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Cost Analysis and Application (Trường Đại học FPT)

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HANOI UNIVERSITY
FACULTY OF MANAGEMENT & TOURISM

TREASURY MANAGEMENT

Tutor: Mrs. Nguyen Thi Minh Hang Tut: 01

Group: 07
Members: ID

Nguyen The Khai 1904040055

Pham Dinh Thanh 1904040107

Quach Duc Thanh 1904040108

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Contents
Abstract................................................................................................................................................2
1. Introduction.................................................................................................................................3
1.1 Overview of Vietinbank.........................................................................................................3
1.2. Main services and products of Vietinbank..........................................................................3
1.3 Viettinbank’s ALCO..............................................................................................................4
2. Current conditions.......................................................................................................................4
2.1 Macroeconomics conditions..................................................................................................4
2.2 Banking industry situation....................................................................................................5
3. Liquidity risk management.........................................................................................................6
3.1 Loan to deposit ratio..............................................................................................................7
3.2 Liquidity ratio........................................................................................................................8
4. Credit management.....................................................................................................................9
5, Capital management..................................................................................................................11
5.1 Basel I....................................................................................................................................11
5.2 Basel II..................................................................................................................................12
6. Scenario analysis........................................................................................................................13
6.1. Interest rate risk management...........................................................................................13
7. Financial derivatives..................................................................................................................15
7.1 Forward contracts................................................................................................................15
7.2 Future contracts...................................................................................................................15
7.3 Forward rate agreement (FRA)..........................................................................................16
7.4 Option...................................................................................................................................16
7.5 Swap......................................................................................................................................17
8. Conclusion..................................................................................................................................17
References..........................................................................................................................................18

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Abstract
The credit intermediation channels between buyers and sellers are dominated by
banks and other financial organizations. They assist a wide range of clients, from individuals
to businesses, operate their activities both in domestic and overseas markets. Banks, like
every other company in today's competitive economic world, have to cope with the risk
concern. In truth, the risks that banks face are not limited to the bank's money and reputation;
but also include a wide range of financial and non-financial threats that the economy as a
whole undertakes. As a result, risk management has become the basis of a bank's long-term
sustainability. Understanding and managing risk requires anticipating and being prepared to
deal with future challenges and threats that banks may encounter. We analyze and evaluate
Viettinbank's risk management in this research based on various criteria, including current
conditions, credit risk, interest rate risk, and liquidity risk. These data are collected from the
bank's annual report and official website, as well as computations and other similar
procedures, in order to gain a deeper understanding and draw more conclusions. Our
investigation revealed Viettinbank to be an outstanding bank, – despite modest setbacks due
to changes in management procedures. Leading to a shortage of publicly available data, some
sections of this report may well not reflect the bank's current situation

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1. Introduction

1.1 Overview of Vietinbank

Vietinbank (Vietnam Joint Stock Commercial Bank for Industry and Trade) is a state-owned
Vietnamese bank and it was established in 1988 after being separated from the State Bank of
Vietnam. It has strategic partnerships with the International Finance Corporation and
Mitsubishi UFJ Financial Group. VietinBank has developed an operations network
comprising 01 Transaction Centers, 150 branches, and over 1000 transaction offices/ savings
offices and also has established correspondent relationships with 900 banks, and financial
institutions of 90 countries and territories all over the world. Particularly, Vietinbank is
diversified with 07 independent accounting subsidiaries: VietinBank Leasing Company,
VietinBank Securities Company, VietinBank Asset Management Company, VietinBank
Insurance Company, VietinBank Fund Management Company, VietinBank Gold and
Jewellery Company, VietinBank Global Money Transfer Company and 03 non-profit making
units: VietinBank Information Technology Center, VietinBank Card Center and VietinBank
Training Center Being one of the four largest State-owned commercial banks of Vietnam,
VietinBank’s total assets account for over 20 percent of the market share of the whole
Vietnamese banking system. VietinBank’s capital resources keep on increasing over the years
and have been substantially rising since 1996 with an annual average growth of 20 percent,
especially up 35 percent a year against that of last year. In recent years, it still has been a
market capitalization of VND 53.22 trillion (around $2.5 billion) as of late 2012 or by the end
of 2020, the ratio of ROE and ROA of Vietinbank has achieved 16.8% and 1.3% for each
portion and now develop a development strategy for the period of 2021-2030 with the desire
to reach out to the region and the world in banking sectors, want to become the top 20
strongest banks in Asia- Pacific region. According to the VNR500 (top 500) ranking,
Vietinbank is Vietnam ‘s 13th largest company. These achievements show Vietinbank’s
significant position in the Vietnam financial market

1.2. Main services and products of Vietinbank

Vietinbank also has many main services for customers. First, Vietinbank savings deposit
products are a service that can help many people who want to develop more of their money
by depositing money to Vietinbank savings deposit products. There are many ways to deposit
money: term savings, non-term savings, multi-term savings, exchange rate incentive deposits,
cumulative savings, and online savings. Second, customers can use Vietinbank bank card
products for any of their demands. For example, domestic debit cards have VietinBank E-
Partner C-Card, VietinBank E-Partner G-Card, VietinBank E-Partner Pink-Card, VietinBank
E-Partner S-Card, and VietinBank E-Partner Link. International debit cards will include
premium banking international debit cards and healthy living cards. International credit cards
have VietinBank Cremium JCB, VietinBank Cremium MasterCard, VietinBank Cremium
Visa, Premium Banking International Credit Card, VietinBank Cremium Visa Platinum Visa
Signature Card, and Diners Club Corporate Card. The co-branded card provided VietinBank
JCB Vietnam Airlines International Credit Card Vpoint card, Vietravel card, and Visa card
payWave Saigon Co-Op. Third, Vietinbank helps customers who need money to do their
work, business such as through consumer loans and loans for production and business.
Moreover, this bank also provides other service products like: Insurance Electronic banking

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services Deposit Property Bank guarantee Financial Leasing Stock Foreign currency trading
and Guarantee for studying abroad.

1.3 Viettinbank’s ALCO

The ALCO, also known as the Assets and Liabilities Committee, is a compulsory part of a
bank which is responsible for asset and liabilities management, hedging risk, establishing
funding strategy and investment plan, thereby ensuring the bank business go smoothly with
the scheme to optimize the firm’s earnings and net worth along with reducing the risk to the
comfortable level. Depending on particular scenarios, ALCO may come up with different
types of policies. For any financial firm as a whole, ALCO is a vital department since it
determines the enterprise operation ratios effectiveness and more

In Viettinbank, ALCO had been set up since the very first day of the bank beginning in 1988
and has taken a crucial part of the bank operation ever since then. From 2015 and up until
now, the ALCO department is in control with the leadership of Mr.Nguyen The Huan and
Ms.Pham Thi Thom as the co-supervisor. Sensible of the importance of controlling and
managing assets and liabilities, Viettienbank’s ALCO had built up a very proficient ALM
system, meeting the requirement under the terms of Basel I and II pillars every year.
Additionally, the department has also set up an implicit credit and risk management system,
hence, increasing the gain and financial position of Vietinbank in the banking industry. As
stated by the World Bank report, Vietinbank is the bank in Vietnam with the highest
expansion in brand value, by a total of 55,3% in the last two years, secured a place in the top
250 biggest banks around the world, and stands on the third place in Vietnam. This result is
greatly contributed by the ALCO office.

2. Current conditions

2.1 Macroeconomics conditions

During the last 6 years from 2016 to 2021, despite the bad effect of the coronavirus outbreak,
macroeconomic economics has stabilized and promoted strategic breakthroughs, restructured
the economy with modernized growth models, and enhanced effectiveness and
competitiveness. Overall, these periods are the most comprehensive socio-economic
development achievements and they are still on the way to maintaining good expansion by
receiving positive signs from macroeconomic indicators

To be more specific, the average growth rate of gross domestic product (GDP) in 5 years
from 2016 to 2020 will be 6.5% - 7% per annum, and the total factor productivity (TFP) will
contribute about 30 - 35% to the economic growth. The total social investment in 5 years will
clarify for approximately 32 -34% of GDP on average. The percentage of industry and
service sectors in GDP by 2020 reaches about 85%. The average social labor productivity
will grow by about 5% per annum. Energy consumption over GDP will decline 1.5% per
annum on average. The urbanization ratio by 2020 reaches 38-40%. Especially, in 2020,
Vietnam’s GDP reached about US$ 343 billion, surpassing Singapore (with about US$ 337.5
billion) and Malaysia (with about US$ 336.3 billion) to affirm its position among the top four
largest economies in ASEAN and among the top 40 largest economies in the world

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In 2021, Vietnam's economy still grew steadily at 2.58% as the government’s target in spite
of the widespread Covid infection and government-imposed lockdown restrictions, and some
of those are still in effect at the start of 2022. Particularly, there are some bright spots for the
economy. Firstly, foreign trade grew 22.6% to US$ 668 billion and exports grew 19.5% to
US$ 336.25 bn. Secondly, overseas remittances reached US$ 18 billion with Vietnam
retaining its top 10 status worldwide. In addition, foreign exchange reserves grew to more
than US$ 105 billion at the end of September 2021 equal to 3.9 mono the imports and the
stock market reached a record high with a market cap reaching 97% of GDP almost double
that in 2020. Especially in 2021, Vietnam has risen three places to 40th in the annual Best
Countries Overall Rankings thanks to economic growth expansion, power, heritage, and
business openness

2.2 Banking industry situation

2021 witnessed a speedy recovery and surge of Vietnam’s financial system as a whole and
the banking industry as a particular, especially in the second half of the year. After enduring
an economic downturn due to a global pandemic in the previous year, to catch up with the
pace of economic growth, the State Bank of Vietnam and many domestic banks in the country
had established several policies to push up the condition of the financial areas. Starting with
the credit room extension and interest rate ceiling expansion decision of the national bank in
q3 and q4, the credit lending and borrowing system observed a growth rate of 8,7% by the
end of November 2020, much higher than the number of 7,6% in the same quarter of 2020.
During the same time, the interest rate for long-term deposits fluctuated between 7,5% and
6,7% and 6%-6,4% for short-term ones in most of the banks in Vietnam, along with a slight
reduction of borrowing rate by 0,2% to 0,4%, together with a variety of benefits for both
individual and business customers, has boosted the demand for both short-term and long-term
needs. Incorporation, the demand for short-term financing gradually higher than long-term
borrowing to compensate for the setback in the past few months has driven many financial
firms to provide many certain products to their clients. Furthermore, to escalate the liquidity
ratio of the economy and to speed up the recovery rate of those businesses affected by the
pandemic, the SBV had poured approximately 420,000 billion VND through several open
market operations and foreign exchange markets. At the end of 2021, the goal of a 13%
increase in the credit system had been achieved, yet, in the recent few months, the liquidity
system is still in a tough time and needs support from the SBV. In the report by the State
Bank, 95% of the banks state that they have retrieved the financial gains and are very
optimistic about the future. Finally, it is predicted that the lending and borrowing system will
continue to extend significantly in 2022.

In the case of Vietinbank, the bank had taken advantage of the policies and accomplished
much success in comparison with other competitors in the banking area.

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As can be seen from above, Vietinbank has very rigorous stats. Looking in-depth at
Vietinbank stats, chiefly the credit criteria stat such as the capital adequacy ratio, and efficient
risk management capability through Basel models, it can be said that the firm has much
potential. Along with much social welfare contributing during a hard time of the epidemic,
many experts in financial fields tell in advance that Vietinbank can have access to higher
credit limits higher than the average of similar corporations in the long term. Moreover, with
the advantage of a high capital adequacy ratio and credit room limit, Vietinbank can attract
more customers as well as approach those with decently high-risk ratios. This may serve the
goal to enlarge their business and build up the model they focus on since 2020

3. Liquidity risk management

One of the bank’s and financial organization’s manager's major concerns is managing the
liquidity ratio and hedging liquidity risk. Upon arising, liquidity risk puts those institutions in
the circumstance where they are unable to respond to the demand for hot money of their
customers and cannot liquidate the credit need. Hence, put them in the run for quick
financing, which also leads to rising interest rates for both debt finance and equity finance. In
short, liquidity risk could put the affecter into a dilemma which eventually leads to profit
reduction or even loss. So, managing the liquidity rate is an important mission in executing
and monitoring financial enterprises.

In the case of Viet Nam financial fields, the economic condition can be stated as stable the
inflation rate is still decently low in recent years, and hardly any recession approaches.
Therefore, the chance of facing the liquidity risk arises from customers withdrawing money
from their accounts, and credit requests from customers the institution wishes to keep, either
in the form of new loan requests or drawings upon existing credit lines of financial firms are
pretty low, yet, taking the lesson from the occasion of Ocean bank in 2015, the SBV had
implied several ordinances and regulations to prevent the same situation to ever happen
again. Some of its for banking firms can be mentioned as No48 in circular 13/2018/TT-
NHNN, commercial and investment banks must maintain high liquidity rate assets at
adequate level quoted by the National bank in case there are liquidity problems. Additionally,
on the next line, banks must obey and manage the risk through No49 on the same circular
which quoted the degree of loan to deposit ratio, current and quick ratio, and several more.
There are only two among those established, used to help stabilize both the economics and
banking industry as a whole, and must be stuck to by any banking organizations which are
currently operating in Viet Nam

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As for saying, Vietinbank has fulfilled all those requirements and stands at the top of the
Vietnamese banking system, remains one of the institutions with the highest ratings among
Vietnamese commercial banks. The Bank had strictly followed the rules of the SBV and was
consistent with the strategy to manage liquidity gap through maturity, and liquidity risk
ratios, design stress test scenarios, and set up a variety of backup plans to proactively handle
measures in facing the market volatility. To minimize this risk, the board of managers
diversifies its funding portfolios and also develops a fund management report system to
calculate liquidity position on a daily basis as well as prepares analysis and forecast reports
on future liquidity position on a regular basis. On a monthly basis, at the ALCO Committee
meeting, the fund balance and liquidity of the Bank is one of the major concerns to be
discussed. At the same time, compliance with the liquidity risk limits was reviewed and
reported at the Management Risk Committee meeting. Based on analysis and evaluation,
ALCO makes recommendations to the Board of Directors and the Board of Management to
best maintain the Bank’s solvency in a safe and effective way. In addition, the Bank also
maintains high liquid assets such as government bonds, which may be sold or under
repurchase contracts with the State Bank of Vietnam. It is not only the second reserve in
liquidity stress circumstances (if any) but also a profitable investment, providing funds for
key national projects. The maturity of assets and liabilities represents the remaining time to
the contractual maturity date from the balance sheet date until the payment date regulated in
the contract or terms of issuance. Over these recent years, Fitch Ratings, Standard and Poor’s,
and Capital Intelligence have affirmed the ratings on Vietnam Joint Stock Commercial Bank
for Industry and Trade (VietinBank), equivalent to the ratings of Vietnam. This has proven
that Vietinbank had done well in controlling its assets and funds, avoiding any risk involving
liquidity rate as possible. Up to now, VietinBank has retained its highest ratings among
Vietnamese commercial banks rated by such international ratings agencies.

Ratings agency VietinBank VCB BIDV Techcombank MB

Fitch B+ B+ withdraw n.a B

Moody’s B2 n.a B2 B2 B3

S& P’s BB- BB- B+ BB- n.a

Capital Intelligence BB- B+ B+ B+ n.a

Table 3.1: Compare ratings of VietinBank with Vietnamese commercial banks in Dec 2019

3.1 Loan to deposit ratio

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One important aspect in managing liquidity ratios, especially those for banks and credit
institutions, is to determine the firm’s loan to deposit ratio. The loan-to-deposit ratio, or the
LDR, indicated the capability of a bank to cover losses from loans and money withdrawals by
its customers. Simply by checking the bank’s LDR, clients, investors, and managers will
know if the bank is being managed properly or not have sufficient liquidity to cover the loan
if a recession leads to a loan default. And by maintaining LDR at a good spot, banks can
attract more customers to their services.

Normally, the bank's LDR ratio would be calculated by dividing the total loans by its total
deposits.

As for Viettinbank’s case, we have the table as follows

Year 2018 2019 2020 2021

LDR 88.0 88.1 86.1 81.9

(%)

As can be seen above, by the end of 2021, Vietinbank has continued to keep its LDR ratio at
an ideal spot by 81, 9%, under the ceiling cap of circular 22/2019 and also lower than the
average of Vietnam banking industry during the period at 84, 88%. This number was
achieved due to the credit room extension during the second half of 2021, which led to
increasing in both demand and supply for credit services in the banking industry. As
mentioned in the previous part, Vietinbank is one of the most reputable banks with many
welfare add-ons for its conditions, so it is understandable that the bank will take many
advantages from this situation. This led to the fact that the NIM of Vietinbank has also
increased by 4,5% during the last quarter of 2021. In short, Vietinbank’s funding and liquidity
profile remained steady amid ample liquidity in the domestic banking system

3.2 Liquidity ratio

Another important measurement in supervising the operation of a bank is to evaluate the

liquidity ratio of the firm to know whether the firm could settle up with any debt without
using the external capital or not. Many financial-service institutions estimate their liquidity
needs to be based on experience and industry averages. This often means using certain
liquidity indicators. Liquidity ratios measure a company's ability to pay debt obligations and
its margin of safety through the calculation of metrics. From that, both internal and external
individuals can know whether they are in a safe spot or not and what to do with their money.

So, by extracting data from Viettinbank’s balance sheet, we have the following table of the
bank’s liquidity ratio:

Indicator 2019 2020 2021

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Net liquidity gap 79.061.551 85.439.224 93.649.511

Liquid reserve ratio 14.23% 14.37% 14.76%

Ratio of short-time capital used for medium and 32% 36.45% 37.49%
long term loans

Outstanding loans/Customer deposits 82.77% 83.00% 80.85%

Outstanding loans/Total assets 75.38% 75.69% 73.82%

Equity/Deposits from customers 6.85% 6.98% 6.70%

Equity/Total assets 6.23% 6.37% 6.11%

As can be seen from the ratios above, with a positive net liquidity gap and it can be the ratio
of short-time capital used for medium and long term loans said that CTG bank is holding a
reasonable amount of liquid assets and other forms of its, term deposits with the SBV and
other credit institutions, and precious papers to reduce liquidity risk. In addition, according to
the 2019 annual report, Vietinbank frequently conducts interest rate differential analysis in
comparison to domestic and international markets to make any adjustments if needed.
Furthermore, the bank's liquidity risk management framework has been fully established in
terms of organizational structure and management, with a comprehensive system of policies,
processes, regulations, and limits, meeting the requirements of Circular 13/2018-TTNHNN
on the internal control system, and is also reviewed, updated, and supplemented with
amendments following State Bank regulations on prudential limits and ratios. To comply with
the SBV's rules in Circular 22, Ctg liquidity risk management policies and regulations have
been reviewed and updated to combat the risk management, measurement, monitoring, and
reporting systems that conform to SBV regulations on solvency and liquidity ratios. Thus, the
ALCO department of the bank had established liquidity risk management instruments such as
risk early warning criteria, liquidity stress testing in normal business situations and liquidity
crises, and contingency planning, to ensure compliance with the Risk Council's risk appetite
and warning limits/thresholds.

By analyzing the liquidity indicator, it can be concluded that the liquidity mechanism was
very well-functioned. With the overall component to combat liquidity risk and follow certain
control of Liabilities – Assets strategy, it is sure to say that Vietinbank can stand strong at its
liquidity position and can face any risk arising from the intermediate need of cash.

4. Credit management

Credit risk is the possibility that a borrower will not be able to repay a loan with a lender
when the payment is due. This is a phrase that is often mentioned in banks’ lending activities

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to businesses or businesses to each other. Every loan agreement contains credit risk and the
lender bears the risk. Credit risk may also arise in the purchase and sale of goods on credit. At
that time, the enterprise selling on credit is the lender and bears the credit risk.

4.1. Non-performing loans ratio of Vietinbank

2018 2019 2020 2021 Overall banking industry

2021

Non-performing loans 1.60% 1.20% 0.95% 1.26 1.9%

ratio %

It can be seen clearly that the non-performing loan ratio of Vietinbank is unstable. In 2018,
the rate is around 1.60% and decreases slightly to 1.20%. This number can show that the
economy of Vietinbank was handling very well. Moreover, Vietinbank still made the non-
performing loans ratio down to 0.95% and proved that Vietinbank is a big commercial bank
in Vietnam. On the other hand, in 2021, the rate of Vietinbank had been up a little percentage
(from 0.95% to 1.26%). This is affected by Covid-19, not only in Vietnam but also in the
world the economy is damaged terribly.

However, compared with the overall banking industry, Vietinbank seemed to work better
than average. VietinBank proactively identifies risks and makes provisions for adequate risks
in accordance with the regulations of the State Bank in order to improve risk management
capacity, and increased resilience in advance of adverse changes in the economy.

4.2. Credit risk management

* Perfecting the organizational model

Deploying a risk management model according to the principle of "3 control loops",
separating functions and tasks between blocks/departments to ensure independence, cross
control, and minimize risks. Specifically, the business units in round 1 promote their role as
generators and proactively and actively control risks. The risk management division of the
two rounds has performed well in its role of proposing to develop policies, principles, risk
control limits, independent supervision, and ensuring that the bank's risk situation is fully
reported. , promptly to the leadership, the internal control department of the third round,
gradually promoted its role as an independent and objective evaluation department of the
adequacy and effectiveness of risk management in the bank.

* Completing the system of policy documents

In order to manage risks well, Vietinbank has actively researched, issued, and upgraded
regulations, processes, indicators, internal limits, supporting information technology systems,
and at the same time, managing closely manage the balance of assets - liabilities, strictly
control business growth and credit quality, comply with limits, operational safety ratio, and
management requirements. Risk management according to Circular 06 and regulations of the

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SBV, as well as gradually meeting the requirements of risk management according to Basel
II.

* Improve and develop the infrastructure system

The bank should install and build more modern equipment to serve the bank's management
needs, deploy tools that can well control possible consequences, and handle them promptly.
Improve service attitude, create friendliness for customers, and create comfort in the way of
service. Diversifying banking services on the basis of information technology applications
will attract many customers, contributing to increasing the bank's income, thereby helping the
bank to limit risks and improve its competitiveness. row. The timely application of modern
banking technology will create favorable conditions for the branch to collect important
information sources from customers and the market, and at the same time learn valuable
experiences about this situation. operations and management of domestic and international
banks.

5, Capital management

5.1 Basel I

Basel I refers to a set of international banking regulations created by the Basel Committee on
Bank Supervision (BCBS), which is based in Basel, Switzerland. The committee defines the
minimum capital requirements for financial institutions as capital adequacy ratio (CAR) with
the primary goal of minimizing credit risk. CAR has played a pivotal factor in measuring the
safety of a bank’s corporation, built and enhanced by leading experts in the bank field. Basel I
is the first set of regulations defined by the BCBS and is a part of what is known as the Basel
Accords

The capital adequacy ratio (CAR) is calculated by dividing a bank's capital by its risk-
weighted assets. The capital used to calculate the capital adequacy ratio is divided into two
tiers:

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Tier 1 capital as known as core capital, consists of equity capital, ordinary share capital,
intangible assets, and audited revenue reserves. Tier-1 capital is used to absorb losses and
does not require a bank to cease operations. Tier-1 capital is the capital that is permanently
and easily available to cushion losses suffered by a bank without it being required to stop
operating. A good example of a bank’s tier one capital is its ordinary share capital

Tier 2 capital as known as supplementary capital, comprises unaudited retained earnings,

unaudited reserves, and general loss reserves. This capital absorbs losses in the event of a
company liquidating. Tier-2 capital is the one that cushions losses in case the bank is winding
up, so it provides a lesser degree of protection to depositors and creditors. It is used to absorb
losses if a bank loses all its Tier-1 capital.

Risk-weighted assets (RWA) is a banking term that refers to an asset classification system
that is used to determine the minimum capital that banks should keep as a reserve to reduce
the risk of insolvency. Banks face the risk of loan borrowers defaulting or investments
flatlining, and maintaining a minimum amount of capital helps to mitigate the risks. When
calculating the risk-weighted assets of a bank, the assets are first categorized into different
classes based on the level of risk and the potential of incurring a loss. The bank’s loan
portfolio, along with other assets such as cash and investments, is measured to determine the
bank’s overall level of risk. This method is preferred by the Basel Committee because it
includes off-balance sheet risks. It also makes it easy to compare banks from different
countries around the world.

Key financial indicators in 2017-2021

No. Capital scale 2017 2018 2019 2020 2021

1 Total assets 1,095,061 1,164,290 1,240,711 1,341,436 1,531,58

7

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2 Charter capital 37,234 37,234 37,234 37,234 48,058

3 Capital adequacy ratio >9% >9% >9% >9% >9%

(CAR)

As can be seen in the table above, in 5 years from 2017 to 2021, Vietinbank’s CAR
coefficient is significant. In the first 4 years, the charter capital of Vietinbank remained stable
at 37,234 billion VND but in 2021, this factor increased steadily to 48,058 billion VND. In
addition, Vietinbank raised its total assets dramatically, especially in 2021 with 1,531,587
billion VND.

5.2 Basel II

Basel II is the second of three Basel Accords, and has three main tenets: minimum capital
requirements, regulatory supervision, and market discipline. Building on Basel I, Basel II
provided guidelines for the calculation of minimum regulatory capital ratios and confirmed
the requirement that banks maintain a capital reserve equal to at least 8% of their risk-
weighted assets. Minimum capital requirements play the most important role in Basel II and
obligate banks to maintain certain ratios of capital to their risk-weighted assets.

As one of 10 commercial banks selected by the State Bank of Vietnam to pilot Basel II,
Vietinbank always shows its determination to apply Basel standards. VietinBank has
established a Basel II Implementation Project Management Office (BMO) to jointly manage
and supervise the Bank-wide Basel II Program. BMO office plays the role of a bridge
between VietinBank and the State bank in implementing Basel II capital adequacy standards
according to the roadmap. In addition, VietinBank consolidated its organizational structure
according to the 3-loop control model, clearly separating the functions of the units in the
business activities and risk management of the bank.

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During the 5- year period 2016-2020, Vietinbank retained its charter capital to meet
requirements of Basel II, with 37,234 billion VND. In 2021, after the first nine months,
Vietinbank surpassed BIDV to become the bank with the largest charter capital in the banking
system. Vietinbank has also a bigger ambition to lift its charter capital to over 54.1 trillion
VND by the end of the year

6. Scenario analysis

In business operations and administration, it is wise to take into account what is currently
happening and make a forecast or prediction on what will happen next, and then either take
advantage of it or avoid any subsequent losses. Based on the necessity of speculating risk and
return of an operation, financial experts had developed a strategy called Scenario Analysis.
Scenario analysis is immersed in analyzing the impacts of possible future events on the
system performance by giving consideration to several alternative consequences, i.e.,
scenarios, and to select different options for future development paths resulting in a variety of
outcomes and corresponding implications. Scenario analysis is the process of forecasting the
expected value of a performance indicator, given a time period, occurrence of different
situations, and related changes in the values of system parameters under an uncertain
environment. Scenario analysis can be used to estimate the behavior of any future state in
response to an unexpected event, and may be utilized to explore the changes in system
performance, in a theoretical best-case (optimistic) or worst-case (pessimistic) scenario.
Financial firm’s managers use scenario analysis to predict potential outcomes of their
designed strategies or decisions, build their plan of action on it and so to maximize the
positive outcome and gain of the firm, minimize the risk and losses as possible and in some
cases, avoid worst case scenarios. In this section below, we will examine what Vietinbank’s
employees has done in the past few years in envisage what lies ahead, particularly on two
important factors that affect the net worth of a bank most: Interest rates and capital

No financial institution and enterprises can completely steer clear of one of the toughest and
probably the risk that could damage the firm most, especially those that rely heavily on
financial instruments such as banks and credit firms which arise from interest rates
fluctuations, or so called interest rate risk. When the market interest rate changes, the sources
of income and expenditures of the firm, such as loans and investment securities for earnings,
deposits and borrowings for expenses, also changes. Changes in market interest rates can
damage a financial firm’s profitability by increasing its cost of funds, by lowering its returns
from earning assets, and by reducing the value of the owners’ investment. . Thus, the changes
of interest rates could also change the value of assets and liabilities, thereby changing the
firm’s net worth depending on whether the firm is asset sensitive or liability sensitive. The
problem here is that hardly anyone can control the trend or predict precisely the future of the
interest rate. As market interest rates move, financial firms typically face at least two major
kinds of interest rate risk—price risk and reinvestment risk. Price risk arises when market
interest rates rise, causing the market values of most bonds and fixed-rate loans to fall. If a
financial institution wishes to sell these financial instruments in a rising rate period, it must
be prepared to accept capital losses. Reinvestment risk rears its head when market interest
rates fall, forcing a financial firm to invest incoming funds in lower-yielding earning assets,
lowering its expected future income. A big part of managing assets and liabilities consists of
finding ways to deal effectively with these two forms of risk, most financial managers focus
on two aspect of the firm: protecting the NIM ( net interest margin) and manage interest-
sensitive gap

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Year 2018 2019 2020 2021

Dollar gap 49,321,441 55,416,412 69,770,957 57,212,479

NIM 2.0% 2.8% 3.4% 3.1%

Table 6.1: Vietinbank’s net interest margin and dollar gap at the end of each year.

Overdue free of interest up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months 1 to 5 years over 5 years Total

2020 27,298,528 24,468,456 -42,884,664 66,356,257 40,855,357 -47,934,426 -29,786,137 31,397,586 69,770,957

Cumulative 23,298,528 37,766,725 59,651,389 76,029,677 44,174,320 45,236,757 21,483,547 28,736,344 57,472,688

Table 6.2: Vietinbank dollar gap in each type

From the table, Vietinbank has a negative gap for 3 periods. So, during those periods if the
market interest rates increase, making interest income increase more slowly than the cost of
interest (NIM decreased), interest rate risk will re-appear. The reason was that customer
deposits were significantly larger than loans to customers’ debt acquired, and securities
investments but deposits and borrowings from other institutions were smaller than them.
Similarly, negative gaps in other maturities (6-12 months and 1-5 years) were caused by
considerably higher deposits and borrowings from other institutions and customer deposits
compared to loans to customers, debt acquired, and securities investments. Table 6.1 also
clearly showed that CTG had positive gaps since 2018. This means that Vietinbank is an
asset-sensitive bank. At this time, if the market interest rate increased, it would increase the
profit for commercial banks. But if market interest rates fell, interest income fell faster than
interest expense (NIM decreases) and risk also appeared. The positive gaps occurred as a
result of a considerably greater proportion of loans to customers and debt acquired, as well as
investments in securities when compared to deposits and borrowings from other institutions
and client deposits.

7. Financial derivatives

7.1 Forward contracts

A forward contract (forward contract) is a type of derivative security in which a buyer and
seller will perform the purchase or sale of an asset at a certain time in the future (maturity

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date) with a certain price agreed from today (the forward price). Currently, the parties
involved in the transaction often choose a number of popular futures contracts as follows:

- Equity Forward contract: A type of forwarding contract with the underlying asset being a
stock.
- A forward contract on bond: A type of forwarding contract with the underlying asset being a
bond. Commodity forward contracts: The underlying assets are real commodities such as rice;
rice, wheat, coffee, and crude oil…
- Currency forward contract: A forward contract in which two parties commit to buy or sell
together a quantity of foreign currency at a specified exchange rate, at a specified time in the
future. Future.
- Forward rate agreement (FRA): A contract in which two parties agree an interest rate will be
paid on a future payment date.
- Non-deliverable forward (NDF): A forward contract that is executed by cash settlement
instead of physical delivery.

In Vietnam at present, only foreign exchange forward contracts are popular, participants
include commercial banks, import-export companies, and financial investment institutions to
hedge against financial risks. exchange rate.

7.2 Future contracts

A futures contract is an agreement to buy or sell an asset at a certain time in the future for a
specified price. The basic economic function of futures markets is to provide an opportunity
for market participants to hedge against adverse price movements and as a tool for
speculators.

Futures contracts based on a financial instrument or a financial index are known as financial
futures contracts, including Stock index futures contracts, Interest rate futures contracts, and
Currency futures contracts.

Futures contracts provide benefits such as high liquidity, risk prevention, and financial
leverage. Furthermore, future contracts have certain drawbacks: increased margin
requirements, which oblige investors to make additional margins as soon as the amount on
the account falls to a level equal to or lower than the maintenance margin. Hedging limits the
potential for additional earnings, which occurs when the market moves in a favorable
direction and the futures investor cannot capitalize on the volatility. That means, your profit
or revenue will rise while the clearing between opposing positions continues. The negative of
the strategy is that if the asset price in the market does not match the initial projection, the
loss is unavoidable.

7.3 Forward rate agreement (FRA)

Forward rate agreements are over-the-counter agreements between two parties that regulate
the rate of interest charged at a future time period. The FRA establishes the rates, as well as
the termination date and notional value, to be used. The payment is determined by the
difference between the contract's rate of interest and the market's floating rate—the reference
rate. There is no transaction of the notional amount. It's a cash amount depending on rate

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differentials and the contract's notional value. At the contract's date of maturity, the floating
rate is determined. This forward rate agreement is also described as an agreement to exchange
a notional sum for an interest rate commitment.

For most forward rate agreements, two parties trade a fixed interest rate for a floating rate.
The borrower is the one who pays the fixed-rate, while the lender is the one who pays the
variable rate. The maturity of a forward rate agreement could be as long as five years. If a
borrower expects interest rates to rise in the future, he or she may sign into a forward rate
agreement to lock in a rate. In other words, a borrower could desire to enter into an FRA
today to lock in their borrowing prices. On the value day or settlement date, the monetary
difference between the FRA and the reference rate or floating rate is settled.

7.4 Option

An option contract is an agreement between two parties to facilitate a potential transaction

involving an asset at a preset price and date that gives the buyers the right but not the
obligation to buy or sell an underlying asset at a specific time in the future at the
predetermined price. The underlying assets are often a stock, index,...

An option contract is divided into 2 main contracts: call option and put option. When
contracts are purchased from the seller, a position is opened in a call option contract. The
seller gets compensated for taking on the risk of selling shares at the strike price in this
transaction. A covered call is a position in which the seller owns the shares to be sold. Buyers
of put options speculate on the underlying stock's or index's price declining and own the right
to sell the shares at the strike price stipulated in the contract. If the stock price falls below the
strike price before and at expiration, the buyer can allocate shares to the seller for acquisition
at the strike price, or sell the contract if the shares are not in the portfolio

7.5 Swap

As one of the biggest banks in Viet Nam, Vietinbank also offers its clients a variety of
financial derivatives to hedge and eliminate risk from fluctuating market rates. One of those
with popular use is swap contracts, both in currency and interest rate. The Bank is involved in
currency forward contracts and currency swap contracts to facilitate customers transferring,
adjusting, or reducing foreign exchange risk or other market risks, and also serve the Bank’s
business purposes. Swap contracts are commitments to settle by cash on a predetermined
future date based on the difference between pre-determined exchange rates calculated on a
notional principal amount or commitments to settle interest amounts based on a floating rate
or a fixed rate calculated on a notional amount and in the same period. Differences in interest
rate swaps are recognized in the consolidated income statement on an accrual basis. Rate
swap contracts provided by Vietinbank are used when customers need to restructure cash
flows and balance of liability assets, ability to identify the required budget, hence can build
up a financial plan and be proactive in business and control fluctuation interest risk for each
amount of liability. By using it, customers can use many swap options, from fix rate to
floating rate or inversely. The number of swap contracts used in 2021 by Vietinbank is
recorded at the number of 1.166.735 million VND.

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8. Conclusion

To sum up, our research aims to provide a run-down of Vietinbank’s system: Operations and
firm management, financial status in recent years, risk management and policies, scenario
analysis, financial derivative instruments, and hedging proposals. In short, Vietinbank has
effectively managed throughout these years, with very high-quality results gained and
bringing good returns for both firms and investors. Without a doubt, the bank is strengthening
its role in financial management, emphasizing long-term and future growth and taking part in
competing with other firms in the same field. Overall, Vietinbank’s BOD is consistent with its
vision and goal of building a safe and stable future spot to provide a strong foundation for
maintaining an essential role in Vietnam's banking sector, thanks to a flexible and suitable
strategy of management.

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