THE STATE BANK OF VIET NAM MINISTRY OF EDUCATION & TRAINING

Ho Chi Minh University of Banking

Faculty of Banking

An In-depth Analysis of Vietcombank (VCB) using the CAMELS Model:

Evaluating Influencing Factors on Financial Performance

Name and student code: Phạm Minh Tài 050609212176

Huỳnh Tấn Sang 050609211251
Trương Đoàn Phước Thành 050609212187
Nguyễn Thị Uyển Nhi 050609212098
Hoàng Thị Hương Loan 050609210693
Class: MAG310_231_9_TA_L12

Supervisor: Ph.D Nguyễn Trung Hiếu

Content
s
Chapter I. The organizational structure of management.......................................................................4
Chapter II. The Principal Types of Accounts..........................................................................................6
2.1. Assets of the commercial banks...............................................................................................8
2.2. Liabilities and Equity capital.................................................................................................13
CHAPTER III. Analyzing the influencing factors through the CAMELS model approach..............15
3.1. General: Business results, profits and factors affecting the bank's ability to generate
profits; indicators to evaluate the bank's business process...............................................................15
3.2 Liquidity Risk Analysis and Management in Banking...............................................................17
3.2.1. Net liquidity gap position:.................................................................................................18
3.2.2. Loan-to-Deposit ratio (LDR).............................................................................................20
3.2.3. Liquidity Coverage Ratio (LCR):.....................................................................................20
3.2.4. Liquidity reserve................................................................................................................21
3.2.5. Short-term funds used for medium to long-term lending (SFL):...................................21
3.2.6. Liquidity management..........................................................................................................23
3.3. CREDIT RISK..............................................................................................................................26
3.4. Operational risk - inherently present but challenging to control..............................................27
3.4.1. [Why Bank Profits Don't Decrease When Interest Rates Rise - LONGFORM]...........28
3.4.2. Interest-rate sensitivity......................................................................................................29
3.4.3. [CASE STUDY - SVB - Analyzing the Significant ALM Breakdown]...........................30
3.4.4. Exchange rate risk.............................................................................................................33
3.5. Capital Adequacy Ratio:..............................................................................................................36
3.5.1. [The Purpose of Bank Capital]..........................................................................................37
Chapter IV. General comments and assessments on the bank’s governance situation......................39
REFERENCE..........................................................................................................................................40
 Full name Tasks %
 Chapter II: Principal types of
accounts
1 Phạm Minh Tài - Leader 100 %
 Chapter III: Section 3.2 - Liquidity
Risk Analysis
 Chapter I: Organizational structure
 Chapter III: Section 3.3 - Credit
2 Nguyễn Thị Uyển Nhi Risk. 100 %
 Chapter IV: General comments and
assessments
 Chapter I: Organizational structure
 Chapter III: Section 3.3 - Credit
3 Hoàng Thị Hương Loan Risk. 100 %
 Chapter IV: General comments and
assessments
 Chapter II: Principal types of
accounts (Assets of commercial
4 Huỳnh Tấn Sang banks). 100%
 Chapter III: Section 3.4 -
Operational risk,
 Chapter II: Principal types of
accounts
5 Trương Đoàn Phước Thành  Chapter III: Section 3.5 - Capital 100 %

Adequacy Ratio,
 Chapter I. The organizational structure of management

The Annual General Meeting of Shareholders is the highest decision-making body

with the authority to decide on the election, dismissal of members of the Board of
Management and the Supervisory Board. The Board of Management is the governing
body responsible for deciding and executing the rights of the Bank, except for matters
within the authority of the Annual General Meeting of Shareholders.
The sub-committees such as the Executive Board, the Supervisory Board, Risk
Management Committee, Human Resources Committee, Strategy Committee, and the
Secretary of the Board of Management have specific functions:
- The Executive Board: manages and supervises all business activities, personnel, and
cooperative activities of the Bank. They formulate and execute strategies to promote the
Bank's development and profitability. They draft plans for the Bank's operations,
coordinate members to organize and implement strategies and network activities. They
also draft/update regulations and oversee the management and use of resources through
the network of member organizations.
- The Supervisory Board: monitors the Board of Management in managing and operating
the Bank and in implementing the business directions and objectives approved by the
Annual General Meeting of Shareholders. They oversee compliance with legal
regulations, the Bank's Articles of Association in governance and management.
- The Risk Management Committee: advises the Board of Management in approving
appropriate policies and directions related to various risks (credit risk, market risk,
operational risk, etc.), including determining ratios, limits/restrictions, and risk appetite
of the Bank. They propose strategies, risk management policies, risk prevention measures
across various operations to the Board of Management.
- The Human Resources Committee: advises and consults the Board of Management on
personnel-related issues, salary schemes, rewards, and other welfare policies of the Bank.
They actively contribute to planning, appointing, managing officials within their
jurisdiction, restructuring the organizational model by Blocs, and developing a suitable
workforce in line with VCB's development strategy and business objectives.
- The Strategy Committee and the Secretary of the Board of Management: are responsible
for comprehending the entire Board's work, reviewing and redistributing tasks to ensure
smooth operations. They construct work plans, excel in advocacy roles, advise the Board
of Management, and coordinate with related departments to accomplish critical tasks
assigned by the leadership.
Specialized Blocs such as Wholesale Banking Bloc, Retail Banking Bloc, Capital
Bloc, Risk Management Bloc, Finance Bloc, Partnership Bloc, Information Technology
Bloc, Support Bloc, and Human Resources Bloc within the Executive Board all have
specific duties and functions in managing and overseeing the operations of over 600
branch networks and representative offices of Vietcombank.
 Main VCB Service Offerings:
Account services
Capital mobilization services (savings deposits, bonds, term deposits)
Lending services (short-term, medium-term, long-term)
Bank guarantee services
 Discounting, rediscounting of transferable instruments and valuable papers
Payment and treasury services
Money transfer services
Credit card issuance services
Collection services
Foreign exchange services
Agency banking services
Domestic and international payment guarantee services
Other forms of credit issuance as per legal regulations
Supply of derivative products within the framework specified by the State Bank of
Vietnam (NHNN)
Other activities as per business license.
 Development and Investment Strategy
Vision for 2020: Become a digital bank in Vietnam, one of the top 100 banks in
the region, one of the 300 largest financial banking groups in the world, and
adhere to the best international regulations.
Enhance retail credit and low-cost capital mobilization; Diversify portfolios and
reduce non-performing loans for inefficient enterprises; Strengthen credit sales
linked to the use of banking services.
Focus on implementing the Three Pillars, the core of business operations: Service,
Retail, Capital Business, and Investment.
Restructure income sources; enhance cost control... especially a strong shift
towards digital banking, researching the application of 4.0 technology to develop
smart banking services. Maintain and expand the domestic market and selectively
develop foreign markets.
Ensure safety indicators according to NHNN regulations and Vietcombank's
objectives. Boost activities related to the handling of bad debt recovery, already
processed risk provisions.
Strongly innovate capital, foreign exchange, and trade finance business activities.
Continue to consolidate the operations of subsidiaries, improving investment
efficiency. Implement the transformation of the wholesale credit model.
Intensify investor relations activities.

Chapter II. The Principal Types of Accounts

A balance sheet, also known as a Report of Condition, provides a comprehensive
listing of a financial institution's assets, liabilities, and equity capital (owners' funds)
at a specific date. Financial institutions, just like other businesses, operate with the
fundamental balance sheet equation: Assets = Liabilities + Equity Capital. This
equation applies to financial-service providers in the same manner as it does to
nonfinancial companies.
For depository institutions, the assets on the balance sheet can be categorized into four
main types:
- Cash held in the vault and deposits with other depository institutions (C).
- Government and private interest-bearing securities acquired through open market
purchases (S).
- Loans and lease financing extended to customers (L).
- Miscellaneous assets (MA).
Liabilities are primarily divided into two categories:
- Deposits from and owed to various customers (D).
- Nondeposit borrowings from the money and capital markets (NDB).
- Equity capital (EC) represents the long-term funds contributed by the owners.
In summary, the balance sheet identity for a depository institution is expressed as
follows:
C + S + L + MA = D + NDB + EC
Cash assets (C) serve the purpose of meeting the institution's immediate liquidity
needs, ensuring that there are readily available funds to cover deposit withdrawals,
customer loan requests, and other unexpected cash requirements. Security holdings
(S) act as a secondary source of liquidity and include income-generating investments.
Loans (L) are primarily provided to generate income, while miscellaneous assets
(MA) are typically composed of fixed assets (such as property and equipment) and
investments in subsidiaries if applicable.
Deposits (D) represent the primary source of funding for banks, with nondeposit
borrowings (NDB) used mainly to complement deposits and provide additional
liquidity beyond what cash assets and securities offer. Equity capital (EC) provides a
stable, long-term financial base that supports the institution's growth and helps cover
extraordinary losses when they occur.
A useful perspective on the balance sheet identity is to recognize that liabilities and
equity capital represent the aggregated origins of funds, which furnish the necessary
financial resources for acquiring assets. In contrast, a bank's assets constitute the
 cumulated applications of funds, and these assets are deployed to generate profits for
shareholders, pay interest to depositors, and remunerate employees for their services
and expertise. Thus, the balance sheet identity can be simplified as follows:
Accumulated uses of funds (assets) = Accumulated sources of funds (liabilities and
equity capital)

(Source: Complied by the authors)

2.1. Assets of the commercial banks
The classification of a bank's assets, as per the Basel framework, revolves around the
demarcation of the Banking Book and the Trading Book.The banking book, primarily

consisting of hold-to-maturity assets, is characterized by its income-generating nature,

focusing on fixed-income investments. The key evaluation revolves around the ability
to effectively carry the portfolio and managing credit risk, which directly influences
the economic return achieved by considering returns, cost of funds, and cost of
capital. The trading book is a multifaceted portfolio, involving both income
generation and trading strategies. It is associated with a broader risk spectrum,
encompassing credit risk and market risk. The evaluation of this portfolio's
performance is based on the economic return formula, which factors in returns, cost of
funds, and cost of capital, while considering credit and market risk components.
Additionally, the trading book is distinctive for its short-term investment horizon, with
assets held for less than one year. In the process of asset allocation on the balance
sheet, a crucial point of emphasis is the significant allocation of assets in the Banking
Book of the bank. This reflects a particular focus on activities primarily related to
holding to maturity, which entails a focus on assessing the profit realized after
offsetting the fees associated with the assets held. However, it's important to note that
in the Trading Book, one must also consider factors related to the cost of capital. This
signifies that assets in the Trading Book require a distinct consideration for the cost of
capital and addresses the tolerance for market risk.
Figure 1: Vietcombank's 2022 Consolidated Financial Report
 Cash and Interbank asset
The "Cash and Interbank Asset" category, a foundational component of a banking
institution's financial reports, comprises various elements critical to its financial
operations. It encompasses physical cash reserves securely stored within the bank's
vault, deposits placed with other depository institutions, often referred to as
correspondent deposits, and outstanding cash items, with a primary emphasis on
uncollected checks. Moreover, it includes loans extended to other financial institutions
in the interbank market, along with mandatory reserve requirements and excess
reserve balances held at the State Bank of Vietnam (SBV). For prudent management,
banks are required to allocate provisions to mitigate potential risks associated with
their interbank asset portfolio. Most interbank asset portfolios are categorized under
the banking book, comprising deposits with maturities of less than 3 months and loans
with maturities exceeding 3 months. This classification is closely associated with the
bank's liquidity ratios, such as the Loan-to-Deposit (LDR).
The cash and interbank asset accounts, often collectively referred to as primary
reserves, play a pivotal role in safeguarding the bank's liquidity. In Figure 1, it can be
observed that cash and interbank assets represent 23.6% of the total asset portfolio, a
significant proportion. They act as the primary source of funds when customers seek
to withdraw deposits or when the bank needs to fund loans. However, it's worth
noting that these cash holdings generate minimal to no interest income, and banks
generally strive to minimize the size of this account to enhance their overall
profitability.
 Investment Securities: The Liquid Portion
To further safeguard against cash demands, banks maintain a category of highly liquid
assets known as secondary reserves or referred to as "investment securities available
for sale" in regulatory reports held by the Treasury department. This portfolio
typically includes short-term government securities, SBV bills, debt securities issued
by domestic credit institutions (known as FI bonds), corporate bonds and equity
securities. Secondary reserves play an intermediary role between cash assets and
loans, serving as a source of additional income. These assets are designed for easy
conversion into cash on short notice, typically within a year. This category constitutes
approximately 5.6% of VCB's total asset portfolio.
 Investment Securities: The Income-Generating Portion
The category consisting of bonds, notes, and other securities held primarily for their
yield to maturity is referred to as the income-generating portion of investment
securities. These securities are often referred to as "held-to-maturity securities" in
regulatory reports held by the Asset-Liability management (ALM) department. This
category includes various types of bonds, such as government bonds, government-
guaranteed bonds, local government bonds, bonds issued by domestic economic
organizations, bonds issued by domestic credit institutions (FI bonds, Certificates of
Deposit), and VAMC bond (VCB has run out of VAMC bonds for a long time). This
portfolio carries an equivalent weight to the Available for Sale Securities portfolio.
 Investment securities: Hold for trading.
These securities include debt instruments, equity securities, and other financial
instruments issued by domestic credit institutions and economic organizations. The
"hold for trading" portfolio is relatively modest in size when compared to the AFS and
HTM categories, and it is predominantly managed by the Treasury department for the
purpose of price arbitrage. Initially, trading securities are recorded at their historical
cost, and later, they are reported at the lower of their carrying value or market value.
 Loans
The most substantial asset category within a bank's balance sheet is typically
comprised of loans and leases, representing a significant portion ranging from half to
nearly three-quarters of the total asset value.
Inclusive of Loans to Domestic Economic Entities and Individuals; Discounting of
Transferable Instruments and Marketable Securities; Financial Lease Arrangements;
and Lending to Foreign Entities and Individuals.
Loans can also be categorized differently, including by maturity (short-term versus
long-term), credit quality (e.g., standard loans, watchlist loans, …), or by industry and
business type.
Customer loans all carry risks, primarily credit risk and concentration risk. According
to Circular 11/2021/TT-NHNN dated July 20, 2021, issued by the State Bank of
Vietnam (SBV) on the classification of assets, risk provisioning levels, and methods
for setting up provisions for risk management in the operations of credit institutions
and foreign bank branches, the classification of loans is as follows:
- Group 1 Loans: Loans with the ability to recover both principal and interest on
time.
- Group 2 Loans: Loans overdue by less than 1 month.
- Group 3 Loans: Loans overdue from 1 to 3 months.
- Group 4 Loans: Loans overdue from 3 months to 1 year.
- Group 5 Loans: Loans overdue by more than 1 year, and loans pending
government resolution.
Non-performing loans consist of loans from Group 3 to Group 5.
 Financial Derivative Instruments and Other Financial Assets
This section of VCB encompasses forward USD contracts sold by the central bank, as
well as USD swap contracts. Some banks also engage in interest rate swap contracts.
In the case of USD swap transactions, when other banks undertake these activities, the
only onshore counterparty is VCB, or they borrow offshore from foreign banks at a
higher cost. Regarding the purchase of cancelable forward contracts, the State Bank of
Vietnam (SBV) intervened in the exchange rate stability by forward selling USD in
the periods 2018 and 2022.
 Miscellaneous Asset

 Fixed Assets Bank assets also encompass the net value of real estate and
equipment, adjusted for depreciation. Typically, a banking institution allocates a
 small portion, usually less than 2 percent, of its assets to physical assets such as
buildings and equipment required for daily operations. The majority of a bank's
assets are in the form of financial claims, such as loans and investment securities,
rather than physical assets. Nevertheless, these fixed assets come with associated
operating costs, including depreciation expenses and property taxes, which create
operating leverage. This leverage allows the institution to increase its operating
earnings by growing its sales volume and generating more revenue from these
fixed assets than the costs associated with them. However, due to the limited share
of fixed assets relative to other assets, banks cannot heavily rely on operating
leverage to enhance their earnings. Instead, they predominantly depend on
financial leverage, utilizing borrowed funds, to maximize earnings and compete
effectively with other industries in attracting capital.

 Intangible Assets: This category encompasses land use rights, copyrights, patents,
and other intangible assets, which constitute an insignificant proportion of the
commercial bank's accounting balance sheet.

 All Other Assets This account comprises investments in subsidiary companies,

customer liabilities related to outstanding acceptances, earned but uncollected loan
income, net deferred tax assets, excess receivables from residential mortgage
servicing fees, and various other assets.
2.2. Liabilities and Equity capital

 Government and State Bank of Vietnam (SBV) Liabilities

This category includes fixed-term deposits sourced from the State Treasury and
deposited in banks, specifically routed through the big 4 banks. Additionally, it
involves obtaining funds from the State Bank of Vietnam (SBV) through Repurchase
Agreement (REPO) transactions, and the placement of deposits with the State Bank of
Vietnam by domestic banks.
 Deposits and Borrowings from Other Credit Institutions
This category includes both term and non-term deposits denominated in VND and
foreign currencies placed with other commercial banks. In addition, it encompasses
borrowings from other credit institutions, although the proportion is relatively small
when compared to the section on lending to other credit institutions. This indicates
that VCB frequently engages in lending activities rather than relying on interbank
borrowing.
 Customer Deposit
This section comprises both term and non-term customer deposits, which constitute a
significant portion of the liability’s portfolio. These deposits, categorized as market 1
deposits, are factored into the Loan-to-Deposit ratio (LDR). Additionally, there are
specialized capital deposits and reserve deposits with negligible proportions.
 Issuance of valuable paper
Primarily consisting of Certificates of Deposit, treasury bills, and bonds, banks issue
marketable securities for two main purposes. Firstly, to address liquidity requirements,
and secondly, to include medium to long-term bonds in the calculation of the Capital
Adequacy Ratio (CAR). However, these liabilities must qualify as subordinated debt
to be considered in this category.
Recently, under Article 7, Amendment to Circular 06/2023/TT-NHNN, credit
institutions are not allowed to lend for "deposit purposes." This directly impacts the
liquidity of commercial banks because the core business of securities companies
involves a long-established practice of short-term borrowing and long-term lending.
This means borrowing short-term credit contracts and purchasing specific papers such
as Certificates of Deposit (CD) and Financial Institution (FI) bonds from credit
institutions. This serves as a source of funding for banks, allowing them to transform
short-term funds into longer-term lending for medium to long-term loans. This can be
seen as a mutually beneficial relationship. With the lending restrictions introduced in
Circular 06, banks must scrutinize the purpose of borrowing for outstanding balances
to securities companies, whether it is for "margin lending" or, essentially, "extending
short positions." As a result of this review, both the liquidity of securities companies
and banks are affected, with immediate repercussions for securities companies when
temporary credit is restricted. However, in the long run, the matter of handling Short
for Long (SFL) when the ratio approaches its 30% limit is a more significant concern.
In the history of handling this ratio, there is a clear trend for banks to issue more CDs
and bonds to address the issue. Since the SFL was at 60% in 2016, it has been
consistently addressed until now, which means the handling of SFL has been
 professional and well-managed. The simplest way to deal with this ratio is to attract
customers to deposit their funds for the long term and offer them the assurance of no
interest loss if they withdraw early. The next step is to address it through securities
companies, although this has been limited by Circular 06 now. Therefore, banks need
to limit the practice of short-term lending for longer-term purposes, and with the
transition to Basel III, SFL will be replaced by Net Stable Funding Ratio (NFSR).
This is a hopeful development, as NFSR involves weight rather than just volume. It is
more comprehensive and transparent.
 Other Liabilities
This category primarily comprises interest-bearing deposits from customers and other
credit institutions, interest on the issuance of marketable securities, and various
financial instruments. Additionally, it includes internal payables, external payables,
and welfare reward funds.
 Shareholders' Equity
Predominantly composed of registered capital, retained earnings, and reserves of the
credit institution. Items such as exchange rate differences have negligible impact
within this category.

CHAPTER III. Analyzing the influencing factors through the

CAMELS model approach
3.1. General: Business results, profits and factors affecting the bank's ability to
generate profits; indicators to evaluate the bank's business process.
 ROA
The profit margin on the average total assets of the bank in 2021 was 1.6%,
increasing to 1.85% in 2022, indicating a more efficient use of resources in 2022
compared to 2021. This implies that in 2022, for every 100-dong worth of assets, the
bank generated a profit of 1.85 dong after tax. This index increased by 0.25% compared
to the same period in 2021. The significant increase in after-tax profit in 2022, around
36.37%, is attributed to higher interest income from deposits influenced by the high-
interest rate environment in 2022. Service income increased as the bank effectively
deployed and diversified insurance, payment (especially card services), and trade finance
products. Net interest income from foreign exchange operations increased due to higher
foreign exchange trading volume by VCB compared to 2021, and the total assets in 2022
increased significantly by about 28.2%. The higher growth rate in after-tax profit
compared to the total asset growth led to an increase in Vietcombank's Return on Assets
ratio. Specifically, the high business growth scale, with credit increasing by 19%
compared to the end of 2021, reaching over 1.1 quadrillion VND.

 ROE
The return on average equity for the bank was 21.66% in 2021 and increased to
24.44% in 2022. This indicates that in 2022, out of every 100 dong of profit, 24.44 dong
belonged to equity holders. This index increased by 2.78% compared to the same period
in 2021. Similar to ROA, the strong growth in after-tax profit in 2022, approximately
36.37%, was due to positive shifts in capital mobilization and credit in the right direction.
The total equity in 2022 increased significantly by about 24.23%. Notably, despite other
banks reducing the proportion of Current Account Savings Account (CASA),
Vietcombank maintained stability at 34%, supporting the increase in Net Interest Margin
(NIM) and subsequently enhancing ROE.

 NIM (Net Interest Margin)

Vietcombank leads in NIM with 3.3% in 2022. NIM stability is maintained through
reduced cost of capital and increased lending. Net interest income, the bank's main source
of revenue, reached 53,246.478 billion VND in 2022, an almost 26% increase compared
to the previous year, mainly from lending services. Efficient capital source management,
especially maintaining a high proportion of Current Account Savings Account (CASA),
contributes to the improvement of NIM. Furthermore, the continued shift in the credit
portfolio towards increasing the retail share also helps enhance NIM.

 Net Non-Interest Margin

Apart from strong credit growth, Vietcombank's non-interest business activities also
experienced significant growth, contributing to sustainable profit growth. In 2022, non-
interest income reached 14,836 billion VND, a 3.3% increase compared to 2021,
completing 108.7% of the 2022 plan. Notably, foreign exchange business saw a high
growth of 31.86%, reaching nearly 5,768.445 billion VND. The securities investment
trading segment recorded a profit of nearly 166.830 billion VND, a 195.73% increase in
net profit from business operations.

 NII (Net Interest Income)

In 2022, net interest income increased by 25.9% compared to the same period,
reaching over 53,246 billion VND. The decline in net profit from service and other
activities was offset by a significant increase in foreign exchange business activities,
reaching 5,768 billion VND, a 31.8% increase. Operating expenses in 2022 increased
sharply by 20.3% to 21,250 billion VND, corresponding to an increase of 3,584 billion
VND compared to the same period. The cost-to-income ratio (CIR) is at 31.2%.
Additionally, Vietcombank allocated 9,464 billion VND from profits to risk provisions, a
17.6% decrease compared to the same period. As a result, the bank's profit before tax
exceeded 37,368 billion VND, a 35.9% increase compared to the previous year.
3.2 Liquidity Risk Analysis and Management in Banking
Liquidity risk, often referred to as funding liquidity, stems from maturity mismatch,
where a bank borrows short-term and lends long-term to maximize Net Interest Margin
(NIM) within the allowed Risk-Weighted Assets (RWA). Liquidity risk arises when a
bank faces a shortage of funds and lacks sufficient liquidity ratios. Textbook strategies
for liquidity risk management include:
 Asset Liquidity Management: Banks purchase liquid assets and, if short on funds,
sell or pledge these assets to generate cash.
 Borrow Liquidity Management: In case of a cash shortage, banks borrow the
required amount.
 Balanced Liquidity Management: Combining both asset and borrowing strategies.
 Source and Use of Fund Approach: Predicting future funding sources.
 Structure Fund Approach: Forecasting cash flows from assets.
 Liquidity Indicator Approach: Utilizing liquidity ratios for liquidity management.
Banks typically apply all these strategies simultaneously. However, the question
arises: Is there still a risk of cash shortage? The concept of cash shortage for a bank is
somewhat elusive. Cash shortage implies an inability to borrow, sell bonds, or, in
extreme cases, being subject to regulatory control. Classic liquidity risk instances, as
observed in Vietnamese banks like ACB during the arrest of Mr. Bầu Kiên or due to
unexpected events like the COVID-19 pandemic causing a rush in cash withdrawals,
underscore the importance of liquidity risk.
Managing liquidity risk becomes challenging due to unforeseen events, making it
necessary to establish stringent controls. Basel regulations propose holding additional
liquid assets through Liquidity Stress Tests. The aim is not just to calculate potential
losses but to determine the amount of extra liquidity reserves needed. The challenge lies
in assessing all factors comprehensively during adverse liquidity conditions, including
potential bailout scenarios. In the case of ACB and MSB, liquidity risk was idiosyncratic,
originating from other factors, whereas at a systemic level, unless a bank resembles
Greece, it can be rescued.
Historically, liquidity risk management has been compliance-oriented, addressing
ratios periodically. However, adopting a proactive approach, forecasting cash flows
alongside maintaining prudent ratios, significantly mitigates costs. Banks that have not
encountered challenges related to Liquidity Coverage Ratio (LCR), Loan-to-Deposit
Ratio (LDR), or Net Stable Funding Ratio (NSFR) are likely operating below optimal
levels.
3.2.1. Net liquidity gap position:

Examining VCB's liquidity position at the end of 2021 reveals a negative gap of
approximately 100 trillion VND for short-term contracts and a 16 trillion VND gap for
contracts exceeding 5 years. VCB's model, focusing on "borrowing long and lending
short," relies heavily on mobilizing around 300 trillion VND, with approximately 283
trillion VND allocated to short-term lending. The negative 100 trillion VND gap is
considered a liquidity gap on contracts rather than reflecting the renewal or new
mobilization behavior. In reality, this gap is much smaller due to the renewal and new
deposits. VCB's significant lending portion consists of 3 to 12-month contracts,
comprising 32% of the total and over 5-year contracts at 25%. VCB's strategy involves
extending loans with maturities exceeding 5 years, mainly for personal purposes, offset
by issuing long-term securities.

By 2022, VCB's liquidity position remained negative for contracts shorter than 1
month, around 84 trillion VND, reflecting a high concentration of deposits (nearly 300
trillion VND) with less than 1-month maturity, while short-term lending constituted only
around 9%. The largest funding and lending activities for VCB occurred in the 3 to 12-
month maturity range, and the status had shifted to a 3% negative gap, indicating frequent
renewal of deposits and loans in this maturity range. For contracts exceeding 5 years, the
situation turned positive, showing reduced renewal of long-term loans, possibly
influenced by economic uncertainties. Despite economic challenges, being a state-owned
bank, VCB experienced a moderate decrease in deposit renewals, and customers
continued renewing corresponding loans despite fluctuating interest rates in 2022.
Liquidity Ratio: In accordance with Circular 22/2019-TT/NHNN, commercial banks in
Vietnam are mandated to adhere to specific liquidity ratios, including those in Interbank
Market: Required Reserve Ratio (RRR), Liquidity Coverage Ratio (LCR), Loan-to-
Deposit Ratio (LDR), Liquidity Reserves, and Market 1's Short-term Funding Liquidity
Ratio (SFLR).

The primary market, serving as both the entry and exit points for capital, is heavily
influenced by factors such as inflow. Inflows determine deposits, liquidity ratios (LCR,
LDR, SFLR), and the conditions for granting room. Thus, inflow is a crucial determinant
for interest rates in Market 1. Restructuring existing debt and offering new loans at lower
interest rates both depend on the availability of inflows. Various types of flows, such as
currency exchange, FDI, FII arbitrages, play a role in determining inflows. Predicting
these flows is challenging, relying more on observation and perception rather than clear-
cut evidence.

The interbank market serves as the venue for addressing liquidity needs, providing
liquidity in quantity for Market 1. The State Bank of Vietnam (SBV) governs this market
through Open Market Operations (OMO) and Bills. It's essential to emphasize that the
SBV controls money supply and interest rate margins in this market, but it cannot entirely
address liquidity needs concerning ratios. Liquidity ratios cannot be managed solely
through OMO lending. However, the importance of Market 2 should not be undermined
for this reason. Market 2 indicates the correlation in monetary volumes, revealing surplus
or deficit through liquidity indicators, OMO, BILL, swaps, etc. Given its short-term
nature, sudden shifts in this market are normal, but prolonged anomalies warrant
attention. As this is the liquidity gateway, substantial amounts of money flow directly
from various sources and are reflected in Market 2 rather than Market 1. Therefore, to
gauge sensitivity in liquidity, analysts often scrutinize interest rates in Market 2. The
fluctuation in interest rates is a somewhat ambiguous indicator. For instance, Swap 6.
may signal instability, while Swap 3. appears more stable. Market 2 not only influences
SBV and flow but also directly links with the State Treasury, making it a complex
landscape.

3.2.2. Loan-to-Deposit ratio (LDR)

The Loan-to-Deposit Ratio (LDR) as per the State Bank of Vietnam (SBV)
regulations for Vietcombank (VCB) in 2021 and 2022 were 77.8% and 73.9%,
respectively. Being a state-owned bank, VCB's reported figures are favorable and well
below the maximum LDR limit of 85% set by the SBV in Circular 22/2019. In terms of
LDR, achieving a balance around 90-93% is considered effective. The internal LDR,
calculated solely based on the loan portfolio over the total deposits, is typically over
100% for non-big four banks, as it excludes valuable papers. This makes it easily
verifiable in financial reports, presenting these banks as robust entities. Even a bank rated
as very secure, such as ACB, reported an LDR above 100% in the Q3/2022 financial
statements, surpassing the 90% threshold. Additionally, the LDR figures for 2022 were
computed based on Circular 22/2019/TT-NHNN and Circular 26, amending and
supplementing Circular 22/2019/TT-NHNN by incorporating 50% of deposits from the
State Treasury into the ratio. This adjustment alleviates the pressure on the entire banking
system in managing LDR.

Previously, the big four banks faced challenges in handling LDR due to the flow
of government funds through them. As these banks lent the money received to tier 2
institutions, they often struggled to meet LDR requirements. Notably, the distinction
between loans and deposits posed a technical challenge, especially considering that loans
did not account for funds borrowed or deposited with other credit institutions. Including
50% of State Treasury deposits in the ratio has significantly reduced the pressure on the
big four banks in managing LDR, paving the way for an increased credit room. This is
particularly relevant for addressing corporate bond maturities, converting them into loans,
and facilitating credit expansion in 2023. With the substantial liquidity expected from
State Treasury deposits in early 2023, estimated to be around 200 trillion VND according
to SBV data of approximately 600 trillion VND, managing these funds for public
investment projects is anticipated to be less burdensome. The ample liquidity in the
interbank market further supports this outlook.

3.2.3. Liquidity Coverage Ratio (LCR):

The Liquidity Coverage Ratio (LCR) for Vietcombank (VCB) is calculated using
the formula: high-quality liquid assets / total net cash outflow over 30 days. The ability to
pay in VND for the years 2021 and 2022 is 72.6% and 73.1%, respectively, while the
ability to pay in USD is 61.6% and 96.3%, correspondingly. It's important to note that
Open Market Operations (OMO) lending cannot address this ratio. Additionally, the LCR
ratio is converted based on the provisions of Circular 22/2019-TT/NHNN, with 10% in
USD and 50% in VND.
VCB's LCR is considered relatively secure as it can sufficiently meet cash
outflows within 30 days. The significant increase in the ability to pay from 62% to 96%
in 2022 can be attributed to a policy change at the beginning of 2018. The State Bank of
Vietnam (SBV) implemented a policy like that of 2018, involving the sale of forward
USD with immediate cancellation. This policy proved to be erroneous and led to liquidity
tensions in the interbank market. Banks needed USD to meet customer demands and had
to borrow USD, mainly through USD-VND swaps. VCB became the primary onshore
lender for USD, as other banks would otherwise have to borrow offshore at high costs.
The severe USD shortage resulted in a negative USD-VND interest rate spread in May
2022 (the first time since 2018), increasing the demand for holding USD as the USD
interest rates remained high. In Q3/2022, SBV implemented a series of policies to
stabilize the situation, including issuing bonds and conducting OMO lending, while
simultaneously adjusting the exchange rate band to ±5% and raising OMO interest rates
to 6.5%. These measures aimed to cool down the exchange rate and alleviate pressure on
the gap USD-VND swap. This is why VCB's 30-day ability-to-pay ratio was
exceptionally high in 2022, as it became the sole avenue for other banks to borrow USD,
indicating that VCB had an excess of USD.
3.2.4. Liquidity reserve
As for the liquidity reserve, it is calculated as high-quality liquid assets / total
liabilities. Foreign banks and branches are required to maintain a minimum liquidity
reserve ratio of 10%. VCB's liquidity reserve ratio increased from 14% in 2021 to 25% in
2022, demonstrating VCB's commitment to ensuring liquidity, especially after the
liquidity crisis at SCB. NHNN's decision to close clean lending lines between banks led
to a shortage of overall liquidity in the market. Therefore, VCB is maintaining a relatively
safe liquidity reserve ratio amid potential liquidity fluctuations, especially given the high
anchoring pressure of USD.
3.2.5. Short-term funds used for medium to long-term lending (SFL):
This ratio has been tightly regulated by the State Bank of Vietnam (SBV), with a
planned reduction to 30% for the use of short-term funds for long-term borrowing
purposes. To meet the lending needs beyond 1-year, financial institutions must either
mobilize more funds or increase their long-term funding sources. If this ratio is not
maintained, two possibilities arise. Firstly, the conversion of short-term funds into long-
term ones, and secondly, an increase in the issuance of valuable papers. Given that long-
term deposits exceeding 1 year are rare, the most feasible and prompt approach is often to
mobilize long-term funds. For Vietcombank (VCB), a bank that explicitly reflects the
SBV's intentions, this ratio is consistently maintained at a very secure level. Despite not
being publicly disclosed in reports, it can be clearly observed in liquidity risk notes. To
comprehend the impact of this ratio, one can examine the case of TCB (Techcombank)
more closely.
According to the financial statements released at the end of June (Figure 1)
(verified), nearly VND 90 trillion in customer deposits with short tenors (1-3 months)
were converted into long-term deposits (1-5 years). This miraculous transformation is
akin to generating an additional VND 120 trillion in credit in just 9 days. This
phenomenon is primarily addressed by the SFL. In Q1, this ratio was 33.5% (Figure 2),
while in Q2, it decreased to 31.6%. This implies that the cost of rolling over debts for
VIC and ensuring compliance with this ratio was around VND 1,800 trillion, calculated
as VND 90 trillion multiplied by 1.5% per year (the difference between short-term and
over 1-year rates). This cost is solely for managing liquidity ratios. Considering the
calculations, TCB must handle a similar situation in October when this ratio is expected
to drop to 30%. Similar costs will be incurred, impacting on interest income, which has
already decreased since the beginning of the year. Furthermore, considering the
likelihood of continued rolling for VIC in the real estate market, the near future appears

challenging for the profitability of the banking sector.

 Conclusion: Most banks, excluding the big four, face difficulties in managing the SFL
ratio. However, for the big four banks, this is not a concern.
3.2.6. Liquidity management
[What have banks prepared for today? - A HISTORY OF HANDLING NFSR]
Since June 2023, there has been a trend among banks to increase the issuance of
certificates of deposit (CDs) and bonds to address the SFL ratio. From when the SFL was
at 60% (in 2016) until now, the handling of the SFL has become more professional. Let's
take a brief look at the history of dealing with the SFL.The simplest way to manage this
ratio is to attract customers to deposit for the long term, ensuring no interest loss upon
early withdrawal. Every Tet holiday and spring season, there is a pattern of offering 13-
month fixed-term deposits with monthly interest payments and the option for early
withdrawal without fees. While effective, this approach requires effort and time, usually
applied towards the end of the year.
Another straightforward method involves collaborating with securities companies.
Banks permit these companies to borrow short-term funds for business purposes,
purchasing CDs, or restructuring their own portfolios into long-term sources. Although
this approach has been used for centuries, banks employ various other methods.
Nevertheless, the consensus is that handling the SFL incurs costs and is not sustainable.
In the long run, increasing long-term funding and reducing long-term lending is a
mandatory requirement. The development of corporate bonds has been a lifeline for many
banks, particularly Techcombank (TCB), which leads the market in terms of issuance
volume. Everyone understands that tightening measures will eventually be implemented,
but no one expected it to be so painful. For instance, TCB reported an SFL ratio of 28.8%
at the end of 2022, and after adjusting some items in the Q2 report, it increased to 31.6%,
incurring significant costs to bring it back to 30%.
In mid-2023, the State Bank of Vietnam (SBV) conducted a review of secondary
deposits from securities companies, adding more weight to the challenge of managing the
SFL ratio. Ultimately, banks had to return to the basics, increasing CD issuances. In
summary, this has been an extended journey from 60% to the current 30%, representing
the history of the banking industry. At present, we do not view this development as
positive, but considering the numerous postponements, it is time to conclude the
discussion on SFL. If Basel III replaces SFL, it is undoubtedly a welcome change. Non-
financial sector requirements (NFSR) are preferable as they are based on weight rather
than simple volumes, providing a more comprehensive and transparent assessment.
[Corporate bonds structure and liquidity]
In the past, most Corporate Bond (CB) deals were primarily aimed at addressing
the Loan-to-Deposit Ratio (LDR) as it was not considered in the Loan category.
Consequently, the LDR remained below 100%, and interbank funds were not utilized to
manage Tier 1 capital. However, the internal LDR would rise above 100%. This
regulation made selling CBs to individuals a powerful tool in managing the ratio.
If this aspect is not restructured or cannot be repaid, banks are likely to bear the
burden. Solutions proposed by experts, such as creating a Vietnam Asset Management
Company (VAMC) for these bonds, are not practical. VAMC simply acts as a Special
Purpose Entity (SPE) to remove the debt to make the balance sheet look better. However,
for the bank, it needs fresh money, and VAMC is not a practical solution. Banks prefer
extending the timeline to reduce bad debts rather than relying on VAMC.
Banks have significant motivation to restructure this portfolio, as many bonds
belong to Large-Corporate Customers of the banks. Hence, restructuring these bonds is
also restructuring for the Large-Corporate Customers, who not only have bonds but also
have significant loan exposure to the bank. Therefore, it is highly probable that banks will
have to retain this portfolio. If banks must retain this portfolio, there are several
considerations:
+ Room: Banks must have sufficient room. This is not difficult as the State Bank of
Vietnam (SBV) will support the transfer from shadow to bright banks.
+ Liquidity: This is a much more challenging issue. When these bonds are brought
into the internal balance sheet, the problem lies in the liquidity ratio, which does not
allow the SFL ratio to exceed 30% when selling bonds to individuals, compared to the
previous 50%. Handling this is extremely difficult, and if banks are to retain these bonds,
they will likely need to relax this ratio.
This approach can be termed as a collaboration between banks and individuals.
Individuals provide the funds, and banks bear the risk. Importantly, it resolves a highly
complex issue in the market – the trustee function, specifically, "the Control-after-Trustee
function”, which is the most lacking function in the market, is Trustee - a party that
understands the business and has a voice. This cannot be delegated to a fintech, an
agency, or anyone else. Why not make Corporate Bonds a capital contribution of the bank
and the individual, where the bank primarily plays the role of Asset Manager and Trustee.
Then, the payment guarantee reserve will not count towards the room but will still require
the bank's off-balance sheet reserve (including both sold and contributed capital). This is
the optimal solution we believe.
In this scenario, the bank is obliged to reserve the entire amount, not only for its
ownership portion but also for the customer's portion as a full loan (with a certain ratio
for the customer). Customers in this case are essentially Funding units, so the pure
funding cost remains nearly unchanged. Banks act as Trustees, and customers will be
assured of many benefits.
The Interest Rate might not be a true credit risk, but it is a necessary tool for a
more transparent market. Both sides benefit: one has the funds, and the other has
experience. In general, this approach is the most elegant. It's not to criticize the creation
of VAMC, but it is less practical. Hopefully, someone from the SBV or MOF will
consider this approach, as we believe it can save the market for a thousand years.
[Behind the CASA, a rather intricate banking story]
At first glance, the CASA ratio appears to be recovering, but looking a bit deeper
and reading the details of each report reveals otherwise. Besides VCB, most banks have a
real Loan-to-Deposit Ratio (LDR) (i.e., the portion calculated only from Term 1 deposits
that is over 100%). TCB, MBB, CTG, and BID all have this ratio exceeding 100%, and
netting it out shows that VCB is providing a net interbank lending of over 100 billion
VND to other banks. In general, there seems to be an issue with Term 1 liquidity. Why?
Because there is currently an excess of funds, but the Cost of Funds (COF) is
increasing. Don't let the CASA myth below deceive you. TCB had to deal with moving
deposits from 1-5 years, so what advantage does that CASA have when the COF is still
increasing? Everyone has their own story. For example, MBB, in the first 6 months of the
year, had over 10 trillion VND of Group 2 debt "pulled out." In the case of VP Bank, we
might need to read the reports for clarity, as handling the burden for NVL can be
exhausting. The issue might become more challenging in October when the SFL ratio is
reduced from 34% to 30%. This implies that banks with long-term loans (mostly joint-
stock commercial banks) will face challenges in rolling over long-term funds. At this
point, interest rates are challenging to keep lower as directed.
In general, the decrease in profits, coupled with the recovery of the CASA ratio, is
still quite low, and it does not accurately reflect the bank's COF in the current period. A
new trend has emerged recently, which is the increase in CD issuances by banks, and the
ultimate buyers are mostly the banks themselves. Part of it is to handle the SFL ratio, but
no one is genuinely surplus except for VCB. It seems to be quite contradictory. Rolling
over a massive amount of real estate debt currently is a headache for the entire system in
terms of balance and, of course, the risk when we are maintaining extremely low interest
rates. In this situation, one should not criticize Vietnam for having high-interest rates. For
instance, even VIN, issuing offshore bonds at a rating of C and having a USD borrowing
COF of 17-18%, can still borrow at 10% when coming back to Vietnam. Of course, the
sources are not abundant, but this is considered cheap.
3.3. CREDIT RISK
Capital mobilization has been
managed appropriately to support
credit growth, and the structure of
mobilized capital and credit
continues to shift in the right
direction. Market capital
mobilization reached nearly 1.26
quadrillion VND (according to
Vietcombank's Annual Report),
increasing by 9.1% compared to
2021.
Credit growth surpassed the
1.15 quadrillion VND mark,
increasing by 19% compared to the
end of 2021. Wholesale credit
growth was 18.5%, while retail credit growth reached 19.4% compared to 2021. With
strong financial capacity and effective risk management, Vietcombank mainly poured
capital into priority sectors, earning it the highest credit room from the State Bank of
Vietnam (SBV). However, Vietcombank's Loan-to-Deposit Ratio (LDR) remains among
the lowest in the banking system. In 2022, the LDR decreased to 73.9% from 77.8% in
2021. Thus, Vietcombank's credit risk is very low.
Regarding deposit and lending to other credit institutions, Vietcombank recorded a
38.8% increase compared to 2021, reaching 313.6 trillion VND, with 283.7 trillion VND
being deposits from other credit institutions and 40.7 trillion VND being loans to other
credit institutions. In terms of lending to customers, Vietcombank lent over 1.145
quadrillion VND in 2022, a 19.2% increase from the beginning of the year. The risk
reserve fund for customer loans as of December 31, 2022, amounted to 24.779 trillion
VND, lower than the same period in 2021 by 961 billion VND, corresponding to 3.7%.
The reduction in the risk reserve fund was due to Vietcombank using 3.53 trillion VND
from the fund to handle difficult-to-recover loans.
Customer deposits at Vietcombank in 2022 increased by 9.5% to nearly 1.24
quadrillion VND. However, for term deposits and loans to other credit institutions, the
non-performing loan (NPL) ratio increased unusually to 5.7%. Vietcombank added risk
provisions of 6.888 trillion VND, raising the total risk provisions for term deposits and
loans to other credit institutions to 10.84 trillion VND, compared to 2.3% in 2021.
Credit quality has been well controlled, and Vietcombank increased provisions,
with the coverage ratio of bad debts remaining among the highest in the system at 317%.
Despite a 19% increase in total outstanding loans at the end of 2022 to 1.145 quadrillion
VND, the ratio of substandard and doubtful debts decreased, and the ratio of potentially
irrecoverable debts increased to 50%, pushing the bad debt ratio on outstanding loans
slightly from 0.63% to 0.68%. The total bad debts at the end of the year increased by
27% to 7.82 trillion VND, with a bad debt ratio of 0.68%, still significantly lower than
the assigned target.
The credit risk provision cost decreased because the bank effectively implemented
control measures, ensured credit quality, regularly updated information about customer
groups with related relationships, and focused on managing credit risk. The bank's credit
portfolio shifted in terms of direction, customers, and industries. Vietcombank also
effectively implemented competitive interest rate loan programs linked to the
development of using associated products and services, and deployed action plans for
conversion. The bank has been enhancing service quality, customer experience,
automation, and operational optimization. Ensuring credit growth is closely tied to
strengthening risk control measures, conducting thorough customer appraisals before
disbursement, and enhancing checks and monitoring during and after lending to ensure
the quality of the credit portfolio.
3.4. Operational risk - inherently present but challenging to control.
In risk management, there's a saying that market risk originates from credit risk,
and credit risk stems from operational risk, highlighting the crucial importance of
operational risk. In the new risk management paradigm, operational risk is factored into
capital reserves. Basel has identified seven types of operational risks for banks classified
across eight business lines. Interestingly, settlement and payment, one of these lines,
carry one of the highest operational risks. Recent incidents, such as banks transferring
funds in error and fraud cases investigated by Vietnamese authorities, underscore the
importance of paying close attention to operational risks, particularly in payment
services. However, many bank key risk systems lack proper tracking, making the overall
assessment of these key risks somewhat ineffective.
Not only banks but also compliance and internal control functions should refer to
Basel's classification system. It provides clear and concise guidance on classifying and
building indicator systems for operational risks and remedies. Operational risk
management should align with performance management; otherwise, it remains a
compliance-driven process without significant impact on performance. Therefore,
building and operating the current operational risk management of banks still primarily
reflects a compliance nature, and transitioning into a performance-oriented approach
requires considerable time.
The impact of rising interest rates on a bank's portfolio is a critical consideration.
The Government bond portfolio of a bank, for instance, may be affected. While it's true
that both Trading Book and Banking Book contribute to a bank's asset portfolio, the real
impact of interest rate changes is felt in the Banking Book. In the context of Interest Rate
Risk on Banking Book (IRRBB), an increase in cost of funds (COF) may be influenced
by various factors, and COF rising could be attributed to a decrease in CASA. However,
the extent of this impact depends on the structure of each bank. Banks with lower cost of
funds are less affected than those with higher costs, primarily due to behavioral
differences. As interest rates have been rising, the divergence between banks has
increased, with those having lower COF performing better, gaining more market share,
and investing in technology and customer base expansion.
This differentiation is evident in the recent decision of Vietcombank to increase
deposit interest rates in July 2022. In essence, the higher the COF, the more a bank is
affected. This variation creates opportunities for banks with lower COF to gain market
share, invest in technology, and expand their customer base. Ultimately, for a bank to
thrive, it needs market liquidity, not just profitability. This explanation partially elucidates
why Q2 profits were strong and suggests that Q3 profits are likely to continue positively.
Analysts cannot predict market behavior accurately and criticizing them for inaccurate
price forecasts is unwarranted. Instead, their focus should be on predicting profitability.
3.4.1. [Why Bank Profits Don't Decrease When Interest Rates Rise - LONGFORM]
Firstly, it's crucial to distinguish between IRR (Interest Rate Risk) and IRRBB
(Interest Rate Risk on Banking Book) as they are entirely different and unrelated
concepts.
IRR, or Interest Rate Risk, refers to the risk of changes in interest rates affecting the
value of assets. This risk is realized when considering selling the asset, affecting its
market value. IRR is relevant to the Trading Book, where market fluctuations impact
decision-making regarding buying or selling assets. On the other hand, IRRBB involves
fluctuations in interest rates but not on the asset side; it pertains to the cost of funds used
to acquire assets. Importantly, IRRBB is associated with assets held to maturity, creating
a gap between assets and liabilities. IRRBB is specific to the Banking Book and requires
a portfolio-based view rather than a deal-by-deal assessment. Banks have two portfolios:
Trading and Banking. While Trading is subject to IRR, Banking is more complex due to
the involvement of IRRBB.
Next, the cyclical nature of interest rates is essential to consider. Interest rates go
through cycles, with recent trends showing a decrease from 2018 to 2022. During rate
increases, banks typically liquidate their entire bond trading portfolio. In contrast, during
rate decreases, banks don't rush to invest immediately, providing a technical aspect where
timing can be strategic. However, the profitability from trading is relatively small in the
overall bank's earnings. As interest rates primarily impact trading, a bank's profit isn't
significantly affected. Larger banks, when faced with rising interest rates, might see a
smaller impact on profits, as their diverse portfolios allow for strategic decision-making
to manage earnings effectively. Smaller banks may utilize earning management
techniques to navigate the challenges.
Moreover, the Banking Book doesn't experience IRR but IRRBB. IRRBB involves
the gap between assets and liabilities, with its impact influenced by spending trends
shifting away from cash. However, this gap, especially at larger banks, tends to be broad
and typically falls within the three-month horizon for repricing. Therefore, the impact of
rising interest rates is not as significant because large banks can increase revenue from
outputs more than the increase in input costs.
In summary, when interest rates rise, trading may incur losses, but with banks
strategically managing trading portfolios and smaller earnings from trading in
comparison to overall profits, the impact is limited. Banking, with its focus on IRRBB,
tends to be less affected, especially for larger banks that can mitigate the impact through
effective earnings management and balancing input and output revenue. This provides a
fundamental explanation for why rising interest rates do not have a substantial impact on
banks in the context of Vietnam.
3.4.2. Interest-rate sensitivity
Examining Vietcombank's interest rate sensitivity gap in 2021 reveals a vulnerable
position in the short-term (less than 1 month) and from 6 to 12 months. This indicates
that if interest rates rise, Vietcombank (VCB) will be negatively impacted, resulting in a
decrease in Net Interest Margin (NIM). Specifically, the 640 trillion VND in deposits will
be rolled over within 1 month and subsequently enjoy higher interest rates in the case of
an interest rate increase. Similarly, the 175 trillion VND in deposits within the 6 to 12-
month range will also be rolled over, benefiting from higher interest rates.
Regarding loans, it can be observed that VCB typically resets rollover loans at intervals
of 1 to 3 months and then from 3 to 6 months, amounting to 311 trillion VND and 261
trillion VND, with corresponding proportions of 32% and 27%. Rollover loans often have
shorter durations than maturity terms, implying that they usually come with floating
interest rates. Therefore, when these loans are rolled over, VCB stands to benefit in terms
of NIM.
The interest rate sensitivity gap in 2022 exhibits a trend similar to 2021, with a negative
interest rate sensitivity gap in the less than 1-month and 6 to 12-month terms. Deposits of
less than 1 month have increased to 678 trillion VND, up 6% compared to the same
period the previous year, while deposits in the 6 to 12-month range amount to 216 trillion
VND. Vietcombank's loans also tend to roll over at intervals of 1 to 3 months and 3 to 6
months, with an estimated 739 trillion VND to be rolled over with floating interest rates.
Particularly in 2022, with the Federal Reserve raising the SOFR interest rate to 4.25-
4.5%, and market expectations indicating continued rate hikes until the end of 2023, VCB
is poised to benefit from rollovers at intervals of 1 to 3 months and 3 to 6 months for
loans.
3.4.3. [CASE STUDY - SVB - Analyzing the Significant ALM Breakdown]
SVB presents several interesting aspects on its balance sheet that warrant scrutiny.
Upon initial examination of SVB's financial statements, several peculiarities stand out. A
bank with a CAR of 15%, where over half of its assets are High-Quality Liquid Assets
(HQLA) with a 100% weight, is facing a severe challenge due to liquidity issues.
Typically, a high CAR indicates either substantial capital or low-risk assets. In this case,
the high CAR likely represents SVB's low credit risk assets. Indeed, SVB's assets exhibit
minimal credit risk, with a significant portion invested in highly stable Govibonds and
Agency MBS. While credit risk is low, market risk is pronounced. Surprisingly, the
substantial market risk exposure lacks corresponding capital reserves.
The issue stems from these bond holdings being entirely on the Banking Book,
shifting the risk from market risk to Interest Rate Risk in the Banking Book (IRRBB).
There is skepticism about the results of SVB's IRRBB NII test at the end of 2021,
projecting a positive 22.9% NII with a +200-bps rate shift. This result seems improbable
given their predominantly demand deposit and CASA structure, using a "Bid short, offer
long" or Run-gap model, which raises concerns about the accuracy of their behavioral
model.
Furthermore, with such results, SVB seemingly has little concern for assessing capital
needs amid the expected Federal Reserve interest rate hikes in 2022. Their model
suggests profitability even with substantial interest rate increases, an anomaly that is
challenging to comprehend. Some financial thought leaders suggest SVB is betting on the
Fed not raising rates, not necessarily because their model predicts it, but because their
model indicates profitability even in a rising rate environment.
Table 1 illustrates that SVB leads the pack in terms of having the largest repricing
gap on total assets. Table 2 further reveals the outcomes of their repricing activities,
fueling doubts about the accuracy of their core deposit model. The significant variation in
Demand Deposits reinforces suspicions about the reliability of their model.
Additionally, SVB faces a concentration risk with a substantial number of deposits,
intensifying doubts about the accuracy of their core deposit model. In conclusion, the
bank exhibits a substantial Interest Sensitivity (IS) due to almost the entire balance sheet
being funded by short-term deposits, predominantly in the form of demand deposits. This
leads to a comparison of why they have such a high proportion of demand deposits.
In reality, deposit interest rates in the United States are significantly lower than in
Vietnam. For example, the interest rates on CDs with a 1-year term are generally lower
than the Fed Funds rate. Even larger banks are offering only 2-3% for a 1-year CD, close
to the Fed Funds rate. Therefore, SVB has a large amount of demand deposits because of
the relatively lower interest rates on time deposits.
 [Consequences of Excessive Standards]
The issue with American banks, and the global banking sector in general, is their
affinity for mark-to-market accounting and recognizing mark-to-market for anything they
consider tradable and profit-generating. For instance, in the SVB case, if they didn't
mark-to-market Available-for-Sale (AFS) securities, there might not be a need to raise
capital during liquidity shortages. Without this trigger, there wouldn't be a rush to
withdraw funds. However, even the contingency plan in textbooks advises capital raising
for shortages and borrowing or asset sales for liquidity shortfalls. SVB, undoubtedly, is
not blameless. While the Profit and Loss (P&L) shows gains, the Comprehensive Income
reveals substantial losses. In the following year, when bond prices rose due to the Fed's
interest rate reduction, they likely reversed their positions to book profits.
Then there are regulatory requirements that can be manipulated. The emphasis on
segregating banking books and trading book in line with Basel standards would be
beneficial. If asset sales from the Banking Book were recognized with gains or losses, the
objective of IFRS 9 is to assess the value of assets, especially loans, to provide adequate
provisions. However, this very objective renders it imprecise. In SVB's case, if they had
continued using repos to support a bond portfolio until it matured, they might not have
faced capital raising since NIM would still exist. There would be no need to raise capital.
In 2019, the The Ministry of Finance introduced a staggering regulation requiring
provisions for government bonds. This regulation was subsequently repealed by 2022.
The rationale behind this change lies in recognizing that government bonds serve not
only for investment purposes but primarily for liquidity. If banks have excess funds, they
will invest in Treasury Bills instead of keeping them as cash. This approach ensures
liquidity for repos and occasional trading for profits. In essence, Vietnam's accounting
approach is commendable for financial assets of this nature. Accounting for the original
cost-plus credit provisions, the rest becomes a story about Net Interest Margin (NIM). In
summary, SVB faced challenges due to various regulations but skillfully navigated many
of them.
Taking a broader perspective, the multitude of standards developed in the other
hemisphere aims to create a safer system. However, it has resulted in complexity and
instability. This is not to praise Vietnamese banks but assessing the stability of
government bonds against interest rate fluctuations demonstrates that Vietnamese banks
are stable, efficient, and less noisy in their operations.
[Market Impact]
The Federal Reserve (FED) has intervened, and the exact interest rate provided to SVB
for recapitalization and the specific procedure are unknown. However, it is certain that,
globally, any bank dealing with mark-to-market bonds would incur realized losses, given
the historical context of bond investments made when interest rates were low. Primarily,
Asset Liability Management (ALM) must step in to rebalance the books. In Vietnam, this
often involves technical adjustments.
An interesting consequence welcomed by the market is that stringent standards and
convoluted customs have created a scenario where Central Banks hesitate to raise interest
rates to ensure system safety. The complexities in standards and the diversity of policies,
as seen in the US with multiple types of banks and different liquidity policies (SVB
follows capital standards type II but liquidity standards type 4, for instance), make it
challenging for Central Banks to increase interest rates. Now, the FED must address
cases like SVB on a case-by-case basis, followed by other banks. Europe faces similar
challenges, and Japan is not exempt. When interest rates rise, a significant portion of
government bonds that banks hold becomes a slow-motion ticking bomb, forcing banks
to figure out ways to Mark-to-Market them smoothly. Additionally, depositors are likely
to seek alternative placements, benefiting larger banks.
3.4.4. Exchange rate risk

Analyzing VCB's foreign exchange risk gap reveals that the primary exposure is to
USD, with a positive gap equivalent to approximately 1,480 billion VND. In case the
USD strengthens, VCB would benefit as 1 USD could be exchanged for more VND.
Conversely, if the exchange rate decreases, 1 USD would fetch fewer VND, putting VCB
at a disadvantage in terms of foreign exchange. The context from March 2022 onward,
with the Fed consistently increasing interest rates and NHNN selling FW USD at the
beginning of 2022, led to significant USD/VND rate fluctuations. This was further
compounded by the liquidity crisis witnessed with the collapse of SCB, THM, VTP,
prompting a surge in demand for holding USD. Banks without sufficient USD had to
engage in swaps, contributing to a sharp increase in the exchange rate and a negative
swap gap for the first time since 2018.
Moving into 2023, numerous triggers, especially the hawkish stance of the Fed,
marked the end of the year with the FFR reaching 5.25-5.5%. The negative swap gap
increased from March 2023, and at present, it continues to deepen. Despite this, SBV has
managed the situation well by consistently calling bills to intervene in the market,
stabilizing the exchange rate, reestablishing the floor interest rate on the market, and
narrowing the swap gap. In summary, exchange rates remain a top concern, and the Fed's
interest rate reduction plan in 2024 suggests VCB will maintain stability due to being the
only onshore source for USD borrowing. Additionally, they can borrow offshore USD at
a higher interest rate, making it challenging for VCB to face significant issues related to
net foreign exchange.
[Is the Exchange Rate a Cause for Concern in the Current Context?]
Just over a month ago, there were observations that the exchange rate might return
to the peak level of 24,600 due to excessively negative swaps, considering all types of tail
risks and the attractiveness of going long on USD. However, the rate has not only
remained negative but has also increased further, rising by almost 1% in the first month
of the year. This figure is intriguing at the beginning of the year, and while various fund
flows could impact it throughout the year, it raises the question of whether this could be a
trigger point, like what we've seen before, for outflows, reduced market liquidity, and a
decline in the stock market. The answer is currently challenging to provide, but let's
explore and compare a bit.
[POSITIVE FACTORS]
Looking back at 2022, the reduction in foreign money supply and the liquidity
crisis in interbank markets during that period, coupled with events such as VTP and
THM, played a significant role in the system, not merely resulting in outflows.
Additionally, the domestic money supply was not favorable at that time. The Federal
Reserve (FED) was on a robust interest rate hike trajectory, with each step being 0.75,
making it difficult for the system to adjust rapidly. Especially at the beginning of the
year, with the potential amendment of Decree 65, forcing the system back to embracing
corporate bond. The exchange rate in 2022 increased after negative swaps but was
"supported" by the SBV's policy of selling forward USD. Moreover, at that tense
moment, the SBV called banks to predict changes in the Loan-to-Deposit Ratio (LDR),
moving away from the TT2 dependency. Overall, at that time, with negative swaps and
an unfavorable domestic money supply, any outflow of money would lead to an
immediate shortage. Thus, looking at it positively, the context has changed; we have
ample money and are ready to fund the system widely.
[ NEGATIVE FACTORS]
Nevertheless, it must be
emphasized that the initial
increase in the exchange rate at
the beginning of the year is not a
favorable development. With
expectations of a significant
trade surplus due to a massive
BOT surplus (primarily from
reduced imports), as PMI
increases, imports are expected
to rise, potentially putting pressure on the exchange rate. Another concern is that the FED
has not yet pivoted, and the exact timing of the pivot, possibly in Q3, is uncertain. Hence,
it's likely that swaps will remain negative until then, exerting pressure on the exchange
rate. However, overall, it is unclear whether the exchange rate is rising to a point where
the SBV needs to sell to narrow the foreign exchange gap. Currently, there is no
confirmation. Additionally, with the approaching remittance season, nothing can be
definitively stated. However, it is undoubtedly a sensitive period for the exchange rate,
especially with excessively negative swaps. In addition to fund flows, the domestic
money supply is also a significant factor influencing the exchange rate.
[CONCLUSION]
In reality, the conclusion is that an increase in the exchange rate does not necessarily
mean a shortage of funds in the market. Partly because the domestic money supply is
quite abundant. However, it is almost inevitable for the exchange rate to rise after a year
of significant trade surplus due to a substantial reduction in imports. To sum up, in
general, the markets have sufficient funds, and the exchange rate could still rise further.
Currently, the level of SBV intervention is around 25,000 VND. This holds true for the
period leading up to that level. Therefore, it is advisable to remain calm without haste or
excessive concern.
3.5. Capital Adequacy Ratio:

Firstly, the CAR in Circular 41 is calculated as follows:

CAR = (Tier 1 + Tier 2)/ (RWA+12.5*Market risk + 12.5* Operation risk)
This CAR is calculated for credit, market, and operational risks, but in essence, it
is primarily focused on credit risk. In Vietnam, most of the balance sheets of banks are in
the Banking Book, so credit risk is the dominant factor. Therefore, CAR is mainly
influenced by the lending portfolio and capital structure. CAR is specific to each bank,
and in Vietnam, Tier 1 is mainly equity, including shareholder equity and retained
earnings, while Tier 2 is mainly subordinated debt, not exceeding 100% of Tier 1.
In practice, CAR in Vietnamese banks is quite high. Although the minimum ratio
is 8%, the actual ratio is around 10-11% on average, excluding the fact that Tier 2 is
significantly smaller than Tier 1. There's a tendency for banks to issue Tier 2 capital, and
recent regulations might provide additional room for such issuances. CAR is calculated
with the denominator being Risk-Weighted Assets (RWA), and it is reassuring that the
average weight is below 100%. Therefore, using CAR as a credit control tool means
leverage ratios are limited, with a maximum impact of 12.5.
It's essential to note that each bank might need a different CAR as a credit control tool
since CAR varies across banks. The analysis of VCB in 2021 with a CAR of 9.31% and
9.95% in 2022, being considered the safest bank in the system, requires further
examination for a clearer view of the CAR.
Taking TCB, the bank with the highest CAR in the system, as an example, its
portfolio includes assets with collateral in the form of real estate. However, many of
TCB's customers have low Debt Service Coverage Ratios (DSC), making the risk weight
around 70%. Although the portfolio is relatively safe, it doesn't align with the SBV's
credit direction.
In conclusion, using CAR as a credit control tool may lead to a loss of credit
direction, and CAR may increase if left unchanged. So why keep CAR? It remains an
effective tool for assessing risks with risk weights and provides a standardized way to
compare Vietnamese banks with international counterparts. Overall, the purpose of CAR
is more focused on an individual bank's perspective rather than a global view for the
entire economy.
3.5.1. [The Purpose of Bank Capital]
Firstly, we need to determine whether businesses dealing with money require
capital. To answer this question, consider a simple example: VCB has total customer
deposits of 1 million VND with an average interest rate payable of 5%. Assuming VCB
lends with an LDR of 85%, reserving the remaining 15% for liquidity, and charges an
interest rate of 9%, the gross profit would be: 0.85 million * 9% - 1 * 5% = 26,500 billion
VND. Assuming a non-performing loan ratio of 2% (an expected figure), you would still
have 9,500 billion VND after accounting for potential bad debts, excluding other costs.
This simplifies the fundamental banking problem, demonstrating that a bank can survive
without necessarily having capital.
So, why do banks need capital?
Returning to the basic problem, if the non-performing loan ratio is not 2% but 3%,
the profit would reduce to 1,000 billion VND. If the non-performing loan ratio is 3.2% on
the 850 billion VND, the bank would incur a loss. This is where capital comes into play.
The purpose of bank capital is to serve as a buffer for such unexpected scenarios,
unforeseen losses (Unexpected Loss). Banks are not merely involved in currency and
lending operations. They also hold various financial assets such as foreign exchange,
stocks, options, and must reserve for losses beyond expectations in these portfolios
(Market Risk). Additionally, banks need to reserve for unforeseen operational risks like
hacking, robbery, etc. (Operational Risk). All these provisions are for unexpected losses
(risks that cannot be predicted). In summary, bank capital is not for immediate use but
serves as a reserve for adverse scenarios.
Why have Tier 1 and Tier 2 capital?
In essence, Basel's rationale is
quite simple: Tier 1 capital is for
reserving, while Tier 2 capital is for
recapitalization to sustain operations.
This is the fundamental understanding
of the purpose of capital.
We already know that "capital"
is reserved for adverse situations. In this
context, if conditions are not
unfavorable, banks can increase
leverage without necessarily raising
more capital. Similarly, the riskier the assets, the more capital is needed. Vietnamese
banks currently adhere to three circulars (CCs) from the State Bank of Vietnam (SBV)
related to capital: The first circular is TT22/2019, applied to banks that have not yet
transitioned to Basel standards. The second circular is TT41, also known as Basel II, for
banks that have transitioned to Basel II (most current banks fall under this category), and
post-Basel II, there is TT13, also known as ICAAP.
The specific provisions of each circular are as follows:
- TT22: Primarily focuses on capital reserve related to credit and liquidity ratios.
- TT41: Governs credit and market risk capital reserves.
- TT13: Encompasses provisions for credit, market, operational risk, IRRBB
(Interest Rate Risk in the Banking Book), and concentration risk.
Now, a bit about the capital structure. Capital (Economic Capital) includes:
- Tier 1 Capital: Mainly represents owner's equity after deducting some
miscellaneous parts, primarily comprising owner's equity.
- Tier 2 Capital: Predominantly consists of subordinated debt (debt with a maturity
of 5 years or more, specifically designated as subordinated debt).
The Capital Adequacy Ratio (CAR) is calculated as (Tier 1 Capital + Tier 2 Capital) /
Total Risk-Weighted Assets. With TT41, this ratio is set at 8%.
From a technical perspective, understanding the nature of capital is crucial. Any
decisions related to a bank's capital must be approved by the SBV. This implies that
increasing capital for additional lending or distributing dividends requires approval.
Decisions regarding the issuance of Tier 1 or Tier 2 capital also necessitate approval.
Increasing capital implies an increase in the assets it holds, effectively expanding its
lending capacity. Decisions related to capital and lending capacity are sensitive and must
comply with the regulations outlined in the circulars mentioned above. Banks wishing to
increase their capital must meet the stipulated conditions in these circulars. Naturally,
increasing assets translates to lending more.

Chapter IV. General comments and assessments on the bank’s governance situation.
In overall assessment following the CAMELS standards, Vietcombank (VCB) not
only demonstrates solidity and stability but also exhibits flexibility and high adaptability
in an increasingly challenging banking environment. With a stable capital base, high-
quality assets, and a proficient management team, VCB has established a robust
foundation for sustainable growth. Consistent profitability, diversified income sources,
and effective financial risk management are strengths that contribute to maintaining the
bank's strong financial position.
Importantly, VCB not only focuses on maintaining CAMELS indicators but
continually innovates and improves processes and services to rapidly respond to market
dynamics. Sensitivity to market risks and flexible portfolio adjustments position VCB
favorably in facing future challenges. An overall view of VCB's management and
operations suggests that the bank is not only a positive contributor to Vietnam's banking
system but also a reliable partner for international clients and investors.
Stability and continuous innovation place VCB in a unique position within the banking
industry, laying the groundwork for sustainable development in the future. However,
acknowledging the imperfections inherent in any banking system and a realistic
understanding of potential challenges will enable VCB to confront and overcome
difficulties. Continuous innovation in products and services, coupled with effective risk
management, will be decisive factors for VCB's long-term sustainability and success.
In conclusion, VCB is not only a standout in the Vietnamese banking sector but also
shines as a star on the international banking map. Commitment, flexibility, and
continuous innovation position VCB favorably to shape and challenge market trends in
the years ahead.

REFERENCE
1. Báo cáo tài chính hợp nhất năm 2022 đã kiểm toán của Vietcombank
2. Báo cáo thường niên năm 2022 củaVietcombank
3. Pham Minh & Nhật Đức (2023), Vietcombank (VCB): Lãi thuần năm 2022 tăng
25,9%, "mất"-3.530 tỷ đồng để xử lý nợ xấu, https://markettimes.vn/vietcombank-
vcb-lai-thuan-nam-2022-tang-25-9-mat-3-530-ty-dong-de-xu-ly-no-xau-26495.html.
4. Kiều Chinh (2023), Quán quân lợi nhuận Vietcombank ghi nhận mức cao kỷ lục,
https://mekongasean.vn/quan-quan-loi-nhuan-vietcombank-ghi-nhan-muc-cao-ky
luc-post24936.html.
5. Lâm An (2023), Nhận diện rủi ro trong hoạt động ngân hàng,
https://baodauthau.vn/nhan-dien-rui-ro-trong-hoat-dong-ngan-hang-post137628.html.
6. Trần Minh Hiếu & Nguyễn Phương Linh (2022), Ứng dụng mô hình CAMELS trong
đánh giá mức độ lành mạnh của ngân hàng thương mại Việt Nam nghiên cứu tại
Vietcombank, Tạp chí Kinh tế & Quản trị kinh doanh số 20.