase of 15% compared to 2005, with purchase turnover reaching 8.5 billion USD, and purchases from the State Bank of Vietnam reaching 1 billion USD. Foreign exchange turnover sold reached 9.5%, equivalent to 9.5 billion, and was mostly sold to economic organizations and individuals, of which sales to petroleum import enterprises accounted for 24.8%.

2.1.3. Business results

Profit before tax and before provisioning in 2006 reached 3,600 billion, up 14.5%; Profit after tax reached 2,470 billion, up 88.7% compared to the end of 2005. The return on assets (ROA) of NHNT in 2006 reached

1.6%; Return on equity (ROE) reached 27.4%. The income structure continued to have positive changes in the direction of reducing the proportion of income from credit activities (from 57.3% in 2005 to 47.5% in 2006), increasing the proportion of service income and other income (from 42.7% to 52.5% in 2006).

2.2. Current status of medium and long-term credit risks at Vietnam Joint Stock Commercial Bank for Industry and Trade

2.2.1. Medium and long-term credit activities

2.2.1.1. Medium and long-term capital sources

One of the strengths of the Vietnam Bank for Industry and Trade is its strong capital potential. With a total mobilized capital of 171,862 billion VND, the Vietnam Bank for Industry and Trade is currently the Vietnamese bank with the largest total capital. However, to provide medium and long-term credit, the Vietnam Bank for Industry and Trade cannot and is not allowed to use all mobilized capital, including short-term mobilized capital and medium and long-term mobilized capital, for medium and long-term lending. According to Decision 457/2005/QD-NHNN, the source used for medium and long-term lending, in addition to medium and long-term mobilized capital, can only use 40% of short-term mobilized capital, so the main source used for medium and long-term lending is medium and long-term mobilized capital. Meanwhile, with current conditions in our country, medium and long-term mobilized capital only accounts for a small proportion of total mobilized capital, this is a difficulty for any bank as well as the Vietnam Bank for Industry and Trade.

Table 03: Capital structure by term in 2006 of Vietnam Joint Stock Commercial Bank

Unit: billion VND

Content

12/2005		12/2006		Increase or decrease
Amount	Proportion (%)	Amount	Proportion (%)	Amount	Proportion (%)
Capital mobilized	139 385	100	171 862	100	32 477	23.3
No term	74 306	53.3	88 165	51.3	13 859	18.7
term < 12 months	35 793	25.7	43 522	25.3	7 729	21.6

Term > 12 months

29 285

21.0

40 174

23.4

10 889

37.2

Source: 2006 business summary report of Vietnam Bank for Industry and Trade

Looking at the table above, we can see that in 2006, capital with a term of over 12 months has improved significantly compared to 2005. Medium and long-term capital reached 40,174 billion VND, accounting for 23.4% of total mobilized capital, an increase of 37.2% compared to 2005 while the growth rate of mobilized capital was only 23.3%. This is a great achievement of the Vietnam Joint Stock Commercial Bank for Industry and Trade. However, because the capital structure of the Vietnam Joint Stock Commercial Bank for Industry and Trade is 54% foreign currency, the actual amount of capital in VND with a term of over 12 months is not much.

The thin medium and long-term capital resources in VND have limited the ability of commercial banks to expand credit in VND. The medium and long-term capital resources in foreign currency are relatively abundant, but the expansion of credit in foreign currency is also facing difficulties when foreign currency prices have continuously increased as in recent times.

2.2.1.2. Medium and long-term lending activities

In the current context, when the country's economy is in the opening stage, the capital demand for the economy is very large, especially the demand for medium and long-term capital for projects. Facing that context, NHNT has implemented a development strategy until 2010, in which one of the goals is to increase the proportion of medium and long-term credit balance in total outstanding debt. Up to now, medium and long-term lending activities have been increasingly developing at NHNT, as can be seen in the following chart:

Chart 02: Medium and long-term credit growth rate of Vietnam Joint Stock Commercial Bank in recent years

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