Quality of financial appraisal of investment projects at Southeast Asia Commercial Joint Stock Bank - Hue Branch - 1

HUE UNIVERSITY UNIVERSITY OF ECONOMICS

FACULTY OF FINANCE AND BANKING

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GRADUATION THESIS

QUALITY OF FINANCIAL APPRAISAL OF INVESTMENT PROJECTS

AT JOINT STOCK COMMERCIAL BANK

SOUTHEAST ASIA - HUE BRANCH

Student performance: Instructor:

Le Thi Thanh Nhan Phan Khoa Cuong

Class: K46 – Banking School year: 2012 - 2016

Hue, May 2016

Thank You

Assigned by the Faculty of Finance and Banking, Hue University of Economics and with the consent of my supervisor Phan Khoa Cuong, I have carried out the topic "Quality of financial appraisal of investment projects at Southeast Asia Commercial Joint Stock Bank - Hue Branch".

To complete this thesis, I would like to sincerely thank the teachers who have wholeheartedly guided and taught me throughout my study, research and training at Hue University of Economics.

I would like to sincerely thank instructor Phan Khoa Cuong for his dedication and thoughtfulness.

kindly guide me to do this thesis.

I would like to thank the staff of the Corporate Customer Department in particular and all the staff of SeABank Hue in general for creating favorable conditions for me to learn experience, improve practical knowledge as well as help me collect data to serve the research process.

Although I have made great efforts to complete the thesis as completely as possible, due to my initial acquaintance with scientific research work, approaching the practical working environment at the Bank as well as limitations in knowledge and experience, it is inevitable that there will be shortcomings. I look forward to receiving comments from teachers and friends to make the thesis more complete.

Thank you very much!

Hue, May 15, 2016

Student

Le Thi Thanh Nhan

THESIS SUMMARY

Investment project appraisal is of particular importance to commercial banks in investment credit activities. One of the characteristics of investment activities is that they take place over a long period of time, so they may encounter many risks. Commercial banks that want to lend safely, ensuring the ability to recover capital and investment profits must base their loans on investment project appraisal, especially project financial appraisal. Investment project financial appraisal will draw accurate conclusions about the feasibility, economic efficiency of the project, debt repayment ability, and possible risks to make a decision to lend or reject.

Southeast Asia Commercial Joint Stock Bank - Hue Branch (SeABank Hue) always focuses on credit activities. However, in the process of operation, besides the achieved results, SeABank Hue still has limitations, especially in the financial appraisal of investment projects. These limitations stem from objective reasons as well as from the bank itself, causing the quality of internal financial appraisal of projects to not yet achieve the best results.

The topic has conducted a number of studies on investment project appraisal in general and project financial appraisal in particular, then the topic studies the current status of investment project financial appraisal, especially project financial appraisal at SeABank Hue, collects a database on financial appraisal for the investment project of 30 Toyota Vios Limo cars of Mai Linh Hue One Member Limited Liability Company. Finally, the topic would like to propose a number of solutions and recommendations with the hope of contributing to improving the quality of investment project financial appraisal at SeABank Hue.

LIST OF SYMBOLS AND ABBREVIATIONS

Abbreviations

Interpretation
Commercial Bank	Commercial Bank
TMCP	Joint stock trading
SeABank Hue	Southeast Asia Commercial Joint Stock Bank – Hue Branch
TCTD	Credit institution
DAĐT	Investment project
DN	Business
KHDN	Corporate Clients
Ltd.	Limited liability
Board of Directors	Board of Directors
NH	Bank
Corporate Income Tax	Business income
State Bank of Vietnam	State Bank
Fixed assets	Fixed assets
NPV	Net present value
STT	Numerical order
QHKH	Customer Relations

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INDEX

Thank You i

THESIS SUMMARY ii

LIST OF SYMBOLS AND ABBREVIATIONS iii

TABLE OF CONTENTS iv

LIST OF TABLES viii

PART I: PROBLEM STATEMENT 1

1. Reason for choosing topic 1

2. Research objective 2

2.1. General objective 2

2.2. Specific objectives 2

3. Research object and scope 2

3.1. Research subject 2

3.2. Scope of research 2

4. Research method 2

4.1. Data collection method 2

4.2. Data analysis and processing methods 3

5. Topic structure 3

PART II: RESEARCH CONTENT AND RESULTS 4

CHAPTER 1: THEORETICAL BASIS OF FINANCIAL APPRAISAL OF INVESTMENT PROJECTS

OF COMMERCIAL BANK 4

1.1. Investment project appraisal activities 4

1.1.1. Investment project 4

1.1.1.1.Concept 4

1.1.1.2.Classification of investment projects 4

1.1.1.3.The role of investment projects 5

1.1.2. Investment project appraisal 5

1.1.2.1.Concept 5

1.1.2.2.Process and content of investment project appraisal 6

1.2. Financial appraisal of investment projects 11

1.2.1. Concept 11

1.2.2. The meaning of financial appraisal of investment projects 11

1.2.3. Contents of financial appraisal of investment projects 12

1.2.3.1. Appraisal of total investment capital, capital usage structure, capital contribution progress...12 1.2.3.2. Appraisal of financing options 12

1.2.3.3.Assessment of project revenue and costs 13

1.2.3.4.Evaluation of annual cash flow of project 14

1.2.3.5. Appraisal of project financial efficiency 16

1.2.3.6.Assessment of project's debt repayment capacity 21

1.2.3.7. Project financial appraisal under risk conditions 22

1.3. Quality of financial appraisal of investment projects 26

1.3.1. Concept of quality of financial appraisal of investment projects 26

1.3.2. Indicators reflecting the quality of financial appraisal 26

1.3.3. Factors affecting the quality of financial appraisal of investment projects 27

1.3.3.1.Subjective factors 27

1.3.3.2.Objective factors 27

CHAPTER 2: CURRENT STATE OF PROJECT FINANCIAL APPRAISAL QUALITY

INVESTMENT AT SOUTHEAST ASIA COMMERCIAL JOINT STOCK BANK – HUE BRANCH 28

2.1. Overview of Southeast Asia Commercial Joint Stock Bank - Hue Branch 28

2.1.1. Formation and development process 28

2.1.2. Business performance of SeABank Hue 29

2.1.2.1.Capital mobilization activities 29

2.1.2.2.Credit activities 31

2.1.2.3.Some other activities 32

2.2. Current status of financial appraisal of investment projects of SeABank Hue 33

2.2.1. Current status of financial appraisal of investment projects of SeABank Hue 33

2.2.1.1. Legal basis of investment project appraisal at SeABank Hue 33

2.2.1.2.Project appraisal process and content at SeABank Hue 34

2.2.1.3. Contents of financial appraisal of investment projects at SeABank Hue 38

2.2.2. Illustrative example of investment project appraisal – Investment project of 30 Toyota cars 5

Vios Limo brand of Mai Linh Hue One Member Co., Ltd. 40

2.2.2.1.Project description 40

2.2.2.2. Contents of project financial appraisal 41

2.3. Evaluation of financial appraisal of investment projects at SeABank Hue 50

2.3.1. Achievements 50

2.3.2. Limitations 51

2.3.3. Causes of limitations 53

2.3.3.1.Subjective causes 53

2.3.3.2.Objective causes 53

CHAPTER 3: SOME SOLUTIONS TO IMPROVE THE QUALITY OF FINANCIAL APPRAISAL OF INVESTMENT PROJECTS AT SOUTHEAST ASIA COMMERCIAL JOINT STOCK BANK - HUE BRANCH 55

3.1. Development strategy orientation of Southeast Asia Commercial Joint Stock Bank - Hue Branch 55

3.1.1. Orientation for medium and long-term credit development 55

3.1.2. Orientation in financial appraisal of investment projects 56

3.2. Solutions to improve the quality of financial appraisal of investment projects at SeABank Hue 58

3.2.1. Add new, more general, more accurate appraisal methods... 58

3.2.2. Solutions on financial appraisal content 59

3.2.3. Improving the professional qualifications of staff doing appraisal work 60

3.2.4. Improve the quality of information collected for the project financial appraisal process, ensuring accurate, complete and timely information 61

PART III: CONCLUSION 62

1. Conclusion 62

2. Recommendation 62

2.1. Recommendations to the State Bank 62

2.2. Recommendations to SeABank Hue 63

REFERENCES 64

APPENDIX 1 65

APPENDIX 2 66

APPENDIX 3 67

APPENDIX 4 69

APPENDIX 5 70

APPENDIX 6 71

APPENDIX 7 73

LIST OF TABLES

Table 1.1: Debt solvency balance sheet 21

Table 2.1: Capital mobilization situation at SeAbank Hue 30

Table 2.2: Deposit structure of SeABank Hue 31

Table 2.3: SeABank Hue 31 loan situation

Table 2.4: Detailed table of investment capital 42

Table 2.5: Capital structure of project 43

Table 2.6: Annual operating cost table of project 45

Table 2.7: Working capital needs of project 46

Table 2.8: Business results of project 47

Table 2.9: Loan and debt repayment schedule of project 48

Table 2.10: Debt repayment schedule of project 48

Table 2.11: Balance of debt obligations 49

PART I: PROBLEM STATEMENT

1. Reason for choosing the topic

Commercial banks are one of the most important financial institutions in the economy. This is a special type of enterprise, operating and trading in the monetary field, not directly producing material wealth like enterprises in the production and business sector, but creating favorable conditions for the production, circulation and distribution of products by providing investment capital for enterprises and economic organizations to expand their business, contributing to economic development.

Credit activities are a key and extremely important activity in the business operations of any commercial bank. This is the most profitable business but at the same time it also contains the most risks. There are countless different risks when lending, originating from many factors and leading to customers not being able to repay their debts when due.

Like other commercial banks, SeABank Hue always focuses on credit activities. However, in the process of operation, besides the achieved results, SeABank Hue still has some limitations, especially in the appraisal of investment projects. Along with the process of economic innovation, the appraisal of investment projects is extremely important. It not only helps SeABank Hue choose optimal projects to finance but also limits credit risks to improve the business efficiency of the Bank. Therefore, SeABank Hue has paid attention to the issue of improving the quality of investment project appraisal in general and project financial appraisal in particular, which is very necessary.

During my internship at the Corporate Customer Department – SeABank Hue, I have clearly recognized the importance of financial appraisal of investment projects. That is why I chose the topic “Quality of financial appraisal of investment projects at Southeast Asia Commercial Joint Stock Bank (SeABank) – Hue Branch” as my graduation thesis.

2. Research objectives

2.1. General objectives

Research the current status of financial appraisal activities of investment projects and propose some solutions to improve the quality of financial appraisal of investment projects at SeABank Hue.

2.2. Specific objectives

- Systematize basic theoretical issues on financial appraisal of investment projects of commercial banks.

- Analyze and evaluate the current status of financial appraisal of investment projects at SeABank Hue in recent times.

- Propose some solutions to contribute to improving and enhancing the quality of aesthetics.

Project finance

3. Research object and scope

3.1. Research subjects

Quality of financial appraisal of investment projects at SeABank Hue.

3.2. Scope of research

- Regarding content: Financial appraisal activities of investment projects at SeABank Hue.

- About space: SeABank Hue.

- Time: from September 2014 to March 2016.

4. Research methods

4.1. Data collection method

- Collect documents on theories related to financial appraisal activities of investment projects, data on the appraisal situation of investment projects at SeABank Hue.

- Report on business performance statistics, organizational structure, capital, assets, customer information of SeABank - Hue from establishment to March 2016.

- Data related to financial appraisal activities of investment projects such as financial reports

main, investment projects, documents, invoices...

- Thesis and articles with reference value on the internet related to financial appraisal activities of investment projects at banks.

4.2. Data analysis and processing methods

- Descriptive statistical method: based on the collected data and documents, combined with the application of comparative statistical analysis methods, from which the work of financial appraisal of investment projects can be seen.

- Comparison method: Determine the increase, decrease and correlation of performance indicators at SeAbank Hue.

- Research and document reference methods: Read, refer to, and study textbooks compiled by lecturers, books in the library, and some theses from previous courses as a basis for the research topic.

- Expert interview method: Used throughout the internship, it helped me better understand project financial appraisal activities, thereby helping me accumulate a lot of practical experience for myself, and at the same time recognize the differences between learned theory and practice.

5. Topic structure

The topic focuses on evaluating the results of financial appraisal activities of investment projects at SeABank Hue, including 3 main parts:

- Part I: Problem statement.

- Part II: Research content and results.

+ Chapter 1: Theoretical basis for financial appraisal of investment projects of commercial banks.

+ Chapter 2: Current status of financial appraisal of investment projects at SeABank Hue.

+ Chapter 3: Some solutions to improve the quality of financial appraisal of investment projects

at SeABank Hue.

- Part III: Conclusion and recommendations.

PART II: RESEARCH CONTENT AND RESULTS

CHAPTER 1: THEORETICAL BASIS OF PROJECT FINANCIAL APPRAISAL

COMMERCIAL BANK INVESTMENT

1.1. Investment project appraisal activities

1.1.1. Investment project

1.1.1.1. Concept

According to Clause 2, Article 3 of Investment Law No. 67/204/QH13 issued by the National Assembly on November 26, 2014: " An investment project is a collection of proposals for medium-term or long-term capital investment to carry out business investment activities in a specific area, within a specified period of time".

1.1.1.2. Classification of investment projects

According to the nature of the project

- New investment project: is a project implemented for the first time or a project implemented independently from the project

is carrying out business investment activities.

- Expansion project : is an investment project to develop an operating business investment project by expanding scale, increasing capacity, innovating technology, reducing pollution or improving the environment.

By capital

- Investment projects with domestically mobilized capital : are projects with capital formed from internal accumulation sources of the national economy, including: State budget capital, State development investment credit capital, State-guaranteed credit capital, development investment capital of State-owned enterprises and other capital sources.

- Investment projects with capital mobilized from abroad : are projects whose capital sources are not equal to the internal accumulation of the national economy, including: capital from foreign loans of the Government and international aid sources for development investment, foreign direct investment capital, investment capital of diplomatic agencies,

International organizations and other foreign agencies investing in construction in Vietnam, foreign loans guaranteed by the State for enterprises.

1.1.1.3. The role of investment projects

A project is a collection of proposals for a very complex process, related to and affecting many different sectors and areas of life, economy and society. The role of a project is very important, specifically shown as follows:

- For investors: the project is always an important basis for deciding to invest and build.

Develop investment plans and monitor investment implementation.

- For commercial banks: Investment projects are an important basis for these organizations to consider the feasibility of the project, from which they will decide whether to finance the project or not, and if so, at what level of funding to minimize risks for the sponsor.

- For State management agencies: Investment project is an important document for competent authorities to review and grant investment licenses, and is also an important legal basis for the court to resolve disputes between parties during project implementation.

1.1.2. Investment project appraisal

1.1.2.1. Concept

Project appraisal is the organization of objective, scientific and comprehensive review of basic contents that directly affect the effectiveness and feasibility of the project before making an investment decision.

 Purpose:

- Help investors choose the best investment options.

- Help relevant State agencies assess the suitability of the project for the general development planning of the industry, locality and the whole country in all aspects, indicators, scale, planning and efficiency.

- Helps financiers make accurate decisions about lending or financing to

DAĐT.

1.1.2.2. Investment project appraisal process and content

a. Investment project appraisal process

The investment project appraisal process is carried out in the following order:

- Step 1: Receive documents.

- Step 2: Project appraisal.

- Step 3: Prepare appraisal report.

- Step 4: Approve and make decision.

- Step 5: Complete and save the file.

Specific procedures can be found in Appendix 1.

b. Contents of investment project appraisal

Preliminary assessment

- When receiving the documents, the appraisal officer must check the legality and completeness of the project documents in order to request the investor to supplement and complete them promptly.

- Then the staff will find out the reputation of the project developer. If it is a design unit, they need to find out their experience in creating similar projects. As for manufacturing enterprises, they must see if they are a reputable and successful manufacturer in the market.

- Next, the appraisal officer contacts the project owner and their support units to find out the motivation for the business to propose the project.

- Finally, the appraiser will review the site and current status of the enterprise, from which they will compare and check the financial situation and production and business situation data recorded in the project documents to make timely adjustments.

Official assessment

Appraisal of factors related to the investor

- Legal capacity:

The appraisal officer will appraise factors such as the legal status of the borrower; civil legal capacity and civil conduct capacity of the individual borrower, representatives of economic organizations, cooperatives; establishment decision, business registration certificate according to the Enterprise Law; enterprise charter; type of loan.

accounting forms; decisions on appointing directors, chief accountants, etc.; joint venture contracts, minutes of the Board of Directors assigning labor, resolutions of the Board of Directors, etc.; business licenses, practice licenses or certificates, import-export business licenses, customs codes, etc.

- Financial capacity:

The financial capacity of the investor is one of the important factors that demonstrate the financial safety of the project. Although the assessment of the financial situation of the investor is only a support for the assessment process, this is a very important task, helping the assessment officer have an overview of the current situation and prospects of the business in the market.

Based on the financial reports provided by the customer, the appraiser evaluates the financial capacity of the investor based on a number of important criteria such as payment capacity, capital balance capacity, operational capacity, and business efficiency of the enterprise.

Ability to pay

- Current payment capacity:

Current assets

Current Ratio =

Short-term debt

This ratio shows how much of a dollar of short-term debt is covered by assets that can be converted into cash within a period equivalent to the maturity of those debts.

- Fast payment ability:

Quick Payability =

Current Assets - Inventory Current Liabilities

This ratio indicates the ability to repay short-term debts without relying on the sale of inventories.

Capital balance ability:

- Debt ratio: