Use Tools to Adjust Loan Structure and Investment Structure Flexibly in Accordance with Practical Conditions.

Banks need to shift the structure of risky assets and the structure of investment portfolios towards safety and sustainability. Specifically, in the asset structure, it will be necessary to adjust the structure towards reducing the proportion of assets with high risk coefficients, while calculating to increase the proportion of assets with high profitability and safety. With this requirement, according to the form of capital use, the proportion of capital invested in securities with high safety will be adjusted to increase, and lending activities will be controlled towards reducing the proportion of outstanding loans for real estate business, securities business, and loans to enterprises with high risk levels (using large financial leverage, lack of transparency, etc.).

* Adjust asset structure to ensure liquidity

The process of capital structure transformation is only considered reasonable if liquidity is ensured. Accordingly, the Bank will initially implement:

+ Comply with the State Bank's regulations on solvency ratios such as: immediate payment ratio; 7-day payment ratio; maximum ratio of short-term capital for T-DH loans; loan-to-deposit ratio (LDR).

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+ Implement well the internal compliance index set that the Bank has built and issued, including: (i) payment assurance indexes such as: cash reserve ratio - this index is to ensure that the bank reserves enough cash to meet the withdrawal needs of individual and corporate customers; reserve deposit ratio on NOSTRO account - to ensure that the Bank maintains enough balance on NOSTRO account to meet payments with other credit institutions; (ii) liquidity index group including MCO (Maxium Cumulative Outflows) - to ensure sufficient liquidity to meet the accumulated cash flow difference in and out of each term; LCR index (Liquidity Coverage Ratio) - to ensure maintaining enough high liquidity assets to pay for debt obligations due in the next 30 days in the liquidity crisis (Tress scenario); In addition, there is a group of funding source indexes reflecting the correlation between the scale of NVHĐ and lending such as: the ratio of outstanding debt/deposits of residents and businesses; the ratio of outstanding debt/total stable source NSFR (Net Stable Funding Ratio) - this index aims to ensure that the Bank has enough stable capital to finance long-term assets. In the above indexes, although the Bank has issued LCR and NSFR in the 2013 RRTK management regulations,

but not yet applied in practice. In the coming time, to evaluate RRTK more accurately, calculating these indicators is necessary.

Currently, Vietinbank has only used the RRTK measurement method based on liquidity indicators and has built a liquidity stress test scenario with the expiration date to assess liquidity stress, but has not yet applied it in practice. Build possible scenarios for the Bank's liquidity problem, especially the situation when the liquidity supply of commercial banks decreases sharply, while the demand for liquidity increases. From these scenarios, the Bank proposes solutions to ensure payment capacity and liquidity in case of temporary payment shortage, as well as in case of liquidity crisis. In addition, the Bank needs to increase reserves by holding highly liquid GTCG to be ready to meet liquidity needs when needed.

3.2.1.6. Use tools to flexibly adjust loan structure and investment structure in accordance with practical conditions .

Implementing the restructuring of lending and investment in a proactive manner requires the Bank to flexibly use tools to adjust the portfolio structure to suit the requirements and development of the market. With the financial investment portfolio, due to its high liquidity, the Bank can easily adjust through transactions on the market, but with DMCV, the application of flexible measures needs to be focused on. In addition to the traditional measures/tools that the Bank has been implementing as in the past (adjusting to increase outstanding debt/investment value, urging debt collection, or some other technical measures), in the coming time, the Bank needs to pay more attention to some modern tools after the financial market mechanism allows:

- For debt trading tools:

Debt trading is considered a tool to adjust the lending structure and currently in Vietnam there is a legal corridor for debt trading. However, due to many shortcomings, this regulation has not been promoted. To overcome these shortcomings and make debt trading a more popular tool, Vietinbank needs to pay attention to the following issues: (i) Based on the debt trading regulations amended by the State Bank,

Banks need to learn to apply it appropriately for their purposes. It is necessary to change the current concept that only bad debts are traded, but instead use debt trading as a tool to flexibly change the portfolio structure, increase/decrease the scale of outstanding debt when necessary; (ii) Strengthen the functions and tasks of AMC Vietinbank. When the legal corridor allows, the activities of this company are not only limited to handling assets related to outstanding debts, but more broadly, it can represent the Bank in negotiations and negotiations related to the purchase and sale of the Bank's assets. Therefore, it is necessary to strengthen and improve the professionalism of these companies.

- For loan securitization tools

Loan securitization is a tool used to transfer RRTD from the lending bank to investors who spend money to buy securities. This transfer is carried out through an intermediary organization that issues securities to the market on the basis of bank loans. In the US, a specialized organization is often established to take on this role, called a special purpose organization. In the current conditions of Vietinbank, it is not necessary to establish this organization but it can be implemented by Vietinbank Securities Company or Vietinbank AMC Company. Regarding the operating mechanism, initially it should only be applied according to the traditional model, that is, securitization according to the transfer mechanism. Applying this mechanism, Vietinbank Securities Company receives the transfer of loan ownership from the parent bank, then issues securities/bonds of the same class. However, to issue bonds based on loans, in addition to increasing equity capital, the issuing company must also make full deposits at the guarantor organization.

- For RRTD swap tool

This is a derivative tool that provides DMCV managers with a new way to adjust DMCV. However, from the experience of the global financial crisis related to RRTD swap tools in the past, when applying this tool, it is necessary to note: Initially, RRTD swap should be applied to large loans in the portfolio (related to only one borrower and with collateral), then proceed to apply to consumer DMCV; Transaction contracts need to be standardized, regulations need to be specific and strict, especially risk events related to insurance payment events need to be

Clearly define the scope, payment limits and exclusions. Avoid unclear regulations leading to disputes between the insured and the insurance company.

3.2.2. Support solutions

3.2.2.1. Enhance the ability to analyze and forecast market fluctuations

The nature of banking business is high risk and depends heavily on the customers/partners of commercial banks. Therefore, enhancing the ability to forecast and analyze the market is an important solution to improve the efficiency of operations in general and capital use in particular. If the forecast information is accurate, the Bank will have the basis to establish a suitable capital use portfolio structure.

The ability to analyze market trends does not stop at transactions directly related to the Bank's TSN-TSC but is also reflected in the ability to grasp the development trends of industries, sectors, and products in the economy. This is the basis for the Bank to build and implement lending policies, investment policies, and build a targeted lending and investment structure. To enhance the assessment of the market situation, interest rates, exchange rates, etc., the Bank needs an independent department specializing in collecting, screening, and analyzing market news and then making market assessments. This department/division can post its assessments for business units to use as a reference for making business decisions.

3.2.2.2. Strengthening equity capacity and improving capital structure, increasing the stability of mobilized capital

* Strengthening equity capacity

Banks need to identify their needs and have medium- and long-term plans as well as annual plans for equity capital associated with the target of TSC growth and capital adequacy ratio according to international standards. In order to meet the CAR ratio as prescribed by Basel II, the Bank's need to increase capital is very urgent. Currently, VietinBank's capital increase room is relatively limited because the State ownership ratio at the Bank has reached the minimum threshold (currently 64.46%) as prescribed by the Government. There is no longer room for increasing capital from foreign investors for VietinBank (because the foreign ownership ratio at the Bank is close to the limit of 30%). Ability to increase capital

from the State budget to increase Tier 1 capital will be difficult to meet the requirements of increasing asset growth, so increasing the size of the Bank's equity capital must continue to consider the option of increasing capital contributions from existing shareholders, from annual dividends. At the same time, issuing long-term bonds to increase Tier 2 capital. Currently, the ratio of Tier 2 capital/Tier 1 is nearly 40% (maximum is 50%), so the Bank can still increase the scale of secondary bond issuance to increase Tier 2 capital. In the coming years, it is still recommended that the Government and shareholders approve the payment of dividends in shares instead of paying shares in cash in order to retain annual profits for reinvestment, increase capital scale and business efficiency.

* Improve capital structure, increase stability of mobilized capital

Based on the basic characteristics of banking activities - the main source of capital for commercial banks is short-term loans. Therefore, decisions related to the allocation of capital to activities with a proportion must be consistent with the structure of short-term loans. If commercial banks maintain a capital structure and capital sources that are not symmetric in terms of maturity, they will have to bear interest rate risks in refinancing assets and capital sources or interest rate risks due to changes in asset values when market interest rates fluctuate. In addition, the Bank will face interest rate risks - the most dangerous type of risk in business. Currently, Vietinbank as well as Vietnamese commercial banks in general, short-term loans are mainly short-term. Meanwhile, the proportion of outstanding loans at banks has tended to increase in recent years, potentially causing interest rate risks due to the maturity asymmetry between assets and liabilities. Therefore, to ensure safety in operations and at the same time meet the demand for T-DH capital of the economy, the Bank needs to increase the proportion of T-DH capital to increase the stability of capital sources. Accordingly:

- Ensure the compatibility between the scale and growth rate of working capital and the scale and growth rate of lending. The capital mobilization target must aim first and foremost at satisfying the investment and lending needs of the Bank. The Bank must have appropriate measures to exploit working capital to meet the capital needs and maintain stability in the growth rate of working capital. Avoid instability in working capital growth that can cause difficulties in forecasting and managing liquidity status.

- Diversify forms and products of capital mobilization and construction.

Reasonable interest rate policy ensures competitiveness to attract and increase long-term mobilized capital with high stability. Especially the source of savings deposits of residents. Apply attractive forms of capital mobilization such as: savings mobilization, lottery-drawn promissory notes, ladder savings, etc. It is necessary to adjust the interest rate difference between short-term deposits and long-term deposits. In addition, balance the expected deposit mobilization capacity with the demand for medium and long-term loans to issue types of GTCG: deposit certificates and T-DH bonds.

- Continue to promote the expansion of non-cash payment methods, considering this an important solution to create the most beneficial capital source for the Bank and society. Improve current traditional payment methods while applying modern technology to payment activities; Strengthen international relations with correspondent banks to mobilize more capital from outside.

3.2.2.3. Complete the XHTDNB system, develop and apply tools to measure loan portfolio and investment portfolio risks according to international practices.

The XHTDNB system is one of three methods of credit risk assessment that the Basel Committee encourages commercial banks to apply, and the XHTDNB system that the State Bank of Vietnam requires commercial banks to implement is to comply with this requirement. A significant change is that the Bank has applied the XHTDNB system according to the statistical method instead of the expert method since the end of 2015. However, in the long term, the Bank continues to improve the XHTDNB system on the basis of applying quantitative models. In order to take full advantage of the advantages that this system brings to the management of lending activities, especially the advantages of the XHTDNB system in managing loan structure and financial investment. Specifically:

- Based on the credit rating of the borrower/issuer, the loan limit and investment limit are determined:

Banks need to clearly define the safety limits in lending for each class of customers/issuers of debt securities, according to the principle that the higher the class of customers/issuers, the higher the loan/investment level and vice versa. This is essentially the concretization of the maximum loan level based on the credit limit currently prescribed in the current Law on Credit Institutions. The establishment of these limits is to form the basis for the process of monitoring the implementation of DMCV/investment, limiting risks.

- Exploiting the features of the new XHTDNB system in pricing:

One of the important steps in lending activities for economic and financial organizations as well as for science and technology is to price the loan/investment. Business interest rates need to be set at a reasonable level compared to the market interest rate, as well as to create a competitive advantage over rival banks or maintain and stabilize relationships with borrowers. As competition in banking activities becomes more intense, banks can only play the role of price takers and gradually abandon the role of price setters. Therefore, accurately pricing loans is becoming an increasingly urgent issue for banks in the current period.

In reality, the choice of a method to determine lending interest rates depends entirely on the subjective will of each bank. Every method is composed of many different components (such as mobilization interest rates, management costs, expected profits, etc.), but all must have a risk premium related to the loan. The size of the risk premium depends on the process of assessing the borrower, the history of lending transactions, and the evaluation results of the XHTDNB system. However, the steps of the customer assessment process and the history of lending transactions only determine the decision to grant credit and the preliminary assessment of risk, but do not clearly define the percentage of risk encountered when lending capital. Therefore, the XHTDNB system is standardized and widely applied in the world's commercial banking system to quantify the level of risk into a percentage of risk premium in determining lending interest rates.

With this system, the Bank will quantify quantitative and qualitative criteria about customers to determine credit ratings. Each credit rating will have a different probability of risk occurrence, and accordingly, different risk probabilities will have different risk premium percentages in lending rates. In addition, it is necessary to add an assessment of the risk level of collateral in loan valuation based on the XHTDNB system, which will help identify: (i) If a customer has a higher expected loss level, the credit rating will be lower, the type of asset contains many risk factors (fixed inventory, circulating inventory, receivables, etc.), the structure of the collateral portfolio is less attractive, and the loan-to-value ratio is lower; (ii) If a customer has a lower expected loss level, the credit rating will be lower.

In contrast to the above case. In addition, this customer group must also have a more attractive real estate portfolio structure.

- Based on the results of the XHTDNB system, the Bank can accurately calculate the expected loss level (EL) according to the Basel Committee's formula. Based on the calculated EL value, the Bank will set aside provisions for expected losses. The results of the XHTDNB system provide important data (such as PD, LGD) for the Bank to build a DMCV risk measurement model.

3.2.2.4. Implement interest recovery of bad debts in accordance with financial mechanisms

One of the problems that has emerged in recent years, not only at Vietinbank but also at all Vietnamese commercial banks, is that the proportion of receivables in the total profitable assets of the Bank tends to increase. This situation reflects the difficulties in credit operations and the shortcomings in debt classification at the Bank today. Accordingly, when implementing the regulations of the State Bank, commercial banks are allowed to restructure debts for customers without having to change the debt group for loans of customers that the commercial bank assesses that the customers are capable of repaying the debt on time according to the restructuring period. Therefore, the debt classification data does not accurately reflect the information on debt quality at the Bank: Group 1 debt balance is much higher than the actual. Meanwhile, when the bank applies the accrual basis principle in accounting and Vietnamese accounting standards (VAS 14), the bank makes provision for interest on group 1 debt. As a result, interest income increases, profits increase, leading to an increase in interest receivables. With this situation, the consequence is that information on the bank's profits will not clearly reflect the actual business results.

3.2.2.5. Improving banking management capacity, especially risk management

Management and operational capacity, especially internal management capacity, is a decisive factor for success or failure in banking business. With the requirements in operation, the Bank needs to further improve its management capacity. Specifically: The Bank needs to perfect the organizational model according to a centralized, customer-oriented model, the business blocks will be reorganized according to customer groups. Management and operational functions are thoroughly concentrated at the TSC, the Branches only focus on sales. The block model according to customer groups and functions needs to be established in a unified manner. Accordingly, the Bank will have blocks

The main businesses are: wholesale, retail, capital trading; functional blocks include: risk management, operations, finance, support. In addition, the Bank needs to review and standardize the functions and tasks of the departments at the Head Office, rearrange them according to the correct functional blocks, clearly define tasks, and avoid overlap. Arrange the departments at the Branch according to the standard functions of each group: sales, customer service and support.

Build and perfect the functions, tasks and define specific responsibilities for management of each unit and individual in the risk management and management system of the Bank. At the same time, it is necessary to perfect the activities of the Committees and enhance the advisory and policy consulting role of these Committees. Create a transparent institution on the functions and tasks between the Board of Directors, the Supervisory Board and the Executive Board. Enhance the management effectiveness of the Board of Directors, more clearly define the functions, powers and responsibilities of the Board of Directors in accordance with the Law on Credit Institutions. In addition, improve the capacity of business organization and management, clearly define the functions of the Head Office and Branches. Strengthen the functions and enhance the role of the internal inspection and control apparatus.

Vietinbank needs to continue to improve its risk management capacity, ensuring that risk management work is built in both quantitative and qualitative terms, including the following elements:

Firstly, build a complete risk management framework and an effective risk management strategy. Accordingly, it is necessary to establish an effective risk management structure with the attention of the Board of Directors and the Executive Board, ensuring the function of fully monitoring governance objectives. In particular, emphasizing the role and responsibility of each member in the process of monitoring and risk management, including the role and responsibility of Internal Audit in the process of independent assessment of the bank's risk management system.

Building and communicating risk culture throughout the system. The communication of risk culture must ensure that it reaches each employee and that employees are aware of the risks to the business operations being performed. Building a comprehensive and specific risk management framework for each type of risk. Banks need to be equipped with a risk management methodology for each specific type of risk in order to be able to organize data, technology, etc. to meet the process of risk assessment and measurement. Once risks have been fully assessed and measured, banks can develop strategies.

QTRR is consistent with the business strategy and risk appetite of bank leaders.

Second , develop risk management policies, procedures and tools/methods. Risk management policies are built on the basis of risk management strategies and must have risk management methods for each type of risk that is important or assessed as important by the bank.

Third, implement reasonable capital allocation. It is necessary to calculate capital for each type of risk, compare with the minimum capital requirement to ensure that banking operations always comply with the regulations of the State Bank and are within a reasonable safety level. At the same time, develop a capital plan in accordance with the business strategy and risk appetite of the bank on the principle of ensuring the efficiency of capital use of the bank.

Fourth , ensure the resources, information systems and infrastructure of the system are effective. Specifically, fully meet the information data for measurement and calculation. The system needs to be fully and comprehensively integrated to support and provide timely information for all levels of the bank and business.

3.2.2.6. Improve the capacity and qualifications of the Bank's human resources

This is an extremely important factor for the development of banks. A team of staff with no or limited qualifications, weak ethics will find it difficult to develop commercial banks according to the set goals and directions, and will even push the bank into the abyss of crisis. Therefore, Vietinbank needs to pay special attention to staff work, which needs to be done from the recruitment, training to the appointment of staff, how to build a team of staff with adequate qualifications and professional skills.

In the banking industry, the factors of trust and professional ethics always play a very important role, being the foundation for all results in business activities. Through the mass media in recent times, the bad image of bank officers and employees violating the provisions of the law, the Industry, violating ethical standards in business,... causing great losses in assets as well as negatively affecting the image of the Bank. Vietinbank needs to quickly review and re-evaluate human resources, on that basis, build a labor quota for each area of operation, each unit, and rearrange labor according to the business requirements of each branch and the entire system.

Develop a mechanism for employee remuneration and salary payment regulations according to market principles, based on productivity, efficiency and quality of work, and move towards completely eliminating the status of average salary distribution. The emulation and reward mechanism needs to change to suit the business situation according to the market mechanism, truly creating motivation to promote emulation movements to excellently complete the assigned tasks.

3.2.2.7. Modernize banking technology and upgrade information technology systems to support asset portfolio management

Nowadays, information technology has become the foundation, effectively supporting the business activities and management of the Bank. Building a modern technology platform, ensuring management requirements is extremely necessary. Technology is closely linked to the operation process, especially the provision of modern banking services. In addition, the application of modern software and technology actively supports the management and operation, risk measurement, etc.

Currently, at Vietinbank, the bank's transactions with customers have been computerized with modern information equipment, significantly shortening the gap in technology level compared to commercial banks in the region and the world. However, Vietinbank's information technology system still has many limitations. In the coming time, Vietinbank still needs to improve its information technology level. The bank must build an information system with analytical techniques capable of measuring all types of risks, and must combine data from individual transactions into a structured system that can estimate the overall risk of the unit and collect data on the total risk of many banks over time.

Building an information system serving risk management must meet the following basic requirements: (i) This system must support the calculation of VAR risk value; (ii) The stored information helps to analyze the chain of events in chronological order, from individual events; (iii) It is possible to measure the value of current and future operations with different subjects. Strengthening the safety system, information security, data and network security; implementing projects to improve and upgrade network security solutions, data security, ensuring the safety of assets and operations of the Bank; building a system to secure information, data and

network security, research and build data transmission lines, link with national information networks to create initiative for the Bank.

3.3. SOME RECOMMENDATIONS

3.3.1. Recommendations to the Government and relevant Ministries and branches

3.3.1.1. Stabilize the macroeconomic environment.

Reality in recent years has shown that focusing too much on economic growth based on investment capital (in breadth) rather than on productivity efficiency (in depth) has, on the one hand, led to scattered and ineffective capital investment: some non-production sectors have grown "overheated" without control, while other production and business sectors have encountered difficulties. On the other hand, in the condition that all economic sectors have difficulties in capital, the capital demand for economic growth will be pushed to the banking system. This is also a reason why the banking system has expanded too much in terms of quantity (banks, branches) at the same time as credit growth is too "hot", the capital use structure is unbalanced, causing many consequences for the following years. It is thought that the Government needs to consistently and persistently pursue the goal of economic stability, on that basis, build appropriate management policies with long-term stability, creating peace of mind and trust for economic actors.

3.3.1.2. There needs to be a specific orientation for socio-economic development in each period.

The capital structure, especially the lending/investment structure of Vietinbank and commercial banks, is built in accordance with the actual conditions, which are the needs of the economy. Therefore, setting out specific development orientations and strategies with fully implemented policies is the basis for Vietinbank and enterprises to build their business strategies and capital investment strategies. The orientation of socio-economic development in each period is reflected in policies to encourage or restrict the development of a certain economic sector/field. That will affect the expansion or contraction of production and business in that sector/field. Because in reality, the Government will build and implement different policies and measures to achieve its goals. If the socio-economic development orientation is announced specifically, transparent policies are the basis for

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