and the credit institutions that the commercial banks selected to study and purchase securities are all units with good financial potential, so most of these investments are classified as qualified debt. Therefore, it can be assessed that in the period 2013 - 2019, the investment portfolio of listed joint stock commercial banks is relatively safe.
Fourth, commercial banks ensure liquidity.
During this period, listed joint stock commercial banks ensured liquidity, liquidity stress did not occur. Even at Eximbank, when employees swindled to appropriate customers' deposits, there was no situation of customers coming to withdraw money en masse, so liquidity was still guaranteed. In addition, during this period, in addition to treasury funds, listed joint stock commercial banks tended to invest in government bonds to increase secondary reserves, so all commercial banks ensured the liquidity reserve ratio according to regulations. Group 1 joint stock commercial banks (BIDV, VietinBank) tended to gradually reduce the LDR ratio to meet the liquidity requirements of the State Bank as well as the roadmap to reduce this ratio in the future. At the same time, during this period, listed joint stock commercial banks also restructured assets to gradually reduce the proportion of short-term capital for medium and long-term loans, meeting the regulations of the State Bank for safer liquidity.
Fifth, at some listed joint stock commercial banks, the profit margin increased but did not trade off profit and safety.
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6/13 commercial banks (VCB, MB, Techcombank, ACB, TienphongBank, HDBank) have increased profitability over the years while asset quality is guaranteed, bad debt ratio remains low (under 2%). This group of commercial banks has completed the purchase of all bad debt from VAMC, showing that commercial banks focus on profit along with ensuring safety. This is the basis for commercial banks to exist and develop sustainably in the future.
2.3.2. Limitations
First, about capital safety
- The equity capital of listed joint stock commercial banks is still limited, especially to meet the requirements of calculating capital adequacy ratio according to international practices.
+ For listed joint stock commercial banks in group 1 (except VietinBank) and group 2: In the period of 2013 - 2019, listed joint stock commercial banks in this group have expanded enough to initially implement governance according to Circular 41. However, the CAR ratio of some commercial banks in this group is not much higher than the minimum ratio (VCB, BIDV). At the same time, in the long term, when expanding business operations as well as applying Basel 2 internally, the equity capital of this group of banks is not high. For VietinBank, although it has completed the construction of a governance model according to Circular 41, the equity capital of this bank is still low. If calculated according to Circular 41, VietinBank's CAR ratio is 8% lower than the minimum.
+ For listed joint stock commercial banks in groups 3 and 4: In the period 2013 - 2019, in addition to the merger of Sacombank with Southern Bank, listed joint stock commercial banks in this group did not increase their charter capital through issuing additional shares. Therefore, compared to the amount of equity capital needed to apply Circular 41 and in the long term, Basel 2 according to the internal method, the equity capital of commercial banks in this group is still low.
- The implementation of pillars related to capital safety, calculation of capital adequacy or information disclosure according to Basel 2 of listed joint stock commercial banks still has limitations.
Although the capital safety ratio is ensured and information is disclosed in accordance with the regulations of the State Bank, compared to the pillars of Basel 2, this gap is still quite large. For pillar 1, some listed joint stock commercial banks (8/13 banks) have applied the CAR coefficient calculation according to Circular 41 (pillar 1 - Basel 2 according to
basic method). Meanwhile, for pillar 1, according to the Basel Committee's recommendation, listed joint stock commercial banks should apply internal methods. Accordingly, listed joint stock commercial banks must build their own models to estimate parameters based on existing data and in accordance with the characteristics of the bank. The construction of this estimation model has just begun to be researched and implemented at listed joint stock commercial banks in groups 1 and 2.
Regarding pillar 2 on calculating capital adequacy according to ICAAP, most listed joint stock commercial banks have not yet determined target capital (including calculating economic capital) based on risks (including other risks in pillar 2 such as concentration risk, interest rate risk in the banking book...) and have not yet monitored and have not had internal reports on capital adequacy.
For pillar 3 related to information disclosure of listed joint stock commercial banks, there is still a long way to go compared to Basel 2.
Second, about asset safety
Despite many efforts, the bad debts of many listed joint stock commercial banks have not been completely resolved because in reality, only 7/13 listed joint stock commercial banks (VCB, MB, Techcombank, ACB, TienphongBank, HDBank, VPBank) have completed the purchase of bad debts from VAMC before the due date, the remaining 6 listed joint stock commercial banks still have debts at VAMC. This means that the actual bad debt ratio of these commercial banks is relatively high because after purchasing bad debts from these commercial banks, VAMC authorized the debt settlement to commercial banks. Therefore, in essence, these bad debts have not been completely resolved.
In addition, the bad debt ratio reported by VPBank tends to increase throughout the period. This shows that VPBank's risk control in the credit appraisal and lending process is still limited, leading to the emergence of many new bad debts.
Regarding the risk compensation capacity (LLR), although listed joint stock commercial banks have set aside DPRR according to the regulations of the State Bank, if compared with the WB's recommendation on the LLR ratio, the LLR ratio of most listed joint stock commercial banks (except VCB, MB and ACB in the period 2017 - 2019) is not achieved.
Third, on liquidity security
Some listed joint stock commercial banks have not fully implemented the liquidity safety ratios. Regarding the liquidity reserve ratio, maintaining only cash to meet liquidity needs caused Sacombank's liquidity reserve ratio in 2017 and 2018 to not meet the requirements of the State Bank. Thus, it can be seen that although liquidity is ensured, if liquidity stress occurs, maintaining only cash will make it difficult for Sacombank to ensure liquidity. Regarding the LDR ratio, VietinBank and BIDV always maintain this ratio higher than the regulations of the State Bank (90%). Regarding non-state listed joint stock commercial banks, in the period 2017 - 2019, 8/10 listed joint stock commercial banks had this ratio higher than the regulations of the State Bank (80%). This shows that the mobilized capital of listed joint stock commercial banks is enough to meet lending needs but not enough to meet liquidity safety according to the regulations of the State Bank. If many listed joint stock commercial banks in particular and commercial banks in general continue to have this ratio higher than the regulations, it may lead to liquidity stress in the banking system.
Compared with international practice (Basel 3), the liquidity safety ratio of these listed joint stock commercial banks is still quite far away. Listed joint stock commercial banks still use about 30% - 40% of short-term capital for medium and long-term loans, while according to Basel 3 recommendations, commercial banks do not use short-term capital for medium and long-term loans. At the same time, the solvency ratio of listed joint stock commercial banks during this period remained at about 50% according to
regulations of the State Bank, lower than the LCR ratio recommended by Basel 3 of 100%.
Fourth, on profitability
- The proportion of net income from interest accounts for about 70% - 80% of the total net income of listed joint stock commercial banks, showing that the bank's income mainly depends on credit. Meanwhile, credit activities have many potential risks. When risks occur, especially macro risks, credit quality declines, the income of listed joint stock commercial banks will be greatly affected. Thus, the high proportion of net income from interest shows that the level of safety in the profitability of listed joint stock commercial banks is not high.
- Some listed joint stock commercial banks after merger or in the process of restructuring business operations still have many limitations, low profitability (Sacombank, Eximbank, NCB) while the actual bad debt ratio (bad debt ratio including debts sold to VAMC that have not been processed) is high. This shows that the financial safety level of these commercial banks is still limited.
2.3.3. Causes
2.3.3.1. Objective causes
First, the economic environment
In the period of 2013 - 2015, the economic environment had many negative developments, business activities stagnated, debt repayment capacity declined, leading to a high bad debt ratio. At the same time, in that economic context, handling bad debt with the resources of listed joint stock commercial banks or handling secured assets also encountered many difficulties.
In the period of 2016 - 2019, the recovery of the stock and real estate markets gave customers more investment options than in the previous period, so the growth rate of deposits at listed joint stock commercial banks was lower than in previous years. Meanwhile, high credit demand caused the growth rate to slow down.
Credit growth is higher than capital mobilization growth rate, leading to LDR ratio of many commercial banks in the research group being higher than the regulation of the State Bank.
Second, the legal environment
Although there have been many changes and timely additions to the system of legal documents, the legal documents are incomplete, inconsistent or outdated and no longer suitable for the practice of ensuring financial safety of banks. For example, according to the Government's regulations in Decision No. 986/ND-CP dated August 8, 2018, for state-owned commercial banks, the minimum state ownership is 65%. This leads to VietinBank being unable to issue more shares because the state ownership at the bank has reached the minimum threshold, while the state budget cannot balance the source to buy more shares. VietinBank's inability to increase its charter capital prevents VietinBank from expanding its business activities. At the same time, when applying the Basel 2 treaty, CAR at VietinBank may not reach the minimum level (8%). Or in Resolution 42/QH14 on bad debt settlement, many obstacles for commercial banks in the process of bad debt settlement have been removed, but there are still some obstacles in the implementation process such as: the right to seize secured assets, procedures for transferring ownership to the buyer of secured assets, etc. These difficulties and obstacles make it difficult for listed joint stock commercial banks to ensure financial safety in the period of 2013 - 2019.
Regarding the implementation of Basel 2, up to now, the State Bank has only issued documents regulating the application of Basel 2 according to the standard method through Circular 41/2016/TT - SBV and Circular 13/2018/TT - SBV. Thus, for listed joint stock commercial banks that have met Basel according to the standard method in 2019 and started to build models to estimate parameters themselves, the lack of relevant circulars and instructions from the State Bank will significantly affect the model building of banks.
Third, social environment
In addition to the activity of “borrowing to lend”, commercial banks also provide non-credit products and services such as: payment, consulting, insurance, etc. However, the awareness of banking services of the majority of Vietnamese people, especially in rural areas, is still low. The unwillingness to use non-credit services makes the proportion of net income from non-credit activities of listed joint stock commercial banks low.
Fourth, VAMC's activities in handling bad debt are not really effective.
The fact that commercial banks sell bad debts to VAMC is essentially just a matter of “cleaning up” the balance sheet because after purchasing bad debts from commercial banks, VAMC authorizes the banks to handle bad debts. Thus, in essence, listed joint stock commercial banks themselves are still responsible for this debt, so the bad debts of commercial banks have not been completely handled.
2.3.3.2. Subjective causes
Firstly, at some listed joint stock commercial banks, there are still many problems in business operations, making it difficult to increase charter capital.
During this period, except for VietinBank which did not increase its charter capital due to regulations related to legal regulations, NCB and Eximbank could not increase their charter capital because the business activities of these two listed joint stock commercial banks still had many shortcomings. For NCB, which originated as a rural bank, after the process of converting into a commercial bank, the bank's business activities contained many potential risks. In 2011, NCB (then Nam Viet Joint Stock Commercial Bank - NCB) was classified as a weak bank and was forced to restructure. However, the restructuring process did not bring significant achievements to improve its position in the market, so it could not issue shares to increase its charter capital.
For Eximbank, the constant changes in the senior leadership and scandals related to fraud and appropriation of customers’ money have resulted in low business performance. Therefore, issuing additional shares to increase charter capital has not been possible.
Second, credit risk management at listed joint stock commercial banks is still limited.
regime
The debt classification of listed joint stock commercial banks is currently mainly still
based on the overdue period of loans. Models for determining the ability to repay debts of customers according to Basel 2 are under construction at listed joint stock commercial banks. Therefore, these commercial banks have not yet followed the ability to repay debts of customers. Therefore, in the process of checking and monitoring the use of capital, commercial banks have not yet classified credit quality according to the ability to repay debts in order to have appropriate debt collection and handling methods.
At some listed joint stock commercial banks (Sacombank, VPBank, SHB, NCB), credit risks have not been strictly controlled, leading to bad debts occurring and tending to increase. In the period 2015 - 2018, after the first restructuring phase, listed joint stock commercial banks changed their business strategies, mainly shifting to the development orientation of becoming retail banks, increasing the proportion of consumer loans. Therefore, potential credit risks increased rapidly. In addition, some listed joint stock commercial banks (VPBank, NCB, SHB) focused on increasing outstanding loans more than credit quality, especially unsecured loans. Easy unsecured loan conditions and simple appraisal processes make these commercial banks unable to accurately determine customers' ability to repay, thereby making credit risks more likely to occur.
Third, operational risks and market risks have not received proper attention.
level
During the period 2013 - 2019, especially when Basel 2 was first implemented, listed joint stock commercial banks paid more attention to operational risks and market risks. However, the organizational structure for risk management has not really met the requirements of international practices. Risk appetite at banks is built at a basic level, the risk appetite framework has not been completed. Therefore, calculating capital adequacy according to Basel 2's advanced methods as well as calculating the level of capital adequacy for these types of risks still faces many difficulties.
Fourth, internal control and internal audit activities are still limited.
Although it has received attention recently, internal control activities have not really been effective in early warning of possible risks in banking operations. Internal control activities mainly focus on detecting and minimizing risks, not really on identifying risks. At the listed joint stock commercial banks selected for research, there is at least 1 member of the executive board - the person directly involved in approving a number of specific economic decisions - participating in the Board of Directors. This leads to risks in the bank's operations.
Regarding internal audit activities, internal audit at listed joint stock commercial banks mainly focuses on checking and detecting compliance issues and violations of regulations and laws. Therefore, internal audit cannot play a role in assessing risk management as well as providing early warnings of risks.
Fifth, moral hazard of bank officers and employees
Moral risks have a significant impact on the financial safety of listed joint stock commercial banks. Some moral risks have occurred in the period of 2013.
– 2019 negatively affected the financial security of a number of listed joint stock commercial banks such as: Eximbank officers and employees intentionally falsified documents to defraud and appropriate deposits of Eximbank customers, seriously affecting the financial safety of some listed joint stock commercial banks such as:
BIDV approved loans for 12 fake projects with a total amount of VND 4,700 billion, greatly affecting BIDV's asset quality.
Sixth, lack of database
One of the reasons why listed joint stock commercial banks have difficulty implementing Circular 41 and Basel 2 internally is the database. Basel 2 requires banks to have a good, accurate database with a minimum history of 5-7 years and updated regularly. However, in reality, listed joint stock commercial banks use multiple core banking systems at the same time, some types of documents were previously tracked on Excel or file files. This causes inconsistency in the information provided in statistical and analytical reports, reducing the accuracy of statistical data.
Seventh, lack of high-quality human resources, awareness of safety assurance of many employees of listed joint stock commercial banks is still limited.
The human resources of listed joint stock commercial banks are in a state of “both surplus and shortage”, with an excess of average quality human resources but a shortage of high quality human resources. While ensuring financial security, especially the implementation of risk management according to international practices, requires high quality human resources, which many listed joint stock commercial banks, especially small-scale listed joint stock commercial banks, are currently unable to meet.
Awareness of safety assurance among a part of employees of listed joint stock commercial banks is still limited, especially operational risks or market risks because the salary and bonus regime of banks depends on the level of completion of the employees' targets. Therefore, sometimes, employees, especially employees in the first control circle, are more interested in developing in breadth (growth) than in depth (safety).
Chapter 2 Conclusion
In chapter 2, the thesis has clarified the following issues:
Firstly, an overview of the formation and development process, an overview of the operations of listed joint stock commercial banks in Vietnam in the period 2013 - 2019.
Second, assess the financial safety status of listed joint stock commercial banks in Vietnam in the period 2013 - 2019 in terms of capital adequacy, asset safety, liquidity safety and profitability.
Third, compare the financial safety status of listed joint stock commercial banks in Vietnam in the period 2013 - 2019 with the standards of the Basel Accord.
Fourth, evaluate the results achieved, limitations, and point out the subjective and objective causes leading to limitations in financial safety of listed joint stock commercial banks in Vietnam in the period 2013 - 2019.
This is the basis for NCS to propose solutions to ensure financial safety of listed joint stock commercial banks in Vietnam in chapter 3.
CHAPTER 3:
SOLUTIONS TO ENSURE FINANCIAL SECURITY OF LISTED JOINT STOCK COMMERCIAL BANKS IN VIETNAM
3.1. ORIENTATION TO ENSURE FINANCIAL SECURITY OF LISTED JOINT STOCK COMMERCIAL BANKS IN VIETNAM
3.1.1. Opportunities and challenges of the banking industry
3.1.1.1. Opportunity
- Vietnam has signed many important international trade agreements such as: EVFTA, CPTPP, VJEPA, AFTA, RCEP,... These agreements come into effect, opening up many opportunities for the Vietnamese banking industry in general and listed joint stock commercial banks in particular. Specifically: (i) Listed joint stock commercial banks have the opportunity to increase charter capital from foreign investors when the limit on foreign investors' ownership ratio increases. For example, according to the agreement in the EVFTA, in the first 5 years, EU credit institutions will be allowed to buy up to 49% of shares of 2 Vietnamese joint stock commercial banks, except for 4 state-owned commercial banks (Agribank, VCB, BIDV, VietinBank). (ii) Listed joint stock commercial banks have the opportunity to expand their business operations to foreign markets through providing services within the framework of commitments. (iii) Listed joint stock commercial banks have the opportunity to cooperate with foreign commercial banks to receive technical and technological support in risk prevention and handling, improving banking management capacity in general and risk management in particular.
- The 4.0 revolution allows listed joint stock commercial banks in particular and the banking industry in general to apply modern technology and artificial intelligence in banking management as well as develop modern distribution channels.