Practices of Improving Business Efficiency of Some Banks in the World and Lessons Learned for Vietnamese Joint Stock Commercial Banks

2. Labor productivity

Total profit after tax

x 100%

Total number of employees

Reflects how much profit each employee generates for the bank.

3. Level of contribution to the economy

a. Contribution rate to the state budget

Corporate income tax paid by bank i

x 100%

Total corporate income tax revenue of the state

Demonstrates the level of contribution to the economic and social development of the country

b. The proportion of employment contribution to the economy

Number of employees of bank i

x 100%

Number of employees in the industry

Reflecting the bank ensures jobs and social security for people. However, this ratio should only be at a moderate level.

SUPPLEMENTARY INDICATORS GROUP

(Reflecting the causes of business efficiency)

1.Ratio of operating expenses to net operating income

Total operating costs

x 100%

Total operating income

Cost Management Efficiency Assessment: How much operating costs does it cost to generate 100 units of net income?

2. Bad debt ratio

Bad debt

Total outstanding debt x 100%

In 100 VND of total outstanding debt, how many VND are bad debts? This high ratio shows a high risk of capital loss.

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3. Lending market share

Bank balance i

x 100%

Total outstanding debt of the industry

Reflects how much bank i contributes for every 100 dong of outstanding debt of the banking system

4. Capital safety and liquidity indicators

a. Capital Adequacy Ratio (CAR)

Equity

x 100%

Total assets “With” risk

Is a basic measure to assess the financial health of a bank. This ratio in Vietnam

≥ 9%.

b. Liquidity reserve ratio

Liquid assets

x 100% Liabilities

Reflects the bank's ability to pay. This ratio is at least 10% for commercial banks.

c. Loan to deposit ratio

Total outstanding loans

x 100%

Total deposit balance

Reflects how much of every 100 VND of mobilized capital is used for lending. This ratio is reasonable at 80%.

d. Loan to asset ratio

Loan outstanding ratio

x 100%

Total assets

Reflects how many dong are in loans for every 100 dong of assets. This ratio is reasonable at 60%.

Rate of return

- This indicator is specified by the index ROA - Return on assets, ROE - Return on equity.

These are two financial indicators used in evaluating the most common profit margins of banking operations (Nguyen Van Nam and authors [61]; Peter and Sylvia [102]). These two indicators measure the efficiency and ability of the executive management in using assets and equity to generate net income.

- In addition, the author uses the NIM and NII indexes to reflect more deeply on the bank's profitability:

+ Net Interest Margin (NIM) reflects the difference between interest income and interest expenses that a bank can achieve through tight control of earning assets and pursuing the lowest cost of capital, determined by total interest income minus total interest expenses (net interest income) over average total earning assets. In which, total earning assets are determined by items such as deposits at the State Bank, at credit institutions, loans to other credit institutions, loans to customers, investment securities (Survey of the Vietnamese banking industry 2013 [37]). This ratio indicates the ability of the board of directors to maintain the growth of revenue sources compared to the increase in costs. Given the nature of the industry, the main input cost is the interest that banks have to pay to depositors, so the bank's profitability depends largely on the capital mobilization factor.

+ Non-interest income ratio (NII): reflects the bank's profitability more fully. NII includes the following components:

+ Net profit from service activities

+ Net profit from foreign exchange and gold trading

+ Net profit from trading of trading securities

+ Net profit from trading investment securities

+ Net profit from other activities

+ Net profit from capital contribution to purchase shares

The inherent characteristic of Vietnamese banks is that they depend too much on income from traditional lending activities. In the trend of development and international integration, to have good business efficiency, the proportion of income from services must be as high as possible.

If profits are high, joint stock commercial banks have the conditions to provide more benefits to workers and thereby have a greater impact on changing the face of society.

Labor productivity

Labor productivity reflects how much income each worker generates for the bank. It is the basis for workers to receive high or low income corresponding to their labor productivity and thereby reflects the social efficiency of the bank. The higher this ratio is, the better the bank's business efficiency is.

This is a comprehensive efficiency indicator, it has both economic and social efficiency. When labor productivity is high, it can support many dependents and contribute a lot to the overall development of society.

Level of contribution to the economy

Expressed through:

- The proportion of corporate income tax payment shows the level of contribution with the state to ensure social security and develop infrastructure, reflected through the amount of corporate income tax that the bank pays to the state budget. The higher this proportion is, the greater the social efficiency.

- Labor working in banks is a part of the total labor force in the national economic sectors in general and in the banking sector in particular. The higher the proportion of labor working in a bank, the more it proves that the bank has ensured jobs and social security for people, which means the higher the social efficiency. However, this indicator is moderately high to ensure the bank's labor productivity as well as reflect the level of technology replacing human labor.

Ratio of operating expenses to net operating income

This indicator shows the manager's management level in controlling.

expense.

Operating expenses include: Tax payments and taxes,

Fees, charges; Employee costs; Asset costs; Management costs; Deposit insurance costs; Other long-term investment depreciation provisions; Other costs.

Net operating income includes: net interest income, net profit from service activities, foreign exchange trading and securities investment, capital contribution to buy shares, other activities...

The smaller this index is, the better.

Bad debt ratio

(Bad debt is understood as debt belonging to groups 3, 4, 5 stipulated in Circular 09/NHNN [52]. Providing credit to organizations and individuals with higher risks will help banks earn higher profits. However, banks have to face the loss of capital and reduce bank profits due to having to set aside risk provisions. The loan portfolio is the largest component in the bank's balance sheet. Therefore, the bad debt ratio is considered an important component in determining business efficiency and safety in the operations of banks. According to international practice, this ratio is equal to or below 3% to ensure the health of credit activities.

High bad debt not only has a negative impact on the commercial banks themselves but also causes bad consequences for society and first of all for bank depositors.

Market share

Banks often compete with each other in terms of market share in deposits, loans, and cards.

... However, the bank's lending market share not only reflects the level of investment in the economy (ie social efficiency), reflects the bank's own income, but also shows the bank's position in comparison to the entire system, its ability to develop and compete in the future.

The larger the market share, the more significant the impact on customers and from there.

that has a big impact on society.

Capital safety and liquidity

- Capital adequacy ratio is the ratio of equity capital to risky assets [53]. Therefore, to gradually reduce the risks of the banking system, the State Bank of Vietnam (2012) [54] raised the capital adequacy ratio of banks in Vietnam to 9% to keep up with the regulations of the Bank for International Settlements (BIS) issued in 2011 [89]. This is the most considered and most noted ratio in the financial analysis of a bank.

In addition to maximizing profits, banks need to pay attention to the level of risk and liquidity because lack of liquidity is always the root cause of bank failures (Moody's) [101]. If banks reserve too much liquidity, they will miss the opportunity to make a profit from borrowed capital. On the contrary, lending too much will lead to a state of illiquidity, increasing the bank's risk. This indicator is shown through:

- The liquidity reserve ratio reflects the level of reserves of the most liquid assets to meet all financial obligations of the bank. This ratio according to Circular 36 of the State Bank is at least 10%.

- In addition, the author uses the Loan/Deposit Ratio and Loan/Asset Ratio to show the level of utilization of input capital to generate profit and also assess the level of liquidity reserves of the bank.

2.2.2.2. Group of qualitative supporting criteria

Trademark

A brand, simply put, is a name associated with a product or a manufacturer. Brands are increasingly becoming an important element in culture and in the economy today. A good brand means being associated with prestige, quality, and gaining the trust of target customers towards the bank. This criterion is measured by customer satisfaction and prestige through surveys and tests.

Diversification and quality of banking products and services

Product quality is the best fit for the needs and purposes of consumers. The quality of bank products and services can be assessed through surveys on the quality of service of employees and customer satisfaction when using banking products. Because the nature of banking products is closely linked to technology, the product quality factor here is also the achievement and compliance with the highest standards and requirements in terms of economy and technology level.

2.3. Practices in improving business efficiency of some banks in the world and lessons learned for Vietnamese joint stock commercial banks

2.3.1. Experience of some banks in the world

1). The case of Siam Commercial Bank (SCB) – Thailand

Siam Commercial Bank of Thailand, founded in 1906, is one of the largest and oldest banks in Thailand and was affected by the Asian financial crisis in 1997, putting it on the brink of bankruptcy. During the 1997 financial crisis, Siam had a large amount of bad debt (uncollectible loans of about 66.4 billion baht, accounting for 11.7% of overdue loans) and losses due to exchange rates. During that time, the value of each share of Siam was only 8.6 baht on the Thai stock market, lower than its capitalization. Siam's weaknesses that led to its turmoil during the crisis were its large customer base, poor risk management, investment in non-core products, unpopular brand, being a conservative bank, and staff management based on the level of responsibility.

In a continuous effort to sustain its business, Siam has also evolved its business-related organizational structure during the economic crisis and highly competitive market as shown in the diagram ( Appendix 2 ). The bank started its organizational redesign in 2001 by changing from a divisional structure to a corporate structure. In 2010, due to the economic instability in Thailand, the bank redesigned its organization again by introducing three main business lines. First, the spearhead business strategy consists of four groups to expand its customer base.

products, market share, building customer relationships. The second line is a specialized business line consisting of 5 subsidiaries. The products and services of this company are different from the main business lines of Siam and foreign banks in Thailand. The five subsidiaries provide products and services such as financial leasing, guarantees, insurance, investment, securities. The third line of business is defensive in nature and includes nine groups: IT, legal, financial systems, infrastructure, risk management, control systems, internal audit, human resources, and communications based on the determined strategy. In addition, bank owners have eliminated the boss mindset, monopoly in management, respected commitments, kept credibility in business, changed the mindset in relations with employees, making employees work loyally, committed to ensuring the quality of work. This is a limitation of banks in Vietnam, as many non-state-owned banks are organized and managed by many people with family relationships, so when the bank grows in size and its scope of operations becomes wider, the family's available capital and management skills cannot meet the demand; leaders rarely connect with employees in activities, and employee management is based only on the levels in charge, so employee loyalty is not high.

Thus, the key to overcoming the crisis and improving its business performance is that Siam Bank has changed its organizational structure and strategy to suit the market and, importantly, the change in the thinking of its leaders when this bank has been conservative and has not changed during nearly 100 years of development. As of 2010, Siam Bank has more than 1,000 branches and more than

8,000 ATMs. (Boriboon Pinprayong and Sununta Siengthai) [88].

2). The case of Bangkok Bank-Thailand

Bangkok Bank, established in 1944, is the largest commercial bank in Thailand and one of the largest banks in Southeast Asia. Bangkok Bank has 17 million accounts including corporate and retail customers, 230 business centers and more than 1,200 branches. Thus, about 1 in 4 Thais have a transaction account at Bangkok Bank.

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