Investment Capital Enhances Competitiveness of Commercial Banks [6]

- Invest in advertising activities on mass media, invest in community-oriented activities,

- Organize customer approach and product introduction,

- Implement incentive and promotional programs.

In essence, investment to improve competitiveness is a part of development investment. However, not all development investment activities are investment to improve competitiveness. If the result of development investment is to increase assets, the result of investment to improve competitiveness is to create and enhance factors of competitiveness, consolidate competitive tools, and meet competitive goals in each stage.

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1.2.4. Investment capital enhances the competitiveness of commercial banks [6]

Banks mobilize capital from many sources and use it for many different purposes. However, there are capital sources that are not used for the main purpose of business and investment, but mainly to meet the needs of reserves and liquidity such as capital borrowed from the State Bank, borrowed from other credit institutions in the interbank market. Investment capital in general, investment to improve competitiveness in particular, requires large scale and ensures long-term stability, and is mobilized mainly through equity capital.

Equity capital accounts for only a small part of the total capital of the bank. However, equity capital plays a very important role, contributing to the formation of the scale of the bank, increasing the ability to expand lending and investment, especially medium and long-term investment, creating and maintaining modern facilities, equipment and technology.

Owner's capital is prioritized to finance investment activities: building headquarters, purchasing equipment, purchasing technological innovation, establishing new companies, etc. for banks. Part of this capital is invested in corporate securities and medium and long-term loans. Banks regularly expand owner's capital through issuing additional shares (or applying for additional issuance), or self-accumulation to expand the scale of investment, scale and quality of operations. Owner's capital expansion is often associated with

Investment activities such as increasing branches, establishing subsidiaries or contributing capital to joint ventures and associations. These investment activities include purchasing headquarters, working facilities, equipment and technology, etc. with very expensive initial costs.

Equity consists of the following components:

(1) Initial capital : is the capital formed when the bank begins operating with different ownership and sources. If it is a state-owned bank, the initial capital is provided by the state budget. If it is a joint stock bank, the initial capital is contributed by shareholders through the purchase of shares and stocks. Joint venture banks are contributed by the joint venture parties; private banks are privately owned capital.

Initial capital is usually subject to government regulations. Regulations often specify the minimum capital – legal capital – that a banker must have to start a banking business.

(2) Equity capital formed during operation : includes additional shares issued or additional budget allocated during operation, accumulated profits, capital surplus, funds, etc.

- Additional shares issued, additional budget allocation : banks can issue additional shares (regular or preferential) or request additional budget allocation to expand the bank's scale of operations and investment scale. This form of mobilization is not regular but helps banks have a large amount of equity capital when needed, meeting large investment needs arising such as technological innovation, establishing subsidiaries, contributing capital to joint ventures, etc.

Increasing equity by issuing additional shares allows banks to expand their equity capital in the fastest way. However, this method is influenced by many factors: the development of the stock market determines the scope, scale, speed and cost of issuance; the reputation of the bank. In addition, the issuance of shares must be approved by shareholders because this will affect the ownership ratio and the rights of shareholders. If the issuance of additional shares is not linked to effective investment activities, it will not improve

The bank's business performance will cause the market price to fall, which is not acceptable to shareholders.

- Additional equity profit :

For joint stock banks, after-tax profits after covering special expenses are usually divided into two parts: one part is distributed to shareholders and the other part is retained. The undivided part is included in additional equity capital under the name of “retained profits” – accumulated fund. This part is essentially owned by shareholders, but is retained to expand the scale of equity capital, serving long-term investment and business activities. For state-owned commercial banks, after-tax profits after deducting losses (previous year) and special expenses are allocated to supplement equity capital according to State regulations. Many banks in their operating charters stipulate a charter capital level (at least equal to legal capital) and regularly supplement it by profit allocation to reach the charter capital level.

Increasing equity through accumulation is an important and stable source of investment capital. Accumulated capital does not change the ownership ratio of shareholders but also increases the market price of shares. The size of this capital source depends on business performance, retained earnings ratio as well as the views of the bank's leadership team.

- Funds : Banks have many funds, each with its own purpose. The funds are owned by the banker. The source of these funds is from the bank's income. These funds can be used for business or investment on a refundable or non-refundable basis, depending on the purpose of the funds.

 Capital preservation fund : In inflationary conditions, equity capital depreciates. To preserve value, banks set aside capital preservation funds calculated according to the inflation rate.

 Loss reserve fund : the bank sets aside reserves to cover losses due to business risks (if any). That is the loss reserve fund. If the bank's losses are less than the amount set aside, the owner's equity will increase and vice versa.

 Surplus fund: During operation, the market price of bank shares may be greater than the par value. When issuing new shares, the selling price of shares may be higher than the par value. The difference between the market price and the par value is called capital surplus. In addition, the value of bank assets often changes according to market prices, especially securities and real estate. Changes between the market price and the purchase price of the assets at the time of valuation are also included in capital surplus. This fund often fluctuates in line with changes in the market price of the bank's asset portfolio.

 Investment funds: Some banks carry out special lending activities, often under the direction of the Government. These banks may be provided with special capital by the Government in the form of a loan fund. This fund does not have to be repaid to the Government. For state-owned banks, this fund has a similar nature to state capital and is therefore accounted for in equity.

 Other funds : Banks often set aside funds from after-tax profits such as bonus funds, welfare funds, training funds, research and development funds for new products, etc. These funds are used for research investment activities and investment in human resources during the period.

- Additional capital by issuing convertible debt securities

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Medium and long-term loans through the issuance of debt securities are possible

Converting into equity is also considered as equity even though it has the nature of debt (must be repaid) due to some characteristics such as long-term use, can be invested in houses, land and may not have to be repaid when due. However, this capital is often limited and tightly controlled.

In addition, depending on each stage, investment capital for improving competitiveness can also come from funding from international organizations, however this source of capital is not regular.

To have equity capital, certain costs are required. The components of equity capital have different costs. Some types have costs included in the bank's costs (capital use tax on budget capital, interest paid on long-term bonds, underwriting costs, securities issuance costs, etc.). Some costs are deducted from after-tax profits before being divided at a certain rate, such as preferred stocks with fixed or floating interest rates that do not depend on business results. Therefore, when using them for investment activities, it is necessary to calculate carefully and manage closely to limit wasteful and ineffective use of capital.

Banks need to take measures to increase equity capital to invest in improving competitiveness. Finding sources of capital for investment activities to improve competitiveness must meet the scale requirements, always ensure stability and reasonable costs.

1.2.5. Investment model and process to enhance the competitiveness of commercial banks

Investment model to enhance competitiveness at commercial banks:

System of indicators to evaluate results and efficiency

Competitive strategy

Competitive goals

Competitive tools

Competitiveness factors need focused investment

Competitive position of commercial banks

Investment Strategy Investment Size + Investment Allocation + Investment Execution and Management

Figure 1.1: Relationship between investment and competitive position of commercial banks

The model shows the close, interactive and continuous relationship between investment in improving competitiveness and the competitive position of commercial banks.

- Tightness, interaction:

+ From the competitive position, it is possible to determine the investment strategy to improve competitiveness, especially how much capital needs to be mobilized and how to allocate capital? For example, at a certain stage, when a bank determines that its market share is lower than that of its competitors due to poor product diversity and poor quality, the bank will develop a competitive strategy with the goal of increasing market share through product tools (quantity and quality of products). To diversify and improve product quality, the bank will have to focus on improving technology level, determining the level of technology, and which type of technology meets the requirements. On that basis, the bank determines the total investment capital needed to be mobilized as well as allocates capital in appropriate proportions for investment activities.

However, from the competitive position, it is not possible to directly determine the scale of capital and capital allocation, but must go through the construction of competitive strategies with many other related factors. Therefore, it is difficult to quantify exactly how much market share (%) to increase, how much investment capital is needed.

+ Investment in improving competitiveness determines the competitive position of commercial banks because investment changes the factors of competitiveness. That is the result and effectiveness of investment activities to improve competitiveness. The relationship in this direction can be accurately quantified through a system of both qualitative and quantitative indicators ( presented in section 1.2.6 of chapter 1 ).

- Continuity: the competitive position of a bank is always at risk of change due to changes in the business environment and competitors. Therefore, to maintain, consolidate and develop its position, the bank must continuously maintain investment activities to improve its competitiveness. The investment process repeats itself but with different levels and contents at each stage.

Based on the model of the relationship between investment and competitive position of commercial banks, it is necessary to concretize it into a process to direct investment activities to enhance competitive capacity to bring the highest efficiency. The process includes the following steps:

Step 1: Assess the competitive landscape

This step includes assessing your competitive position, competitors and the current competitive environment. The bank needs to identify key competitors and potential competitors. The competitive environment assessment includes: competitors; customers; input suppliers; potential substitute products and services; policies and regulations that may affect the competitive situation.

Step 2: Build a competitive strategy

Based on the assessments and comments of step 1, the bank needs to develop a competitive strategy in which it determines the competitive goals, focuses on competing in which areas, which areas are strengths that need to be further consolidated, and which areas are weaknesses that need to be strengthened. In the competitive strategy, the bank must also identify key competitive tools to achieve the goals.

Step 3: Build investment strategy and plan

From the competitive strategy, the bank builds an investment strategy and plan. The important content in the investment strategy is to determine the capital scale, the source of capital mobilization, the method of capital mobilization, the capital allocation, the order of priority, at what time, the investment management method, etc.

Step 4: Conduct investment activities

After having an investment strategy and plan, the bank implements specific investment activities, including: bidding, purchasing, construction, working with partners, testing, etc. This step requires strict supervision, control, decentralized management, assignment of work and scientific coordination between departments to ensure the correct direction, progress and budget in the plan.

Step 5: Evaluate results and investment efficiency

This step is to gain experience and make timely adjustments when necessary. To carry out this step, the bank evaluates and calculates the results and efficiency indicators to see whether the target has been achieved or not, and to what extent. The competitive position of the bank after investment is the result and efficiency of the investment activity.

enhance competitiveness. At that time, an investment process ends and also begins a new investment process in the next stage.

1.2.6. System of indicators to evaluate the results and effectiveness of investment in improving competitiveness at commercial banks

1.2.6.1. System of indicators for evaluating results

The results of investment activities to improve competitiveness at commercial banks are reflected in the fluctuations of indicators reflecting the competitiveness of banks. Among them, there are indicators that are directly affected, there are indicators that are indirectly affected by investment activities to improve competitiveness, there are indicators that are quantifiable but there are also indicators that are qualitative in nature. Therefore, the results of investment activities to improve competitiveness at commercial banks are reflected through a system of indicators belonging to the following groups: the group of indicators reflecting direct results, the group of indicators reflecting indirect results, and the group of qualitative assessments.

However, depending on the competitive strategy of each stage, the bank determines appropriate performance evaluation criteria, it is not necessary to use the entire system of criteria.

For example, in the early stages of development, banks build a competitive strategy with the goal of increasing market share and using the distribution channel as a competitive tool. The bank will focus on investing in infrastructure development. The result will be fluctuations in the distribution channel system (number of branches, transaction offices, ATM network). At the stage when the bank has a certain position, the bank pursues a competitive strategy with the goal of leading in profits. The competitive tool is determined to be diversifying and improving product quality. At that time, the bank will focus on investing in technology and evaluating the results through indirect indicators (profit fluctuations, profitability ratios, total assets, etc.) and qualitative assessments.

(1) Group of indicators reflecting direct results

Indicator 1: Number of trained staff increases annually ( ∆ DT)

∆DT = DT i – DT i-1 (1.6)

In which: DT i : Number of workers trained in year i

Number of employees trained in year (i- 1 )

Indicator 2: Changes in labor structure by professional qualifications

This indicator, if calculated annually, will not fluctuate much and will not reflect the results of investment because improving professional qualifications requires a training process of several years. Therefore, this indicator can be calculated for a period of 3-5 years.

Indicators (1) and (2) reflect fluctuations in labor capacity, which are a direct result of investment in improving the quality of human resources.

Indicator 3:) Number of transaction points (branches, transaction offices) increases annually ( ∆ ĐGD)

∆ĐGD = ĐGD i – ĐGD i-1 (1.7)

In which: DGD i : is the number of branches and transaction offices in year i.

i-1 : is the number of branches and transaction offices in the year (i-1).

This indicator reflects the fluctuation in the capacity of the distribution system, which is a direct result of infrastructure investment and distribution channel expansion.

Indicator 4: Number of automatic transaction points (ATM and POS) increased annually ( ∆ ĐGDTĐ)

∆ĐGDTĐ = ĐGDTĐ i – ĐGDTĐ i-1 (1.8)

In which: ĐGDTĐ i : is the number of automatic transaction points in year i.

i-1 : is the number of automatic transaction points per year (i-1).

This indicator also reflects fluctuations in the capacity of the distribution system, but is also a direct result of investment activities to improve technology levels.

(2) Group of indicators reflecting indirect results

Indicator 1: Annual increase in charter capital (∆VDL)

∆VĐL = VĐL i – VĐL i-1 (1.9)

In which: Charter capital i : charter capital in year i

Charter capital i-1 : charter capital year (i-1)

Indicator 2: Annual increase in equity ( ∆ Equity)

∆VCSH = VCSH i - VCSH i-1 (1.10)

In which: VCSH i : owner's equity in year i VCSH i-1 : owner's equity in year (i-1)

Indicator 3: Total assets increased annually ( ∆ TTS)

∆TTS = TTS i – TTS i-1 (1.11)

In which: TTS i : Total assets in year i

TTS i-1 : Total assets year (i-1)

Indicator 4: Annual increase in profit after tax ( ∆ LNST)

∆ PAT = PAT i – PAT i-1 (1.12)

In which: LNST i : Profit after tax year i LNST i-1 : Profit after tax year (i-1)

Indicator 5: Annual increase in profit rate

∆ROA = ROA i – ROA i-1 and

∆ ROE = ROE i – ROE i-1 (1.13)

In which: ROA i , ROE i : Profitability ratio of year i ROA i-1 , ROE i-1 : Profitability ratio of year (i-1)

Indicator 6: Fluctuation of capital adequacy ratio (∆CAR)

∆ CAR = CAR i – CAR i-1 (1.14)

In which: CAR i : CAR coefficient of year i

CAR i-1 : CAR coefficient year (i-1)

Indicator 7: Fluctuation of asset quality ( ∆TLNX)

∆ TLNX = TLNX i – TLNX i-1 (1.15)

In which: TLNX i : Bad debt ratio in year i

TLNX i-1 : Bad debt ratio year (i-1)

Indicators from (1) to (7) reflect the fluctuation of financial capacity - one of the important criteria showing the competitiveness of commercial banks. However, these are indicators indirectly affected by investment activities to improve competitiveness.

Indicator 8: Annual sales fluctuation (∆DS)

∆DS = DS i – DS i-1 (1.16)

In which: DS i : Sales in year i

DS i-1 : Annual sales (i-1)

Indicator 9: Annual market share change (∆TP)

∆TP = TP i – TP i-1 (1.17)

In which: TP i : Market share in year i

TP i-1 : Market share year (i-1)

Market share is an indicator reflecting the market dominance of a bank's service, calculated as a percentage of sales/balance at a given time/number of customers using the bank's service compared to the entire market.

The two indicators 8 and 9 are calculated for some main products of the bank: mobilization, lending, international payment, foreign exchange trading, etc., reflecting the fluctuations in operating capacity and most clearly reflecting the competitive position of the bank.

Indicator 10: Changes in income structure from business activities:

The structure of a bank's operating income is usually calculated by the ratio of interest income to non-interest income. The higher the ratio of non-interest income, the more diversified the bank's business activities are and the better the ability to disperse risks.

This indicator reflects the change in technological capacity that affects the ability to diversify products. If calculated annually, there will not be much fluctuation and it will not reflect the results of investment because to change the income structure, it is necessary to go through a process of several years. Therefore, this indicator can be calculated for a period of 5 years.

Indicators from (8) to (10) reflect the change in the bank's operating capacity under the impact of investment activities to improve competitiveness.

(3) Group of qualitative assessments

(i) Changes in technological capacity: in addition to quantifiable results such as changes in modern distribution channels and income structures, changes in technological capacity are also reflected in many other aspects that are difficult to quantify, such as impacts on product features, operating processes, etc.

(ii) Changes in management and administration capacity: reflected in changes in the management's ability to monitor and respond to market developments; changes in the quality and effectiveness of policies and operating procedures, internal controls; changes in organizational structure; level of coordination between departments and the ability to adapt and change the structure.

(iii) Changes in service quality : reflected through the level of customer satisfaction with the manners, attitudes, and service skills of bank staff, with transaction facilities, etc.

1.2.6.2. System of performance evaluation indicators

Effective investment in improving competitiveness must have a positive impact on the goal of competition. The goal of competition can be to increase sales, increase market share, increase profits or all three, depending on the competitive strategy of each bank in each period. Investment, through its impact on technology, human resource quality, management and operation capacity, product quality, etc., has impacted sales, market share and profits. Therefore, the effectiveness of investment activities to improve competitiveness at commercial banks can be assessed through the following criteria:

(1) Sales increase compared to investment capital (∆DS/Iv)

∆DS/Iv = (DS i – DS i-1 )/ Iv i (1.18)

This index is calculated for each product, which are the main products of the bank. Depending on each stage, it can be calculated for different products.

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