welcome to

TURBULENCE IN THE
GLOBAL BANKING SECTOR:
PERSPECTIVES FOR VIETNAM
Breakfast Forum

May 2023

A business of Marsh McLennan

TODAY’S AGENDA

8:00am Breakfast

8:30am Opening Remarks

Hoang Minh Tuan, Chief Client Officer, Marsh Vietnam

8:35am Presentation: US Banking Disruptions, SVB, And Perspectives For Vietnam

Clarence Koo, Partner, Oliver Wyman

9:05am Discussion and Q&A

9:25am Closing Remarks

Sean Choo, Co-head of Retail and Business Banking, Oliver Wyman

9:30am End

© Oliver Wyman 2
OVER LAST 2 MONTHS WE WITNESSED COLLAPSE OF A G-SIB AND 2 TOP-20 US BANKS

March 10 | ~ $200B assets March 19 | ~ $600B assets May 1 | ~ $200B assets

Large depreciations in bonds Historical (since GFC) track-record of Large depreciations in mortgages
portfolios due to rising interest rates poor performance and controversies portfolios due to rising interest rates
Uninsured & concentrated funding Mostly uninsured funding Mostly uninsured funding
(VC sector) (institutional investors, HNWIs) (HNWIs)

Details on next pages

Investors' confidence in banking sector is low amid concerns over persistent high inflation and looming recession

© Oliver Wyman 3
THIS MARCH SILICON VALLEY BANK (SVB) COLLAPSED WITHIN 48 HOURS, BUT EVEN
WITHOUT HINDSIGHT BIAS, A GOOD RISK MANAGEMENT COULD HAVE PREVENTED IT

SVB deposits grew As interest rate grew SVB announced sale of AFS
from $60B to $200B bank accumulated securities with loss of $1.8B
since 2020; mostly unrealized losses in as liquidity ‘last resort’
from VC sector HtM bonds and sale of $2B shares to
recapitalize
Bank invested majority VC sector faced working
of fund into long-term capital shortages led to Depositors responded with
bonds; mostly HtM outflow of SVB deposits bank run – pulled out $42B
in a single day

2021 1Q 22 2-3Q 22 4Q 22 1Q 23

Fed started to JP Morgan warned

increase rates of SVB’s $16 billion
unrealized losses
CRO (Laura Izurieta)
left the bank By year end SVB
lost ~$25B deposits

© Oliver Wyman 4
SVB UNDERESTIMATED INTEREST RATE RISK AND OVER-ESTIMATED ITS LIQUIDITY FROM
DEPOSITS, PROVIDING RELEVANT LESSONS FOR VIETNAMESE BANKS

SVB case Relevance for Vietnam

• Major investments in long-term bonds to compensate for high • Especially volatile interest
Interest rate rates on customer deposits driving balance sheet growth rate environment
Medium
risk • Hold-to-maturity classification of bonds created a false sense of • Significant IRR exposures
security and resulted in huge losses when bank had to ‘fire sale’ compared to capital buffers

• Customer deposits were mostly (98%) uninsured

• High and growing demand
• Funding base was highly concentrated on a single sector: for customer funding
Liquidity risk & VC funds, their clients and employees
High • SBV not yet roll out key
funding • Liquidity buffer, while seemingly meeting Basel requirements, liquidity regulations
were insufficient for actual outflow of funds, likely due to (e.g. lack of LCR and NSFR)
misunderstanding of “core deposits”
• Took actions too late despite clear warning signals in 2022
Crisis • Likely inadequate crisis response contingency set-up given poor • Recent collapse of SCB
management & sequencing of actions Medium • Insufficient crisis
risk governance • Overall paid insufficient attention to ALM risks contingency planning
(e.g. no CRO appointed for much of 2021)

© Oliver Wyman 5
Interest rate risk

HISTORICALLY VIETNAM INTEREST RATES HAVE BEEN VOLATILE THAN IN DEVELOPED

MARKETS—ESSENTIAL TO MEASURE AND MANAGE IRRBB1, NOT JUST NIM2

SBV Refinancing Rate, % 5-year Gov Bond Yield, %

18

16 Tight
Firm monetary
monetary policy
policy
to curb inflation
14

12
Hike to support VND,
10 but rates in US are still
Stable interest rates high and might well
8 during the QE era remain there

4
?
2

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

1 Interest Rate Risk in the Banking Book 2 Net nterest Margin

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Interest rate risk

SOME VIETNAMESE BANKS HOLD SIGNIFICANT VOLUMES OF LONG-TERM BONDS COMPARED

TO THEIR CAPITAL BUFFERS CREATING VULNERABILITIES TO MARKET INTEREST RATE RISK
Bond with duration >1Y / Capital buffer1

650% commentary
600%
550% • Hold-to-maturity (vs Available-for-Sale)
Bond revaluation classifications of bond protects PnL from volatility
500% > 30% of buffer if driven by mark-to-market revaluation of bonds
450% rates go 2% up1
400% • But at the same it can create a false sense of
350% security as accumulated revaluation might
Bond revaluation
300% eventually hit the bank if bonds are to be sold for
> 30% of buffer if
rates go 3% up1 liquidity purposes (as in case of SVB)
250%
200% • We recommend measuring and tracking one’s
150% “mark-to-market” exposures regardless of
100% accounting classification
50% • We also recommend taking into account impact
0% of bond revaluations in liquidity stress-testing

State-owned banks Private banks

1. Oliver Wyman approximations based on public financial reports

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Interest rate risk

EXPOSURE TO INTEREST RATE RISK IN THE BANKING BOOK (DUE TO REPRICING GAPS)
IS LIMITED IF BANKS ARE WILLING TO PUSH FOR INCREASING RATES FOR BORROWERS
NII sensitivity to +200 bps rate increase / Capital buffer 1

20% commentary
15%
If all floaters • NII sensitivities to interest rate fluctuations are
10% are revaluated relatively limited due to majority of loans being
5% floaters (having rates linked to market benchmarks)

0% • Loans’ floating rates do hedge interest rate risk

-5% in case rates going up, but at expense of credit risk
(via increased interest burden on borrowers)
-10%
If only 50% • This questions the extend to which banks will be
-15% of floaters
realistically able to execute options of increasing
are revaluated
-20% client rates for borrowers
-25%
• We recommend running holistic macroeconomic
stress-test to capture interplay between interest-
-50%
rate risk and credit risk
State-owned banks State-owned banks’
Private banks Private banks’

1. Oliver Wyman approximations based on banks’ public financial reports

© Oliver Wyman 8
Interest rate risk

BEST PRACTICES IN LIQUIDITY AND INTEREST RATE RISK MANAGEMENT REQUIRES

UNDERSTANDING CASA1 ”BEHAVIORAL” MATURITY, NOT ”LEGAL” MATURITY
Typically, CASA will have significant portion of stable and interest-rate … this varies greatly across customer segments, so granular
insensitive balances … segmentation is highly recommended

Volume,
LCY

Segmentation

Time
• Basic segmentation: • Important customer features:
Volatile – should be treated as overnight funding – Product types (e.g. CA vs SA) – Age
Rate-sensitive – should be treated as 1-3 months funding – Currencies – Education
Stable – typically long (5+ years) and 30-50% rate-insensitive – Business lines – Depth of relationship
– Channels – Turnover (for companies)
1 Current Accounts / Savings Accounts
© Oliver Wyman 9
Liquidity risk & funding

RAPID LOAN GROWTH IN VIETNAM HAS CREATED ONE OF THE MOST INTENSELY
COMPETITIVE MARKETS FOR DEPOSITS, EXACERBATING LIQUIDITY RISK

Loan to deposit ratios are already high Loans has been growing faster than deposits Collapse of corporate bond market1
will increase need to fund those loans to avoid
defaults
LDR if interbank is excluded Loans, YoY% Corporate bonds issues, T VND
LDR by SBV approach Deposits, YoY%
-66%
114
106 13.96 14.18 742.7
13.61
35 100 12.17
27

9.24
7.98
368.4

79 79 255.1

Weighted-average Excluding state- 2020 2021 2022 2020 2021 2022

of top-10 banks, % owned banks, %

1. Corporate bond issuances seemed to start recovering recently, but vast majority of those were bought by banks and not retail investors, putting pressure on funding
© Oliver Wyman 10
 Liquidity risk & funding

TO MANAGE LIQUIDITY RISK, BANKS STRESS TEST THEIR PORTFOLIO WHILE MAINTAINING
ACCEPTABLE REGULATORY RATIOS (LCR, NSFR)

PRACTICE OVERVIEW Internal liquidity stress-test involve projecting dynamics of net cash
position under stress-assumptions and available mitigation actions

• Leading institutions in Asia run internal liquidity stress-tests Survival horizon 1

to cover risk sources and mitigations not covered in Basel 3 ratios: Survival horizon 2
– Funding concentrations Time
– Impact of macroeconomic environment on liquidity

Net cash position

(e.g. pressure on liquidity buffer from rising interest rates
and credit spreads; lower cash inflows due to credit risk, etc.)
– Liquidity gaps on horizons longer than 30 days
– Management actions (e.g. lending freeze)
• Typically, at least 3 scenario are used:
– Idiosyncratic shock (bank-run)
– Market-wide shock (freeze of wholesale market)
– Combined shock
• Stress-tests’ results often used to set liquidity risk-appetite Market stress Combined
(in form of ‘survival horizon’) in addition to limits on Basel 3 ratios

© Oliver Wyman 11
Liquidity risk & funding

AT THE SAME TIME BANKS CAN GROW DEPOSITS AND/OR NIM VIA DEEPER UNDERSTANDING
OF CUSTOMER SEGMENTS AND PRICE SENSITIVITY
Deposits analytics allows differentiating customer segments … and apply specific strategy to each resulting in more profits
by liquidity value and price sensitivity … (consistently >5-10% NII uplift based on our project experience)
Disguised client example

High value1 and low elasticity

• Most profitable segments – should be grown by through
non-pricing incentives (e.g. marketing)
Behavioural maturity (liquidity value)

Low value and low elasticity

• In these segments bank can typically retain volumes while
keeping price lower than the market

High value and low elasticity

• Valuable segments when marking price to the level of
competitors pays off

Low value and high elasticity

• Least profitable segments – relationships can be exited
unless critical from liquidity / funding perspective

Price (rate) elasticity

Small Business Private Affluent Mass 1 Value should be assessed comprehensively considering both liquidity and cross-sell income

© Oliver Wyman 12
Liquidity risk & funding

FUND TRANSFER PRICING (FTP) IS THE KEY MECHANISM TO EMBED REAL VALUE OF
DEPOSITS INTO BUSINESS DECISION-MAKING
FTP charge for deposits = 1 + 2 - 3

Illustrative
METHODOLOGICAL COMPONENTS
- FTP curve
1• Interest rate risk charge:
Repricing term

– Depends on repricing maturity of the product

- Risk-free (swap) curve
(contractual maturity for term deposits)
2 yr
– Curve is defined by risk-free rates in the local currency
2
liquidity (typically by swap curve)
premium

Deposit behavioural maturity

Rate

2• Term liquidity premia:

– Depends on behavioral holding maturity of product
– Curve is defined by prima paid on bank’s wholesale
funding vs risk-free rate
6m interest rate
1
hedging cost
3• Contingent funding charge:
– Reflects costs of holding the liquidity buffer covering potential
0 0.5 2
stress outflows from the product (e.g. as implied in LCR)
Time (year)

© Oliver Wyman 13
Crisis management & risk governance
MOST COMMENTATORS STATE THAT SVB COULD HAVE SURVIVED IF IT HAD BETTER CRISIS
MANAGEMENT IN PLACE BEFOREHAND
We see regulators increasingly demanding more sophisticated contingency planning
Robust crisis planning system
should cover:
• Operational resilience
• Liquidity / contingent funding ->
• Solvency
Should include:
• Early warning indicators
• Specific and detailed plans linked
to various scenarios (systemic,
idiosyncratic and combines)
• Communication strategy
Should be tested / simulated
on regular (often annual) basis
with involvement of senior
management
© Oliver Wyman
Top-5 Malaysian bank example
Contingency Funding Plan
Early Warning Indicators  Convene crisis management team to direct Liquidity Crisis Response Strategy
implementation of plan
 Mix of indicators covering
 Recognition of stress level (i.e. appropriate  Liquidity management in a
liquidity management, the
funding situation and the general management of size and composition of balance stressed environment must be
sheet commensurate with crisis) a centralised effort in order for
market environment decisions to be clear and
 Indicators align closely with decisive and for responses
liquidity reporting to avoid to be prompt
Combination of both scenarios
Combined crisis
duplication of effort
Systemic crisis  The key issues include the
Qualitative indicators/ expert Financial system instability Bank’s communication strategy,

judgement with senior the availability and use of the
management taking final Bank 2
different sources of liquidity, the
decision nature of people and system
Bank 1
Bank 3 support together with the
 Quantitative liquidity logistics of cash management
status indicators on over large networks
liquidity and funding
Liquidity condition triggers
situation as well as Bank
market situation
Bank specific crisis
Loss of confidence in the bank
Liquidity risk drivers
14
CONCLUSIONS AND POTENTIAL NEXT STEPS

• Key watchout points for bank:

– Invest in understanding your deposits, both for the sake of ALM risk management and profitability
– Ensure your internal liquidity stress-tests include the drivers that brought SVB down – funding concentrations and bond revaluation
- Some Vietnamese has similar risks
- Good to show regulators and analysts that you have considered such risks and are fine
– Critically reassess whether your ALM risk controls are holistic and impact business decisions

• We will be happy to share with you more detailed perspectives on the topics briefly covered in this presentation:
– Deposit analytics and pricing
– ALM risk management
– Fund-term pricing
– Crisis management
– Risk appetite and business-planning
– Risk governance and culture

© Oliver Wyman 15
 Contact us Sean Choo
Co-head of Retail and Business Banking
Oliver Wyman
sean.choo@oliverwyman.com

Clarence Koo
Partner
Oliver Wyman
clarence.koo@oliverwyman.com

Ilya Androsov
Principal
Oliver Wyman
ilya.androsov@oliverwyman.com

© Oliver Wyman 16