MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY FALCUTY OF BANKING MBA PROGRAM Capital Adequacy Measurement A CASE STUDY OF AN BINH COMMERCIAL JOINT STOCK BANK Thesis made by NGUYEN THANH PHONG Thesis Tutor: Assoc. Tran Hoang Ngan Vice Rector of HCMC University of Economics 06/2010 Ho Chi Minh City LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgements To achieve this thesis, I would like to convey my sincere thanks and appreciation to the Economics University of Ho Chi Minh City , MBA program officers who have facilitated and helped me with all their kindness and assistance. My special thanks to Ms. Pham Thanh Thuy, Director of Treasury Division of An Binh Commercial Joint Stock Bank, Mr.
Vo Van Nhuan, Vice Head of Financial Accounting Department, of ABBank, Mr. Nguyen Cong Anh and Ms. Tuy Loan, Expert of Financial Accounting Department of An Binh Commercial Joint Stock Bank who created favorable conditions, gave me relevant data and helped me to carry out significant analysis and CAR measurement jobs during the time I had been doing this research dissertation. From DHL- VNPT Express Ltd.
Do Huu Anh, Deputy General Director, Ms Dao Thi Ngoc Anh who have supplied me valuable data, information and edited this research. All of us have had good cooperation during the time of this thesis being done. Apart from the above mentioned, Mr. Nguyen Huu Nhan, Mr.
Ngo Tran Kien Quoc- members of MBA Banking class, Dr. Truong Tan Thanh- lecturer of Investment analysis and portfolio management and my wife having encouraged and helped me with all their hearts made me more confident and delighted to carry out this research dissertation. I would like to say that a lot of thanks are owed, in particular, to the assistance and guidance from Assoc. Tran Hoang Ngan, Vice Rector of Ho Chi Minh City Economics University.
Tran Hoang Ngan, the tutor has encouraged and given me a lot of advice on doing this thesis. Tran Hoang Ngan‘s advice, a lot of difficulties would surely arise during my performance on this task. Once again, all assistance helping me with this thesis is highly appreciated. i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract In current age, globalization of financial institutions is a characteristic point and unavoidable trend that make each country have to establish a banking management system to protect against financial risks, to reinforce transparency in the banking payment system and to tighten regulation on capital adequacy.
In order to conduct the opening door policy and integrate intothe world economy, implement commitments of the WTO, Vietnam has many efforts to apply international standards in capital banking management. In 2005, SBV issued the Decision 457/2005 promulgating the regulation on safety assurance ratio in activities of credit institutions and they continued to grant the Decree number 141/2006 date the January 1st, 2006 required Vietnamese commercial banks to have a chartered capital of 3,000 billion VND at the end of 2010 which were seen the interest of SBV in capital fund of commercial banks. The research problem of the thesis is to examine the adequacy of bank capital in Vietnamese banking system through a case study of An Binh Bank. In term of structure, the research study has six chapters.
Chapter One and Two review research background, scope of work, methodology, significance of the study, risk in banking operation and banking capital adequacy. Chapter Three introduces research methodology is carried out in the thesis. Chapter Four and Five present an overview of CAR measurement in Vietnamese banking system and survey results obtained from a real model. Chapter Six provides some conclusions and recommendations from the research.
With the finding as presented above, the dissertation provides many implications to be able to improve in banking capital adequacy management in Vietnamese commercial banks. ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Glossary of terms and abbreviations SBV State bank of Vietnam SOCBs State owned commercial banks JSCBs Joint stock commercial banks SPBs Social policy bank JVBs Joint-venture banks FBBrs Foreign bank branches FFOBs Fully foreign owned banks VAR Value at risk ORM Operational Risk Management ALM Asset Liability Management ALCO Asset Liability Committee ABB An Binh Commercial Joint Stock Bank FRB the Federal Reserve Board FRS the Federal Reserve System FDIC Federal Deposit Insurance Corporation OCC The Office of the Controller of the Currency RWAs Risk- weighted assets US the United States OECD The Organization for Economic Co-operation and Development BIS Bank for International Settlements CAR Capital adequacy ratio GDP Gross domestic product IBRD International Bank for Reconstruction and Development EBRD European Bank for Reconstruction and Development ADB Asian Development Bank AfDB Africa Development Bank iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com EIB European Investment Bank IADB Inter- American Development Bank ACB Asia Commercial joint stock Bank STB Saigon Thuong Tin Commercial Join Stock Bank VCB Vietnam Foreign Trade Commercial Join Stock Bank Vietinbank Vietnam Joint Stock Commercial Bank for Industry and Trade EAB Eastern Asia Commercial Joint Stock Bank TCB Technological and Commercial Joint Stock Bank EIB Export Import Commercial Bank OCB Orient Commercial Joint Stock Bank NAB Nam A Commercial Joint Stock Bank SCB Saigon Commercial Joint Stock Bank HDB Hochiminh City Housing Development Joint Stock Bank VBSP Vietnam Bank for Social Policies VDB Vietnam Development Bank BIDV Bank for Investment and Development of Vietnam MHB Mekong Housing Bank VBARD Vietnam Bank of Agriculture and Rural Development DAB Dong A Bank MB Military Bank VIB Vietnam International Bank ROA Return on Assets ROE Return on Equity EPS Earning per Share PCC Primary capital components TA Total assets AfL& LL Allowance for loan and lease losses ATRR Allocated transfer risk reserves SCC Secondary capital components iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of Contents Acknowledgements. ii Glossary of terms and abbreviations. iii Table of Contents .v List of Tables.
ix List of Figures.x Chapter One: Introduction.4 SCOPE OF WORK AND LIMITATION .6 SIGNIFICANCE OF THE STUDY .7 STRUCTURE OF THE STUDY. 5 Chapter Two: Literature survey .2 RISK IN BANKING OPERATION.1 BANKING RISK OVERVIEW .2 Market concentrate risk .8 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.3 Interest rate risk.5 Foreign currency risk.2 BANKING RISK MANAGEMENT ORGANIZATION.3 ADEQUACY OF BANK CAPITAL .1 REGULATIONS OF ADEQUATE CAPITAL .1 Uniform capital requirements .2 Risk- adjusted capital requirements .2 REGULATORS’ VIEW POINTS .3 BANKERS’ VIEW POINTS .1 DEFINE RESEARCH PROBLEM AND ESTABLISH RESEARCH OBJECTIVES .2 DETERMINE AND COLLECT DATA .3 EVALUATE AND ANALYZE DATA.4 RECOMMENDATIONS AND CONCLUSIONS. 21 An overview of CAR measurement in Vietnamese banking system.1 VIETNAMESE BANKING STRUCTURE.2 REAL ACTIVITIES OF VIETNAMESE COMMERCIAL BANKS 23 4.1 Number of commercial banks increased annually. 23 vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 Mobilizing and supplying a large amount of funds.3 Increasing chartered capital .1 Bank- based financial system.2 Bad debts of state owned commercial banks .3 Small equity capital .4 Traditional and mono banking services.3 CAR REGULATIONS IN VIETNAMESE BANKING SYSTEM.
35 Capital adequacy ratio measurement analysis in ABBank .2 MILESTONE AND VISION .3 BANK’S ORGANIZATION, PRODUCTS AND SERVICES .2 ROLE OF ALCO .1 TARGETS OF ALCO .2 TASKS OF ALCO.3 CONTENTS OF THE REPORT SUBMITTED TO ALCO .3 CAPITAL MANAGEMENT IN ABBANK.1 REGULATIONS IN SAFETY.3 DEBIT CLASSIFICATION AND RISK PREVENTION .4 FOREIGN EXCHANGE STATUS .4 ABBANK’S CAPITAL ADEQUACY .5 CAR CALCULATED ACCORDING TO SBV IN COMPARISON WITH PRIMARY CAPITAL TO ASSET RATIO (FRB). 49 vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter Six: Recommendations.1 QUALITY OF ASSET .2 INCREASING THE CURRENT CAR .3 APPLYING STANDARDS OF BASEL II IN VIETNAMESE COMERCIAL JOINT STOCK BANKS. 56 List of appendices. 58 viii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of Tables Table Page 4.1 Number of commercial bank 2004- 2008 23 4.2 Chartered capital of Vietnamese commercial banks 27 4.3 CAR of Vietnamese commercial banks from 2003 to 2008 33 5.1 Specific provision for debts 43 5.2 Total assets and capital in ABBank from 2006 to 2009 45 5.3 Capital adequacy ratio in ABBank 2006- 2009 48 5.4 Calculating CAR in accordance with different ways 50 ix LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of Figures Figures Page 2.1 Asset/ Liability management structure 10 3.1 Chart of research framework 20 4.1 Chart of commercial bank types 24 4.2 Fund mobilization and loan outstanding from 2001 to 2008 by 25 Vietnamese commercial banks 4.3 Growth rate of fund mobilization and loan outstanding 25 4.4 Credit market share of commercial banks 29 4.5 Top 10 banks are traded the best 31 4.6 Customer’s satisfactory ratio 32 4.7 CAR chart of Vietnamese commercial banks 34 5.1 ABBank’s Board of Director 36 5.2 Total assets and owned capital of ABBank 46 5.3 Capital adequacy ratio of some commercial banks from 2006 to 48 2008 5.4 Owned adequacy/ Total asset of commercial banks 48 5.5 Chart of CAR according to different calculation 51 x LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter One: Introduction Chapter One: Introduction 1.1 INTRODUCTION Banks undertake a variety of functions which assists the operation of the economy and the general community.
The most important function of these is the provision of payment service and it acts as financial intermediaries between savers and borrowers. In this role, banks pool the community’s saving, thereby increasing liquidity and avoid the risk of investing funds with a few borrowers- household or businesses when approaching banks or other financial intermediaries do not face the cost of approaching a large number of small savers to meet borrowers’ finance needs. Lending and borrowing activities make banks take many risks caused by from external and internal factors such as business risk, financial risk, liquidity risk, exchange risk and country risk as well. That requires banking managers to consider about the risk management.
The risk management in financial institutions is sophisticated and its purpose is to optimize the uncertainty and to create the value by maximizing return available for a given level of risk. Banking business activities are sensitive and highly spread into a whole system. Any social volatilities which affect on banking the downturn of banking system are able to make bad results on national economy. Thus, with the role as a central place of national payment system, banking management, especially capital management is crucial to absorb the volatility of economy affected in banking system and build in the confidence on the customers.
Bank capital must be sufficient to protect a financial organization’s depositors and counterparties from the risks of the institution's on- and off-balance sheet risks.2 RESEARCH BACKGROUND Vietnamese banking system has been executing a careful process of reform which has resulted in the restructure of its large monobank. The process has created four public sector banks including state owned commercial banks (SOCBs), joint stock commercial banks (JSCBs), foreign banking and credit cooperatives. JSCBs only 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter One: Introduction account for 15% of banking sector assets, but they are considered more rapid growth than SOCBs. Their operations are concentrated on major urban areas and focus on providing credit to small and medium sized companies and retail banks.
JSCBs’ services are various and new technologies have been applied in operation and management on the purpose to give the best service to consumers. JSCBs’ banking activity are supervised by SBV and board of management. The reform has made Vietnamese banking system operated better and contributed significantly in economic growth. With the role of financial intermediary, Vietnamese banking system has been contributed positively to maintain high economic growth continuously in last years.
With the outstanding loan of economy making up 35% to 37% of GDP, annually, banking system has contributed over 10% of overall Vietnamese economic growth rate. Business downturn has occurred since the end of year 2008 with the bankruptcy of big banks in the world such as Lehman Brother and Citibank that have been the signals of financial regression.