Vietnam Banking System 2010 – 2012

Chapter 2 Conclusion

Chapter 2 has built the model, research hypotheses and determined the research method. To test the relationship between owners and operators and the role of the Board of Directors in resolving this relationship, the thesis uses the situational analysis method and the regression method.

For the case analysis, the thesis evaluates conflicts of interest and the role of the Board of Directors in resolving conflicts of interest at two Vietnamese commercial banks based on the corporate governance principles of the OECD and the Basel Committee.

For the regression method, the thesis tests (i) the relationship between the separation of ownership and management rights with the efficiency of asset use and costs of the bank, (ii) the relationship between the control role of the Board of Directors with costs and efficiency of asset use of the bank. The testing is carried out through 4 research hypotheses.

The scope of the study is Vietnamese commercial banks in the period 2010 - 2012.

CHAPTER 3

RESULTS OF THEORETICAL ANALYSIS OF REPRESENTATIVES IN VIETNAM'S BANKING SYSTEM BY QUALITATIVE METHOD

With research data and qualitative research methods in chapter 2, the thesis analyzes the conflict of interests between owners and operators and the role of the Board of Directors of two Vietnamese commercial banks in the period 2010-2012 and gives the following results.

3.1 Vietnam banking system in the period 2010 - 2012

The period 2010 - 2012 was the period when Vietnam's economy and the financial and banking system experienced many fluctuations: economic growth declined after the global financial crisis in 2008, the banking system was restructured. The banking system also revealed weaknesses during this period.

Commercial banking management

In the previous period, many joint stock commercial banks were established. This made it easier for investors to raise capital and transfer ownership of banks, without interrupting business operations and allowing them to continue to inherit the business results of the previous period of the bank. On the other hand, the trend of bank equitization created many monitoring channels, making information in the banking sector more transparent, contributing to creating a healthier financial system. However, the strong development of the Vietnamese banking system in previous years, along with loose regulations on governance, has led to a complex cross-ownership network and increased systemic risks. The organizational structure and ownership of shares of banks in Vietnam are very complicated. In addition to the State controlling and appointing representatives to manage state-owned commercial banks, most economic groups and state-owned corporations own banks. Typically, the Group

Vietnam Electricity Group owns An Binh Commercial Joint Stock Bank, Military Telecommunications Group owns Military Commercial Joint Stock Bank (MB), Vietnam Coal - Mineral Industries Group and Rubber Group own Saigon - Hanoi Commercial Joint Stock Bank, Vietnam Oil and Gas Group owns Ocean Commercial Joint Stock Bank, etc. State-owned banks such as BIDV, Vietcombank, Vietinbank, Agribank also own other banks.

In addition, the ownership of commercial banks is also carried out by other commercial banks or enterprises. For example, Maritime Commercial Joint Stock Bank owns Military Bank and Mekong Development Bank. More complicated is the case of ACB Bank owning EximBank, but EximBank also owns Saigon - Thuong Tin Commercial Joint Stock Bank. In addition, ACB also owns other banks such as Dai A, Kien Long, and Vietnam Thuong Tin.

When the GDP growth of the economy is low, banking activities are still profitable. In 2009, the year when banks implemented the 4% interest rate support program, bank profits increased significantly. The issue of concern here is: banks can accept high risks to gain high profits, and if this risk occurs, depositors and related parties must bear it. Bank staff already receive salaries based on annual business results, which are already high. Thus, banks gain many benefits from accepting high risks but only bear few costs for doing so. However, if the government still advocates supporting banks to prevent them from collapsing, the costs related to risks and increased risks will put pressure on the budget.

In this context, bank governance plays a particularly important role because a good governance mechanism will help banks resolve conflicts of interest among parties.

Financial intermediary function

The poor financial intermediary function of the banking system is reflected in low capital circulation efficiency and unreasonable capital allocation. Meanwhile, banks

still enjoy profits. If risks occur and if the Government does not have an appropriate handling mechanism, related parties such as small shareholders, depositors, etc. will all suffer losses. One of the indicators reflecting the efficiency of financial intermediation of banks is the difference between deposit interest rates and lending interest rates. This difference is on average 3% in the world and in the region, then banks can cover costs and make profits (VTTu Anh, 2012). In fact, this difference in the US is about 3%, in Singapore it is about 3 - 4%, and in Thailand it is 5%. Meanwhile, in 2012, according to the latest regulations of the State Bank, the short-term deposit interest rate is 9%/year, and the lending interest rate is brought down to 15%/year, then this difference in our country is 6%. However, from 2013 to now, the difference between lending and deposit interest rates has tended to decrease, at 3% - 4%. This interest rate difference does not include additional fees paid to banks so that customers can conveniently borrow capital and continue production and business. Therefore, the actual difference may be higher. From 2010 to 2013, the banking system still announced profits. However, in 2012, the banking system's profits decreased by 60% compared to 2011. In 2013, profits increased by 40% compared to 2012, but did not reach the level of 2010.

Asset structure and quality

The allocation of outstanding loans to sectors is not reasonable. Lending to sectors directly involved in production such as agriculture and forestry is still low, while lending to construction, commerce and personal activities serving the community is still high.

Lending to economic organizations and individuals still accounts for a large proportion of total outstanding bank loans, however, this figure has tended to decrease from 98% in 2008 to 95% in 2011, and to 89.10% in 2012. On the other hand, the growth rate of outstanding loans to economic organizations and individuals in 2011 and 2012 also decreased, reaching only 14% and 11.07% respectively, compared to an average of more than 30% in previous years. This shows that banks with surplus liquidity tend to prioritize lending to the interbank market. For economic organizations and individuals in need of capital, access to loans has increased more slowly than before, not only because of the economic recession and businesses borrowing sparingly, but also because banks are cautious about increasing outstanding loans for fear of bad debt.

In addition, lending in the interbank market has increased sharply. In 2008, lending in the interbank market was about 19,000 billion. By 2011, this figure was about 105,000 billion VND and in 2012 it was about 325,000 billion VND, leading to the capital dependence of banks on the interbank market increasing, and the level is relatively fast. Capital support between banks is extremely necessary but we need to maintain it within the allowable level.

(Unit: Billion VND)

Lending on TT2

120,000

100,000

80,000

60,000

Lending on TT2

40,000

20,000

0

Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011

Figure 3.1. Lending on TT2

Source: Bank reports

However, since 2012, deposit mobilization from market 2 has decreased.

Lending activities to other credit institutions account for a small proportion of total outstanding loans but have increased significantly over the years (1.66% in 2008 to 4.22% in 2011 and increased sharply to 10.9% in 2012).

High credit risk and bad debt.

Bad debt and overdue debt of the banking system have increased rapidly since 2011. According to the announcement of the State Bank in 2011 and 2012, bad debt is about 3% to 8% of total outstanding debt. Bad debt data announced by the State Bank fluctuates continuously, showing that the bad debt situation is complicated. The scale and severity of bad debt have not been determined.

The risk provisioning ratio is assessed by the State Bank as insufficient and much lower than the 70-100% level in the banking system in other emerging economies .

Figure 3.2. GDP growth and credit growth

Since 2010, bad debts have appeared at credit institutions. Thus, it can be seen that even for borrowers who are credit institutions, credit quality has declined. This could be a warning sign for the banking system.

Debt structure

The debt structure has shifted in an unsustainable direction with the proportion of capital mobilized from the population and economic organizations decreasing, and loans from credit institutions and other loans increasing.

During the period 2008 - 2011, although mobilized capital grew at a high rate, reaching an average of 26.46%/year during the whole period, the rate of capital mobilized from residents and economic organizations compared to total capital had a slow growth rate from 65% in 2008 to 58% in 2011, the proportion of borrowed capital on total capital increased from 3.11% in 2008 to 8.19% in 2011 and mobilization from other credit institutions on total capital increased from 14% to 18% in the same period. However, since 2012, the growth rate of mobilized capital has decreased sharply to only 0.8%, the proportion compared to total capital.

Capital sources mobilized from the population and economic organizations and mobilized from other credit institutions tended to fluctuate in the opposite direction compared to the period 2008 - 2011, reaching 66% and 8% respectively, the proportion of borrowed capital on total capital sources continued to increase, reaching 10% (Table 3.1).

Capital mobilization is mainly concentrated in short terms while the credit structure has not changed accordingly, leading to a prolonged imbalance in terms of terms and liquidity stress over the past many years.

Table 3.1: Mobilized capital, borrowed capital in total capital

Source: Bank reports

Year

2007	2008	2009	2010	2011	2012
Capital mobilized	82%	80%	78%	79%	76%	74%
Mobilize TT1	66%	65%	64%	62%	58%	66%
Mobilize TT2	16%	14%	14%	17%	18%	8%
Loan capital	3%	3%	8%	7%	8%	10%

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• Orientation and Development Strategy of Vietnam Banking System and Vietnam Joint Stock Commercial Bank for Investment and Development
• Pre-tax Profit of Bidv Tien Giang in the Period 2011-2015 zt2i3t4l5ee zt2a3gsnon-credit services, joint stock commercial bank zt2a3ge zc2o3n4t5e6n7ts At that time, the Branch had to set aside a provision for credit risks, which reduced the Branch's income. Chart 2.2. Pre-tax profit of BIDV Tien Giang in the period 2011-2015 Unit: Billion VND 140 120 100 80 60 40 20 0 63.3 80.34 89.29 110.08 131.99 2011 2012 2013 2014 2015 Profit before tax (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, through chart 2.2, it can be seen that BIDV Tien Giang's profit is still increasing continuously, and its operating efficiency is currently leaking. This is a contribution of non-credit services, and this service segment will be increasingly focused on growth by BIDV Tien Giang to ensure the highest profit safety because credit activities have many potential risks. At the same time, focusing on developing non-credit services is consistent with one of the contents of restructuring the financial activities of credit institutions in the project "Restructuring the system of credit institutions in the period 2011-2015" approved by the Prime Minister in Decision No. 254/QD-TTg dated March 1, 2012 [14]: "Gradually shifting the business model of commercial banks towards reducing dependence on credit activities and increasing income from non-credit services". 2.2. Current status of non-credit service development at BIDV Tien Giang. 2.2.1. BIDV Tien Giang has deployed the development of non-credit services in recent times. Along with the development of the Head Office, BIDV Tien Giang's products and services are constantly improved and deployed in a diverse manner to ensure provision for many different customer groups in the area: individual customers, corporate customers, and financial institutions. Typical services are as follows: Payment services, treasury services, guarantee services, card services, trade finance, other services: Western Union, insurance commissions, consulting services, foreign exchange derivatives trading, e-banking services,... 2.2.1.1. Payment services: In accordance with the Prime Minister's Project to promote non-cash payments in Vietnam [15], banks in Tien Giang province have continuously developed payment services to reduce customers' cash usage habits through card services and electronic banking services such as: salary payment through accounts, focusing on developing card acceptance points, developing multi-purpose cards, paying social insurance by transfer, paying bills through banks, etc. Chart 2.3. Net income from payment services in the period 2011-2015 Unit: Million VND 6000 5000 4000 3000 2000 1000 0 3922 4065 4720 5084 5324 2011 2012 2013 2014 2015 Net income from payment services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Along with the technological development of the entire system, BIDV Tien Giang has a payment system with a fairly stable transaction processing speed, bringing many conveniences to customers. The results of observing chart 2.3 show that the income from payment services that the Branch has achieved has grown over the years but the speed is not high and the products are not outstanding compared to other banks. Domestic payment products such as: Online bill payment, electricity bills, water bills, insurance premiums, cable TV bills, telecommunications fees, airline tickets, etc. bring many conveniences to customers. Regarding international payment, this is an indispensable activity for foreign economic activities, BIDV Tien Giang is providing international payment methods for small enterprises producing agriculture, aquatic food and seafood that have credit relationships with banks in industrial parks in Tien Giang province such as: money transfer, collection, L/C payment. 2.2.1.2. Treasury services: BIDV Tien Giang always focuses on ensuring treasury safety and currency security, always complies with legal regulations, and minimizes risks in operations such as: counting and collecting money from customers, receiving and delivering internal transactions, collecting from the State Bank (SBV) or other credit institutions, receiving ATM funds, bundling money, etc. BIDV Tien Giang's treasury service management department is always fully equipped with modern machinery and equipment such as: money transport vehicles, fire prevention tools, money counters, money detectors, magnifying glasses, etc. to ensure absolute safety in treasury operations, immediately identifying real and fake money and other risks that may affect people and assets of the bank and customers. In addition, implementing regulation 2480/QC dated October 28, 2008 between the State Bank of Tien Giang province and the Provincial Police on coordination in the fight against counterfeit money, in the 3-year review of implementation, BIDV Tien Giang discovered, seized and submitted to the State Bank of Tien Giang province 475 banknotes of various denominations and was commended by the Provincial Police and the State Bank of Tien Giang province [17]. Chart 2.4. Net income from treasury services in the period 2011-2015 Unit: Million VND 350 300 250 200 150 100 50 0 105 122 309 289 279 2011 2012 2013 2014 2015 Net income from treasury services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, as shown in Figure 2.4, income from treasury operations is not high and fluctuates. Specifically, in the period 2011-2013, net income increased and increased most sharply in 2013, then in the period 2013-2015, there was a downward trend. This fluctuation is due to the fact that fees collected from treasury services are often very low and can even be waived to attract customers to use other services. 2.2.1.3. Guarantee and trade finance services: BIDV Tien Giang, thanks to the advantages of the province and the favorable location of the Branch, has continuously focused on developing income from guarantee services and trade finance. Chart 2.5. Net income from guarantee and trade finance services in the period 2011-2015 Unit: Million VND 14000 12000 10000 8000 6000 4000 2000 0 5193 5695 2742 3420 8889 3992 11604 12206 5143 5312 2011 2012 2013 2014 2015 Net income from guarantee services Net income from Trade Finance (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.5, we can see that BIDV Tien Giang's income from guarantee services and trade finance has grown over the years. The reason is: Among BIDV Tien Giang's corporate customers, the construction industry is the industry with the highest proportion of customers after the trading industry, this is a group of customers with potential to develop guarantee services. The second group of customers is corporate customers in the fields of agricultural production, livestock and seafood processing with high import and export turnover in the area. are the target of trade finance development. In addition, BIDV Tien Giang also focuses on continuously developing these customer groups to increase revenue for many other products and services in the future. 2.2.1.4. Card and POS services: As a service that BIDV Tien Giang has recently developed strongly, it can be said that this is a very potential market and has the ability to develop even more strongly in the future. Card services with outstanding advantages such as fast payment time, wide payment range, quite safe, effective and suitable for the integration trend and the Project to promote non-cash payments in Vietnam. Cards have become a modern and popular payment tool. BIDV Tien Giang early identified that developing card services is to expand the market to people in society, create capital mobilized from card-opened accounts, contribute to diversifying banking activities, enhance the image of the bank, bring the BIDV Tien Giang brand to people as quickly and easily as possible. BIDV Tien Giang is currently providing card types such as: credit cards (BIDV MasterCard Platinum, BIDV Visa Gold Precious, BIDV Visa Manchester United, BIDV Visa Classic), international debit cards (BIDV Ready Card, BIDV Manu Debit Card), domestic debit cards (BIDV Harmony Card, BIDV eTrans Card, BIDV Moving Card, BIDV-Lingo Co-branded Card, BIDV-Co.opmart Co-branded Card). These cards can be paid via POS/EDC or on the ATM system. In addition, with debit cards, customers can not only withdraw money via ATMs but also perform utilities such as mobile top-up, online payment, money transfer,... through electronic banking services. In order to attract customers with card services, BIDV Tien Giang has continuously increased the installation of ATMs. As of December 31, 2015, BIDV Tien Giang has 23 ATMs combined with 7 ATMs in the same system of BIDV My Tho, so the number of ATMs is quite large, especially in the center of My Tho City, but is not yet fully present in the districts. Basic services on ATMs such as withdrawing money, checking balances, printing short statements,... BIDV ATMs accept cards from banks in the system. Banknetvn and Smartlink, cards branded by international card organizations Union Pay (CUP), VISA, MasterCard and cards of banks in the Asian Payment Network. From here, cardholders can make bill payments for themselves or others at ATMs, by simply entering the subscriber number or customer code, booking code that service providers notify and make bill payments. Chart 2.6. Net income from card services in the period 2011-2015 Unit: Million VND 3500 3000 2500 2000 1500 1000 500 0 687 1023 1547 2267 3104 2011 2012 2013 2014 2015 Net income from card services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.6, it can be seen that BIDV Tien Giang's card service income is constantly growing because the Branch focuses on developing businesses operating in industrial parks, which are the source of customers for salary payment products, ATMs, BSMS. Specifically, there are companies such as Freeview, Quang Viet, Dai Thanh, which are businesses with a large number of card openings at the Branch, contributing to the increase in card service fees [25]. Table 2.6. Number of ATMs and POS machines in 2015 of some banks in Tien Giang area. Unit: Machine STT Bank name Number of ATMs Cumulative number of ATM cards POS machine 1 BIDV Tien Giang 23 97,095 22 2 BIDV My Tho 7 21,325 0 3 Agribank Tien Giang 29 115,743 77 4 Vietinbank Tien Giang 16 100,052 54 5 Dong A Tien Giang 26 97,536 11 6 Sacombank Tien Giang 24 88,513 27 7 Vietcombank Tien Giang 15 61,607 96 8 Vietinbank - Tay Tien Giang Branch 6 46,042 38 (Source: 2015 Banking Activity Data Report of the General and Internal Control Department of the Provincial State Bank [21]) Through table 2.6, the author finds that the number of ATMs of BIDV Tien Giang is not much, ranking fourth after Agribank Tien Giang, Dong A Tien Giang, Sacombank Tien Giang. The number of POS machines of BIDV Tien Giang is very small, only higher than Dong A Tien Giang and BIDV My Tho in the initial stages of merging the BIDV system. Besides, BIDV Tien Giang has a high number of cards increasing over the years (table 2.7) but the cumulative number of cards issued up to December 31, 2015 is still relatively low compared to Agribank, Vietcombank, Dong A (table 2.6). div.maincontent .content_head3 { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: bold; text-decoration: none; font-size: 14pt; } div.maincontent .p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent .s1 { color: black; font-family:"Courier New", monospace; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; } div.maincontent .s2 { color: black; font-family:"Times New Roman", serif; font-style: italic; font-weight: normal; 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• Solution Group on Bad Debt Monitoring and Handling Violations of Vietnam's Commercial Banking System
• Limitations in the Development of Retail Banking Services at Vietnam Joint Stock Commercial Bank for Industry and Trade and the Causes
• Orientation To Improve Competitiveness Of Vietnam's Commercial Banking System In The Context Of International Economic Integration

3.2 Commercial bank management in the Vietnamese banking system

The management of Vietnamese commercial banks has had positive changes. New regulations on management have been issued, amended and supplemented. Typically, the Law on Credit Institutions 2010 3 has dedicated a chapter with 8 sections and 60 articles on the organization and management of credit institutions, providing general regulations and specific regulations for each type of organization, especially issues on the Board of Directors, Board of Members, Board of Supervisors, rights and obligations and standards and conditions of the organizations.

members of these departments. Information disclosure by banks has made significant progress, increasing in quantity and improving in quality. Corporate governance has also changed significantly but still has limitations.

Legal regulations in banking activities have an incomplete impact on governance practices, low enforcement capacity, and lack of consistency:

3 The Law on Credit Institutions was passed on June 16, 2010 and took effect on January 1, 2011.

- Currently, banking activities are regulated by the Law on Credit Institutions, the Law on the State Bank, the Law on Enterprises (mandatory for all types of banks), the Law on Securities (for listed or IPO banks) and sub-law documents such as the decree on deposit insurance activities, the decree on bankruptcy, etc. Compared to enterprises in general, the regulations for banks set higher and stricter requirements. However, from the perspective of practical implementation of the laws, some sub-law documents are being applied inappropriately, leading to the goal of ensuring safety and efficiency in banking activities not being well implemented. Currently, there is a lack of documents applying best practices or new trends in the market. This can be seen in regulations such as regulations on capital safety ratios which have a large gap compared to practices, lack of guidance on measuring, recording, and managing risks for derivative instruments, operational risks, and no clear regulations on business acquisitions. Bankruptcy regulations are not effective.

- Some documents are situational and administrative in nature such as interest rate ceilings and gold trading controls. This shows that the market orientation of policies is still limited. However, since 2012, interest rate management policies have become more proactive and market oriented, showing that the market orientation of policies has improved.

- Low enforcement capacity leads to low enforcement effectiveness. According to the assessment and survey of the banking system in 2010, up to 30% of the number of banks with information on independent and non-executive board members did not meet the required half level. According to Tran Thi Thanh Tu et al. (2011), although the standards for independent members have been prescribed, in reality, in some cases, independent members do not meet these standards.

Coordination among agencies performing the functions of supervision, management and enforcement, including the State Bank of Vietnam, the Ministry of Finance, the Securities Commission, the National Financial Supervision Commission, the Business Registration Authority, the Court and other agencies, is not good. This affects the effectiveness of supervision.