Net Interest Income Ratio From Tdtd In The Period 2015-2019

September 30, 2019, contributed to helping VPBank achieve a lending profit margin of 8.7%, much higher than the operating profit margin of the parent commercial bank alone of 4.5% and the banking industry in general of 3%.

In fact, the scale of outstanding loans and business performance achieved by affiliated financial companies in the period of 2014-2019 was not only due to major reforms in the ownership structure and changes in business models, but also due to appropriate methods of developing credit through aspects of credit products, distribution channels and markets, as well as organizational and management capacity to ensure credit quality. In addition, there are a number of reasons from factors affecting credit development of affiliated financial companies such as business environment, legal environment, politics, etc. Detailed analysis from annual data of financial companies and customer survey results, interviews with experts/officers of financial companies clearly show these reasons.

3.2.3.4. Bad debt ratio

The risks from the credit activities of financial companies mainly come from loans that customers cannot repay the principal and interest when due. This is a major risk and directly affects the operations of financial companies, causing capital loss and reducing the net interest income of financial companies. Analyzing the bad debt ratio (NPL) from credit activities of affiliated financial companies will show the status of consumer loans of financial companies and the safety in the operations of affiliated financial companies.

Table 3.16. Bad debt ratio in the period 2014-2019

Unit: %

STT

Bad debt ratio	2014	2015	2016	2017	2018	2019
1	FE Credit	4	4.05	6	5	5.98	6
2	HD Season	3	4.6	5.18	5.73	6.3	6.21
3	MCredit	N/A	N/A	N/A	N/A	5.93	7.9
4	SHB Finance	N/A	N/A	N/A	N/A	2.29	3.52

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Source: 2014-2018 (Fiingroup), 2019 (author's own calculation based on information from Virac)

In terms of the risk nature of subprime credit activities, the average NPL of financial companies is always double the banking industry's target. In the period 2016-2019, the NPL ratio of HD Saison and FE Credit fluctuated between 5%-6%% while the industry's NPL threshold was 4.68%. The reason comes from the rapid increase in the scale of outstanding credit balance of these financial companies.

causing bad debt from KHCN and making FE Credit and HD Saison bear bad debt up to

3,365 billion and 682 billion VND of bad debt at the end of the third quarter of 2019. Thanks to the increase in provisions and the use of most of the reserve fund to write off debt, FE Credit's bad debt ratio as of December 31, 2019 remained at 6%, equivalent to 2018. Meanwhile, HD Saison's bad debt ratio has increased slightly and has shown no clear signs of improvement over the past 6 years, from 4% in 2014 to 6.21% as of September 30, 2019. MCredit alone is the financial company with the highest bad debt ratio among its affiliated financial companies as of September 30, 2019 with a bad debt ratio of 7.9%, equivalent to VND 590 billion. In fact, in the bad debt structure of affiliated financial companies, most of the bad debt falls into groups 3 and 4, the proportion of group 5 is very small, specifically, in the 3,365 billion bad debt of FE Credit, there is up to 3,200 billion bad debt of group 3, accounting for 95% of the total bad debt, in the 682 billion bad debt of HD Saison, only 4% of bad debt belongs to group 5.

Unlike commercial banks that focus on lending at quite competitive interest rates, with an average interest margin of about 2%-3%, a high NPL ratio of over 3% will seriously affect profits. Financial companies are often willing to lend at high risk levels with interest rates 2-3 times higher than the average lending rate on the market (19%-44%/year), and thus still earn expected profits. In 2019, FE Credit's lending interest rate was about 40%/year, with an average NIM of 28%/year, enough to ensure that FE Credit achieved a return on equity of about 28% despite an NPL ratio of 6%.

3.2.3.5. Minimum capital adequacy ratio

Table 3.17. Capital adequacy ratio CAR in the period 2014-2019

Unit: %

STT

Capital Adequacy Ratio	2014	2015	2016	2017	2018	2019
1	MCredit	N/A	N/A	N/A	N/A	13.6	12.0
2	FE Credit	13	11	12	13.2	16.1	16.3
3	HD Season	15.1	10.2	9.1	12.5	19.7	17.7
4	SHB Finance	N/A	N/A	N/A	N/A	84.7	22.2

Source: 2014-2018 (Fiingroup), 2019 (author's own calculation based on information from Virac)

In the period 2014-2019, the minimum capital safety ratio of affiliated financial companies has always been high compared to commercial banks. This shows the safety level of assets of affiliated financial companies against potential risks in business operations, especially in the current unstable economic conditions. For FE Credit, the capital safety ratio CAR in 2019 reached 16.3%, a slight increase compared to 2018.

(16.11%) but significantly improved compared to 2017 (13.2%) thanks to a 2.854% increase in charter capital (equivalent to a 64% increase) from retained earnings (from 4,474 billion to 7,328 billion) but still lower than the average CAR of financial companies (19%). Thus, FE Credit's capital safety level is at an average level and has been stable for 2 consecutive years, still lower than the industry average threshold, showing the pressure to increase capital in the coming time. For HDSaison, this financial company has continuously increased capital in the period of 2014-2018 from 527 billion in 2014 to 1,400 billion in 2019 and currently its charter capital has reached 2,000 billion. Thanks to efforts to increase charter capital, CAR in 2017 was above the minimum level of 9% and increased to 19.7%, equivalent to industry CAR in 2018. MCredit and SHB Finance are only slightly above the required CAR level and are still quite far from the industry average CAR.

Thus, in the process of operation and credit granting, the affiliated financial companies always comply with the regulations on safety indicators in operation according to the current regulations of the Law as well as of the State Bank of Vietnam. However, most financial companies need to have a plan to increase charter capital according to the roadmap to ensure the level of safety in business operations.

3.3. Assessment of the current status of consumer credit development of financial companies under commercial banks in Vietnam

3.3.1. Achievements and causes

3.3.1.1 Achievements

Firstly, financial companies under commercial banks successfully applied traditional credit development methods suitable to the characteristics of the credit market in the period 2014-2019.

From the analysis of the current status of the credit development methods of the affiliated financial companies, it can be seen that the affiliated financial companies have all developed in the right direction and achieved good results in credit development. In terms of credit products, for financial companies such as FE Credit and HD Saison, the strategy of specializing in core credit products and developing the number of core products according to the needs of many customer groups has helped the financial companies rise to dominate the market share and take the leading position in the field of specialization. Newly joined financial companies such as MCredit and SHB Finance with product strategies focusing strongly on the cash lending segment, which still has a lot of development potential, have had outstanding credit growth in a short time. In terms of distribution channels, the current status of developing the traditional POS distribution channel based on the business model associated with partners of FE Credit and HD Saison is suitable for the culture and behavior.

consumption of KHCN in the period of 2014-2019, helping CTTC get closer to customer needs and achieve expected outstanding loans. In addition, developing modern distribution channels according to market trends and increasingly clear digital thinking of customers in the period of 2020-2025 helps CTTC update and adjust business models in a timely manner, preparing for the next stages of TDTD development.

Second, contributing to creating the main income of the affiliated financial companies.

Table 3.18. Net interest income ratio from TDTD in the period 2015-2019

Unit: %

STT

CTTC	2015	2016	2017	2018	2019
1	MCredit	N/A	N/A	N/A	98.3	95.6
2	FE Credit	93.2	91.8	88	86	86.5
3	HD Season	97.6	98.8	95.2	84.5	85
4	SHB Finance	N/A	N/A	N/A	96.7	94.2

Source: Author's own calculation based on reports from Fiingroup and Virac

In the period 2011-2014, financial companies under the Group mainly lent to member companies of the Group or co-invested with commercial banks to lend medium and long-term capital, and credit activities were almost not implemented. Therefore, the revenue of financial companies during this period did not come from consumer loan interest but from interest collected from corporate customers. The period 2015-2019 was the period when the affiliated financial companies completely passed the stage of ownership transition from the Group and focused only on implementing credit activities, the results were completely positive. The data in Table 3.17 shows that income from consumer loan interest was the main source of income for the affiliated financial companies during the period 2015-2019. For the affiliated financial companies, most of the net revenue came from net credit interest income, accounting for more than 80% of the total income before annual RRTD provision.

Third, risk management is gradually approaching international practices, and the quality of credit is maintained in a safe and effective manner.

Two of the four affiliated financial companies, including FE Credit and HD Saison, have successfully established and deployed a centralized risk control model in which the organizational model has separation and sufficient personnel to deploy an internal control system with 03 independent lines of defense, although the operational efficiency has not been clearly verified due to the short implementation time. Moreover, the risk management activities of these financial companies are all under the supervision and direction of the parent commercial bank with experience in applying Basel II standards, so the operations will gradually go in the right direction and bring long-term benefits to the financial companies. Affiliated financial companies

The rest are also implementing similar projects to ensure risk management activities are in line with international practices.

After merging with commercial banks, the affiliated financial companies have clearly changed in credit quality thanks to the operational experience and good orientation of commercial banks. In the period 2014-2019, the group of financial companies including FE Credit and HD Saison were the financial companies with bad debt ratio maintained at around 5%-6% but still achieved the efficiency target.

Fourth, enhance the position of the parent commercial bank, affirm the right direction of commercial banks when implementing the TDTD model at CTTC.

In the period 2014-2019, for joint stock commercial banks, the development of credit is an important strategy of commercial banks to enhance the position of commercial banks in the market. FE Credit is one of the main growth drivers that VPBank has focused on implementing in recent years and has contributed greatly to VPBank's position in the market in terms of outstanding loans, pre-risk revenue and profits. Because the TDTD model is riskier than standard lending, the lending margin is higher than that of commercial banks (about 27% compared to 3%-4% of commercial bank loans), FECredit's revenue accounts for 50% of total consolidated income although it only contributes 23% of profit, and at the same time contributes to bringing VPBank's consolidated lending NIM to the top 3 of the industry (9.5%) in 2018. According to information updated from the website vietnambiz.vn on June 25, 2019, VPBank ranked 6th in the Top 6 prestigious Vietnamese commercial banks and Top 2 prestigious joint stock commercial banks, Top 5 commercial banks with pre-tax profits, Top 4 commercial banks in terms of consolidated pre-risk revenue in 2019.

HD Saison was named by the press as the "golden goose" of HDBank during the period 2017-2019, in which 2018 was the year of a leap in efficiency with after-tax profit reaching 719 billion, an increase of 72.8% compared to 2017, with ROE of 40%, quite high in the consumer finance industry, contributing significantly to HDBank's total consolidated income during this period.

MCredit and SHB Finance have just entered the market but have had very positive growth in consumer loans and ensured capital safety, showing the potential to contribute to the parent bank's income in the coming time.

Fifth, actively contribute to implementing the policy of limiting black credit according to the Government's direction.

According to Directive No. 12/CT-TTg on strengthening the prevention and combat of crimes and law violations related to black credit activities dated April 25, 2019 of the Prime Minister and related documents issued over the years, the task of combating black credit is required to be implemented by competent authorities, in

which requires the State Bank to "promote the application of science and technology, develop online lending and payment services, associated with administrative procedure reform, simplify loan procedures in a favorable direction so that all classes of people can easily access loan sources when requested". In fact, black credit mainly occurs with low-income individual customers who have difficulty accessing bank loans and lack understanding of the financial market. The credit activities of affiliated financial companies are being implemented with these subjects. With a total market share of up to 74% of outstanding credit loans in the whole market in 2019, affiliated financial companies have lent nearly

86,000 billion VND to millions of KHCN with income from 2 million - 7 million, average loan amount under 20 million VND/loan to buy household items such as washing machines, refrigerators, televisions or means of transport such as motorbikes, electric cars, even for beauty needs, electricity and water payments... Through the lending activities of affiliated financial companies, sub-prime credit activities are increasingly transparent and tightly controlled. Sub-prime customers, who are vulnerable in society, have the opportunity to access loans to improve their lives instead of having to borrow from black market lenders and suffer serious consequences both financially and mentally. Thus, the positive side of the credit development activities of affiliated financial companies is to help people avoid black credit, bringing civil activities into the legal framework. These are the social achievements that financial companies in general and affiliated financial companies in particular bring.

3.3.1.2. Reasons for success

Firstly, the development strategy of the affiliated financial company is linked to the general development strategy of the parent commercial bank.

One of the reasons contributing to the success of the affiliated financial companies in their credit activities is that the development strategy of the affiliated financial companies has been closely linked to the general development strategy of the parent commercial bank. The activities of the affiliated financial companies are strictly controlled by the parent commercial bank through established growth targets, helping the affiliated financial companies achieve the expected credit development, specifically:

- FECredit: In the 5-year strategy with the vision of becoming the leading joint stock commercial bank in Vietnam in 2017, focusing on developing the core segment of consumer finance and focusing on transforming the foundation systems such as specialized distribution channels according to customer segments and product groups. VPBank's strategy has had a positive impact on FE Credit's credit development during this period. In line with the parent bank's strategy, FE Credit's strategy during the 2014-2017 period focuses on developing credit by scale with the goal of gaining the leading market share. The credit development methods that FE Credit has implemented

Successful implementation includes diversifying TDTD products and developing sub-products to suit many customer segments, rapidly developing POS and DSA scale, covering the geographical market and strongly implementing sales promotion activities. Thanks to that, FE Credit has increased its market share from 11.3% in 2014 to 48.9% in 2017. According to information published on the website: vpb.com.vn, VPBank announced that it "set strategic goals for the period 2018-2022 with the ambition to become the most consumer-friendly bank thanks to the application of technology and to be in the top 3 most valuable banks in Vietnam. VPBank continues to pursue the goal of affirming its position in the market, which is to be in the top 5 private joint stock commercial banks and the top 3 private retail joint stock commercial banks in terms of customer loan scale, customer mobilization and profit". VPBank's development strategy in the new period led to a change in FE Credit's strategy: from focusing on growth in scale and market share while the risk management model was not commensurate in the period of 2014-2017, to a strategy of developing in scale but ensuring safety (implementing a digital product business model, perfecting a strict risk management system with upgraded quality standards and consistent development in the next period). As a result, in the period of 2018-2019, FE Credit maintained its existing market share, kept the bad debt ratio at 6%, and the profit growth rate decreased compared to previous years as a result of increased IT investment costs and bad debt provisions to ensure credit quality.

- HD Saison: HD Bank's strategy of ensuring safety and efficiency in lending activities has influenced HD Saison's development strategy. In the period of 2014-2019, HD Saison did not pursue TDTD development in scale with a sudden increase like FE Credit but had moderate growth. Resources were focused on developing the durable goods and transportation business thanks to the advantages of the parent commercial bank, strongly developing the number of POS. The capital safety target was considered important, leading to HD Saison, although maintaining its market share in the TOP 3 financial companies in terms of scale, the gap with FE Credit was getting wider and wider, with profits growing relatively better than FE Credit while the bad debt index was controlled at around 6%.

- MCredit: New strategic phase 2017 - 2021, in which MB orients the vision of "Becoming the most convenient bank" with the goal of being in the Top 5 Vietnamese banking systems in terms of business efficiency and safety by 2021. In the period 2017-2019, MBBank has implemented a business strategy with the goal of expanding

To ensure safety and security, key projects are implemented such as information technology, risk management capacity, and digital banking business transformation.

- SHB Finance: SHB Finance's development strategy is aligned with SHB's strategy with the desire to build a "purely Vietnamese" consumer finance company, developing sustainably, contributing to society and having a market ranking for effective operations. SHB Finance has set a 5-year goal of being among the top effective and safe consumer finance companies in Vietnam.

Second, the affiliated financial institutions have the capacity to develop basic TDTD products.

The ability to develop basic credit products is one of the reasons that helps the affiliated financial companies successfully deploy basic credit products in the market in the period of 2014-2019. The basic credit products are researched and deployed quite fully, helping the affiliated financial companies meet most of the spending needs of customers. The ability to develop products also helps the affiliated financial companies deploy credit products in accordance with business orientation and risk appetite, quickly adjusting products to suit customer needs or the management requirements of the financial company.

According to the interview results of product officers of affiliated financial companies, the development of credit products is always focused on and strictly controlled by the Executive Board of affiliated financial companies, ensuring that credit products are effective in accordance with the annual business strategy of the financial company. The development of credit products is not only implemented by independent product units and approved by the Executive Board, but also must be consulted and accepted by specialized units including credit risk management, legal, business, appraisal, approval, operation, and information technology. The affiliated financial companies all have quite similar credit product management organization models, internal product document systems, and product approval hierarchy. In order to ensure that the development of TDTD products is carried out in accordance with regulations and ensure efficiency, and prevent risks when designing TDTD products released to the market, all affiliated financial companies have developed and issued a Product Design and Management Process with full steps including: Product Design - Product Development - Product Pilot/Deployment - Product Management. Interview results with product officers of some affiliated financial companies show that the average time to develop a TDTD product is from 1 month to 6 months depending on the complexity of the product and the IT factor when developing the product.

Third, financial companies enjoy advantages from their parent commercial banks when implementing their operations.

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