Indicators Reflecting the Safety of NHTM's Business Operations

Group 1: Indicators reflecting bank income

Income (revenue) is an amount of money in an accounting period that a commercial bank receives when performing banking services to the market. Income is the first factor that needs to be considered when evaluating the business performance of a bank because, like normal businesses, the profit-making activities of a commercial bank are to meet the goal of covering expenses and making a profit. Good income growth is a necessary condition to improve the business performance of a bank. A bank's income can be assessed through the following indicators:

- Income growth rate

Income growth rate

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=Income in year N – Income in year N-1 Income in year N - 1

*100%

The income growth rate reflects how much the income of the following year increases/decreases compared to the previous year. A high income growth rate shows that the bank's income-generating activities are expanding or the bank's business activities are becoming more effective and vice versa.

- Income structure

Income ratio =

from activity i

Income from operations i

Total income *100%

This ratio shows how much activity i contributes to total income. This ratio shows the strength of the activity, bringing in large income for the bank so that the bank can more clearly define its operating strategy, promote its strengths to improve business efficiency. The income of commercial banks includes: income from credit activities, income from investment activities, income from non-credit activities. In which, income from credit and investment activities are income with high potential risks, while income from non-credit activities has low potential risks. Therefore, if business activities are effective and safe, the proportion of income from non-credit activities tends to increase.

- Growth rate of each type of income

Growth rate of income from Activity i

= Income from Contract i in year N-Income from Contract i in year N-1

Income from Contract i year N-1

*100%

The growth rate of income from activity i reflects how much the income of the following year increases/decreases compared to the previous year. A high growth rate of income from this activity shows that the bank's business activities are expanding, bringing in more income for the bank and vice versa.

Group 2: Cost assessment criteria of commercial banks

Expenses are the amount of money that a commercial bank must pay in an accounting period to conduct its business activities. To evaluate the efficiency of a commercial bank's business activities, in addition to income, it is necessary to determine the expenses that the commercial bank spends to generate that income. If income increases but expenses increase more than income, the commercial bank's business activities are not considered effective. Therefore, to evaluate the efficiency of a commercial bank's business activities in terms of costs, it can be evaluated through the following criteria:

- Cost increase rate

Year N Cost - Year N-1 Cost

* 100%

Cost of year N-1

Rate of cost increase

When evaluating the rate of cost increase, it is necessary to compare it with the rate of income growth. If the rate of cost increase is less than the rate of income growth, then the business activities of the commercial bank next year will be more effective than the previous year and vice versa.

- Cost structure

Type i cost

Cost structure = Total cost * 100%

Type i costs include: costs for credit activities, costs for non-credit activities and operating costs. In banking business, it is impossible to clearly allocate operating costs (salary expenses, fixed asset expenses, etc.) to each activity. Therefore, the division is relative. Credit operating costs are the cost of paying interest on the amount of capital mobilized for use in credit activities. Non-credit operating costs are costs related to that activity such as (expenses for treasury, agents, consultants, etc.).

for payment service provision activities, losses in foreign exchange trading, compensation costs in insurance service provision activities...)

The cost structure shows what percentage of the total cost of a commercial bank is cost of type i. For commercial banks operating in the monetary sector, the input cost is interest cost, so the proportion of interest cost is the main cost in the total cost of a commercial bank. Therefore, if the proportion of operating costs is high, it shows that the bank's business activities have not been cost-effective. The high proportion of risk provision costs means that the business's capital use activities are potentially risky.

- Rate of increase of each type of cost

Rate of increase of cost type i =

Cost type i year N - Cost type i year N-1

Cost of type i year N-1 * 100%

The cost growth rate of each type shows how much that cost type increased/decreased compared to the previous year.

For interest expenses, compare the rate of increase in interest expenses with the rate of growth in income from credit and investment and compare the scale of expansion of mobilized capital sources to evaluate. If the rate of increase in interest expenses is lower than the rate of growth in income from credit and investment and the rate of growth in capital sources, it means that the commercial bank has mobilized many cheap sources of capital to save costs and vice versa.

For costs of non-credit activities, compare the costs of each non-credit activity with the income generated by that service, and consider the reasons to evaluate the effectiveness of that service.

Regarding operating costs, the goal of commercial banks is to save operating costs. However, when business activities expand, operating costs will increase. Therefore, it is necessary to consider the causes of increased operating costs to evaluate operating costs.

For risk provision expenses, this high rate shows that the bank's off-balance sheet asset/commitment item has a larger value or is more risky than the previous year and vice versa.

Group 3: Net income from commercial bank business activities

- Net income from interest

Net interest income is the difference between interest earned from credit and investment securities activities and interest expenses incurred to raise capital (excluding operating expenses) over a given period of time.

Net income reflects the level of maximizing income and minimizing costs of commercial banks, reflecting the efficiency of commercial banks' business operations. Net income from credit and investment activities can be assessed through the following indicators:

+ Net interest income growth rate

Growth rate

net interest income =

Net income from interest year N-Net income from interest year N-1

Net income from interest year N-1 *100%

The growth rate of net income from credit and investment activities reflects how much the net income from this activity increases/decreases in the following year compared to the previous year. A high growth rate of net income shows that the bank's lending and investment activities are expanding or the bank's operations are more effective and vice versa.

+ Net interest margin (NIM)

NIM =

Net interest income

Total assets *100% =

Interest Income-Interest Expense

Total assets * 100%

Reflects the efficiency of capital creation and capital use of the bank. If many cheap capital sources are mobilized and invested in assets with high profitability, the NIM will be larger. A large NIM shows that the bank is operating effectively on one unit of assets. For banks with traditional credit business with a high ratio of capital use to total assets (over 80%), a high NIM index reflects the high efficiency of capital creation and capital use of commercial banks.

The standard for evaluating business performance through NIM is based on the NIM of the commercial bank itself in the previous year, the average NIM of the industry or the NIM of commercial banks of similar size in the same market. If the NIM of the following year is larger than the previous year, or larger than the average of the industry or other commercial banks, then the business performance is considered more effective and vice versa.

- Net non-interest income

Net non-interest income is the net income from non-credit activities. This is the difference between income from non-credit activities and expenses for those activities (excluding operating expenses) in a certain period of time. Non-credit activities are activities that contain a low level of risk, so the higher the income from this activity, the more it proves that this activity is expanded and the level of safety in the total income of the commercial bank. Net income from non-credit activities can be assessed through the following indicators:

+ Net income from non-credit activities

Net income from non-credit activities

= Income from non-credit activities

Costs from non-credit activities

+ Growth rate of net income from non-credit activities

Net income growth rate from non-credit activities

= Net income from non-commercial activities year N-Net income from non-commercial activities year N-1 *100%

Net income from non-credit activities year N-1

The growth rate of net income from non-credit activities reflects how much the net income from this activity increases/decreases in the following year compared to the previous year. A high growth rate of net income shows that the bank's non-credit activities are expanding, banking activities are safer and more effective, and vice versa.

- Cost of Operating Ratio/Net Operating Income (CIR)

Operating costs

CIR = Net income from operations * 100%

This ratio indicates the level of efficiency in the business operations of commercial banks. If this ratio is high, it shows that the ability to save operating costs of commercial banks is low, operating efficiency is low and vice versa.

The standard for evaluating business performance through CIR is based on the CIR of the commercial bank itself in the previous year, the average CIR of the industry or the CIR of commercial banks of similar size in the same market. If the CIR of the following year is smaller than the previous year, or smaller than the average of the industry, the

Other commercial banks demonstrate that commercial banks save operating costs so they can evaluate business operations more effectively and vice versa.

Group 4: Profitability

- Pre-tax profit is the difference between income and expenses (excluding corporate income tax payable) that a commercial bank earns in an accounting period.

Profit before tax = Income – Expenses

- Profit after tax is the difference between income and expenses (including corporate income tax payable) that a commercial bank earns over a period of time.

Profit after tax = Profit before tax - Income tax

These indicators reflect the profitability of commercial banks. This large figure shows that the profitability of commercial banks is high and vice versa. In addition, after-tax profit also depends on tax policies according to State regulations.

Net profit year N-Net profit year N-1

- Net profit growth rate =

Net profit year N-1 * 100%

This indicator shows how much this year's net profit increased/decreased compared to last year's net profit. The higher this rate, the more effective the operation will be next year and vice versa.

- Return on Equity

Profit after tax

Return on Equity (ROE) =

Equity * 100%

This is an indicator that reflects the profitability of equity, indicating how much profit 1 dong of equity generates, reflecting the business performance achieved in relation to the capital structure of the bank. ROE is the indicator that shareholders are most interested in because it reflects their income each year. Therefore, this is considered an indicator that attracts investors and is of primary interest to investors.

The standard for evaluating business performance through ROE is based on the ROE of the commercial bank itself in the previous year, the average ROE of the bank.

industry or ROE of commercial banks of similar size in the same market. If the ROE of the following year is greater than the previous year, or greater than the industry average, other commercial banks, then the business performance is considered more efficient and vice versa.

- Return on assets (ROA)

Return on assets (ROA) =

Profit after tax

Total assets * 100%

This ratio shows how much profit after tax is generated for every dollar of assets. It measures the efficiency and ability of the management in using assets to generate net income.

The standard for evaluating business performance through ROA is based on the ROA of the commercial bank itself in the previous year, the average ROA of the industry or the ROA of commercial banks of similar size in the same market. If the ROA of the following year is greater than the previous year, or greater than the average of the industry or other commercial banks, then the business performance is considered more effective and vice versa.

- The relationship between ROE and ROA

ROE =

LNST

Total assets

* Equity

= ROA *

Total assets Equity

From the above formula, it can be seen that ROE is very sensitive to the way the bank uses capital to finance the formation of assets. A bank can have a low ROA, but can still achieve a high ROE if the bank mainly operates with mobilized capital. Conversely, a bank can have a high ROA but can still only achieve a low ROE if the bank uses a lot of equity in its business to form assets. The problem is that high financial leverage means higher risk for the bank.

1.2.4.2. Indicators reflecting the safety of commercial bank business operations

a. Group 1: Group of indicators reflecting financial security

Indicators reflecting the level of capital safety

Capital adequacy is the amount of capital that can help banks cope with risks such as credit risk, operational risk, market risk to absorb losses and protect the interests of depositors.

To determine the level of capital safety for each credit institution, people use the minimum capital adequacy ratio (CAR). This is an index given to suggest the minimum capital ratio for banks in the world. The goal of this ratio is to ensure that the bank can withstand a certain rate of capital loss before falling into a state of insolvency.

According to Basel 2 standards,

CAR

Equity

Credit risk RWA+Market risk RWA+Operational risk RWA * 100%

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there :

- Equity capital includes tier 1 capital and tier 2 capital

+ Tier 1 capital (basic equity): includes common shares, long-term preferred shares, capital surplus, undistributed profits, general reserves, other capital reserves, convertible trust vehicles and credit loss reserves. This is the charter capital and published reserve funds.

+ Tier 2 capital (additional equity capital): this capital is considered to be lower quality capital including: undisclosed reserves, revaluation reserves, general provisions/general loan loss provisions. Hybrid capital instruments (debt/equity), subordinated debt. However, unsecured short-term debts are not included in this definition of capital.

Limits in calculating total bank capital: Total Tier 2 capital must not exceed 100% of Tier 1 capital, secondary debt must be at most 50% of Tier 1 capital, general reserves must be at most 1.25% of risk-weighted assets, revaluation reserve must be discounted at 55%, remaining maturity of secondary debt must be at least 5 years, bank capital does not include intangible assets.[78]

- RWA is total assets adjusted for credit risk, market risk, and operational risk.

This ratio is the basic measure for the Central Bank to assess the financial health of a bank. If a bank fails to ensure its own capital, it is considered to be unable to operate normally and will be placed under special control or forced to close. According to Basel 2, CAR ≥8% [78].

This ratio reflects the impact of asset structure on the safety level of bank operations. If the bank determines the level of risk it can

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