Vietcombank (Bank for Foreign Trade of Vietnam): Challenges of the banking sector’s liberalization
...ade Organization (WTO), it is time to develop a clear strategy and a road map for gradual liberalization of financial and banking sectors. Interest rates liberalization has been implemented recently, deregulation on exchange rate is on schedule. As commitments on opening financial , banking market stated in the agreements signed between Vietnam and ASEAN, United States, and WTO, the environment for Vietnam banking industry would become more competitive, and therefore, making credit and financial institutions vulnerable to ??. All government protection will be dismantled in 2010. This therefore requires a reform of the whole banking system, especially for State-owned commercial banks. Exhibit 5: Overview on Vietnam banking reform Background on Vietcombank Founded in 1963, Bank for Foreign Trade of Vietnam (Vietcombank) had initial role to under-take international credits payments for the postwar economy . By the end of 2002, Vietcombank had 4,185 employees, 53 branches (including 24 first class and 35 transaction offices). Vietcombank opened one additional first class branch, 5 second-class branches and a representative office in US in this year. Vietcombank was organized in terms of functional structure, a type of departmentalization in where job positions are grouped according to the job specialization. Exhibit 6: Organization chart The Bank has established inter-bank relationships with over 1,300 banks in 85 countries. Apart from being the leading bank in utilizing the global telecommunication payment system (SWIFT), the Bank is considered as the epitome of a modern bank in Vietnam. Vision With the motto “Always for Customers success”, Vietcombank’s goal is to maintain the role of leading commercial bank in Vietnam and to be an international bank in the region in the next decade. Objectives To consolidate financial strength, to achieve CAR of 8% by 2005 and other international standard (BIS) criteria To make organizational restructuring and improve the management capability in compatible with business goal To expand network, launching new IT-based products To maintain the leading role in Vietnam banking system with strategic initiatives as follows: - To diversify operations to take the advantage in wholesale banking, further focus on SMEs - To play a key role in the inter-bank market and forex dealing - To maintain a leading role in applying IT in business and management - To mobilize capital as significant domestic bank; endeavor to become an above-average bank in the region. Operations of Vietcombank Vietcombank handles over 80 % of all trade transactions, including foreign exchange. Vietcombank’s market share on international payments was 100% until 1988. In the early of 1990s with two new banking ordinances, other banks are permitted to operate on international payment. Thus market share of the bank has changed, 1996: 35%, 1997: 32% and 2003: 30%, respectively. However, Vietcombank still presents a leading bank in international payment in value. The socialist countries’ banks had been the main partners of Vietcombank, but recently the bank has formed relationships with other nations. There are over 1300 corresponding banks in 85 countries dealing with the bank. and has been a member of Asian Banking Association, Master, Visa, JCB, AMEX. The clientle of Vietcombank includes state owned enterprises, which account for nearly 80% of the total credit of Vietcombank period 1997-1999. There is a marginal change in loan structure: an increase in loans for joint venture companies to 7% (2003) ( from??). Private and household firms still find it difficult to borrow, because of low credit rate. Joint stock and limited companies have the second ranking with 9% ( what is it supposed to imply??). The following table present loan structure of Vietcombank. Exhibit 7: Distribution of Vietcombank credit (1997-1999) Borrower 1997 1998 1999 Average State owned enterprise 80 78 80 79 Joint stock and limited liability company 14 4 10 9 Private company 1 1 1 1 Joint venture company 1 4 3 3 Other 4 13 6 8 Source: Banking review 1/2004 Capital management method has changed typically, from decentralization management to concentration methods. Big branches can open accounts in other nations. Not only relying on capital allowances from Government, Vietcombank actively mobilizes capital. Domestic capital mobilization is a key part; and the bank does not borrow from the State Bank of Vietnam or other foreign banks. Capital mobilization in foreign currencies counts for nearly 70% total capital. Medium and long-term credits have been increasing, 30-32% of total capital. Recently, the mobilization method has been diversified by enterprise deposit, resident savings, registered bond and bearer bond. Thus, the amount of mobilization reaches to about 87.000 billion VND ( US$??) , counting for 87% total capital ( Source??2003). Frozen loans account for a large portion of total loans outstanding. In 2000, overdue debt presented nearly 4.000 billion VND, about 25% of total loans and 60% of which was foreign currency debt. Vietcombank has the highest proportion of currency loans. Thus, exchange rate affects strongly on credit risk of the bank- this is a specific difficulty of Vietcombank. The bank has worked to manage debt, with 3.313 billion VND bad debt solved by the end of September 2003. Source: World Bank reports Interest income is a key source of earnings for Vietcombank, but the bank also tries to diversify services to increase both its profits and client services. … Exhibit 9: Profit by activities Source: Vietcombank Financial performance Exhibit 10: Financial highlights (For the fiscal year) Unit: VND million 2002 2001 Total assets 81,495,679 76,681,819 Outstanding loans for customer 29,295,181 16,504,803 Total deposits from customers 56,422,051 57,239,068 Owners’ equity 4,397,848 2,036,625 Net income 3,873,146 5,604,711 Interest income 3,347,317 5,067,395 Net interest income 860,727 1,263,531 Before-tax Net profit 328,951 312,815 Other indicators % Loans/Deposits 51.9 29 Provisions/Loans 2 2.9 Return on Assets (ROA) 0.40 0.41 Return on Equity (ROE) 7.48 15.36 Source: Vietcombank Recent changes to enhance competitiveness The bank completed the first phase of its five-year transformation program in 2002, strengthening its balance sheet by shedding bad loans and raising Tier 1 ( what is tier 1??) capital by 55%. At the same time, it invested significant resources improveming risk management. The bank is already reaping the benefits of the program in terms of operating results and maintaining its leading role in the local market. Such leadership is underscored by a 30% share of the country’s import-export settlement turnover and 45% share of its credit card market. Over the past two years (year 2001, 2002), Vietcombank has emerged as a lead in local banking sector, introducing new levels of services towards client convenience like installing automatic-teller machines ( ATM’s) , launching credit-card services ,clearing non-performing loans. That process is being largely driven by commitments under the United States-Vietnam bilateral-trade agreement and the country's bid to join the World Trade Organization, or WTO, by 2005. Financial capacity improvement Non-performing Loans (NPLs) management and financial strength is very important to reflect banks capability to sustain risks. In order to increase the Bank’s equity, the bank implemented speedy management of loan recovery and management of of NPLs and also received VND 1000 billion as supplementary payments as paid up capital from the Government in the form of long-term bond. Vietcombank has therefore managed to reflect its internal resources as annual retained profit. Up to now, Vietcombank has converted approximately VND 1000 billion to equity by increasing its equity to more than VND 4000 billion and improving the Bank’s capital adequacy ratio (CAR) to 8% under the standards prescribed by Bureau of International Standard (BIS) while average CAR of Vietnamese banks is around 5%. ( Iam not sure what he implies by the above paragraph!!). Equity growth has improved financial prospects and it reflects a signal of financial strength of Vietcombank. Restructuring Expansion of the network: Vietcombank has worked out a strategy to develop its brand networks, bringing the bank closer to potential customer to facilitate its access to the untapped capital resources and to strengthen its banking services. Product and customer-oriented configuration: It is necessary for Vietcombank to restructure to have a scientific and efficient model, to focus on the strategy of developing a multi-service banking institution. The purpose is to provide specific products and service for targeted groups of customers. The structure of Vietcombank has been changed from professional functions to a customer-oriented and product configuration. The structure consists of four major groups: Retail banking, Corporate banking, Financial Institutions, and Treasury. Each customer will be provided corresponding banking products and services through a single department. Each customer group is in turn supported by an administrative and advisory division to ensure that the four major groups can function effectively. Improvement of risk management skill The Board of Director established a Risk Management Committee and an Asset and Liability Committee to effectively handle risk management. A handbook of risk management for Vietcombank was prepared out in 2002 with the support of international consultants and the World Bank. Strengthening of transparency, improvement of internal control and audit For safety and effectiveness in business performance, internal control and audit has received attention to ensure: the compliance with stipulations and regulations by the State Bank; transparency in the performance of business divisions, achieve the realization of business strategies, the discovery and early warning of errors in operations. Vietcombank are preparing a manual for internal control and audit with the help of international institutions. Banking technology renovation In technology, Vietcombank is way ahead of its local competitors. For integration, Vietcombank has expanded its investment in upgrading Information Technology system, particularly the implementation of a project named “VISION 2010”. Vietcombank had completed a US$49 million banking modernization project financed by the World Bank. Vietcombank’s computerized system and payment system will integrate the transactions and thereby enable the customers to make transactions at any of the branches. . Online banking service (VCB-Online) has broken the space and time obstacle helping customer deposit and withdraw money from anywhere , any time over the Net. Vietcombank also provids individual customers with Automated Transactions System (Connected-24 service), a;so known as the debit card to pay for goods and services at shops, supermarket, restaurants. Impacts of integration on Vietcombank Integration increases challenges to Vietcombank in both direct and indirect impacts. Direct impacts on Vietcombank can be stated in several points as follows: International integration in banking is associated with the rising risk and sensitivity of the domestic financial market confronting the volatile global market. Although the interest rates and exchange rates have been liberalized, the essential infrastructure (technical infrastructure, macroeconomic environment, institutional setting, market structure, and laws) is not in place to make sure the liberalized exchange rates and interest rates are effective. Growing competitive pressure in domestic market for banking: When the financial market is liberalized...