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Evaluation of SHB's Business Performance After Merger According to Camel Model

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2.2. Evaluation of SHB's business performance after the merger according to the CAMEL model

2.2.1. Equity valuation

Table 2.2.: SHB's equity evaluation criteria for the period 2008 - 2014


Target

2008

2009

2010

2011

2012

2013

2014

VCSH

2.266 billion

2.417 billion

4.183 billion

5.830 billion

9.506 billion

10.355 billion

10,480 billion

Growth

VCSH

-

6.63%

73.07%

39.39%

63.03%

8.94%

1.2%

Safety factor

Capital (CAR)

-

17.06%

13.81%

13.37%

14.18%

12.38%

11.39%

Leverage ratio

financial leverage

5.34

10.36

11.20

11.17

11.26

12.87

10.20

Generation factor

internal capital

7.54%

13.53%

10.36%

13.14%

0.27%

7.32%

7%

Investment Rate

Fixed assets/equity

4.98%

36.78%

37.84%

40.45%

47.52%

40.09%

44%

Investment Rate

finance/ equity

107.49%

202.14%

211.96%

259.30%

133.79%

180.42%

212%

Capital contribution and stock purchase ratio

part / VCSH

33.01%

11.16%

7.97%

5.72%

4.12%

3.49%

3.06%

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Source: SHB's financial statements and annual reports 2008 - 2014 Table 2.2 shows that SHB has a strong growth in equity in the year of consolidation. The merger of HBB into SHB has helped increase SHB's charter capital from VND 4,815 billion to VND 8,865 billion. This is the benefit that the merger brings to this bank when it nearly doubles its capital scale in just seven months at a reasonable cost, compared to normal growth which would take the bank at least 5 years with a larger investment capital, and the merger also puts SHB in the 8th/10th position with the largest equity in the entire system (see Appendix 5). SHB has always shown quite good capital growth over the years, both before and after the merger. However, since 2013, the bank has maintained a slower capital growth rate compared to the previous period, showing that the bank is entering a period of stability in capital growth.

Regarding the capital adequacy ratio, SHB before and after the merger maintained a higher capital adequacy ratio than the regulations of the State Bank and the industry average. Only in the first year of operation after the merger (2013), SHB's CAR decreased.

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decreased and was lower than the industry average (12.38% compared to 13.25% in 2013, 11.39% compared to 12.75% of the industry in 2014). However, such a ratio is still quite good and meets the standards of equity capital safety.

In addition, SHB has always maintained a relatively stable financial leverage ratio from 2009 to 2014. According to convention, the best financial leverage ratio is from 10 to 14 times and SHB has always maintained this ratio between 11 and 12 times. This demonstrates SHB's solid financial capacity when it can ensure a reasonable correlation between liabilities and equity over the years.

SHB's internal capital generation ratio fluctuated erratically throughout the period. In the pre-merger period, the internal capital generation ratio was always maintained at an average level. However, in the year of merger (2012), this ratio suddenly dropped to 0.27%. In this year, SHB almost did not retain profits due to having to bear a large loss from HBB (VND 1,660 billion). At the same time, the strong increase in equity in 2012 also contributed to reducing this ratio to nearly zero. However, just one year after the merger, the internal capital generation ratio was significantly increased to 7.32%, showing that the bank's self-financing ability from retained profits had improved quite quickly.

Another noteworthy point in the capital assessment index of SHB is the ratio of financial investment/equity. This ratio of SHB is quite high and exceeds the equity level. However, the structure of the bank's financial investment portfolio does not focus entirely on long-term financial assets but is evenly distributed to short-term investments such as bills and certificates of deposit. These investments are considered safe and highly liquid.

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120

100

80

60

40

20

0

2.2.2. Asset quality assessment


Branch

SHB

10

8

6

4

2

0

Branch

Chart 2.1: SHB's credit growth rate compared to the industry (Unit: %)


SHB

2009

2010

2011

2012

2013

2014

Chart 2.2: SHB's bad debt ratio compared to the industry (Unit: %) Source: Compiled from SHB's annual report 2008 - 2014

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Table 2.3.: Asset quality indicators of SHB in the period 2008 - 2014

Unit: %


Target

2008

2009

2010

2011

2012

2013

2014

Loan balance growth


103.97

89.76

19.52

93.32

35.25

38.20

Loan to Asset Ratio

43.30

46.24

47.23

40.58

47.79

52.44

61.58

Investment/TTS ratio

65.44

65.01

65.26

62.35

59.04

65.70

69.15

Fixed assets/total assets ratio

5.73

3.11

2.99

3.18

3.54

2.89

2.43

Profitable assets / TTS

87.90

92.01

89.45

89.54

87.68

88.53

89.05

Non-Profitable Assets/TTS

12.10

7.99

10.55

10.46

12.32

11.47

10.95

Credit/Funding

51.40

50.70

52.46

45.74

52.03

57.43

65.97

Overdue debt ratio/Total outstanding debt


3.26

3.89

6.06

16.65

7.13

3.93

Bad debt ratio in total outstanding debt


2.82

1.41

2.23

8.80

4.06

2.02

Credit DPRR ratio on total outstanding debt



1.13

1.23

2.25

1.58

1.20

Source: Financial statements and SHB Annual Report 2008 - 2014 Observing the calculated indicators combined with analyzing the information provided in SHB's annual report during the evaluation period, it can be seen that:

In the pre-merger period, SHB achieved impressive credit growth, higher than the industry average (see Figure 2.1). Before 2010, the credit growth rate was maintained at about 100% per year. The growth rate slowed down to 19.52% in 2011. The credit growth rate was quite high but did not greatly affect SHB's credit quality, the bad debt ratio in the period 2008 - 2011 was always maintained at below 3%. The bank's provision for credit risk at the end of 2011 for the credit portfolio according to Decision 493/2005/QD-NHNN and Decision 18/2007/QD-NHNN was only 1.23% of total outstanding debt.

For many years before the merger, SHB has shown improvements in diversifying its asset portfolio to minimize risks. In the investment portfolio, in addition to long-term investments aimed at expanding the network of strategic partners, bonds, promissory notes and deposit certificates account for a large proportion. Investments in these interest-bearing assets are considered safe and meet the requirements of increasing profits, in line with the nature and characteristics of the operations of credit institutions. Credit institutions are also encouraged to invest in these assets.

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encourage investment in these types of assets to diversify the portfolio and prevent risks that may appear in the market during business operations.

In the post-merger period, SHB's total assets growth rate remained quite good compared to the industry average (SHB's total assets growth rate in 2013 was 23.24%, 5 times higher than the industry's 4.37%). In the context of the banking industry facing challenges from the macro economy, SHB still has to improve its financial capacity and competitive position, while focusing on stabilizing operations after the merger. However, SHB's asset quality indicators are still generally quite positive: In terms of credit quality, the economic context in 2013 and 2014 has had positive changes but still contains many potential risks due to difficulties in business operations, high bad debt ratio, etc. However, SHB's credit growth by the end of 2013 still reached 35.25%. This result is quite good when the credit growth rate of the whole system only reached 12.51% . This outstanding growth partly comes from the incentives that SHB received from the State Bank after the merger, for example, SHB has a higher credit growth limit than most other equivalent banks (group 1 banks are only allowed to have a maximum credit growth of 17% because during this period, the State Bank proactively applied credit growth limits to each group of banks to ensure credit quality and limit the increase of bad debt). The bank still maintained this rate stably at 38.2% in the third year after the merger (2014).

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Chart 2.3.: SHB's loan structure classified by industry 2009 - 2014


Unit:%



Source: SHB Annual Report 2009 – 2014


Regarding the loan structure: if we base on the loan classification by customer group, we can see that the loan structure has changed since the merger. The SOE loan portfolio increased from 14.5% in 2011 to 19.2% in 2013. If we include the 1.6% of Vinashin's pending debt, the SOE loan proportion in total debt will account for 20.8%. SHB's SOE loan proportion is slightly higher than the industry average of about 18% 2 . On the other hand, the proportion of personal loans has decreased from 31.1% in 2011 to 23.2% in 2013. Such a change in customer structure

not very suitable for SHB's strategy of becoming a leading bank in the retail segment.



2 See Appendix 8: Loan classification by customer group of SHB in the period 2011-2013

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Chart 2.4.: Debt structure classified by maturity of SHB

Unit: million VND



150000000


100000000


50000000

Long-term debt

Medium term debt

Short-term debt


0


200920102011201220132014


Source: SHB Annual Report 2009 – 2014 In terms of the term structure of loans, the term of SHB’s loan portfolio has been lengthened recently, for example, the proportion of short-term loans decreased from 63.5% in 2011 to 51.7% in 2013 and 43.5% in 2014, while the proportion of long-term loans increased from 14.6% to 31.9% and medium-term loans increased from 21.9% to 24.9% (see Figure 2.4.). This is contrary to the general trend of the banking system. Compared to MBB, SHB has a lower proportion of short-term loans and a much higher proportion of medium- and long-term loans. This term structure helps SHB obtain a higher average income interest rate because long-term loans often bring higher profit margins. In fact, SHB's longer-than-industry average loan term is more beneficial to the bank as it is still maintaining the ratio of short-term capital used for medium- and long-term loans lower than the prescribed level of 30% (see table 2.8.).

In terms of lending sectors (see chart 2.3), SHB's credit portfolio structure in recent years has been diversified by sector, with higher proportions in some low-risk sectors such as: export production and business, production and business of goods in the agricultural and rural sectors... In 2013, SHB's lending proportion to agriculture, forestry and fishery was 21.6%, twice as high as the industry average of 10.5%. In recent years, the agricultural and rural development sector has been given priority in accessing bank loans while non-production sectors have been subject to tight monetary policies. In addition,

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The SBV also introduced more flexible policies and incentives related to required reserves or refinancing to support banks to expand lending to encouraged sectors. The recent increase in SHB's lending proportion in these sectors is in line with the trend and takes advantage of SBV's incentives.

Regarding the issue of bad debt handling : after the merger, SHB paid special attention to the collection and handling of overdue and bad debts, so the debt collection has achieved positive results. As analyzed in section 2.1.1., HBB was forced to restructure in a state of financial exhaustion, the merger of HBB had a significant impact on SHB's financial safety indicators in 2012, such as the bad debt ratio reaching a very high level: 8.8%. However, just one year after the merger, SHB brought this bad debt ratio down to 4.06% at the end of 2013, and just one year later (2014), SHB reduced the bad debt ratio by half to 2.02%, to the safe level according to the regulations of the State Bank (below 3%). The overdue debt ratio also decreased sharply from 16.65% in 2012 to 7.13%. To solve the problems from HBB, SHB has implemented a series of synchronous measures: First, SHB participated in restructuring loss-making and insolvent enterprises to help them overcome difficult times and strengthen their financial health to repay debts; some successful restructuring cases are Bianfishco Joint Stock Company, Thanh Dat Paper Company Limited and Quoc Bao Joint Stock Company.

Regarding bad debt, SHB sold VND1,800 billion of bad debt to the Vietnam Asset Management Company (VAMC) in exchange for VND1,665 billion of special bonds. SHB also used nearly VND188 billion of its previous provision to write off bad debt in 2013. This is a significant figure because in the past 5 years, SHB has not had to write off bad debt. Another measure is that SHB has liquidated the collateral of customers who are unable to repay their debts to recover as much as possible.

For Vinashin's VND3,345 billion debt, SHB converted VND1,103 billion of debt into bonds and the remaining VND1,419 billion was set aside for provision and allocated within 5 years. DATC bought Vinashin's debt at 30% of its value.

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