Lecture 5

COMMERCIAL BANKS

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 Structure of the presentation

 General introduction of Vietnam commercial

banking system
 The role of commercial banks
 Analysis of the activities and role of the
commercial banking system
 Some discussions on the implications of WTO
accession to Vietnam’s commercial banking
system

Commercial Banks Vu Thanh Tu Anh

 Overview of the Commercial
Banking System in Vietnam

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 Definition of Commercial Bank
 Law on Banking 1997: “A commercial bank
(CB) is a form of credit institution entitled to
carry out all banking activities and other
related activities”
 Banking activities are those of monetary
business and banking services with regular
operations as accepting deposits, and using
them to provide credit and payment services.

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 Balance Sheet of a Commercial Bank
Assets Liabilities
 Reserves and Cash  Demand Deposits
 Securities  Time Deposits and Savings
• Government Securities  Borrowing
• Others
 Bank Capital
 Loans
• Commercial and
Industrial
• Real Estate
• Consumer
• Others
 Other Assets

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 Abstracts on Commercial Banks’ Operations

 Asset transformation
• Banks mobilize funds by issuance of debt with certain
features (size, maturity, level of risk, rate of return)
• Banks use funds to buy assets of other features
 In the asset transformation process, commercial
banks carry out some important functions:
• Mobilizing and allocating funds
• Conducting the settlement system
• Screening, transferring, and spreading risks
• “Producing” information and monitoring customers
(MH, AS)

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 Organization of Commercial Banking
System in Vietnam
Category China Vietnam
Central Bank 1 1
State-owned Commercial Banks 4 5
Policy Banks 3 1
Regional, Joint-stock Banks 123 37
Branches of Foreign Banks 157 27
Foreign-owned Banks 7 0
Joint-venture Banks 7 4
Credit Collectives 36.000 898
AMC 4 6

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 Banking asset by sectors

NH NNg, 9.1 Khác, NH NNg, 1.6 Khác, 1.5

NHTMCP, 15
NHTMCP, 14.6
HTXTD, 1.2 NH Đô Thị, 0.7 HTXTD, 10.4
NHCS, 14.5 NH Đô Thị, 5.4
NHCS, 11.4

NHTMNN, 60 NHTMNN,
54.6

Việt Nam ('05) Trung Quốc ('04)

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The size of the commercial banking system
USD Billion

Criteria China(’05) Vietnam (’06)

Total asset 4.000 75

Total credit 3.000 42

GDP 1.333 62

Credit/GDP 182% 67%

NPLs 5% (40%) 4,7% (30%)

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 The Dominance of SOCBs

Government Ownership in the Banking Assets of 5 SOBs 314.000 bill.

System 1998
10% ∑ Assets SOBs 267.000 bill.
8%
82% Credits of 5 SOBs 205.430 bill.

∑ Credits of SOBs 194.100 bill.

4 NHTMQD 51 NHTMCP 27 NHLD&NN

* Annual reports of 5 state-owned commercial banks (SOCBs)

** IMF and the State Bank of Vietnam

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 Refinancing SOCBs

NPLs (%) 1996 1998 2000 2003

Banking System 9.3 13 11.4 4.74
SOCBs 11.0 11.2 10.8 -
JSCBs 4.2 13.9 12.4 -

Refinance (bil VND) Charter 12/2002 2003 Charter capital

capital 2001 2003
AgriBank 2,279 1,500 700 4,471
BIDV 1,000 1,200 1,450 3,650
VIETCOMBANK 1,100 1,000 400 2,500
INCOMBANK 1,045 1,000 - 2,245

Commercial Banks Vu Thanh Tu Anh

 Performance of Vietnam’s Commercial Banks
Service revenue in total revenue

Úc

Hàn Quốc

Đài Loan

Singapore

Thái Lan

Hồng Kông

Malaysia

Việt Nam

Commercial Banks
0 10 20 30 40
Vu Thanh Tu Anh
50
 Performance of Vietnam’s Commercial Banks
ROA and CAR for some Banks (2004)
ROA% CAR%
Hong Kong 15.4
Thailand 12.9
Indonesia 19.9
India 12.7
Singapore 14.8

Malaysia 13.3

South Korea 12.2

Taiwan 10.7

China 7.8
Vietnam 5

0 0.5 1 1.5 2
Nguồn: The economist và tính toán của tác giả
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 The Role of Commercial Banking
System in Economic Development

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The Relative Role of Commercial Banks in the
US, Germany, and Japan (1960 – 1996)

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 The United States

250

200

150
%GDP

100

50

0
1993 1994 1995 1996 1997 1998 1999 2000 2001

Bank loans Bonds Stocks

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 The United States Germany

250 250

200 200

150 150
%GDP

%GDP
100 100

50 50

0 0
1993 1994 1995 1996 1997 1998 1999 2000 2001 1993 1994 1995 1996 1997 1998 1999 2000 2001

Bank loans Bonds Stocks Bank loans Bonds Stocks

Japan UK

300
200
250
150
200
%GDP

%GDP
100 150

100
50
50
0 0
1993 1994 1995 1996 1997 1998 1999 2000 2001 1993 1994 1995 1996 1997 1998 1999 2000 2001

Bank loans Bonds Stocks Bank loans Bonds Stocks

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 Bank credit in Vietnam

600 80
70
500
60
400
50
300 40

30
200
20
100
10

0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

GDP/đầu người (USD) Tín dụng NH (%GDP)

Source: World Development Indicators 2007

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 Financial structure in some countries (% GDP)

2005
Indonesia 1997
2005
Philippines 1997
2005
Vietnam 1997
2006
China 1997
2005
Thailand 1997
2005
Malaysia 1997
2005
Singapore 1997
2005
Hong Kong 1997

0 200 400 600 800 1000 1200

TSNH Cổ phiếu Trái phiếu

Source: IMF, WB
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 Financial structure in some countries (%GDP)

Country Financial Bank Assets Bonds Stocks

Assets
1997 2005 1997 2005 1997 2005 1997 2005
Hong Kong 466 1,085 205 445 234 594 26 47
Singapore 258 474 122 185 111 220 25 68
Malaysia 251 385 101 159 93 138 57 88
South Korea 71 261 38 94 8 91 25 76
Thailand 102 215 80 104 15 70 7 41
China 149 205 125 163 11 18 13 24
Vietnam 30 151 30 120 - 23 - 8
Philippines 116 140 56 63 38 40 22 37
Indonesia 45 98 31 50 12 29 2 20

Commercial Banks Source: IMF, WB (Vietnam 2006) Vu Thanh Tu Anh

 Some Remarks
 In developing countries, securities (stock and bond)
are not the most important external source of funds
for firms
 Even in the US, indirect finance (via financial
intermediaries) had been more important than direct
finance until 1990s
 In general, banks are the most important external
source of financing for firms in developing countries
 The more developed the economy and financial
system, the more reduced the role of banks, and the
greater the role of securities exchange

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 Why do banks still play an important role?

 Transaction costs
 Asymmetric information
 Reducing consequences of “free rider” and
“herd behavior” effects (since bank loans are
not liquid)

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 An Application of Theoretical Framework to
Analyze Activities and the Role of
Commercial Banking System

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 Transaction Costs and the Role of FIs?
 Transaction costs (TCs) impede small,
individual investors’ participation in the
financial market;
 TCs in commercial banking include
• costs of information in general
 The existence of significant TCs leads to the
presence of FIs as information-producing
bodies:
• Economies of scale,
• Specialization

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 Some Principles of CB Management
 Main concerns of CBs:
• Reducing the cost of mobilized funds
• Being able to meet the demand for withdrawals
• Qualified for capital adequacy
• Managing asset risks
 Risk management
• Maturity risk (liquidity risk)
• Credit risk
• Interest rate risk
• Etc.

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 Risks of CBs

 Maturity risk (liquidity risk)

• Asset maturities are often longer than liability
maturities → CBs carry out maturity transformation
• A bank may be insolvent when there is a bank run
(due to asymmetric information, herd behavior)

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 Risks of CBs

 Interest rate risk

• Deposit rates are often floating for a short term.
Lending rates are fixed for a long term.
• When interest rates rise sharply, banks incur losses
because they have to pay more interest on deposits
while interest received from outstanding loans
remains unchanged

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 Risks of CBs

 Credit risk
• Banks are exposed to credit risk as borrowers are not
able to pay back principal and interest. These loans
become non-performing loans (or bad debt).
• The higher the bad debt ratio, the greater the capital
loses for the bank to remove bad debt. When the
bank’s net value becomes negative, it is considered to
be “technically” bankrupt.

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 Credit Risk
 Adverse selection (AS) in bank credit
• AS: The most risky borrower are willing to pay the highest
interest rate
 Moral hazard (MH)
• MH: Without proper monitoring, borrowers may misuse
borrowed funds in risky projects
 How to fix problems
• Collecting information and screening customers/projects
• Loans focus on certain sectors
• Monitoring uses of loans
• Developing the long term relationship with customers
• Collateral requirements
• Credit rationing

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Commercial Banking Management in Vietnam

 Economic and non-economic goals of the

SOCB system?
 Who owns SOCBs?
 Who controls SOCBs?
 The relationship between SOCBs with other
stakeholders: SOCBs – Government – SOEs
…
 Inevitable consequences:
• Low economic efficiency
• Bad debt
• Vulnerability, esp. with shocks (Beim and
Calomiris, Ch. 7)
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 Implications of WTO accession to
Vietnam’s commercial banking system

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 The “new game”?
 New strategy space
 New players
 New rules: Starting from 1 April 2007, foreign banks
are allowed to:
• Establish 100% foreign-owned branches and enjoy
MFN
• Accept VND deposits from legal entities and issue
credit cards

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 The role of foreign banks in
some former socialist countries
No. of banks (1997) No. of banks Asset share
(2003) of foreign
banks (2003)
Total Foreign Total Foreign
banks banks

Czech 50 24 35 27 96%
Estonia 12 4 6 3 97%
Hungary 45 30 36 29 83%
Latvia 32 15 22 9 47%
Lithuania 12 5 13 10 96%
Ba Lan 83 29 60 46 68%
CH Slovakia 29 13 21 19 96%
Slovenia 34 4 22 6 36%
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 Bank credit in some other countries
(% GDP, 1999)
Czech Hungary Poland Slovenia Argentina Brazil Mexico

Domestic banks 53,1 17,6 32,1 53,6 23,5 36,9 18,5

Cross-border credit 10,8 12,7 7,8 5,0 14,1 8,5 12,9

by foreign banks

Branches of foreign 20,0 32,7 10,3 9,8 17,7 12,4 4,3

banks

Total credit 84 63 50 68 55 58 36

Market share of 35% 72% 36% 22% 58% 36% 48%

foreign banks

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 Assets of Financial Institutions in China
(2005)

14.9%

9.2%

1.9% 53.1%
5.7%
15.2%

NHTMQD NHTM khác NHTM đô thị & HTXTD

NH do N/N tài trợ HTXTD nông thôn Tổ chức TC khác

Commercial Banks Vu Thanh Tu Anh

 Some important issues
 Bank governance system
 Risk management
 Legal and regularoty framework
 Financial instruments

Commercial Banks Vu Thanh Tu Anh