For the above reasons, banking managers of all countries always clearly define and supervise banks to maintain a minimum capital adequacy ratio. In Vietnam, this ratio is currently 8%, similar to the Basel standard that is commonly applied by banking systems around the world.
When calculating the minimum capital adequacy ratio, two types of capital are considered: Tier I capital (core capital) and Tier II capital (supplementary capital), of which Tier I capital is considered to be more reliable and safe. In addition to the requirement to ensure CAR of 8% or more, banks must also ensure that total Tier II capital does not exceed 100% of Tier I capital.
2.2.2.6. System of indicators for analyzing the stock situation of commercial banks
Shares of commercial banks as well as other companies are traded on the market, reflecting the value of the company, reflecting the financial situation of the company. Therefore, analyzing the stock situation is an important content when analyzing the financial situation of commercial banks to provide information to information users including bank managers and investors (Hoang Thi Thu Huong, 2019).
The system of indicators for analyzing stock situation includes:
- Number of shares : is the total number of common shares in circulation, shares
Preferred and treasury stock.
- Book value of common stock : Is the stock value determined on the basis of
accounting data base
Book value per common share
= Equity – Preferred stock value
Number of common shares outstanding
(2.33)
Analyzing this ratio shows shareholders the change in the value of the stock.
usually after a period of operation of the commercial bank.
- Market value of shares (P): is the trading price of shares on the stock market. Market value shows the supply-demand relationship of shares on the market, the investor's assessment of the joint stock commercial bank.
- Basic earnings per share : EPS (formula 2.22)
- Dividend paid per share (D) : reflects the actual profit that the commercial bank pays to investors. Dividend depends on basic earnings per share and dividend payout ratio.
- P/E index is calculated by P/EPS: used to measure the relationship between current income and stock price, showing how many times higher investors are willing to pay per share than current income.
- The P/B ratio is used to compare the price of a stock with the book value of that stock. Formula: P/B = Market price of the stock (Price) / Book value of the stock (Book value per Share)
This ratio shows how many times the book value of a stock investors are willing to pay, which is related to the safety of long-term investors.
- D/P index: shows the dividend that investors receive for 1 dong spent on buying shares.
2.2.2.7. The system of indicators reflects the situation of compliance and implementation of policies and regimes.
To determine this indicator, it is necessary to base on the compliance and implementation of the policies and regimes issued by the State in the financial sector of commercial banks. There are a number of indicators to evaluate the compliance with safety regulations in lending, guaranteeing and investing such as:
Loan (guarantee) ratio for
=
with the biggest customer
Maximum customer debt level Owner's equity
x 100 (2.34)
Joint venture capital contribution ratio
buy shares of NH so
=
with charter capital of
business
Total capital contribution to joint ventures and share purchases compared to
The level of capital contribution to buy shares of the bank in a business
Charter capital of the enterprise
Total capital contribution of joint venture to buy shares of the bank
x 100 (2.35)
Bank's charter capital and reserves
= Charter capital and reserve fund
of NH
x 100 (2.36)
From there, there can be criteria to evaluate the following credit institutions:
- Credit institutions will be classified as A if they do not violate current legal regulations.
- Credit institutions are classified as B if there is a conclusion from a competent authority about violations of current State policies and regulations but not to the extent of being subject to administrative sanctions.
- Credit institutions that are administratively sanctioned for failing to comply with legal regulations or credit institution managers who violate the law in the performance of their duties to the extent of being prosecuted for criminal liability will be classified as C.
2.3. Overview of financial capacity of joint stock commercial banks
2.3.1. Concept of financial capacity of joint stock commercial banks
In fact, the term “financial capacity” is used quite commonly when evaluating the performance of organizations or businesses, but there is no official concept referring to this content. So what is the financial capacity of commercial banks? Below are the contents that the author of the thesis wants to analyze from a personal perspective.
Phan Thi Hang Nga & Hoang Thai Hung (2013) believe that “capacity” is a general category that represents the ability of socio-economic entities in various fields of activity. From the perspective of the entity, capacity can be a measure for an individual, an enterprise, a socio-economic organization or a department such as the capacity of employees, the capacity of business administrators, the capacity of the leadership apparatus, etc.
For each subject, “capacity” is also the ability to perform tasks and set goals. To have capacity, it can be the result of available factors, also known as advantages that subjects have and based on subjective factors that each subject grasps through their own measures (Pham Thi Van Anh, 2012).
With the above analysis, "capacity" in the author's understanding of the thesis is " The ability to achieve goals based on the available or subjective conditions of a subject for a certain activity".
“Commercial Joint Stock Bank Finance” is the movement of financial flows associated with the process of creating, distributing and using monetary funds arising in the business operations of the bank.
Thus, "Financial capacity of commercial banks" is the financial capacity for banks to effectively carry out and develop business activities based on available conditions or subjective factors that banks can grasp through their professional measures.
The financial capacity of a commercial joint stock bank is not only the financial resources that ensure the bank's business operations but also the ability to exploit, manage and use capital.
Use those resources effectively for business operations. Financial capacity not only shows current strength but also shows potential financial strength, prospects and future development trends of that bank.
2.3.2. Content of financial capacity of commercial banks
Based on the theoretical basis of financial capacity of commercial banks by authors Peter S. Rose (2004 ) ; Nguyen Viet Hung (2018); Phan Thi Hang Nga (2013); Phan Thi Hang Nga & Hoang Thai Hung (2013); Nguyen Thu Hien (2012); Pham Thi Van Anh (2012); Nguyen Van Thuy (2015), the content of financial capacity of commercial banks includes:
First: Financial capacity shows the ability to create capital of commercial banks.
The capital of a joint stock commercial bank is the total monetary resources that the bank creates and mobilizes to lend, invest and perform banking services. For a joint stock commercial bank, capital is a legal basis when starting operations, at the same time the scale and structure of the bank's capital are decisive for the scale, structure of lending, investment as well as the ability to provide banking services. Moreover, the ability to create capital is also to meet the liquidity needs of a joint stock commercial bank. From a macro perspective, the capital of a joint stock commercial bank is decisive for the growth and sustainable development of the economy. Although in many economies, in addition to capital mobilized through the banking system, capital is also concentrated through the stock market channel. However, with the nature of their business, joint stock commercial banks easily collect and "fully exploit" the idle money of all entities to meet the investment capital needs of the economy.
In addition to the owner's capital, the ability to create capital of a commercial joint stock bank is also reflected in the scale of mobilized capital that the bank receives. Through appropriate networks and measures, commercial joint stock banks mobilize temporarily idle capital sources from all economic entities to form their own capital use fund. The goal of each commercial joint stock bank is to mobilize capital to meet the needs of reserves, loans and investments at a reasonable cost in order to achieve the goal of safety and profit.
Second: The financial capacity of commercial banks is also reflected in the ability to "use capital".
If the capital that a commercial joint stock bank creates represents the “precondition” for the bank’s operations, the ability to use capital is considered the “decisive” factor for the performance of a commercial joint stock bank. A commercial joint stock bank can use the capital created to lend, invest or modernize banking technology to increase the quality of the banking products and services provided. Asset holding structure of a commercial joint stock bank
depending on the profitability target, liquidity safety as well as the risk tolerance of the bank. The ability to use capital of a commercial joint stock bank is first reflected in the scale of loans, usually loans account for the main proportion of the total assets of the bank. However, due to the high risk nature of lending, the current common trend is to reduce the proportion of loans in the asset structure of a commercial joint stock bank. Not only reflected in the scale of loans, the ability to use capital of a commercial joint stock bank is also reflected in the quality of loans, this is one of the most difficult requirements for the "art" of management of a commercial joint stock bank, from determining the target customer market, to the ability to appraise and monitor the use of loans, which are factors affecting the quality of loans.
With the requirement of risk diversification and profit seeking, commercial banks use a part of the capital created to carry out investment activities. The ability to use capital for this purpose is reflected in the efficiency of the investments and compliance with legal regulations as well as safety limits in banking business activities.
Third: Financial capacity shows the ability to achieve profit goals in business of commercial banks.
Like any other business, profit is the ultimate goal in the business activities of commercial banks. Profit is both a synthetic indicator reflecting the business results and a factor directly affecting the financial situation of commercial banks. Profit is an important condition to ensure the ability to pay as well as affirm the reputation of the bank in the market. Therefore, financial capacity shows the ability of commercial banks to achieve the profit target in their business.
Fourth: The financial capacity of commercial banks also includes financial security.
Banking is a business based on the word "trust", so financial security is a vital condition for a joint stock commercial bank. The ability to create and use capital shows the level of operational safety of a joint stock commercial bank. If a bank performs well in its ability to create and use capital, the safety of that commercial bank will be guaranteed and vice versa. On the other hand, due to the special nature of the business, banking activities have a "chain reaction", so the safety of banking activities is systematic. Therefore, when talking about the financial capacity of a joint stock commercial bank, it includes the level of ensuring the safety of the banking system's operations. This is also the point that shows the difference between the content of the financial capacity of a joint stock commercial bank compared to other enterprises.
Fifth : Financial capacity not only shows current financial strength but also shows potential financial strength, prospects and future development trends of that commercial bank.
When assessing the financial capacity of a commercial joint stock bank, people often consider it within a certain period of time or at a certain point in time. However, financial capacity does not only reflect the financial strength of the current commercial joint stock bank, because from the perspective of resources, financial capacity is considered a "springboard" for commercial joint stock banks to expand and improve the quality of their operations in the future.
Conclusion : With the above content, we can understand more fully the financial capacity of a joint stock commercial bank as follows: " The financial capacity of a joint stock commercial bank is the ability to create capital sources and use capital to meet the maximum needs in the process of business operations to achieve the set goals of the joint stock commercial bank. The financial capacity of a joint stock commercial bank is shown in the scale of equity capital, the scale and quality of mobilized capital, the quality of assets, the ability to generate profits and ensure safety in business operations" .
2.3.3. System of indicators to evaluate the financial capacity of commercial banks according to the Camel safety framework
According to Muhammad (2009), the quality of each factor determines the overall strength of a bank, emphasizing the internal capacity and the extent to which the bank can “take care” of itself against market risks. Barker & Holdsworth (1993) found the Camel system useful, acting as a model for predicting bank failure with the rating principle assigned based on both quantitative and qualitative information of the bank. Some existing academic studies are concerned with evaluating the effectiveness of the criteria when using historical data to rate in the future context of rapidly changing banking markets. Hirtle & Lopez (1999) examined the previous Camel criteria for assessing the current conditions of banks and they argued that the supervisory information contained in the previous Camel ratings provided more insight into the current conditions of the bank. In conclusion, after much debate, the information monitored by Camel ratings is still considered an effective way to assess the financial capacity of banks.
The Camel system analyzes five traditional aspects considered to be the most important in the operation of a financial intermediary. According to Nguyen Le Thanh (2012), the five areas reflect the financial conditions and general operating capabilities of a commercial bank, described as follows:
(1) C (capital) - Ability to balance capital: This is the equity of the commercial bank and the ability of the commercial bank to meet the increasingly expanding loans as well as
potential asset development directions that commercial banks need to achieve. CAMEL analysis system considers the ability of commercial banks to raise additional equity capital in case of losses and the ability and policy to establish reserves in case of operational risks. Indicators used for capital analysis:
- Rate of increase in equity capital
- Compliance with regulations on minimum capital requirement (CAR) – (8%)
- Financial leverage ratio L = total liabilities/Equity (avg 12.5)
- Capital reserve index = Actual capital loss reserve/Capital loss reserve adjusted according to CAMEL
(2) A (assets) - Asset quality. The overall quality of loans and other assets, including infrastructure loans. This requires consideration of the adequacy of loan classification systems, information collection processes and write-off policies.
- Loan portfolio/total assets = Outstanding loans/Total assets
- Bad debt ratio/total outstanding debt (1.5% according to international standards, 3.5% according to Australian standards)
- Overdue debt ratio/Total outstanding debt (Vietnam: 3%, International: 5%)
(3) M (management) - Management: Human resource management policies, general management policies of the organization, information systems, internal control and audit regimes, strategic plans and budgets are all considered separately to reflect the overall quality of management activities, human resource analysis and working style of: Board of Directors; Management Board; Relationship between the two parties... Results of management quality: Operating costs/total assets.
(4) E (earnings) - Profit: This is an important factor in the analysis of revenue and costs, including the efficiency of operations and interest rate policies as well as overall operating results measured by indicators. Analyzing the ability to generate enough income to cover costs and increase capital sustainably, the indicators used are: ROA must be greater than 1%; ROE must be 15% or more.
- Net interest margin (NIM) = (Interest income from loans and securities investments
– Interest payments on deposits and other debts)/Average total earning assets
(5) L (liquidity) - Liquidity: This is a factor used when analyzing the organization's ability to determine the need for project financing in general as well as the need for loan capital in particular. The organization's debt and equity structure, the ability to pay short-term assets are also very important factors.
important in assessing the overall liquidity management ability of the organization. Liquidity:
- Asset liquidity ratio = liquid assets/total assets (20-30%)
- Deposit guarantee ratio = liquid assets/total deposits (30-45%)
- Current liquidity ratio = liquid assets/total current liabilities (30%)
- Loan and deposit balance ratio = total loan balance/total deposits (80-100%)
Table 2.2. CAMEL criteria
Criteria
Meaning | Recipe | |
Capital adequacy | Capital adequacy ratio represents the amount of capital | - Rate of increase in equity capital - Compliance with regulations on minimum capital requirement (CAR) – (8%) - Financial leverage ratio L = total liabilities/Equity (avg 12.5) - Capital reserve index = Actual capital loss reserve/Capital loss reserve CAMEL Adjustment |
self-supporting for business operations | ||
(C-CAPITAL) | bank business. Bank | |
The more risks you take, the more rewards you get. | ||
requires a lot of equity to support | ||
banking operations and compensation | ||
potential loss related to the level | ||
higher risk | ||
Asset quality | Asset quality is a general indicator | - Loan portfolio/total assets |
(A-ASSETS) | integration of quality management, ability | = Credit balance/Total assets |
solvency, profitability and | - Bad debt ratio/total outstanding debt (1.5% | |
Sustainable prospects of a bank | by international standards, 3.5% by | |
goods. Most of the risks in business | Australian standard) | |
banking activities are concentrated towards | - Overdue debt ratio/Total outstanding debt | |
its assets, so together with ensuring | (Vietnam: 3%, International: 5%) | |
capital security is the issue of quality improvement. | ||
The amount of assets is an important factor. | ||
ensure banking operations. | ||
Management quality (M-MANAGEMENT) | Bank management is to create a system of unified activities, coordinate and link the labor processes of staff from departments to the board of directors in the bank, to achieve business goals in each determined period, on the basis of minimize resource costs. | Operating Expenses/Total Assets |
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