Commercial banks

Commercial Banks Vu Thanh Tu Anh

Lecture 5

COMMERCIAL BANKS


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


Overview of the Commercial

Banking System in Vietnam


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.


Balance Sheet of a Commercial Bank

Assets Reserves and Cash Securities

• Government Securities• Others

Loans• Commercial and

Industrial• Real Estate• Consumer• Others

Other Assets

Liabilities Demand Deposits Time Deposits and Savings Borrowing Bank Capital


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)


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

Organization of Commercial Banking System in Vietnam


Banking asset by sectors

NHTMNN, 60 NHTMNN, 54.6

NHCS, 14.5NHCS, 11.4

NH Đô Thị, 5.4HTXTD, 1.2 HTXTD, 10.4

NHTMCP, 14.6NHTMCP, 15

NH Đô Thị, 0.7

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

Việt Nam ('05) Trung Quốc ('04)


The size of the commercial banking system

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%)

USD Billion


The Dominance of SOCBs

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

** IMF and the State Bank of Vietnam

Government Ownership in the Banking System 1998

82%

10%

8%

4 NHTMQD 51 NHTMCP 27 NHLD&NN

Assets of 5 SOBs 314.000 bill.

∑ Assets SOBs 267.000 bill.

Credits of 5 SOBs 205.430 bill.

∑ Credits of SOBs 194.100 bill.


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 capital 2001

12/2002 2003 Charter capital 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


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

0 10 20 30 40 50

Việt Nam

Malaysia

Hồng Kông

Thái Lan

Singapore

Đài Loan

Hàn Quốc

Úc


Performance of Vietnam’s Commercial Banks ROA and CAR for some Banks (2004)

0 0.5 1 1.5 2

Vietnam

China

Taiwan

South Korea

Malaysia

Singapore

India

Indonesia

Thailand

Hong Kong 15.4

12.9

19.9

12.7

14.8

12.2

13.3

10.7

7.8

5

CAR%

Nguồn: The economist và tính toán của tác giả

ROA%


The Role of Commercial Banking

System in Economic Development


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


The United States

0

50

100

150

200

250

1993 1994 1995 1996 1997 1998 1999 2000 2001

%G

DP

Bank loans Bonds Stocks


The United States

0

50

100

150

200

250

1993 1994 1995 1996 1997 1998 1999 2000 2001

%G

DP


Germany

0

50

100

150

200

250

1993 1994 1995 1996 1997 1998 1999 2000 2001

%G

DP


Japan

0

50

100

150

200

1993 1994 1995 1996 1997 1998 1999 2000 2001

%G

DP


UK

0

50

100

150

200

250

300

1993 1994 1995 1996 1997 1998 1999 2000 2001

%G

DP



Bank credit in Vietnam

Source: World Development Indicators 2007

0

100

200

300

400

500

600

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

80

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


Financial structure in some countries (% GDP)

Source: IMF, WB

0 200 400 600 800 1000 1200

Hong Kong 19972005

Singapore 19972005

Malaysia 19972005

Thailand 19972005

China 19972006

Vietnam 19972005

Philippines 19972005

Indonesia 19972005

TSNH Cổ phiếu Trái phiếu


Financial structure in some countries (%GDP)

Country Financial Assets

Bank Assets Bonds Stocks

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

Source: IMF, WB (Vietnam 2006)


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


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)


An Application of Theoretical Framework to

Analyze Activities and the Role of

Commercial Banking System


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


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.


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)


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


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.


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


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)


Implications of WTO accession to Vietnam’s commercial banking system


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


The role of foreign banks in some former socialist countries

No. of banks (1997) No. of banks (2003)

Asset share of foreign

banks (2003)Total Foreign

banksTotal Foreign

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%


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 by foreign banks

10,8 12,7 7,8 5,0 14,1 8,5 12,9

Branches of foreign banks

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

Total credit 84 63 50 68 55 58 36

Market share of foreign banks

35% 72% 36% 22% 58% 36% 48%


Assets of Financial Institutions in China (2005)

53.1%

15.2%5.7%

1.9%

9.2%

14.9%

NHTMQD NHTM khác NHTM đô thị & HTXTD

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


Some important issues

Bank governance system Risk management Legal and regularoty framework Financial instruments

Commercial banks

Economy & Finance

commercial bankcb

vu thanh tu anh50

policy banks

commercial banking system

bank capital loans commercial

banking assets

banking services

bank credit