Profitability of Long-Term Investment Activities

Currently, the ratio of long-term investment income per contributed capital is very low and has tended to decrease in the last 3 years (Table 2.7).

Thus, it can be assessed that the structure of profitable assets of Agribank, although accounting for a large proportion and tending to increase over the years, the profitability of each type of assets has decreased and bad debt has increased, which is one of the reasons for liquidity difficulties for Agribank.

Table 2.7. Profitability of long-term investment activities

Unit: Billion VND

2008	2009	2010	2011	2012	2013	2014
Average long-term investment contribution	2534	2357	2472	3215	3107	2679	2651
Income from capital contribution to purchase shares	40	34	51	202	119	61	70
TN contributed capital to buy shares/ contributed capital ( )	1.58	1.44	2.06	6.28	3.83	2.28	2.64

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Source: [25]

Second, the TSC mechanism is not profitable.

Agribank's non-profitable assets are shown in the following indicators: Cash position index, treasury position, liquid securities index, proportion of fixed assets and other assets.

- Cash position and treasury position index

Table 2.2 shows that Agribank's cash position index has fluctuated slightly, generally being relatively stable over the years. As we know, cash is the most liquid asset to meet customers' withdrawal needs and the bank's own spending, but this is a non-profitable asset, so cash reserves need to be maintained at a reasonable level, according to Basel regulations (BCBS) - principles for strengthening corporate governance in banks, October 2010, the cash index should be in the range of 2-3%. Compared to this level, Agribank has maintained cash at a low level, which will increase the bank's profitability, but whether it affects the ability to pay or not depends on how much the bank holds other cash equivalents.

Specifically, we will consider the bank's treasury index. In contrast to the cash index, Agribank's treasury index has large fluctuations during times of liquidity stress and the general trend is to decrease over the years, especially sharply in 2010 and 2011. This is due to changes in Agribank's treasury structure. Table 2.8 shows that deposits at the State Bank always account for a large proportion of the bank's treasury. However, this component also has sharp fluctuations and declines during periods when the bank has liquidity difficulties and capital mobilization declines.

Table 2.8. Agribank's treasury structure

Unit: %

Target

2008	2009	2010	2011	2012	2013	2014
Cash	16.0	14.5	34.1	27.7	15.3	21.4	37.8
TG KKH at other credit institutions	6.35	11.05	13.89	11.90	2.71	3.65	3.87
Payment period at the State Bank	77.63	74.47	51.99	60.38	81.97	74.92	58.33
Total budget	36419	45832	22631	28886	49554	41698	28183

Source: [25]

According to the Regulation on Compulsory Reserves issued by the State Bank, credit institutions must maintain compulsory reserves on payment deposit accounts at the State Bank and according to the principle that the average balance of payment deposit accounts during the period of maintaining compulsory reserves is not lower than the compulsory reserve in the period. The compulsory reserve in the period is calculated on the basis of the average mobilized deposit balance of each type of deposit subject to compulsory reserves at the Head Office and branches of the credit institution during the period of determining compulsory reserves and the corresponding compulsory reserve ratio prescribed by the Governor of the State Bank for each period. In reality, credit institutions in general and Agribank in particular often maintain balances on payment deposit accounts at the State Bank and sufficient compulsory reserves according to the regulations of the State Bank. So the sharp decline in deposits at the State Bank in 2010 and 2011, both in absolute and relative terms, at a faster rate than the increase of the remaining components, caused the treasury index to decline sharply, which can be explained by the sharp decline in mobilized capital (Chart 2.1) - the subject of compulsory reserves according to the State Bank's regulations in 2010 and 2011.

- Liquidity stock index

The calculation results in Tables 2.2 and 2.9 show that Agribank's liquidity index remained low and decreased sharply in 2009 and 2010, then gradually increased but was still lower than in 2008. In 2009, Agribank no longer held SBV bills but mainly held government bonds and treasury bills, which are securities with the lowest risk and highest liquidity among all types of securities, but they often have low interest rates.

Table 2.9. Liquidity stock index

Unit: Billion VND

Target

2008	2009	2010	2011	2012	2013	2014
State Bank Bills	8773	0	0	0	0	0	0
KB bills	9463	2701	3162	614	978	867	0
CP Securities	14453	15111	16743	26768	30712	33987	30255
Total assets	391520	466020	519759	558371	612905	693355	794414
Liquidity Index ( )	8.35	3.82	3.83	4.88	5.17	5.03	3.81

Source: [25]

Agribank's liquidity index has decreased over the years, although it may increase the profitability of assets, on the other hand, it will affect the initiative in finding sources to compensate for liquidity shortages.

- Fixed assets ratio

The proportion of Agribank's fixed assets tends to increase over the years but not strongly and accounts for a small proportion of total assets, increasing from 0.9 in 2008 to 1.3 in 2013 (Table 2.2). This shows that Agribank has also paid attention to investing in facilities to serve the bank's business activities and has control and management within the permitted limits to increase the efficiency of using fixed assets in particular and assets in general of the bank.

- Other TSC density

Agribank's other assets account for a small proportion and tend to decrease over time.

t from 3.1 in 2008 to 2.9 in 2014 shows that the bank has increased the collection of receivables, reduced capital appropriation, contributing to making the bank's asset structure more reasonable.

Third, asset utilization efficiency

Table 2.2 also shows that the efficiency of using assets of Agribank is not high, shown in the income indicators of profitable assets/profitable assets and operating income/assets both decreasing over the years. It is worth noting that the ratio of operating income/assets is always greater than the ratio of profitable assets/profitable assets, showing that the efficiency of using profitable assets is not high, which also reflects that the asset structure is not reasonable.

Correlation between TSC and TSN

In the process of implementing LM, gribank has also paid attention to ensuring the correlation between TSC and TSN, which is reflected in setting out planning indicators on capital mobilization and capital use and based on the actual situation to adjust the structure of TSC and TSN appropriately to ensure the regulations of the State Bank, ensuring profit and safety targets. The results of adjusting this correlation are reflected in the following basic indicators:

- Ratio of profitable assets/mobilized capital

Table 2.10. Ratio of profitable assets/mobilized capital

Unit: Billion VND

Target

2008	2009	2010	2011	2012	2013	2014
Profitable TSC	328109	390373	447043	471873	524178	611484	722015
Capital mobilized	352405	426140	464963	491264	527787	603709	700124
Profitable assets/Working capital (%)	93.11	91.61	96.15	96.05	99.32	101.29	103.13
Average interest rate	5.06	3.89	4.21	5.43	4.78	3.14	3.14

Source: [25]

Table 2.10 shows that the ratio of profitable assets/mobilized capital tends to increase rapidly over the years, even reaching over 100 in 2013 and 2014, which proves that Agribank has fully utilized mobilized capital to invest in assets to bring in profits.

income to offset the cost of capital. However, the average interest rate difference tends to decrease, showing that the balance between assets and liabilities is not reasonable.

- Loan balance ratio/Mobilized capital

As shown in Table 2.2, loans are the asset that accounts for the largest proportion of Agribank's total assets and is also the asset that generates the main income for the bank. This asset is financed by mobilized capital. In fact, Agribank has balanced loans and mobilized capital based on the growth target of mobilized capital to decide on the growth target of outstanding loans.

Table 2.11. Credit to capital mobilization ratio

Unit: Billion VND

Target

2008	2009	2010	2011	2012	2013	2014
Outstanding Loans	287198	361661	422005	449945	476215	533147	600378
Capital mobilized	352405	426140	464963	491264	527787	603709	700124
Outstanding loans/Working capital ( )	81.50	84.87	90.76	91.59	90.23	88.31	85.75
TD granting rate in VND (%)	82.4	89.5	91.6	92.7	90.7	88.5	85.1
Rate of foreign currency credit (%)	73.7	54.6	83.7	78.2	83.1	83.7	98.1

Source: [25]

Table 2.11 shows that the credit granting ratio of Agribank's mobilized capital tends to increase over the years with a very large number (over 81 to over 91), which shows that mobilized capital is mainly used for credit granting, on the one hand proving that Agribank has expanded lending to serve the economy, but on the other hand also showing that capital mobilization still has limitations, especially capital mobilization in foreign currency in the past 3 years has tended to decrease, causing the credit granting ratio in foreign currency to increase significantly. However, the actual credit quality is not as high as analyzed in Table 2.4, which will reduce the efficiency of capital use of the bank, reducing the liquidity of assets. Realizing that, Agribank has gradually adjusted to narrow the credit granting/mobilized capital ratio and this ratio has tended to decrease since 2013.

here, however, is still at a relatively high level.

Profitability

Profitability can be assessed through the net interest margin (NIM). Table 2.12 shows that Agribank's net interest margin (NIM) is unstable and has been on a sharp downward trend in the past 3 years, meaning that the growth rate of net interest income is not commensurate with the growth rate of assets.

This is explained by two basic reasons: the profitability - generating income - of assets has decreased, although the proportion of profitable assets has tended to increase as analyzed in Table 2.2; in terms of asset structure, Agribank has not exploited low-cost capital sources in market 1, so it has to increase borrowing in market 2, leading to increased interest expenses, that is, interest expenses to finance assets increase while income generated from assets decreases, causing NIM to decrease.

Table 2.12. Agribank's marginal interest income

Unit: Billion VND

Target

2008	2009	2010	2011	2012	2013	2014
Interest income	42185	41778	53484	67628	64298	52132	57541
Interest expense	29900	30118	36623	44430	41427	34191	35790
Assets	391520	466020	519759	558371	612905	693355	794414
Average TSC	352453	428770	492889.5	539065	585638	653130	743885
NIM (%)	3.49	2.72	3.42	4.30	3.91	2.75	2.92

Source: [25]

2.2.2.2. Liquidity risk management of Agribank

Through the analysis of the structure of Agribank's assets and liabilities above, it can be seen that Agribank's liquidity has also had difficult periods. Although it has not yet fallen into crisis, Agribank has had to incur costly expenses to maintain it. To demonstrate this, we can consider the following two aspects: How are liquidity indicators maintained? How do market signals reflect the bank's liquidity?

a. Liquidity indicators of Agribank

With the current information system and database of Agribank, it is enough to apply the method to evaluate liquidity, which is the liquidity index method, but it does not meet the conditions to use the modern method, which is the maturity ladder method. The results of liquidity risk management are shown in the following indicators:

- The indicators of capital structure and assets reflect the liquidity of Agribank:

As analyzed in section 2.2.2.1, these indicators include: deposit structure index (chart 2.3 and chart 2.6), cash status index, treasury status index; liquid securities index and loan/total assets ratio (table 2.2). Thereby, it shows that in difficult periods of liquidity of Agribank, it is mainly due to unreasonable structure of assets and liabilities. The loan ratio is too high while credit quality seriously declines, reducing Agribank's liquidity. Meanwhile, mobilization in market 1 encounters many difficulties, leading Agribank to mobilize in market 2. Chart 2.3 shows that the mobilization ratio in market 2, although a modest number, tends to increase over the years. Obviously, excessive credit expansion, not commensurate with the growth rate of capital mobilization, leads to liquidity tensions, forcing Agribank to borrow more in market 2, thereby changing Agribank's "net position" in market 2.

First, consider the net position index of Agribank with respect to other credit institutions. This index is calculated as the difference between “deposits at and loans to other credit institutions” and “deposits from and loans to other credit institutions”. If this index is positive, it shows that Agribank deposits and lends more to other credit institutions than borrows from other credit institutions and vice versa.

Looking at chart 2.12, we see that Agribank's net position with other credit institutions has fluctuated over the quarters during the period but in general it has tended to increase, meaning it has shifted from being a "borrower" (quarter 4/08, quarter 2/09 - quarter 4/09) to being a "lender" for other credit institutions, which clearly shows the role of Agribank.

Agribank's role is to be a strong and prestigious bank in the interbank market.

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Q4/0 Q1/0 Q2/0 Q3/0 Q4/0 Q1/1 Q2/1 Q3/1 Q4/1 Q1/1 Q2/1 Q3/1 Q4/1 Q1/1 Q2/1 Q3/1 Q4/ 1 Q1/1 Q2/1 Q3/1 Q4/1

8 9 9 9 9 0 0 0 0 1 1 1 1 2 2 2 2 3 3 3 3

Net position with TCTD ≠ -1083 7088 -1409 -9423 -1850 7377 10280 15181 20959 21724 9994 16110 8871 9802 6613 5651 10254 9485 9503 6933 16340

Net position on TT 2 27165 44246 17479 2034 7616 15683 21615 34975 11793 4331 -566 12685 -6937 -6004 12788 19985 28145 16137 21514 25009 29232

T copper

Chart 2.12. Agribank's net position

Source: [31]

However, if we consider the net position index in market 2 of Agribank, there is a downward trend. The net position in market 2 here is determined to include the net position with other credit institutions and transactions with the State Bank, that is, the difference between "deposits at the State Bank, deposits and loans to other credit institutions" and "borrowing from the State Bank and deposits and loans from other credit institutions". Thus, if this position is positive, it reflects that the bank uses more capital than mobilizes capital in market 2 and vice versa, if this position is negative, it means that the bank mobilizes more capital in market 2, which also reflects the bank's liquidity in a state of tension.

Chart 2.12 also shows that although Agribank's net position in market 2 is mainly positive, there is a relatively large level of fluctuation between quarters of the year and a tendency to decrease, even at times decreasing to negative levels such as in the second quarter of 2011 and the fourth quarter of 2011. At times from the third quarter of 2010 and earlier, we can see that the graph line representing Agribank's net position in market 2 is above the net position line for other credit institutions, which means that Agribank's transactions with the State Bank are always in a positive position. However, from the fourth quarter of 2010 to the first quarter of 2012

The net position in market 2 is lower than the net position with other credit institutions, which means that Agribank borrows more from the State Bank while with other credit institutions, Agribank is still in the position of a lender. That shows that Agribank's capital balance is not good, but it also shows that Agribank's ability to access capital from the State Bank is very large. From the second quarter of 2012 until now, transactions with other credit institutions and with the State Bank are all in a positive state, showing that Agribank's liquidity is no longer in a tense state.

- Net loans/Total deposits

Table 2.13 shows that Agribank invested in lending activities at a very high level, even too much in the years 2009-2011, which affected the bank's liquidity, especially in the condition that the bank's bad debt had not been resolved as analyzed in Table 2.4 and Chart 2.11.

Table 2.13. Net loans/total deposits ratio

Unit: Billion VND

Target

2008	2009	2010	2011	2012	2013	2014
Net lending	278288	356963	413451	429264	454810	521703	569792
Deposit	316197	358084	400070	423332	507865	590911	662046
Net CV/Deposits (%)	88.01	99.69	103.34	101.40	89.55	88.29	86.07

Source: [25]

- Affordability ratio

During the research period of the thesis (2008-2014), the solvency ratios prescribed by the State Bank of Vietnam changed according to two documents of the State Bank of Vietnam, namely Decision 457/2005/QD-NHNN dated April 19, 2005, promulgating "Regulations on safety ratios in the operations of credit institutions" and Circular 13/2010/TT-NHNN dated May 20, 2010, promulgating "Regulations on safety ratios in the operations of credit institutions", effective from October 1, 2010. According to these two documents, commercial banks must ensure two solvency ratios: the solvency ratio of the next day and the solvency ratio of the next 7 days.

+ Next day solvency ratio:

The assessment of Agribank's compliance with the next-day solvency ratio will be divided into 2 stages: Stage 1 from 2008 to the end of September 2010 and Stage 2 from October 2010 to the end of 2014. Data is taken at the reporting times of the last day of the month shown in Chart 2.13.

Chart 2.13. Agribank's next-day solvency ratio

Unit: %

Source: Agribank's liquidity indicators report

Looking at chart 2.13, we can see that the monthly solvency ratio according to Decision 457, which stipulates a minimum level of 25, has been well complied with by Agribank, even far exceeding the level prescribed by the State Bank, at times reaching 133. However, when it came to the stage of applying Circular 13/2010/TT-NHNN in October 2010 of the State Bank, which stipulates that the ratio of immediately payable assets calculated on total payable debts must be at least 15%, Agribank did not achieve it. This ratio was always lower than 15 and often fluctuated between 10 and 13 until the end of September 2012.

One of the reasons here is the way these indicators are calculated. Both of these indicators are calculated as a ratio between immediately payable assets, that is, the numerator is "immediately payable assets", but according to Decision 457/2005/QD-NHNN, it is calculated on payable assets within 1 month, while according to Circular 13/2010/TT-NHNN, it is calculated on immediately payable assets within 1 month.

on Total liabilities, so these two indexes have very different denominators (that's why the minimum level is different). But more importantly, there are also differences in the "Immediately payable" component of these two indexes. Basically, according to Decision 457/2005/QD-NHNN, "Immediately payable" takes into account secured and unsecured loans due within 1 month, bills of exchange of export payment certificates accepted for payment by foreign banks, with a remaining term of 01 month or less, receivables due, while these components are not included in "Immediately payable" according to Circular 13/2010/TT-NHNN.

Chart 2.14. One-month solvency ratio of the State-owned commercial bank sector

Source: Report on liquidity indicators of banks

For Agribank, as seen, the bank's asset structure is mainly loans while the treasury ratio and the liquid securities ratio are both low, leading to "immediately payable assets" if calculated according to Decision 457/2005/QD-NHNN will be much larger than "immediately payable assets" calculated according to Circular 13/2010/TT-NHNN. Furthermore, according to Decision 457/2005/QD-NHNN, assets due for payment within the next month are all reported by banks based on the contract term while during that period, banks in general and Agribank in particular are still allowed to apply products

convenient deposit products for customers, creating conditions for customers to withdraw money before maturity while still enjoying high interest rates, leading to the actual term being far different from the nominal term, making the actual payment obligation of the bank always much higher than the contractual obligation. That shows that the fact that Agribank and many other banks (Chart 2.14) maintain the payment capacity ratio according to Decision 457/2005/QD-NHNN at a much higher level than the regulations of the State Bank is not necessarily good and accurately reflects the liquidity problem of the bank. And in fact, when switching to implementing the regulations according to Circular 13/2010/TT-NHNN of the State Bank with a reserve requirement calculated on total payable debt (not calculated on payable debt within 1 month) of 15%, Agribank did not meet it.

+ 7-day solvency ratio

Chart 2.15. Agribank's 7-day solvency ratio

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7-day coverage ratio VND

7-Day Coverage Ratio USD

7 Day Coverage Ratio EUR

1.0

0.0

Unit: %

T10/10

Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14

T10/14

Source: Agribank's liquidity indicators report

According to Decision 457/2005/QD-NHNN and Circular 13/2010/TT-NHNN, the 7-day solvency ratio must be at least 1 at the end of the day. In fact, during the period when Decision 457/2005/QD-NHNN was still in effect, many banks, including

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