Development Orientation of An Binh Commercial Joint Stock Bank to 2020

CHAPTER 2 SUMMARY

Chapter 2 of the thesis has mentioned the following contents:

General introduction to the history of formation and development process of more than 20 years of An Binh Commercial Joint Stock Bank. Outlining the business situation and achievements of the bank in the development process as well as the development plan in the coming time.

Chapter 2 also clearly analyzed the current status of credit risk management. Analyzed the credit risk management model and process that An Binh Commercial Joint Stock Bank is applying. It can be seen that the credit risk management process and model that An Binh Commercial Joint Stock Bank is using is quite high quality, suitable for the development of a modern bank and keeping up with the credit risk management system of major banks in Vietnam.

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From the in-depth analysis of the current state of credit risk management, chapter 2 highlights the achievements of credit risk management activities and points out the remaining limitations of this activity as well as the objective and subjective causes that An Binh Commercial Joint Stock Bank needs to know and will have to have solutions as well as develop tools to overcome in the coming time.

Chapter 3

SOME SOLUTIONS AND RECOMMENDATIONS TO IMPROVE THE QUALITY OF CREDIT RISK MANAGEMENT AT AN BINH JOINT STOCK COMMERCIAL BANK

3.1 Development orientation of An Binh Commercial Joint Stock Bank to 2020

3.1.1 General orientation

ABBANK's development orientation until 2020 is to become the leading joint stock commercial bank in Vietnam, focusing on the retail sector.

ABBANK has been affirming its position as a bank with stable and sustainable operations in the banking system in Vietnam. ABBANK aims to differentiate itself in terms of solid business orientation, building effective risk control measures and defenses along with the awareness of innovation in improving both quality and service, investing in modern infrastructure to best serve customers, ensuring the interests and rights of shareholders, customers, society and employees of ABBANK.

Especially with the support, consultancy, knowledge and experience transfer of shareholders who are large and prestigious financial and banking organizations in the world such as Maybank, International Finance Corporation - IFC in retail banking business, risk management, corporate governance; Together with a team of dedicated, creative employees and a wide and growing network of operations nationwide, ABBANK has all the necessary facilities and conditions to become the leading commercial joint stock bank in Vietnam, focusing on the retail sector.

To realize ABBANK's development orientation until 2020, ABBANK's Board of Directors has approved 23 Strategic Projects deployed in many important areas, closely monitored by the Strategic Project Steering Committee (SC) and through the supporting unit, the Project Management Office (PMO). With the orientation of sustainable development and improving the quality of risk management to help the bank limit potential losses, ABBANK's Board of Directors always pays close attention and advocates building positive and quality solutions to promote risk management throughout the system. Typical example:

In 2016, ABBANK marked a positive change in risk management through the implementation of the Basel II project and the enhancement of risk management culture at each level. Although not among the 10 banks that had to pilot Basel II implementation as required by the State Bank, in 2016, ABBANK also proactively and officially launched the Project to Assess the Gap & Develop a Comprehensive Implementation Plan according to Basel II. This is considered a key project on banking governance and risk management of ABBANK aiming at one of the 5 strategic goals of "Modern corporate governance according to international standards". By 2020, ABBANK will focus on completing these projects, as a basis for proposing the implementation of Basel II.

3.1.2 Credit development orientation

The credit development orientation until 2020 is applied uniformly throughout the ABBANK system for customers who are eligible for credit according to ABBANK's current regulations [15], [27].

Build an optimal credit portfolio based on Risk Appetite [14], ABBANK's annual Business Plan and the annual Credit Development Plan of Branches and Transaction Offices.

Diversify, minimize risks, maximize profits and ensure ABBANK's business activities develop sustainably and long-term.

Ensuring safety ratios and credit structure in line with customer and industry strategies to create synchronous and unified development across the entire system, avoiding the situation of lending being too concentrated for certain customers, customer groups, industries, and regions affecting the overall balance of the entire bank and to minimize risks when there is an economic crisis, recession, natural disasters, epidemics, price fluctuations, market, and human resources.

Exploit and promote the specific strengths of regions, areas and localities to increase credit sales and enhance ABBANK's competitiveness.

Developing key products: Import-export financing, lending to supplement working capital for power contractors, small and medium enterprises, reputable customers, brands and market share...

ABBANK focuses on lending to market 1, dividing customers into individual customers, corporate customers including small and medium enterprises; large enterprises. In addition, ABBANK divides customers by industry and products and services.

ABBANK provides the allowable limit range for industries and products. In addition, the bad debt scale (NPL) is divided into 5 levels and will warn at the credit risk threshold, specifically as follows:

- Level 1: NPL/enterprise, industry/product: ≤ 1

- Level 2: NPL/enterprise, industry/product: > 1 - 3%

- Level 3: NPL/business/industry/product: > 3 - 5%

- Level 4: NPL/business/industry/product: > 5 - 7%

- Level 5: NPL/business/industry/product: > 7%

For industries/products with NPL at level 4, 5 will be closely monitored and have an appropriate handling roadmap.

ABBANK ensures that at all times, the maximum ratio of short-term capital used for medium- and long-term lending as prescribed by the State Bank of Vietnam is 50% as of December 31, 2017 and 40% as of January 1, 2018 .

ABBANK manages, monitors and reports credit limits for a customer and related parties according to regulations. Credit limits for a customer and related parties of 1% or more of equity must be reported periodically. For foreign currency loans, ABBANK considers foreign currency loans, in accordance with regulations of the State Bank.

To achieve the above strategic orientations, ABBANK needs to make breakthrough changes and achieve high efficiency while saving costs at the lowest level. This is not an easy task for ABBANK staff and leaders in the coming time.

3.2 Solutions to improve the quality of credit risk management at An Binh Commercial Joint Stock Bank

Although measures to limit risks in lending activities of commercial banks are often detailed in the Operating Regulations as well as the Operating Charter and have also been detailed in the Procedures and Regulations, there are still many limitations that commercial banks must always improve according to the development trend of the economy. The same goes for ABBANK, as mentioned above, ABBNK has built a 3-layer wall to prevent risks in general and credit risks in particular quite effectively at the present time, although that wall still needs to be improved to be more solid and effective. To do so, ABBANK still has a lot of work to do to achieve the set goals. In particular, overcoming outstanding problems in Credit Risk Management is very important because it directly affects the bank's profits. Although the scope of the topic is Credit Risk Management at ABBANK, Credit Risk Management is a component of overall Risk Management. From the above reasons, the author would like to propose some solutions to improve the quality of credit risk management with ABBANK in both risk management and credit risk management as follows:

3.2.1 Risk management solutions

3.2.1.1 Developing a culture of risk management

Risk Management Culture also has a great influence on the risk management of the entire ABBANK. Currently, ABBANK has not developed a vision, rules and guidelines related to risks applicable to the entire bank. Therefore, ABBANK needs to develop a vision, rules and guidelines related to risks applicable to the entire bank (for example, in the form of issuing a handbook on risk management culture).

ABBANK has only regulated the responsibility of reporting risks for Risk Management Officers (ROs) at branches. Therefore, the Bank needs to issue regulations and risk reporting procedures for newly arising risks identified by employees, regulations on reporting levels as well as regulations on rewards/punishments for risk identification applicable to all employees in the Bank.

ABBANK has included risk criteria in employee evaluation for a number of positions (credit specialists, branch credit approval managers, capital business specialists). Therefore, the Bank needs to expand the scope of employee evaluation based on risk criteria to the entire bank because each employee is responsible for identifying, managing and reporting risks within the scope of their assigned work.

3.2.1.2 Strengthening the management and supervision apparatus

The second line of defense according to ABBANK's current regulations only includes the Risk Management Division and the Credit Management Division. The Bank needs to add the Finance and Accounting Division and the Legal & Compliance Department to the second line of defense because these departments have the functions and tasks of monitoring the departments of the first line of defense independently, ensuring that the first line of defense is designed and operates effectively.

In ABBANK's organizational structure, there exists both a Risk Management Committee (RMC) under the Board of Directors (BOD) and an Risk Monitoring Committee (ERC) under the Executive Board.

- According to the practice of large banks in the world and in Vietnam, there is always a Risk Management Committee, a specialized committee under the Board of Directors.

- For the Risk Management Committee/Council under the Executive Board:

Most major banks around the world have established one or more committees to assist the Board of Directors in risk management;

However, in Vietnam, the scale of banks is relatively small compared to the world. With the current model and scale of operations, ABBANK can consider whether or not to maintain the operation of the Risk Monitoring Committee (ERC) to limit overlap with the operation of the Risk Management Committee (RMC).

3.2.1.3 Increase the quality of risk appetite

Every year, ABBANK has issued its risk appetite. Risk appetite guides ABBANK in controlling risky activities. Risk appetite is built in accordance with business strategy, risk management and risk orientation by identifying and clearly defining business limits, risk limits, tolerance and risk acceptance. However, the organization of implementation

There is still room for improvement in risk appetite to fully play its role. To do so, ABBANK needs to improve in the following aspects:

Regarding communication – ABBANK has not yet established an internal and external communication process regarding risk appetite, therefore it is necessary to establish an internal and external communication process regarding risk appetite. This helps ABBANK employees understand the business environment and sources of risks, understand the funding structure and characteristics of their business. From there, there is a proactive policy to avoid transactions that violate “risk appetite”, prevent losses or share risks and losses.

Regarding the method of building risk appetite, ABBANK has implemented a combination of top-down and bottom-up methods. However, bottom-up only involves the participation of business units at the Head Office, not the participation of business unit heads. Therefore, when building risk appetite, it is necessary to discuss with both business unit heads and business unit directors. Business unit heads will have a clearer view of the market and the branch's operating area, and will have more practical contributions to the construction of a complete Risk Appetite.

One thing to mention is that ABBANK does not have detailed indicators by business unit/block, by category. Therefore, it is necessary to consider the level of detail that ABBANK wants to build corresponding indicators.

In addition, ABBANK has never conducted a stress test on capital and according to a severe scenario. Therefore, it is necessary to conduct a stress test on risk appetite. This test will help ABBANK know in advance whether it can stand firm in the face of a crisis storm or will be knocked down. This will help ABBANK make improvements to confidently face market fluctuations or risks that may occur.

3.2.1 Solutions on credit risk management

3.2.1.1 Improve the quality of credit risk management system:

Human is the most important factor and the core of all problems. Therefore, the human factor needs to be taken seriously and considered as the top priority. Good human resources will make the organization good, good human resources will improve work efficiency, business benefits.

The profession will also be improved. If credit risk management is to be good, more attention needs to be paid to the personnel doing related work.

- Regarding the human resources in charge of the work: Knowing that credit risk management work will be spread across the three layers as above, specialized human resources are extremely important and have a great influence on all human resources participating in the defense lines. The Credit Risk Management Department needs to be expanded to have enough human resources to fully implement activities to avoid the current situation of concurrent holding of positions (6 people including the head of the department). The Credit Risk Management Department needs to have enough human resources to perform work in a more specialized manner, especially knowledge of Econometrics and statistical probability, instead of having to hold concurrent positions as at present. In addition, with the increasingly perfecting of credit work according to international standards, expanding the scale of human resources will also help the bank reduce the burden when simultaneously implementing modernization projects and improvement projects to improve the quality of banking according to international practices, which here are close-knit projects such as the Basel II project, the KPI project, the Credit Rating improvement project, etc.

- Full-time staff need to have sufficient qualifications and capacity, so training courses must be regularly held for full-time staff to grasp the innovations and new requirements of the job. Send staff to credit institutions to exchange experiences or invite experienced personnel to train and guide them in their work. Attracting human resources from leading banks in Vietnam and foreign banks in Vietnam to work is also a good option, although it will be more difficult because it will create exceptions to the bank's current salary and bonus policies.

- To limit and prevent ethical risks, banks need to have legal regulations and sanctions for behaviors that can lead to credit risks. Credit risk handbooks and manuals should be created, and information on ethical risks should be regularly updated for credit officers and officers throughout the bank. Internal training courses on professional ethics can be opened.

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