Security Solutions Group in Operations at Military Commercial Joint Stock Bank

For risk provisioning costs, the provisioning rate must comply with the regulations of the State Bank. Therefore, to reduce risk provisioning costs, MB must improve the quality of appraisal, risk management, inspection and supervision of loans. Thereby, reducing debts from groups 2 to 5 at the bank.

3.2.3. Group of solutions to ensure safety in operations at the Military Commercial Joint Stock Bank

3.2.3.1. Capital safety assurance solution

* Solution 1: Increase equity capital

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Although there has been a clear growth in recent times, in order to improve financial capacity to create a premise to improve business performance and implement governance according to Basel 2 standards, MB needs to continue to increase the scale of its equity.

To successfully increase charter capital and equity, MB must develop a specific program, including the following steps:

- Step 1: MB calculates the amount of capital needed to increase by 2025 through capital planning linked to the business plan.

- Step 2: Calculate the internal cost of equity and compare this cost with other banks in the market to determine the expected return on equity at MB. In addition, compare this cost with the interest cost when issuing long-term debt instruments included in equity when calculating related indicators. Research and evaluate the supply and demand of capital in the domestic and foreign primary markets to choose the appropriate time and market to increase capital.

- Step 3: Determine the target equity structure, thereby identifying potential investors for the capital to be increased, including equity investors and other debt investors; existing shareholders and potential future investors. From here, MB will decide on the method of increasing equity and the details of the issuance for the capital to be increased. As one of the ten commercial banks selected to pilot risk management according to the Basel 2 model, MB will have to supplement a large amount of equity. Therefore, MB needs to study and develop a financial plan, business plan

By 2025, on that basis, we will reserve equity plans as well as have appropriate plans to increase capital.

Regarding the method of capital increase, according to NCS's point of view, MB can increase equity in the following ways:

First, issue shares to the public

This is the way to increase the largest amount of equity. In fact, the operations of commercial banks in recent years have improved significantly. According to experts' assessments as well as surveys conducted on the stock market at the end of 2017, investors expect banking stocks to make waves in the coming years. Regarding MB shares, with good business results and growth year by year, up to December 2017 alone, MB's stock price has increased by 107% (from 14,000 at the end of 2016 to 29,000 on March 31, 2017). The fact that MB shares are well-evaluated can be considered a good opportunity for MB to increase its charter capital through issuing additional shares. With the expectation of future stock prices, MB not only increases its charter capital but also increases its equity surplus. Therefore, with the same number of issued shares, MB's equity will increase more. However, this issuance may affect the ownership ratio of existing shareholders as well as depend on the development of the stock market. In addition, the cost of a public share issuance is more expensive than other forms of charter capital increase. Therefore, to implement successfully and effectively, the bank must carefully research and calculate the timing, issuance price as well as the number of additional shares issued.

Second, increase capital from existing shareholders

Increasing capital from existing shareholders is done by issuing additional shares to shareholders or paying dividends in shares. Increasing capital in this way will not affect the current ownership ratio of shareholders as well as the long-term investment strategy at MB, so this method of increasing capital is easy to receive consensus from shareholders. Of the two ways to increase capital from existing shareholders, increasing capital through issuing additional shares will help the bank increase a much larger amount of capital than paying dividends in shares. However, this method requires shareholders to find a capital amount to buy shares, so issuing in this way does not always make the bank

Banks can also increase their capital as desired. Increasing capital through paying dividends in shares is a measure that can not only be done regularly but also ensures the rights of shareholders, without putting pressure on shareholders to buy more shares to maintain the same holding ratio. However, for some investors, especially large institutional investors, dividends are revenue, directly related to their profits and business performance, so sometimes paying all dividends in shares will reduce the attractiveness of shares to these investors. Therefore, to harmonize interests, banks can pay part of the dividend in shares and part in cash.

Third, issue individual shares

In addition to issuing shares to the public or to existing shareholders, MB can issue private shares to a certain number of investors or issue shares to bank officers and employees.

In 2015, MB increased its equity capital through a private placement. In this placement, in addition to the existing shareholders at MB at that time: Viettel, Vietnam Helicopter Corporation, Saigon Newport Corporation, MB also sold 160 million shares, equivalent to 10% of its charter capital, to the State Capital Investment Corporation (SCIC). In the context of good business performance, many institutional investors want to invest in MB, so the private placement at MB will not encounter many difficulties. In addition, according to VCB's experience, selling shares to foreign banks has helped VCB receive support in banking technology as well as management experience from these large banks. Therefore, in NCS's opinion, MB can conduct private placements with foreign banks to receive support in capital, technology, and experience from these banks. As of the end of 2017, the percentage of foreign investors owning MBB shares was 20%, but this was capital from many foreign organizations and individuals. Therefore, the bank's executive board did not have the participation of experts who were foreign investors. This ownership ratio helps MB not to disperse the right to decide on business activities. However, the disadvantage of this is that MB cannot take advantage of support from

foreign investors, especially from banks with extensive experience in business operations. Currently, according to the State Bank of Vietnam's regulations, the foreign investor ownership ratio limit is 30%, so it is appropriate for MB to seek to conduct a private offering of shares to foreign banks.

In addition, MB can issue shares at preferential prices to bank officers and employees. With the characteristic of a large number of employees, as of December 31, 2017, MB had more than 10,000 employees with an average age of 29 years old, who are young and dynamic. Therefore, when MB issues shares at preferential prices to this group, it will increase its charter capital. Not only that, when becoming the owner of the bank, each bank employee will be more responsible and make more efforts in their work.

Fourth, increase capital from retained earnings

Increasing capital from retained earnings is a method of increasing capital to ensure the stability of equity. However, increasing retained earnings will affect dividends for shareholders. If the retained earnings ratio is large, shareholders' dividends will decrease significantly, and the bank's shares will no longer be attractive to investors. Therefore, MB needs to calculate a reasonable retained earnings ratio to ensure the rights of shareholders. After that, MB will ask for the opinion of the general meeting of shareholders to gradually add this part to the charter capital. This is a cost-saving measure to increase charter capital for the bank, but this measure requires high after-tax profits for the bank.

* Solution 2: Improve equity management capacity

During the period 2011 - 2017, MB's equity increased sharply. However, the bank's operating efficiency (ROE) tended to decrease. In addition to objective factors due to negative fluctuations in the macro economy, MB's equity management is also limited. Therefore, to ensure capital safety as well as improve business performance, MB needs to improve its equity management capacity according to international practices. To achieve this goal, according to NCS, MB needs to implement the following issues:

- Develop reliable models and methodologies to estimate capital needs, integrate all risks, including legal and strategic risks, and integrate the interactions and summations of all types of risks to

Measure economic capital needs, overall stress testing based on establishing solid and reasonable methods and data.

- Set and evaluate adequate equity objectives to ensure that equity planning processes become a robust, standardized process, including necessary contingency plans.

- Ensure consistency and integration of all equity management content, ensure the establishment and auditing of processes towards establishing solid processes that guide and serve as a basis for continuous improvement.

- Integrating equity management capabilities into MB's business processes. With this integration, MB will not only use equity management to assess the safety and adequacy of equity, as a reference for business purposes, but also widely apply EC to calculate capital adequacy ratios and determine capital adequacy, as a basis for strategic decisions of business units and the bank, performance management, pricing and support for determining customer/product segments.

* Solution 3: Increase issuance of long-term bonds to increase tier 2 capital

In fact, the current Debt/Equity ratio at MB is low (APPENDIX 2.6) , so MB can issue bonds with terms of 5 years or more to increase Tier 2 capital, thereby indirectly contributing to improving the CAR ratio at MB. This is a form of short-term capital mobilization with a predetermined interest rate. At the same time, the issuance of this type of bond avoids dilution of ownership ratio at MB and avoids putting pressure on the ROE.

3.2.3.2. Improving liquidity risk management capacity

Daily liquidity is considered a “life and death” issue for banks and a problem for commercial banks at all times. During the period 2011

– In 2017, MB always ensured liquidity. However, in the work of liquidity risk management at MB, there are still some limitations, especially the ability to access international practices. Therefore, in the coming time, improving liquidity risk management capacity to meet market requirements is necessary.

necessary. To improve liquidity risk management capacity, according to NCS, MB needs to implement the following issues:

* Solution 1: Improve the quality of liquidity supply and demand forecasting

In reality, the cash inflows and outflows of banks are cyclical, seasonal and trend-based. For example, in Vietnam, the amount of cash withdrawn before Tet is higher than at other times of the year. Therefore, based on the bank's historical statistics on deposits and loans, MB can predict liquidity risks and the amount of money needed to meet liquidity needs at each time. Along with that, the bank studies the impact of major historical events on cash flow to grasp the trend of fluctuations in assets, liabilities as well as off-balance sheet categories when there are market fluctuations. From there, it creates initiative for the bank in developing plans to deal with similar situations that may occur in the future. In addition, MB needs to use economic models to analyze market trends in the near future. The results of the model will be used to predict changes in the balance sheet and cash flow. From there, the ability to proactively plan capital resources at MB will be increased.

* Solution 2: Ensure information sources are published to the outside

In Vietnam or in the world, many banks have had liquidity problems due to false rumors. Up to now, MB has not been affected by these harmful rumors, but the source of information released to the public must always be strictly controlled. To ensure this, MB must first create a good reputation, not violate legal regulations to affect the image of the bank. Information must be censored by leaders before being released to the public. The communications department must carefully select employees to avoid ethical risks among the bank's staff.

* Solution 3: Strengthen capital mobilization to create a solid source of liquidity for banks.

To enhance liquidity, capital mobilization at MB needs to be improved in the following directions:

- Ensure the compatibility between the scale and growth rate of capital mobilization and the scale and growth rate of lending. If the scale of capital mobilization is much higher than the demand for use, liquidity is guaranteed but will increase interest expenses while interest income from lending is not much. Then business performance will decrease and vice versa. Therefore, calculating a "sufficient" amount of capital is a problem for banks at all times. Based on the mobilization and use cycle in the past, depending on each time of the year, banks predict the amount of capital needed to have appropriate economic and psychological measures to mobilize enough of that capital.

- Ensure the balance between the mobilized capital structure and the capital usage needs such as the symmetry of the maturity, the fluctuation of each mobilized capital source and the liquidity of the assets.

- Maintain a stable capital mobilization growth rate to reduce difficulties in forecasting and liquidity management.

* Solution 4: Use dynamic liquidity analysis method (Stress testing) in measuring liquidity risk

Currently, liquidity management at MB mainly uses the method of measuring liquidity risk in a static state, which is the approach to liquidity indicators and the maturity ladder approach. Therefore, the current liquidity analysis at MB only stops at indicating the liquidity status at MB at each point in time, not forecasting future cash needs when there are market fluctuations. Therefore, in the future, MB needs to urgently complete the dynamic liquidity analysis, from which MB can develop a long-term liquidity strategy.

To complete and perform dynamic liquidity analysis, MB needs to perform the following tasks:

- Step 1: Prepare a liquidity supply and demand report.

The market risk management department builds liquidity reports by allocating original cash inflow and cash outflow data due at the following maturities: 1 day, 2 to 7 days, 8 days to 1 month, 1 month to 3 months, 3 months to 6 months.

- Step 2: Liquidity simulation analysis

On a weekly basis, the market risk management department develops future scenarios based on assumptions with a minimum probability of occurrence of 5%. The assumptions stated in the scenarios must include assumptions about interest rate changes; assumptions about changes in the business environment (macro environment, micro environment).

Each scenario should forecast the following elements: (i) lending plan;

(ii) Ability to mobilize new deposits from the economy; (iii) Ability to mobilize new capital from issuing GTCG; (iv) Ability to borrow from the State Bank; (v) Ability to mobilize additional funds from other credit institutions; (vi) Ability to execute repo contracts (sale of securities with a commitment to buy back); (vii) Ability to convert other assets (fixed assets, shares, etc.) into cash.

- Step 3: Analyze liquidity

Based on the scenario, the liquidity risk management department must build a cash flow report, cash flow report for each content, determine the liquidity status to forecast liquidity fluctuations in the coming time. In addition, to ensure the accuracy of the forecasting work, MB can build and apply customer behavior models in cash flow forecasting.

3.2.3.3. Improving interest rate risk management capacity

Interest rate risk has a great impact on the operations and business activities of the bank. In the period of 2011 - 2017, interest rate risk management at MB has revealed certain limitations. Therefore, in order to manage the bank according to international practices and improve business performance, in the coming time, MB needs to implement a number of solutions to improve its interest rate risk management capacity.

* Solution content

- Apply appropriate interest rate forecasting model

Accurately forecasting interest rate fluctuations helps banks measure the level of risk as well as develop appropriate interest rate risk management strategies. Therefore, when managing risks according to international practices, MB must build an interest rate forecasting model instead of forecasting based on experience as it is now. To build a suitable interest rate forecasting model, according to NCS, MB needs to focus on implementing the following contents: (i) Research and analyze factors affecting interest rates such as: economic growth rate, expected inflation rate, changes in monetary policy, etc. (ii) Build an information system (including internal information)

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