Other capital must not exceed 50% of Tier 1 capital, financial reserve fund must not exceed 1.25% of total assets,...
Deductions when calculating the bank's equity are: 100% of the debit balance of the fixed asset revaluation account according to regulations, 100% of the debit balance of the financial asset revaluation account according to regulations.
Risky assets are the total value of assets determined by the level of risk and the corresponding value of assets of off-balance sheet commitments determined by the level. Thus, assets according to the level of risk are the product of the value of assets and the corresponding risk coefficient of the prescribed assets. Assets corresponding to off-balance sheet commitments determined by the level of risk are calculated by the product of the value of off-balance sheet commitments and the prescribed conversion coefficient [ 18 ].
RWA is total assets after being adjusted for credit risk, market risk and operational risk. Thus, risk-weighted assets will be calculated according to the formula:
Risk-weighted assets = Credit risk RWA + Market risk RWA + Operational risk RWA.
Equity | ||||
CAR | = | RWA Risk RWA Risk RWA Risk credit risk + market + operations | x 100 | (2.26) |
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When Basel II was issued, the CAR of commercial banks was required to be at least 8%.
* Overdue debt rate
Overdue debt | x 100 | (2.27) | |
= | Total outstanding loans |
Overdue debt is debt that arises when a loan matures but the customer fails to repay all or part of the principal or interest. Overdue debt of banks is inevitable, however, banks need to have measures to limit the rate of overdue debt exceeding the allowable threshold, thereby leading to the risk of bank insolvency.
The overdue debt ratio reflects the overdue debt situation of commercial banks, reflecting the outstanding principal and interest that are overdue but the bank has not yet recovered. In other words, the overdue debt ratio shows how many VND 100 of the bank's current outstanding debt are
Overdue debt. This shows whether the credit management ability of the commercial bank in lending and debt collection of that commercial bank with loans is effective or not. The indicator also reflects the credit quality and credit risk of the commercial bank under consideration. A high indicator shows that the credit quality of the commercial bank is poor, or a large overdue debt ratio shows that the credit management ability of the commercial bank is very low.
* Bad debt ratio
Total bad debt | x 100 | (2.28) | |
= | Total outstanding loans |
Total bad debt of commercial banks includes debts in groups 3, 4, 5 according to the classification of commercial banks' loan portfolios. In which, group 3 includes substandard debts (debts overdue from 91 days to 180 days; debts with first-time restructured repayment terms; debts exempted or reduced due to customers' inability to pay full interest according to the credit contract); group 4 - doubtful debts - consists of debts overdue from 181 days to 360 days and debts with first-time restructured repayment terms overdue less than 90 days according to the first restructured repayment terms, or debts with second-time restructured repayment terms; and group 5 is the group of debts with the possibility of losing capital (including debts overdue for more than 360 days; debts with the first restructured repayment term overdue for 90 days or more according to the first restructured repayment term; debts with the second restructured repayment term overdue according to the second restructured repayment term; debts with the third restructured repayment term overdue, whether not overdue or overdue; and frozen debts, debts awaiting settlement).
The bad debt ratio of a commercial bank assesses the credit quality of that commercial bank. How much of each 100 dong of outstanding debt of a bank is bad debt will be reflected in the bad debt ratio. The higher the index, the poorer the credit quality of the commercial bank, and vice versa.
* Risk reserve/bad debt ratio (LLR)
Reserve fund | x 100 | (2.29) | |
= | Total bad debt |
Commercial banks face high and diverse potential risks, affecting the bank's business performance, especially in credit activities. To minimize risks, commercial banks must set aside risk reserves according to the regulations of the central bank in the host country. LLR shows how much capacity the bank has to compensate for that risk when a risk occurs with bad debts. To ensure safety during operations, LLR of commercial banks requires a minimum level of 100%.
Loan losses | |||
Level of loss | = | (2.30) | |
* Extent of loss
Loan
x 100
Loan losses (credit losses) are determined by the formula:
Credit loss = substandard debt x 0.2 + doubtful debt x 0.5 + bad debt x 1 Credit loss is the basis for determining the amount of risk provisions and the ability to
Bank solvency
Loans that are overdue for too long (6 months or more) are likely to cause loan losses. Loan credit losses mean the value lost in the lending activities of commercial banks.
The level of loss of commercial banks in credit shows the level of credit loss of commercial banks when considering the total loans of commercial banks in a period. The higher the ratio shows that the commercial banks will have to suffer a greater level of loss, and vice versa, it will decrease when the ratio is low.
1.2.4.3. Qualitative indicators group
Along with the above quantitative indicators, to evaluate the business efficiency of commercial banks, qualitative indicators are indispensable. This indicator group reflects the prestige and brand of the bank with customers and the economy. Two indicators representing this group include:
* Brand Awards : Gives an overview of the bank's reputation in the economy. These awards show how the bank has achieved results throughout its operations.
* Awards on technology, banking products and services: Commercial banks mainly and regularly operate by providing their products and services to customers, thereby requiring an increase in the quality of their products and services in the competition process. Awards on technology, products and services demonstrate the development efforts of that bank in the process of operation, improving its business efficiency through improving the quality of its products and services, reducing its operating costs.
1.2.5. Factors affecting the business performance of commercial banks
In an imperfectly competitive market, in order to survive and develop, improving business efficiency is a top consideration for commercial banks. Improving business efficiency is affected by many factors, so commercial banks themselves need to identify those influencing factors and determine the level of influence of those factors on their business efficiency. Thereby, commercial banks can make decisions to limit risks in operations, while increasing capital preservation, increasing income and profits from their business activities. After a long period of research, factors affecting the business efficiency of commercial banks are divided into two main groups: objective factors and subjective factors.
1.2.5.1. Objective factors
* Economic, political and social environment at home and abroad
Commercial banks are financial intermediaries that perform two main activities: mobilizing and allocating capital for the economy, and have economic relations with all economic entities. Therefore, in the process of operation, commercial banks cannot be separated from the economic, political and social environment. The operations of commercial banks are not only affected by domestic economic, political and social factors but also by the international environment. The international environment has a great impact on foreign investors as well as the international currency market.
A stable economic, political and social environment will create a favorable operating environment for commercial banks, ensuring the ability to mobilize and allocate resources.
The capital of commercial banks is easily mobilized with a low level of bad debt. On the contrary, in an unstable economic, political and social environment, the operations of commercial banks will easily face a high rate of bad debt, the ability to supply capital in the economy will decrease sharply.
The economic, political and social environment will affect people's confidence, the value of money, influence government policy management, and investor psychology. From here, it will affect people's savings deposit activities at banks, business production activities of enterprises, workers' income, consumer demand and commodity markets. Thus, a stable economic, political and social environment will help banks expand their service provision (payment, guarantee, consulting, etc.) and improve their credit quality. On the contrary, when the environment is unstable, it will cause difficulties for economic actors, and bank credit activities will decline seriously.
* Legal environment
The legal environment is made up of the legal system, sub-law documents, law enforcement as well as the level of education of the people. This shows that the legal environment has a great influence on the management of the market economy. A complete legal environment allows the development of the market economy without facing any major barriers. However, this is a weakness of Vietnam, a developing market with an incomplete and incomplete legal environment. Therefore, in order to create a baseline for the commercial banking system to develop strongly and stably, Vietnam needs to create a complete legal environment through which it can help commercial banks in particular and economic entities in general resolve conflicts in their operations.
A commercial bank is an enterprise operating in the field of credit and currency, so it must be subject to very strict control from many sides: the Central Bank, relevant ministries and branches. Controlled factors of commercial banks include: competition, bankruptcy, merger, organizational structure, bad debt, etc. In addition to being subject to control, commercial banks must also ensure compliance with laws and policies in their business activities, regarding: ensuring liquidity, capital safety ratio, operations
deposits, lending activities, and payments,.... This shows that the legal environment directly affects the strategy development as well as the implementation of business activities of commercial banks.
* Level of economic development
The operations of commercial banks are greatly influenced by the development of the world, regional and national economies. In particular, the influence is reflected in the development of the stock market and the growth of GDP.
When a country has a large GDP growth, it shows that the capital that entities can mobilize and supply in the market will increase accordingly. As a financial intermediary in the market, in that context, the business efficiency of commercial banks will increase in the same direction. On the contrary, when countries have an economic recession, a decline in GDP will cause the credit and payment business efficiency of commercial banks to decrease, leading to a decrease in the business efficiency of banks.
In addition, the stock market is one of the channels that help commercial banks increase their mobilized capital during their operations. When the stock market develops, it creates a premise for commercial banks to easily access capital from entities. On the contrary, when the stock market is underdeveloped or shows signs of decline, the business efficiency of banks also deteriorates.
* People's income
One of the sources of capital mobilization that is increasing for commercial banks is from small individuals. When these entities have increased income, it means an increase in demand for deposit and payment services. This creates conditions for commercial banks to promote the provision of products and services to people and households in the market. However, when the income of this segment decreases, it will lead to difficulties in capital mobilization for commercial banks, affecting the ability of banks to supply capital to the market. Although capital mobilization from households and people is not the largest source of capital, this is one of the main sources of mobilization for domestic and foreign commercial banks.
* Social customs
The activities of commercial banks are closely linked to people's trust and the diversity of customers. It can be said that the social customs of each country and region will greatly affect the operations of banks. The habit of using high-tech banking services (cashless payments) and consumer loans has become popular in developed countries, but these products and services are still different in developing and underdeveloped countries. In addition, people in developing and underdeveloped countries are still quite unfamiliar with high-tech services. For example, in Vietnam, the majority of the population lives in rural and mountainous areas, with low access to banking services and products; even a large number of people living in urban areas refuse to use high-tech services (such as cashless payments) and still use cash payments out of habit. Another habit of people in developing and underdeveloped countries is the habit of storing cash and gold at home. Therefore, retail activities of commercial banks in developed countries will take place at a higher speed than those in developing and underdeveloped countries, and the income from these items between countries will also differ greatly.
* Development of science and technology
The development of science and technology directly affects the products and services that banks provide to the economy. The development of science and technology creates the premise for commercial banks to diversify high-tech services and products for customers, increase safety and shorten time, reduce costs when using those services and products. In the context of the 4th industrial revolution (revolution 4.0) taking place worldwide, the business performance of commercial banks in countries will be strongly affected.
Along with the development of technology in the world, artificial intelligence (AI) is the focus of development of countries, especially developed countries. AI is used by commercial banks in risk portfolio management, customer management and database management in their banks. AI has the ability to adapt itself with unlimited potential and is more effective than humans, which has strongly impacted the organizational and management models of commercial banks.
The development of science and technology has led to the development of digital networks, where commercial banks are connected to each other through computer software via the Internet. From here, the structure of the banking system has changed, especially in providing high-tech services and products. Online payment transactions within banks or between banks have developed strongly with low costs, partly meeting the needs of customers in payment transactions, no longer dependent on time, space and location. The development of invisible technology has helped commercial banks expand their network of operations through non-traditional channels with significantly reduced operating costs. From here, it can be seen that science and technology have contributed greatly to increasing the business efficiency of commercial banks.
* Competitors
Commercial banks operate in the same system in a country, operating based on customer trust, so commercial banks both compete and support each other.
The products and services provided by commercial banks are not fundamentally different from each other, only in terms of price and distribution channels. The price of banking products and services will create a difference in the market share of the bank. Banks with cheaper products and services will have a larger market share, increasing business efficiency, and vice versa. In terms of distribution channels, commercial banks distribute through traditional channels and new distribution channels based on the development of science and technology (internet banking, mobile banking, etc.). The emergence of new distribution channels has created conditions for customers to access the services and products of banks more easily at a more reasonable cost. In other words, the factors that create competition between commercial banks from the customer side are price and distribution channels.
In addition to competition between commercial banks, they also support each other in their operations, especially through deposits and loans through the interbank market. The support of banks contributes to ensuring immediate liquidity, minimizing risks for banks in credit and investment activities.