HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

--------oOo--------

BANK MANAGEMENT

ANALYSIS OF FINANCIAL PERFORMANCE OF

VIETINBANK

Autumn 2021

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 PEER EVALUATION

Lecturer: PhD Dao Thanh Binh

Tutor: Nguyen Thi Minh Hang

Tutorial: Tut 4

Group 3

Name ID Performance Evaluation

Ngô Thanh Huệ 1904040048 100%

Nguyễn Thị Liễu 1904040058 100%

Nguyễn Thị Bích Ngọc 1904040088 100%

Nguyễn Hữu Phú 1904040095 100%

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 ABSTRACT

Vietinbank, one of Vietnam's leading banks, makes a substantial contribution to the

country's banking system's growth. This paper will provide a complete overview of
Vietinbank’s history, vision, and goal, as well as its function and structure. First, it
gives a quick overview of Vietinbank’s background, vision, and objective. The report
then goes into detail into Vietinbank’s financial performance, credit risk management,
capital management, liquidity, and lending. The study continues to cite fresh data to
ensure that our research matches the current state of Vietinbank. In addition, our
group discovered that, despite various economic hardships, the bank has always kept
its commitment to provide the greatest and most beneficial services to clients, as well
as ideally reducing risks for consumers. Vietinbank wants to be a leading
distinguished bank in Vietnam, among other banks in the financial sector.

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 TABLE OF CONTENTS
PEER VALUATION...........................................................................................1
ABSTRACT.........................................................................................................2
I. VIETINBANK’S GENERAL INFORMATION........................................3
1.1 Overview of Vietinbank..............................................................................3
1.2. Organized structrure of Vietinbank............................................................3
1.3. Vision and Mission.....................................................................................4
1.4. Core values................................................................................................4
1.5. Main services and network of Vietinbank..................................................5
II. BANK PERFORMANCE.........................................................................7
1. Return on Asset (ROA).............................................................................7
2. Return on Equity (ROE)...........................................................................8
3. Net interest margin(NIM).......................................................................10
4. Net operating margin..............................................................................11
5. Management efficiency ratios.................................................................11
III. INTEREST RATE RISK MANAGEMENT.........................................12
1. Interest rate risk management at portfolio level.....................................13
2. Interest rate risk management at transaction level..................................14
IV. CAPITAL MANAGEMENT..................................................................17
1. General situation of capital management in Vietnam banking system...17
2. Capital management situation in Vietinbank..........................................19
V. Lending and Liquidity Management.....................................................23
1. Lending management..............................................................................24
2. Liquidity management............................................................................25
VI. Conclusion................................................................................................26
REFERENCES..................................................................................................27

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 I. VIETINBANK’S GENERAL INFORMATION

1.1. Overview of Vietinbank

Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) was
established in 1988 after being separated from the State Bank of Vietnam. Over 30
years of development, Vietinbank is currently one of four state-owned commercial
banks, also known as the "Big 4". They hold an important position in the banking
industry in Vietnam with strongly developed domestic and international network
system (according to the 2019 annual report) in which the domestic network includes 1
head office , 155 local branches, 1 southern customer center , 2 representative offices
in HCM and Da Nang cities, member companies, 09 non-business units, 958
transaction offices in 63 provinces/cities while international network consists of 2
foreign branches in Germany (The first and only Vietnamese bank presenting in
Europe with 02 branches in Frankfurt and Berlin); 1 subsidiary bank in Laos; 1
representative office in. In addition, Vietinbank has established correspondent
relationships with over 1,000 financial institutions of more than 90 countries and
territories worldwide. Vietinbank is especially proud to be the first bank in Vietnam to
apply modern technology and e-commerce in its banking system.

1.2. Organized structrure of Vietinbank

1.2.1. Board of directors

According to the The Resolution No. 21/NQ-DHDCD dated 23/05/2020 by the Annual
General Meeting of Shareholders in 2020, the Board of Directors of Vietinbank for the
term of 2019 - 2024 was consolidated with 9 members, of which Mr. Le Duc Tho is
the chairman. However, he was appointed secretary of Ben Tre Provincial Party
Committee from July, 2021, so two months later, Vietinbank has elected General
Director Tran Minh Binh as the bank's new chairman.

1.2.2. Board of supervisor

The Supervisory Board is the agency on behalf of shareholders to supervise the

operation and compliance with the Law and Vietinbank’s Charter in the management
and administration of Vietinbank; being responsible before the Law, the GMS in
implementing the rights and duties assigned. During the implementation, the
Supervisory Board may use the rights in accordance with the Law and Vietinbank’s
Charter. The Supervisory Board has the role of implementing internal audit,
controlling and evaluating the compliance with the provisions of the Law, internal
regulations, Vietinbank’s Charter and resolutions and decisions of the GMS and the
BoD.
The Annual GMS in 2019 approved the list of elected members of the Board of
Supervisors of Vietinbank for the term of 2019-2024, which consists of: Ms. Le Anh
Ha, Ms. Nguyen Thi Anh Thu and Mr. Nguyen Manh Toan. On the same day, the
Supervisory Board held a meeting and reached consensus on electing Ms. Le Anh Ha
as the Head of the Supervisory Board.

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 I.2.3. Board of management

The Board of management is responsible for managing Vietinbank’s day-to-today

affairs in accordance with Vietinbank’s Charter and the Regulations on Organization
and Operation of the BoM. The BoM is under the direct, comprehensive management
and supervision of the BoD.

The management board of the Vietinbank in 2019 has 8 members spanning all
divisions and departments include Mr. Nguyen Hoang Dung-Deputy General Director
in charge of BOM, Mr. Nguyen Duc Thanh, Ms. Le Nhu Hoa, Mr. Masahiko Oki, Ms.
Nguyen Hong Van, Mr. Tran Cong Quynh Lan, Mr. Nguyen Dinh Vinh- Deputy
General Director, Mr. Nguyen Hai Hung-Chief Accountant. Their primary and most
important role is to run the company and deliver the greatest benefit to its
shareholders, increasingly enhancing the company's value.

1.3. Vision and Mission

1.3.1. Vision

A leading multi-functional, modern and efficient bank in Vietnam, being among the
Top 20 strongest banks in the Asia-Pacific region by 2030; and by 2045, being the
strongest and most prestigious bank in Vietnam, a leading bank in the Asia-Pacific
region and a highly reputable bank in the world.

1.3.2. Mission

Being a pioneer bank in the country's development on the basis of bringing optimal
value to customers, shareholders and employees.

1.4. Core values

1.4.1. Customer-centricity

"To consider the needs of customers as the goal of the Bank to serve. Listen to voice
of customers and share with stakeholders to come up with solutions/consultancy
services to meet customer needs. At the same time, ensuring safety for internal and
external customers."

1.4.2. Creative innovation

"To show constant creativity in all activities; to ensure continuous innovation with
inheritance in order to create the best value for the system, customers and contribute to
the development of the country."

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 1.4.3. Integrity

"To be consistent in thinking and action to ensure compliance, discipline, regulation,

honesty, transparency and uphold professional code of ethics."

1.4.4. Respect

"To demonstrate attitudes and actions of listening, sharing, caring and acknowledging
with customers, partners, shareholders, leaders, colleagues, and respecting one's self.

1.4.5. Responsibility

"To demonstrate the spirit, attitude and action of Vietinbank’s whole system, each unit
and each employee in showing high responsibility towards customers, partners,
shareholders, leaders, colleagues and for the brand of Vietinbank. Well practicing
Vietinbank’s social responsibility to the community is the responsibility, role, honor,
and pride of Vietinbank."

1.4.6. Business philosophy

Safe, efficient and sustainable;

Loyal, dedicated, united, innovative, intellectual, disciplined;

The prosperity of Vietinbank’s customers is our ultimate success.

1.5. Main services and network of Vietinbank

1.5.1. Main services

As one of the largest joint stock commercial banks in Vietnam, Vietinbank provides all
basic and diversified financial services. In particular, the bank mainly focuses on
serving two types of services: Personal banking and Corporate banking.

In terms of personal banking, Vietinbank provides customers with a wide range of

products and services such as: Account, Loans, Savings Account, Overseas
Remittance, Foreign currency trading, Wire transferring, Digital banking, Card
services and Vietnam Sakura Benefit Package. In which, the bank mainly concentrates
on Savings account, Loans and a variety of Cards. Specifically, Vietinbank focuses on
developing many types of savings accounts with term and without term and related to
other products like Current account, Remittance savings account, Term notes,
Certificate of Deposit. This product is suitable for customers who have idle cash
without a future plan of use, to earn interest on such amounts deposited with
Vietinbank. Meanwhile, Loans service provides customers with the funds they require
and then collects both principal and interest on the maturity. Customers can borrow
money for personal use via Consumption loans, for purchasing a car via Car loans,
building a house via Mortgage loans, supporting children to study abroad via Study
Abroad loans. Moreover, individuals and households who need to borrow for business,

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production or investment in the country without having to use a specific purpose also
can take Business loans from Vietinbank. Each form of loan has a specified interest
rate, therefore, customers must ensure that they are able to repay the loan. Another
significant service provided by Vietinbank is Card service. Currently, the two most
popular cards in Vietinbank are Debit Card and Credit Card, which are used both
domestically and internationally. Customers who own a debit card must first put their
money into the card before using it. On the other hand, customers who have a credit
card can make a payment immediately but must pay back at the end of the period.
Notably, Vietinbank also developed the Vietinbank 2Card domestic dual card system
with the outstanding feature of a single card that integrates all domestic credit and
domestic debit card utilities to help customers be more flexible when using card
service.

The second type of customer service is Corporate banking services. Vietinbank brings
customers comprehensive financial solutions with professionalism and efficiency,
meeting corporation diversified needs. Firstly, Deposits and Account management
products to help Corporate to manage cash flows efficiently, meeting its payment and
investment requirements in the trading and production activities. Secondly, Vietinbank
provides diverse and flexible financial loans, meeting the capital needs quickly and
effectively to support Corporate in business production and trading plans, project
investments or production and expansion. Thirdly, Payment and cash management
service is the most professional transaction management and reports that help
corporations fast collect receivables & effectively make payables. Fourthly,
Vietinbank also issues International payment and trade finance services for both
Exporting Corporates, Importing Corporates and Domestic Trading Corporates.
Besides, Vietinbank also has Foreign Exchange & Derivatives products that control
foreign exchange rate risk, thus maximizing the profits for the corporates. Last but not
least, Investment banking services support Corporates to diversify fund mobilization
sources, in addition to the traditional credit sources, for example through issuing debit
stocks, capital stock as well as finding financial and strategic partners through M&A.

1.5.2. Vietinbank subsidiaries

Joint Stock Commercial Bank for Industry and Trade of Vietnam is known as the bank
that owns many leading subsidiaries in many industries from fund management
(Vietinbank Capital), insurance (Vietinbank Insurance), financial leasing (Vietinbank
Leasing), securities (Vietinbank Securities), gold and silver gems (Vietinbank Gold &
Jewelry), asset and liability management (Vietinbank AMC), fund exchanges
(Vietinbank Money Transfer), trading and investment services (Vietinbank Coseco).
There are even joint venture banks. With the vision of becoming the leading multi-
purpose, modern and efficient bank in Vietnam, Vietinbank has been developing a
comprehensive network across all fields to be able to provide specialized, optimal
products and services for its customers.

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II. BANK PERFORMANCE

Analyzing Vietinbank’s financial statements could be used to evaluate its financial

performance. Balance sheet (Report of Condition) and income statement (Report of
Income) are the two most critical ones. While a bank's balance sheet documents the
assets, liabilities, and shareholders' equity held by or invested in a bank or other
financial firm at a given point in time, an income statement records the financial flows
over time.

In Vietinbank’s annual reports, the long-term goal is to create a powerful and efficient
financial organization in comparison to other domestic banks. In the period 2015-
2019, an (State bank of Vietnam) SBV-approved strategy for restructuring related with
NPLs (non performing loans) recovery was aggressively and constructively
implemented. Improved credit and finance structure by combining reasonable scale
expansion with managed credit growth quality. With unprecedented high growth in
several measures, business performance and income structure were dramatically
enhanced. Moreover, continued to be a trailblazer for the government's and SBV's
programs, contributing to the country's socio economic development.

Therefore, utilizing data from Vietinbank’s yearly financial statements to evaluate the
bank's performance using profitability measures is a good option. The figures below
are the official statistics that Vietinbank published in its annual report.

Return on equity (ROE) and Return on Assets (ROA) are commonly used by bank
managers and analysts to assess bank profitability (ROA). A high performance bank is
defined as one that has a higher average ROE and ROA.

1. Return on Asset (ROA)

Net income
ROA=
Total Assets

The ratio of return on assets, or ROA, is a measure of the relationship between a

company's profitability and its assets. ROA will indicate to us how effective the
company is at generating profit from the property. The asset is utilized more efficiently
when the ROA is higher.

The table below describes Vietinbank’s ROA from 2015 to 2019:

Year 2015 2016 2017 2018 2019

ROA 0.73% 0.71% 0.68% 0.45% 0.76%

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Overall, the ratio of return on assets was changed insignificantly in the period 5-years,
beginning from 2015. Standing at 0,73% in 2015, there was a slight decline in
Vietinbank’s ROA, which decreased slightly by 0,05% in 2017. Especially, the ratio of
return on assets hit the lowest point at 0,45% in 2018. However, the year 2019 saw a
retrieval in Vietinbank’s ROA.

2. Return on Equity (ROE)

Return on Equity (ROE) is a profitability ratio which is calculated by dividing net

income by shareholders' equity. The return on equity ratio shows how much profit
each dollar of common stockholders’ equity generates. A higher ROE is always
preferred as it indicates efficiency from the side of the management in generating
higher profits from the given amount of capital.

Net income
ROE= '
Shareholder s equity

The table below describes Vietinbank’s ROE from 2015 to 2019:

Year 2015 2016 2017 2018 2019

ROE 10.23% 11.27% 11.75% 7.86% 12.34%

In general, Vietinbank’s ROE increased in the period from 2015 to 2019. Specifically,
the ratio increased steadily from 10.23% to 11.75% in the first 3 years. In 2018, this
index suddenly dropped sharply by approximately 4% to 7.86%. However, the ROE
ratio of Vietinbank then surged and hit a peak of 12.34% at the end of 2019.

In analyzing the ROE, it is necessary to concentrate on the relationship between ROA

because both use the same numerator: net income. These two profit indicators can be
linked directly as follows:

ROE=ROA × Equity Multiplier

In this formula, the two factors represent managerial efficiency and financial leverage
respectively. The lower a bank’s ROA, the higher it must push its leverage to achieve
a target ROE. It means higher risk, higher return.

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The chart below shows the correlation of ROA and ROE of Vietinbank:

It can be clearly seen that the ROA ratio has a slight fluctuation during this period.
Therefore, the ROE growth of Vietinbank is not due to the impact of ROA but the
influence of EM.

EM is calculated according to the formula:

Total Assets
EM =
Total Equity Capital

EM measures the level of financial risk of the bank and shows the bank’s debt
situation, by comparing the amount of the bank's equity and liabilities.

The table below illustrates Vietinbank’s EM from 2015 to 2019:

Year 2015 2016 2017 2018 2019

EM 13.95x 15.80x 17.25x 17.34x 16.16x

Based on this data, Vietinbank’s EM experienced an upward trend in general. Because

equity must absorb losses on assets, the larger the multiplier, the more exposed to
failure risk the bank is. However, the larger the multiplier, the greater the potential for
high returns for the stockholders

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 3. Net interest margin (NIM)

Net interest margin (NIM) measures how large a spread between Vietinbank’s interest
revenues and interest costs management has been able to achieve by close control over
earning assets and pursuit of the cheapest sources of funding.

Interest income−Interest expense

NIM =
Total Assets

The graph below shows Vietinbank’s NIM from 2015 to 2019:

During the first 3 years, NIM of Vietinbank maintained stability from 2.35% to 2.47%.
In 2018, Net interest margin of Vietinbank declined significantly to only 1.93%. The
main reason for the decline came from the unapproved capital increase plan, while the
initial restructuring plan had to be implemented, causing the bank to shrink its
operations. Vietinbank’s credit balance in the last quarter of the year decreased by
VND 26,000 billion, dragging the year's credit growth to only 6.1%. Outstanding real
estate loans also decreased by 8%

However, this figure has rapidly recovered to 2.68% in 2019. By actively restructuring
credit portfolio structure, reducing cost of funds, the profitability efficiency was
significantly improved with NIM. Vietinbank’s NIM is also equivalent to domestic

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banks. Although the NIM of Vietinbank is lower than the industry, the growth is
gradual for the bank's investment advisory plan.

4. Net operating margin

Net operating margin, an efficiency measure as well as profitability measure, shows

how well management and staff of Vietinbank were able to keep the growth of revenue
ahead of rising costs.

Total operating revenues−Total operating expenses

NOM=
Total Assets

40 . 519 .350−15 .734 .862

¿ =4 . 53 %
1 .240 . 711. 475

Overall, Vietinbank’s net operating margin also fluctuates over 5 years. Specifically,
this figure dropped sharply in 2018 at 3.69%, then grew rapidly after only 1 year. The
restructuring plan associated with bad debt settlement for the 2016-2020 period has
been approved. Accordingly, Vietinbank accelerated growth in the first days of the
third quarter of 2019 in the direction of ensuring business efficiency, safe and effective
scale growth.

Vietinbank implemented solutions to increase credit in VND; selective credit growth

associated with restructuring of customers, product lines, diversification of credit and
business activities. Vietinbank’s NOM is maintaining a stable level. With an approved
investment plan, the Vietinbank will definitely grow strongly in the future.

5. Management efficiency ratios

The management efficiency ratios are created to assess management’s effectiveness in

controlling the working capital or other resources used by the bank. They include some
particular ratios: efficiency ratio, asset turnover efficiency, tax management ratio.

The first ratio that can be mentioned is asset turnover efficiency, which can be used as
an indicator of how efficiently a bank's assets are used to generate revenue. The higher
the asset management ratio, the more effective the bank's assets are used in services
and systems.

Total operating revenues

Asset turnover efficiency =
Total Assets

63 ,511 , 481
¿ =6 . 07 %
1, 045 , 622 ,594

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With a low asset turnover efficiency ratio, it is not good for Vietinbank as the total
assets aren’t able to produce enough revenue at the end of the year. This may indicate
a problem with one or more of the assets - inventory, receivables, or fixed assets. The
bank could be holding inventory but not selling fast enough. Fixed assets, such as
equipment, could be inactive instead of operating at full capacity.

The second is about expense control efficiency - a measure of a bank's overhead as a

percentage of its revenue. The bank efficiency ratio is a quick and easy measure of a
bank's ability to turn resources into revenue. The higher the ratio, the higher the cost,
and the lower the revenue, which is detrimental to the bank

Pretax net operating income

Expense control efficiency=
Total operating revenues

8 , 668 , 981
¿ =13 .65 %
63 ,511 , 481

This ratio is considered to be low in Vietinbank, showing that increasing profit margin
is promoted instead of controlling expenses.

Tax management ratio is one of the other indicators in management efficiency ratios
that measures the proportion of fund’s earning lost due to tax.

Net income
Tax management ratio=
Pretax net operating income

6 , 939 , 045
¿ =80 . 04 %
8 , 668 , 981

The very positive ratio (more than 80%) points out that the amount of loss to tax of
Vietinbank is negligible, in addition, the funds were impressive. Vietinbank is capable
of exploring tax shields, which are optional, legal deductions and credits that result in
tax savings as well as has enough knowledge of accounting and the code to manage
taxes well.

III. INTEREST RATE RISK MANAGEMENT

Interest rate risk (IRR) is considered as one of the specific risks in commercial banks,
occurring when there is a difference between input and output interest rates due to
market fluctuations as well as investment, capital mobilization or lending activities. In
essence, it is the potential change in net interest income and market value of bank
capital resulting from the variation in interest rates. When the interest rates fluctuate
adversely, it potentially has negative effects on the bank's entire balance sheet and
income statement, in addition, the profit can decrease because of increasing costs and

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reducing the bank's income. If such a situation persists for a long time, the economy
will go down, so it creates unfavorable conditions for banks.

Therefore, the assessment of interest rate risk management is important and necessary
in the current period for all commercial banks, including Joint Stock Commercial
Bank for Industry and Trade of Vietnam (Vietinbank) - a bank that plays a key role in
economic development in Vietnam.

At Vietinbank, interest rate risk management is implemented through two levels:

transaction level and portfolio level, of which the former is more focused. Some
methods are also used such as interest-sensitive gap management, asset-liability
management (ALM) that can be applied by most of the banks. In this study, we will
focus on analyzing interest rate - sensitivity gap management.

1. Interest rate risk management at portfolio level

Vietinbank drastically changed its business model from providing single banking
products and services to developing and applying modern, comprehensive and
comprehensive financial banking solutions for customers and customer groups; supply
chain links to synchronously serve the customer ecosystem. Changing business
methods in the direction of providing banking and financial solutions suitable to the
needs of each customer segment/group, applying strong digitization in product
development, applying modern technology such as blockchain , AI in developing and
providing products and services, and at the same time improving consulting capacity,
improving service quality to meet the maximum financial needs of customers,
reducing transaction time and costs for both customers and banks, contributing to
diversifying customer structure and revenue structure.

There is a fundamental change in business quality and efficiency, and the income
structure shifts towards sustainability with the comprehensive restructuring of
operations in the direction of raising operational standards, drastically transforming
business models, business methods, and business results. Customer structure changed
positively in the direction of increasing the proportion of highly profitable segments
such as retail customers and SMEs (the average proportion of outstanding loans of the
retail and SME segments increased from 54% (in 2019). Vietinbank controls credit
growth in association with credit quality improvement, in line with the bank's capital
capacity, deposit growth and the SBV's monetary policy management objectives. Well
managed growth quality, improved asset quality, bad debt/credit balance at about 1%,
bad debt coverage ratio is estimated at over 130%( 2019: 120%).

Moreover, based on the world's leading technology platform, EWS built by Vietinbank
is capable of processing millions of records in a short time with 2 filters. The first filter

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is based on information from Enterprise Data Warehouse (EDW), Internal Credit
Rating System, Credit Risk Management System. From there, the system filters out the
list of credits that need to be investigated. After that, the second filter is based on the
results of the investigation of information about the customer's business activities and
reliable sources of information from the outside to give the corresponding level of
Red, Yellow, and Blue warning for each customer. that credit. There are 3 levels of
early credit risk warning, including: Green - temporary difficulty, Yellow - risky, Red
- high risk, sharp decline in ability to repay, risk of large debt group transfer.

In 2016, the EWS system was modified and upgraded by Vietinbank to be able to
operate with the new system - Core Sunshine Banking System. The new version of the
product is expected to be based not only on official information from the internal
system, Credit Information Center - State Bank of Vietnam (CIC), tax authorities,
financial statements of customers but also can collect unstructured information from
social networks, from reputable websites from which to get complete information
about customers. Vietinbank constantly researched, improved and expanded the model
and set of customer indicators to get the most accurate assessment of customers,
thereby improving credit quality in the bank.

According to statistics, the implementation of an effective credit monitoring system

and early warning system can help banks detect customers' default before the actual
default time of about 6 months. Banks with well-developed credit monitoring systems
can also reduce losses by about 60%, while the average estimate without an effective
supervisory system is about 20%. After more than 1 year of widespread
implementation throughout the system, EWS has proven its operational efficiency
when actively contributing to making Vietinbank the bank with the best credit quality
in the system. By the end of the first quarter of 2016, the bad debt/credit balance ratio
of Vietinbank was 0.8%, the lowest in the banking industry.

2. Interest rate risk management at transaction level

All credit contracts are required to include terms relating to interest rate risk
prevention to ensure that the bank can hold initiative in coping with fluctuations of the
market, lending interest rate must reflect the bank’s actual funding cost. Vietinbank
manages the interest rate risk through the Fund Transfer Pricing (FTP) system - a
system used to estimate how funding is adding to the overall profitability of a bank.
The FTP system is very widely used because the implementation is relatively simple,
which does not require complicated techniques like other models; however; the
efficiency is relatively high. Thanks to this system, Vietinbank allows buying and
selling to match the terms and transaction characteristics so that managers can be
flexible in interest rate policy and give maturity orientations for the whole system. In
addition, it also provides timely reporting information on loans, deposits, bank profits

15
 daily that helps the information reach superiors more quickly, reducing manual time
for creating reports, accounting. Depending on the orientation of the bank and the
market movements, the Head Office can change the fund price for each type of
customers or products, etc. to give signals for the business units to determine their
lending/fund mobilization rates. With the experience and sensitivity in managing,
Vietinbank has been cautiously, flexibly managing the deposit and loan interest rate
mechanism to ensure the safety and effectiveness of the business operation.

Interest-Sensitive Gap management

Interest −sensitive gap=RSA−RSL

Where:
RSA: Interest - sensitive Assets
RSL: Interest - sensitive Liabilities

An interest rate gap measures a firm's exposure to interest rate risk. The gap is referred
to the comparison between the amount of interest-bearing assets (including short-term
securities, variable-rate loans, short-term loans) and interest-bearing liabilities
(including money market deposits, short-term saving, central bank funds borrowing) in
each time period.

The following table describes Vietinbank’s Interest-Sensitive gap over the past five
years.

Year 2015 2016 2017 2018 2019

RSA
785,928,590 958,735,419 1,105,948,029 1,180,295,315 1,261,778,460
(VND Million)
RSL
723,254,165 888,062,160 1,030,953,995 1,096,558,639 1,162,870,969
(VND Million)
Interest-
sensitive gap 62,674,425 70,673,259 74.994.034 83,736,676 98,907,491
(VND Million)

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Based on the interest sensitivity gap, Vietinbank analyzes the change in the bank's net
interest income before fluctuations in market interest rates. In the figure 2, it can be
clearly seen that Vietinbank has had a positive interest sensitivity gap over the years.
Therefore, Vietinbank will bear the interest rate risk when market interest rates
decrease and it will increase net earnings if market interest rates rise. In 2019, Interest
sensitive gap has the strongest fluctuations, thus impacting the bank's net earnings if
interest rates are lowered.

With the current structure of allocation of interest-sensitive assets and interest-

sensitive liabilities, in order to minimize the potential interest rate risk for the
Vietinbank, it is recommended to consider reducing the differential in this term by
reducing the ISA (interest-sensitive asset value) and increase the ISL (interest-
sensitive debt value).

For Vietinbank, the profit after tax in 2018 was only VND 5,416,429, a decrease of
VND 2,042,473 million compared to 2017. One of the reasons for the decrease in
profit was that the difference in the interest rate did not meet the expectations. In 2018,
the policy of reducing the interest rate on loans decreased the difference in the average
interest rate of the bank's input - output, although both capital mobilization and
outstanding loans increased compared to the previous year in 2017.

Limit the loss of value of the bank's assets and liabilities when market interest rates
fluctuate. Vietinbank has developed and controlled the implementation of debt gap
limits and interest-sensitive assets with terms such as: Less than 1 month, 1-3 months,

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 3-6 months, 6-12 months, 1-5 years and more than 5 years. . Based on the calculation
of the interest rate sensitive gap, the bank adjusts the interest rate sensitive gap based
on predictions about the fluctuation of market interest rates.

Net Interest Margin

Net Interest Margin (NIM) is a very important factor for a bank when calculating
interest rate risk management at the transaction level. From the difference between
interest income and interest expense that the bank has to pay during its operation, the
bank can know how the bank is actually enjoying the interest rate difference during the
operation credit mobilization and investment.

As mentioned in the performance part, the net interest margin is calculated as:

Interest income−Interest expense

NIM =
Total Assets

The following table describes Vietinbank’s net interest margin from 2015 to 2019:

Year 2015 2016 2017 2018 2019

Interest Income
42.471.731 52.889.585 65.277.199 74.176.120 82.742.771
(VND Million)
Interest Expense
23.632.746 30.585.706 38.204.212 51.658.034 49.543.734
(VND Million)
Net Interest
Income 18.838.985 22.303.879 27.072.987 22.518.086 33.199.037
(VND Million)
Total assets 779.483.48 1.164.434.73
948.567.505 1.095.060.842 1.240.711.475
(VND Million) 7 5
Total assets
2,42% 2,35% 2,47% 1,93% 2,68%
(VND Million)

Overall, Vietinbank’s NIM ratio experienced an upward trend from 2.42% to 2.68%
during the last five years. It indicates that Vietinbank has been successful in
responding to adverse changes in interest rates. Especially, when interest rates are low,
consumers and investors are more likely to borrow money and there's a higher demand
in loans versus savings accounts in Vietinbank. As a result, Vietinbank’s interest
income is large enough to cover interest expenses and the bank is able to maintain
stable profits and make optimal decisions in financial activities.

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IV. CAPITAL MANAGEMENT

1. General situation of capital management in Vietnam banking system

Capital management is a critical component of a bank's overall management. Capital

refers to societal assets that are invested in order to improve future efficiency. As a
result, capital is a fundamental determinant of market economy effectiveness,
regardless of the sector in which it operates. Banking operations must focus on
mobilization in order to achieve high efficiency and effectiveness. Every country,
including Vietnam, needs capital to pursue industrialization and modernization.
Capital is the most important and necessary condition for industrialization and
modernization. The capital that the bank generates and mobilizes not only aims to
assist the bank in organizing all business operations, but it also makes a major
contribution to the investment and development of production and business of each
enterprise in particular, as well as the development of the entire national economy in
general. Commercial banks' capital, on the other hand, is derived from a variety of
sources, including equity, mobilized money, borrowed capital, and other forms of
capital.

In 1997, the Law on the State Bank of Vietnam and the Law on Credit Institutions
were both enacted. Two years later, the SBV issued Decisions 296 and 297
establishing Basal-like regulations for Vietnam, including client credit limits,
minimum capital requirements, and asset categorization into four risk categories.
Accordingly, a bank with strong capital has a CAR (Capital Adequacy Ratio) of more
than 10%, a bank with adequate capital has a CAR of more than 8%, and a bank with
insufficient capital has a CAR of less than 8%. However, Commercial banks were
unable to achieve the minimum capital requirement due to fundamental challenges in
coping with the aftermath of the Asian Financial Crisis. The Basel Accords, which are
proposals on banking legislation and regulations produced by the Basel Committee on
Banking Supervision, are now in their second edition: Basel II. Its goal is to improve
banking sector competitiveness and transparency while also making banks more
responsive to market fluctuations. Despite the fact that commercial banks in Vietnam
have had a difficult time implementing Basel II because it requires a lot of capital and
liquidity, Vietnam International Bank (VIB) has become the first bank in the country
to complete the three pillars of Basel II: minimum capital, supervisory review, and
market 16 discipline. Many commercial banks were certified by SBV as satisfying
Basel II standards in 2019, making it a significant year. Pillar III attempts to improve
bank information disclosure in order to improve market discipline. It mandates and
encourages public disclosure in a variety of areas, including how banks calculate
capital adequacy and how banks assess risk. Pillar III's aim is to strengthen bank
comparability and transparency. Simultaneously, the Basel Committee worked to
verify that Basel II is consistent with accounting rules and does not conflict with the

19
broader standards of accounting information disclosure that banks must adhere to.
While commercial banks in neighboring countries have already implemented Basel III,
the majority of Vietnam's commercial banks are currently attempting to adopt Basel II
and III. Commercial banks in Vietnam have always worked to approach and attain
Basel III in order to stimulate and strengthen the economy.

2. Capital management situation in Vietinbank

2.1. Applying of Basel I

Before making Basel II, Vietinbank needs to measure the capital adequacy through
Basel I.

First of all, it is necessary to identify two categories of Vietinbank capital: Tier 1

capital and Tier 2 capital.

Balance on 2019
Vietinbank’s Capital
(Million VND)
Tier 1 Capital
Common stock 77.354.818
Surplus 8.974.683
Undivided profits 19.832.683
Intangible assets 4.574.593
Total Tier 1 Capital 110.736.777
Tier 2 Capital
Reserve 9.610.061
Debt 26.945.019
Total Tier 2 Capital 36.555.080

As we can see from the table, Tier 1 capital is the primary funding source of
Vietinbank including Common stock and Surplus, Undivided profits (Retained
earnings) and Other intangible assets, which account for 69.85%, 8.10%, 17.91% and
4.13% respectively. Whereas, Tier 2 (supplemental) capital includes two main sources
of funds. The majority is the amount of debt that Vietinbank borrows from Other
credit institutions (73.71%) and the rest is the amount of Allowance (Reserves) for
loan and lease losses (26.29%).

Obviously, Tier 2 capital is considered to be less reliable than Tier 1 capital because
funds in Tier 2 capital are more difficult to calculate accurately and assets also have
less liquidity. Therefore, when evaluating the riskiness of the bank, Tier 1 capital is
preferred than Tier 2 capital.

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 The following step is the process of examining risk-weighted assets. Vietinbank’s
Risk-weighted assets is calculated based on the statistics from On balance sheet and
Off balance sheet as the following table.

Balance on
CCF RW RWA
2019
(%) (%) (Million VND)
(Million VND)
On-Balance-Sheet Items (Assets): 1.240.711.475
0 percent risk weighted category 41.527.836 0% 0
Cash, gold 8.261.895 0% 0
Balance with central bank 24.873.714 0% 0
Government bond 2.200.000 0% 0
VAMC bond 6.192.227 0% 0
20 percent risk weight category 259.641.097 20% 51.928.219
Gemstone 21 20% 4
Due from other credit institution 129.388.518 20% 25.877.704
Derivative and other financial asset 469.712 20% 93.942
Available for sale securities 97.131.629 20% 19.426.326
Receivable and other asset 32.651.217 20% 6.530.243
50 percent risk weighted category 1.137.259.903 50% 568.629.952
Loan secured by residential properties 1.137.259.903 50% 568.629.952
100 percent risk weighted category 674.762.752 100% 674.762.752
Loan for corporation 660.483.068 100% 660.483.068
Long term investment 3.282.709 100% 3.282.709
Fixed asset 10.996.975 100% 10.996.975
Off-Balance-Sheet (OBS) Items: 297.023.477 100% 100% 297.023.477
Guarantee of borrowing 526 100% 100% 526
Commitment 190.185.460 100% 100% 190.185.460
Letter of credit 34.487.895 100% 100% 34.487.895
Other guarantee 51.550.780 100% 100% 51.550.780
Other commitment 20.798.816 100% 100% 20.798.816
Total risked weighted assets 1.592.344.400

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 Risk-weighted Assets Structure of Vietinbank, 2019
1.97%

12.29%

31.93%

53.82%

0 percent risk weighted category 20 percent risk weight category

50 percent risk weighted category 100 percent risk weighted category

Overall, more than half of total Risk-weighted assets of Vietinbank in 2019 is 50

percent risk weighted category. This category comprises only loans secured by
residential properties. The second rank is 100 percent risk weighted category
accounting for approximately 40% of total on-balance-sheet assets, with the majority
of loans to corporations. Moreover, this category also includes off-balance-sheet items
which are converted to equivalent amounts of on-balance-sheet assets by using
conversion factor. In which, commitments take the highest proportion, making up
about 71% of total off-balance-sheet value. The following position is the category of
20 percent risk weighted. The main sources of this category come from credit
institutions due and available sale securities. The lowest proportion in this structure is
0 percent risk weighted category, only 1.97%, with the largest amount of balance with
the central bank.
In short, Vietinbank has a large amount of risk-weighted assets, about 1.592.344
billion VND and the 50 percent risk weighted category is the main type of
Vietinbank’s assets.
In order to ensure whether Vietinbank has enough capital on hand to handle
obligations or not, we need to comply with the three sets of banking regulations.
Firstly, a ratio of core capital (Tier 1 capital) to total risk-weighted assets is at least
4%. Secondly, the ratio of total capital to total risk-weighted assets is at least 8% and
the last requirement is that Tier 2 capital is smaller than Tier 1 capital. In which, Tier 1
capital is core capital and Tier 2 is the supplemental capital of the bank. The formula
to calculate these ratios are:

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 Tier 1 capital
Tier 1 capital ratio=
Total risk−weighted assets

Tier 1capital +Tier 2 capital

Capital Adequacy ratio (CAR)=
Total risk −weighted assets

Tier 2 capital
Ratio=
Tier 1 capital

The following table describes Vietinbank’s ratios in 2019 based on Basel I standard:

Tier 1 capital ratio (%) 6.95%

Capital Adequacy ratio (CAR) (%) 9.25%

Tier 1/ Tier 2 (times) 0.33

Looking at the details, in 2019, the main indicator of a bank's financial power - the
Tier 1 capital ratio of Vietinbank reached 6.95%. This ratio is considered nearly
double the minimum amount under Basel I agreement. Also from the table, we can
clearly see that the Capital adequacy ratio (CAR) of Vietinbank is 9.25% which is
much higher than the 8% requirement. Besides, the ratio tier 2 capital-to-tier 1 capital
which is 0.33 also satisfied the minimum requirement that is smaller than 1.

In conclusion, the use of Vietinbank capital is safe and Vietinbank has fully met all the
conditions to qualify as adequately capitalized according to Basel I Agreement.

2.1. Applying of Basel II

In Vietnam, Basel II capital standards are regulated under Circular 41/2016 and
Circular 13/2018 of the State Bank. Accordingly, the application will adopt 3 main
pillars. Pillar I refers to maintaining an amount of legal capital for the three risk
components faced by the bank: market risk, credit risk and operational risk, so it's
related to required capital maintenance. Specifically, on the basis of Basel I
inheritance, pillar I of Basel II also needs CAR >=8%. Pillar II defines the process of
monitoring the organization's risk management framework and ultimately capital
adequacy. It places specific supervisory responsibilities on the board of directors and
senior management, thus reinforcing the principle of internal control. Pillar III is on
the implementation of market principles with the aim of disclosing information in a
number of areas, including how banks calculate capital adequacy and assess risk,
thereby enhancing comparability and transparency between banks.

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One of the basic factors to be able to successfully implement Basel II is the need to
have a good and complete database. Until now, the database system of Vietnamese
commercial banks in general has not been stored and managed completely according
to international standards and has not been focused on serving risk management.
Meanwhile, the requirements to deploy Basel II are very demanding in terms of data
management. Moreover, this standardized method requires a lot of research, analyses
as well as human resources with enough knowledge about risk management and
experience in Basel implementation. As stated by Mrs. Bui Nhu Y, Deputy General
Director cum Chief Risk Officer of Vietinbank: “For the case of Vietinbank, our first
and foremost problem is the lack of experience in terms of domestic implementation. It
is obvious that none of Vietnamese banks have officially accomplished Basel II, and as
a result, we have to learn from what we are doing”.

Vietinbank formed an organizational model that has been applied since 3rd quarter of
2015 through “3 control stages” rule including: (i) Round 1 is the business units,
which directly and fully responsible for risk operation; (ii) Round 2 is the Risk
Management Department with establishing the policies, control limit and supervise the
risk management; (iii) Round 3 is the Internal Audit Department that ensure the
effectiveness of the risk management at Round 1 and Round 2. Being one of the first
10 banks selected by the State Bank of Vietnam (SBV) to apply the most advanced
methods in the implementation of Basel II, Vietinbank has basically completed the
regulations and shaped the building of a regional bank with sustainable development
based on international standards. At the end of 2017, Vietinbank continued to build a
Risk-weighted Assets (RWA) to meet the methodological requirements of data
structures, algorithms and methods of calculating risky assets under Circular 41.
Entering 2018, Vietinbank is ready to meet the capital calculation methodology for
key risks including: Credit risk, operational risk and market risk. At the same time,
ICAAP continues to be applied to assess risk-adjusted performance. After more than 4
years since the implementation of Basel II, Vietinbank’s capital adequacy ratio (CAR)
has always remained above 9% (According to the 2019 annual report) and this number
exceeds the minimum level of 8%. Along with that, Vietinbank’s business activities
have shown signs of continuing to grow quite quickly. As a result, we can partly see
the impact of Basel II on the development of governance and control activities in the
banking sector.

V. LENDING AND LIQUIDITY MANAGEMENT

1. Lending management

Loan is a method of granting credit that transfers to allocate the amount used within a
certain period of time to customers under the principle of repayment of principal and
interest.

24
Not only is it important for banks to follow the process when approving and issuing
loans, but it is also important to continuously monitor the loan portfolio. Banks need to
constantly check the overall quantity of their investment portfolios. They must ensure
that borrowers use funds for sanctioned purposes and comply with the terms and
conditions of the sanctions.

2018
2019
% (VND %
(VND million)
million)
Current 918,780,095 98,24 846,022,474 97,81
Special
5,677,439 0,61 5,194,126 0,60
mention
Substandard 2,062,615 0,22 2,139,221 0,25
Doubtful 1,546,701 0,17 2,016,689 0,23
Loss 7,204,095 0,77 9,553,438 1,10
Total 935,270,945 100 864,925,948 100
Loan portfolio by quality
According to the CIC (Credit information center) system, bank bad debts are divided
into three categories: substandard, suspicious (doubtful), and loss. This means that the
borrower has been overdue for more than 90 days and will therefore be included in the
bank’s bad debts. At the Vietinbank in 2019, the bank’s bad debts decreased to 1.16%,
which was 1.58% compared with the previous year in 2018. This means that
Vietinbank’s loan management policies and strategies are working well.

For lending activities, Vietinbank controls and manages risks by setting interbank and
investment limits for each specific counterparty through analysis and evaluation of
counterparty risks. These limits are set by the Committee of Financial Institutions and
implemented by the Treasury Trading Department.

Moverover, Vietinbank will remain selective as we increase our exposure to large

companies and FDI, maintain our customer-centric culture and promote cross-selling.
As there are new policies and mechanisms specifically designed for each region,
customer group and industry, Vietinbank will continue to expand these scopes and
explore further in the most effective way. Focus on and all-round support for
customers with good credit ratings and good business prospects. We will also make
necessary adjustments to our loan portfolio in terms of currency to increase the
proportion of local currency loans, while continuing to focus on more in-depth
development and diversification of our customer base.

25
 2. Liquidity management

Liquidity management is the process of lessening liquidity risk or meeting cash

requirements.
In structure, Vietinbank has been centrally managed via the Treasury and Financial
Planning Management Dept. and Market Risk Management Dept. In which, Treasury
and Financial Planning Management Dept. work closely together and cooperate to
ensure the bank's liquidity and Market Risk Management Dept. act as an independent
supervisory unit. The bank has built The Assets – Liabilities Management (ALM)
system in compliance with international standards to provide automatic reports on the
balance of funding and cash flows to calculate daily liquidity status, analysis and
forecast on future liquidity. The liquidity risk has been also closely monitored by type
of currency (VND, USD, other foreign currencies in USD equivalent). Moreover, the
process of capital adequacy of Vietinbank is performed in the Core Sunshine system -
the interbank payment program CITAD, Asset-Liability management software,
information about large cash flows from business units. Therefore, the Bank actively
performs liquidity risk management on a daily basis. Specially, in the monthly meeting
of the Risk Committee & ALCO Committee, balance of funding, liquidity and
compliance with liquidity risk ratios are reviewed and reported by these two
departments; then relevant recommendations for capital management are proposed to
ensure good liquidity and capital efficiency.
Besides, Vietinbank also establishes credit limits with other banks and other credit
institutions for mutual support when needed. In addition, the Bank also maintains a list
of secondary liquid assets such as the Government bonds, which may be sold or under
repurchase contracts with the State Bank of Vietnam. It is not only the secondary
reserve if there are any liquidity stress circumstances.
In term of managing liquidity ability, Vietinbank is aim to set up specific funding
strategies to ensure the diversification of fund raising channels with suitable tenor
structure based on solvency including required reserve ratio, lending to deposit ratio,
short term borrowings to medium - long term lending, capital adequacy ratio to control
liquidity risk on a daily basis.

Liquidity Indicators 2019

Liquidity reserve ratio 14%
Loans to Deposits Ratio (LDR) 88.1%
Ratio of short-time capital used for medium and long-term loans 32%
Capital Adequacy Ratio (CAR) >9%

Generally, almost all the above ratios of Vietinbank meet the requirement of the State
Bank of Vietnam except Loans to Deposits Ratio (Circular 36/2014/TT-NHNN
stipulating that the maximum LDR of the joint stock commercial bank group is 80%).
As a result, Vietinbank needs to restructure loan balance or deposit ratio for better
liquidity management.

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VI. CONCLUSION

In overall, Vietinbank has had a strong performance and has made important
accomplishments. This study examined the bank's financial performance, credit risk
management, capital management, liquidity and loan management in order to
showcase the bank's operations. Despite confronting various economic problems and
obstacles, Vietinbank has maintained a strong efficiency and consistent growth. In
2020, Vietinbank is the only Vietnamese bank to enter the Top 300 World's Most
Valuable Banking Brands (Brand Finance) twice in a row, nine times in a row in the
Top 2000 Forbes Global, and the National Brand title. Vietnam for the 6th time in a
row, 15 years Vietnam Strong Brand, Top 10 Sustainable Enterprises, Top 10 Most
Valuable Vietnamese Brands, Best Retail Bank in Vietnam, Typical Retail Bank, Top
10 Sao Khue, the best bank providing foreign exchange services in Vietnam, The best
mobile banking technology application in the Asia-Pacific region. Hopefully,
Vietinbank still keeps their high position and contributes to the growth of Vietnam
banking system.

27
 REFERENCES

Vietinbank (2015, 2016, 2017, 2018, 2019), “Annual report” [online]. Available at:

https://www.Vietinbank.vn/web/home/en/annual/

“Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank)”,
[online]. Available at:
http://htdcorp.vn/partner/vietnam-joint-stock-commercial-bank-industry-trade-
Vietinbank/?fbclid=IwAR3GYCVD-IzVykfQb7VnmAW6h4Z63U5uBo-
DzwghzpPP_Ld0uass0DxzBPQ

“Vietinbank với Basel II: Đề cao tính tuân thủ, chuẩn mực”, [online]. Available at:

https://www.Vietinbank.vn/web/home/vn/news/16/04/Vietinbank-voi-basel-ii-de-cao-
tinh-tuan-thu-chuan-muc.html&p=1?
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YVn0

“Chủ tịch Vietinbank: Nếu tăng vốn thành công, CAR sẽ đạt 8,24%”, [online].
Available at:

https://ndh.vn/ngan-hang/chu-tich-Vietinbank-neu-tang-von-thanh-cong-car-se-dat-8-
24 1261352.html?
fbclid=IwAR2bOnDggGnPWCw0K42Bvdl76qNVbPA2LEbJ1IdSiUYusqdgFdAQWf
gMJzI

“ Bảng cân đối kế toán”, [online]. Available at:

https://investor.Vietinbank.vn/FinancialStatements.aspx?fbclid=IwAR2Avou-
DbSHsawGC9JyYXYVmoWTRDYrjtoMz5DqVJLtiszThGH5i5utzMY#

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