Classifying the loan portfolio by credit extension helps the bank to manage the capital to meet it, thereby ensuring solvency because the bank is inherently exposed to risks due to the maturity difference. between assets and liabilities.
2.1.2.2 Classification according to loan collateral
When classifying the loan portfolio according to the criterion of loan security status, the loan portfolio can be classified into 2 groups as unsecured and secured.
Unsecured loans: In unsecured loans, banks only rely on the first debt collection source, which is cash flow from the customer’s own business plan. Customers who get loans without collateral are often reputable customers in credit relationships and really effective business plans.
Loans secured by assets: In addition to the first debt collection from the cash flow of the loan plan, the bank also adds a second debt collection source, which is pledged, mortgaged, and assets formed from the loan. loan or property guaranteed by a third party. The lending bank has collateral for the customer when there is doubt about the goodwill to repay the debt and the ability to repay the debt from the business plan. Besides, asking for collateral is also a way to limit moral hazard and adverse selection (Huynh The Du, Nguyen Minh Kieu, 2008).
2.1.2.3 Classification by investment field
The loan portfolio by investment sector is usually divided into two large sectors, namely the manufacturing sector and the non-manufacturing sector. In which each field is subdivided into many categories, in production, there are agriculture, industry, and commerce; in non-production, there are loans for securities business, real estate, and consumer loans. This is a way to design a portfolio to orient loan investment in large areas, suitable for development in different stages of the economy, ensuring compliance with the provisions of the law.
2.1.2.4 Loan portfolio by currency
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The loan portfolio by currency not only shows the bank’s views and orientation in finding domestic and foreign target markets, but also helps the bank assess the potential risk level when there is a change in the market. movement of the foreign currency against the domestic currency. (Bui Dieu Anh, 2010).
2.1.2.5 Loan portfolio by customer type
Each customer will have different characteristics (in terms of organizational structure, capacity to take responsibility before the law), so to orient for safe and effective investment, banks always have reasonably distribute the proportion of loan items according to customers, ensuring the necessary safety from the perspective of the whole portfolio. (Bui Dieu Anh, 2010).
2.1.2.6 Loan portfolio by geographical area
The construction of the proportion of loan items by geographical area shows the bank’s view in forming the target market, in accordance with the conditions of facilities, operating network as well as the control capacity. supervision of loan staff. In the process of monitoring the loan portfolio by geographical area, the bank will evaluate the investment performance of each region in comparison with other regions, thereby making appropriate adjustments, ensure the intended goal.
2.1.2.7 Loan portfolio by economic sector
The loan portfolio according to this criterion has great significance for commercial banks, both in the planning stage as well as in the implementation organization. The loan portfolio by economic sector forms a necessary orientation for the credit investment process of the bank. Which industries need to be concentrated and expanded, and which ones need to be reduced will be shown through the determined proportion of each industry in the total outstanding balance of the portfolio. The loan portfolio by economic sector clearly reveals the bank’s position: focusing on priority areas for specialization or loan diversification.
2.1.3 Measure of concentration
2.1.3.1 Distance measure
Quantifies the gap between the portfolios that lend to a group of banks and the market’s lending portfolio. The distance measure quantifies the divergence between a bank’s lending share for each economic sector (r) and the benchmark (x) of loan portfolios. In this case, the industrial component of the economy’s market lending portfolio is used as a benchmark of diversification. Therefore, the closer the bank’s loan ratio (ri) is to the benchmark xi for each industry i, the more diversified the bank is. Calculate the absolute distance Da and relative Dr, as follows:
Da(r, x)bt = ½ |rbti – xbti|
Dr(r, x)bt = 1/n
There are many researchers who choose to use this distance measure such as Pfingsten and Rudolph (2002), Andreas Kamp, Danek Prath (2005), Benjamin M.Tabak, Dimas M. Fazio and Daniel O. Cajueiro (2010). Pfingsten and Rudolph (2002) were among the first to use distance measures to measure concentration. They argue that distance measurement methods have many advantages over traditional measurement methods, one of which is the difference in size of each industry. We can easily calculate and do not need to collect additional data.
2.1.3.2 SE (Shannon Entropy) measure
Shannon Entropy is an effective tool for showing different distributions at a given time, and is also used to measure industrial concentration. This entropy is calculated as follows:
SEbt= – b ti.. ln(1/rbti )
If SE = 0, the loan portfolio is extremely concentrated (for one customer only). We have perfect diversification when SE is equal to -ln(n).
2.1.3.3 Hirschman-Herfindahl Index (HHI)
The HHI is calculated as the sum of the squares of the loan weights.
The bank’s HHI at time t can be calculated as follows:
HHI bt = 2 bt
With the ratio of bank loans at time t for each economic sector i (rbti) as follows:
Rbti = Outstanding loans of industry i / Total outstanding loans of the Bank at time t
Note that the lower bound for the HHI is 1/n, representing a perfectly diversified portfolio, which means that the risk ratio is the same for each sector. On the other hand, if HHI is equal to 1, then all loans are given to only one industry, i.e. perfect specialization. One advantage of this indicator is that the higher the value, the higher the concentration.
The HHI index is used by many researchers to measure the concentration of a loan portfolio such as Andreas Kamp, Danek Prath (2005), Benjamin M.Tabak, Dimas M. Fazio and Daniel O. Cajueiro (2010). , Acharya (2004), Elyasiani and Deng (2004). However, the research group Andreas Kamp, Danek Prath, Pfingsten (2005) argue that the distance measure is a better method to quantify diversification than the HHI index because there is a comparison between loan portfolio bank relative to the market’s loan portfolio.
2.2 Theoretical foundations of commercial banks’ profits
2.2.1 Concepts
A commercial bank’s profit is the difference between total revenue minus valid and reasonable expenses.
Profit realized in the year is the business result of the credit institution, including profit from professional activities and profit from other activities.
Gross profit = revenue – cost
Net profit = Gross profit – Income tax
2.2.1.1 Criteria for evaluating the bank’s net profit
Absolute profit
The absolute profit includes
– Profit before corporate income tax and loan interest
– Profit before corporate income tax
– Profit after corporate income tax (also known as net profit)
However, when comparing the quality of business activities, the absolute profit criterion is rarely used, but financial managers are often more interested in the criterion of relative profit (which is the profit rate). .
2.2.1.2 Return on equity (ROE)
ROE is calculated as a percentage of net return on equity.
Data on net profit is taken from the income statement, while the total assets indicator is taken from the annual balance sheets of banks. ROE ratio shows the efficiency of the bank’s use of equity. The ROE indicator results show how much profit for every dollar of equity spent. Theoretically, the higher the ROE, the more efficient the use of capital. Stocks with high ROE are often favored by investors, so this indicator has important implications for investors’ decisions.
ROE = Net Profit / Equity (Average Equity)
ROA = Net Profit / Total Assets (Average Assets)
2.2.2.2 Return on asset ratio (ROA: Return on asset)
ROA is calculated as a percentage of net profit on average total assets. The data on profit after tax is taken from the income statement and the total assets indicator is taken from the annual balance sheets of the banks. ROA indicator shows the effectiveness of the process of organizing and managing production and business activities of the bank. The target results show how much profit is generated for every dollar of assets used in the business process.
2.3 Risk structure of commercial banks’ loan portfolio
– Commercial bank is a business organization in the financial and monetary field – a diverse and highly sensitive field, so the risks in banking business are very diverse. Risk can arise from any transaction or business that contains an element of uncertainty. While every banking transaction/activity involves a certain degree of uncertainty. Therefore, all transactions/activities performed by the bank contribute to the formation of the bank’s overall risk. – In the types of risks of banking business, the risk of lending activities is considered the main type of risk, stemming from the important position of the loan in total assets as well as in the source of profit. from loan. – Regarding the compositional structure, the risk of lending activities can be divided into two basic types: loan transaction risk and loan portfolio risk. Transaction risk is related to the repayment of an individual loan transaction, while portfolio risk is the risk associated with a commercial bank’s existing loan portfolio. Portfolio risk includes two components: intrinsic risk and concentration risk as analyzed below:
2.3.1 Intrinsic risk
Derived from the unique characteristics of each borrower, each economic sector, each form and method of credit granting. For example, agricultural loans may face risks from force majeure disasters, industrial loans may face overproduction, shrinking consumption markets, and unsold goods. … It can be said that intrinsic risk is very diverse and indispensable, cannot be eliminated because it belongs to the inherent nature of the object that the bank invests in. The bank’s measures can only help control and limit it. Thorough appraisal, accurate lending decisions, avoid lending to entities/industries/forms of loans with high intrinsic risk, and the balance of assets used in the business process will create How much profit can you make?
2.3 Risk structure of commercial banks’ loan portfolio
– Commercial bank is a business organization in the financial and monetary field – a diverse and highly sensitive field, so the risks in banking business are very diverse. Risk can arise from any transaction or business that contains an element of uncertainty. While every banking transaction/activity involves a certain degree of uncertainty. Therefore, all transactions/activities performed by the bank contribute to the formation of the bank’s overall risk.
– In the types of risks of banking business, the risk of lending activities is considered the main type of risk, stemming from the important position of the loan in total assets as well as in the source of profit. from loan.
– Regarding the compositional structure, the risk of lending activities can be divided into two basic types: loan transaction risk and loan portfolio risk. Transaction risk is related to the repayment of an individual loan transaction, while portfolio risk is the risk associated with a commercial bank’s existing loan portfolio. Portfolio risk includes two components: intrinsic risk and concentration risk as analyzed below:
2.3.1 Intrinsic risk
Derived from the unique characteristics of each borrower, each economic sector, each form and method of credit granting. For example, agricultural loans may face risks from force majeure disasters, industrial loans may face overproduction, shrinking consumption markets, and unsold goods. … It can be said that intrinsic risk is very diverse and indispensable, cannot be eliminated because it belongs to the inherent nature of the object that the bank invests in. The bank’s measures can only help control and limit it. Thorough appraisal, accurate lending decisions, avoid lending to entities/industries/forms of loans with high intrinsic risk, pay more attention to lending to risky subjects low intrinsic value, which can help banks increase the safety level for their loan portfolio.
2.3.2 Concentration risk
This type of risk comes from the lack of diversification in the bank’s loan portfolio, which goes against the principle of risk dispersion in currency trading. Assessing the importance of risk concentration, the Basel Committee on Banking Supervision commented.