Solutions to promote sustainable development of vietnamese commercial banks

Nội dung text: Solutions to promote sustainable development of vietnamese commercial banks

1. SOLUTIONS TO PROMOTE SUSTAINABLE DEVELOPMENT OF VIETNAMESE COMMERCIAL BANKS PhD. Bui Khac Hoai Phuong hoaiphuongbk@gmail.com MSc. Le Khac Hoai Thanh hoaithanhlk89@gmail.com Faculty of Economics and Tourism, Quang Binh University, Quang Binh, Vietnam Abstract: The sustainability of banking operations has been discussing more in developed countries since the 2008 financial crisis. Bank managers believe that sustainable implementation is important to the success of the bank in the future. IFC survey (2002): 86% reported positive changes of integrating ESMS system into their business; 19% saw changes as significant: 0% reported negative change. UNEPFI survey (2007): 26 financial institutions in CEE to assess the state of sustainability awareness in the finance sector. Over 90% of institutions that had implemented sustainable business practices experienced clear benefits such as reputation enhancement and cost savings. This study assesses the situation and proposes some solutions to promote sustainable development of Vietnamese commercial banks. Keywords: Basel II, Sustainable development, Vietnamese Commercial Banks. 1. Introduction Currently, Vietnam's commercial banking system is being restructured in association with bad debt handling to ensure the safety, health and sustainability of credit institutions, thereby creating a firm premise for reducing inflation, renovating growth model aimed at sustainable economic development. After the 2011-2015 restructuring process, the financial capacity of commercial banks has been improved, according to their audited financial statements, bad debts compared to the outstanding balance of entire system has been declined to below 3%, this is a safe level prescribed by the State Bank of Vietnam. Some weak commercial banks are resolved through selling bad debts to VAMC (Vietnam Asset Management Company), or merging with the others, particularly, there are some commercial banks sold for SBV for zero Vietnamese dong. Sustainable development at Vietnamese commercial banks is now at an early stage, some banks are interested and considering environmental issues in their credit 135
2. decisions, implementing cost-saving measures on environment in internal operations. However, the implementation of sustainable development is not synchronous, there are many barriers to develop a sustainable model, for example, many banks do not have environmental and social risk management system to evaluate and classify projects according to level of environmental and social risks; lack of implementation solutions and high implementation costs. Sustainable development to improve competitiveness, create prestige and position for the bank becomes an inevitable trend in international integration process. 2. Methodology To calculate financial indicators, data was collected from the audited financial statements of 12 commercial banks including 3 SOCBs and 9 JSCBs. List of 12 commercial banks are as follows: Table 1. List of 12 commercial banks No Banks 1 VCB Joint Stock Commercial Bank for Foreign Trade of Vietnam 2 Vietinbank Vietnam Joint Stock Commercial Bank for Industry and Trade 3 BIDV Joint Stock Commercial Bank for Investment and Development of Vietnam 4 ACB Asia Commercial Joint Stock Bank 5 Techcombank Vietnam Technological and commercial Joint Stock Bank 6 MBBank Military Commercial Joint Stock Bank 7 Eximbank Vietnam Export Import Bank 8 SHB Saigon - Ha Noi Commercial Joint Stock Bank 9 Martimebank Vietnam Maritime Commercial Join Stock Bank 10 VPBank Vietnam Prosperity Joint Stock Commercial Bank 11 Sacombank Saigon Thuong Tin Commercial Joint Stock Bank 12 VIB Vietnam International Commercial Joint Stock Bank Descriptive statistical methods are used to process collected data of 12 banks over the period of 2008-2017 and to calculate financial indicators such as: income structure, bad debts, proportion of net interest income and non-interest income. Comparative method is used to compare sustainable development level of Vietnamese commercial banks to branches of foreign banks in Vietnam and other banks in the world. 136
3. 3. Sustainable development of Vietnamese commercial banks 3.1. Capital adequacy ratio (CAR) According to banks’ annual reports, many of them have a relatively high CAR ratio compared to State-owned Commercial Banks (SOCBs). In 2017, Maritimebank has the highest rate among these banks, which was 19.48%, followed by Eximbank was 15.98%. In 2017, Vietcombank has the highest CAR among 3 SOCBs, followed by BIDV and Vietcombank, which accounted for 11.13%, 10.9% and 10.4%, respectively. 19.5% 20% 18% 16.0% 16% 12.1% 12.6% 14% 12.7% 13.1% 10.9% 11.6% 11.3% 11.5% 11.3% 12% 10.4% 10% 8% 6% 4% 2% 0% Figure 1: Minimum CAR of commercial banks in 2017 Source: Annual report of commercial banks in 2017 Many commercial banks are planning to increase their charter capital to ensure CAR to meet Basel II standards in 2019. ACB is proactively improving CAR through various activities such as issuing more than 3 trillion of Tier 2 bonds, monitoring and managing loan portfolio from many aspects such as term and industry with the aim of improving risk coefficient. By the end of 2017, CAR and Tier 1 capital was at 11.49% and 7.77%. BIDV plans to raise their charter capital through selling shares to foreign investors and actively works with partners and related agencies to speed up this process. In 2017, MBBank completed the plan to increase their charter capital to VND 18,155 billion, an increase of 6% compared to 2016. VCB successfully implemented the plan to increase Tier 2 capital to ensure minimum CAR and improve the ability to meet Basel II standards. Up to now, Vietcombank and VIB has already met the Basel II standards. According to Circular No. 41/2016/TT-NHNN, banks must maintain minimum CAR of 8% as defined in financial statements thereof; and to calculate 137
4. CAR, required capital for credit, market and operational risk need to be included. Thus, regulation on minimum CAR decreases from current level of 9% to 8% in 2020. However, the determination of CAR according to Circular No. 41 will reduce this ratio compared to current regulations. In order to implement the Basel II project, beside Circular 41/2016/TT-NHNN, SBV has determined a roadmap to issue guidelines to calculate CAR according to Internal rating base, initial is the Foundation Internal Rating Based (FIRB), expected to be consulted by financial institutions in 2019. Circular No. 13/2018/TT-NHNN on internal control system of commercial banks to create a legal framework to implement Three Pillars of Basel II. Data were provided for a total of 206 banks, including 111 large internationally active (“Group 1”) banks, among them all 30 G-SIBs, and 95 other (“Group 2”) banks. All Group 1 and Group 2 banks (including all 30 G-SIBs) would meet the average Common Equity Tier 1 (CET1) minimum capital requirement of 4.5% and the CET1 target level of 7.0% (i.e. including the capital conservation buffer). This target also includes the G-SIB surcharge where applicable but does not include any countercyclical capital buffers. The report also concluded that the current level of Tier 1 capital in Europe is higher than in the U.S and other regions (BIS, 2018). The average Tier 1 capital of 12 commercial banks in Sri Lanka in 2017 was above 10% and average CAR of these banks was above 15%. In 2018 Sri Lanka banks started to apply Basel III. Countries in Southeast Asia such as the Philippines, Singapore and Malaysia have developed policies and roadmap to comply with Basel III. 3.2. Potential bad debt Figure 2. Bad debts of commercial banks 35000 million Dong 32304 30000 31344 29484 25000 20000 18084 15000 16752 13680 10000 10728 9528 5000 7212 0 2015 2016 2017 Subprime Loan Doubtful debts Irrecoverable debts Source: Annual report of commercial banks 138
5. Bad debts reported by commercial banks tend to increase after restructuring phase (2011-2015), although bad debt ratio of 12 commercial banks in 2017 is lower than in 2016, which accounted for 2.04% and 2.31% respectively, scale of bad debts is increasing. In 2016, total bad debt of 12 banks reached VND 59,916 million, increased by 26.34%, equivalent to VND 12492 million. In which, subprime loan tended to increase sharply to 68.6%, equivalent to VND 7,356 million. In 2017, bad debts of these commercial banks reached VND 61,776 million, increase 3%, equivalent to VND 1,860 million compared to 2016. In which, doubtful debts increased sharply to 75.8%, equivalent to VND 7,224 million. Thus, bad debts of commercial banks have not been thoroughly dealt with after restructuring, bad debts are still high in the banking system. However, these bad debts are reported by banks only and not included bad debts sold to VAMC and other amounts taken out of the balance sheet, thus this figure does not reflect fully and substantially the bad debts. According to the National Financial Supervisory Committee, bad debt of the banking system in 2017 is about 9.5% due to potential bad debts in restructuring debts. According to the National Committee of the SBV in 2017, the process of dealing with bad debts of credit institutions was faster, especially in the last months of the year. Credit institutions limit transferring debts to VAMC, handling bad debts, securing assets, using risk provisions and other measures. In 2017, about VND 70 trillion of bad debts were handled, an increase of 40% compared to 2016. In which, debt collection from customers accounted for 54%, using risk provisions accounted for 42.3%, selling collaterals accounted for 2.3%. However, the bad debt settlement results of the credit institution have not been as expected due to selling bad debts at market price is limited; The process of restructuring commercial banks is weak and process of buying banks with 0 dong is slow. The balance of provision for credit losses increased sharply. In 2017, provision for credit losses, specific provision and general risk provision were estimated to increase by 24.7%, 26.3%, 22.1% compared to 2016, respectively. 3.3. Banks’ revenue depends on credit Income of commercial banks is mainly from interest; some banks have net interest income of nearly 90% of total income. Traditional non-credit services will be the cornerstone of sustainable income for banks. Development of non-credit services contributes to diversify banking products and services, provides customers with many utilities, and disperses risks in business operations, gradually reduce the dependence on revenue from credit activities, increases income and profit from service activities, creates stable revenue for the bank. 139
6. 100% 13% 90% 21% 18% 21% 20% 17% 27% 27% 23% 28% 33% 31% 80% 70% 60% 50% 87% 40% 79% 82% 79% 80% 83% 73% 73% 77% 72% 67% 69% 30% 20% 10% 0% Non-interest Net Interest income income Figure 3. Net interest income and non-interest income Source: Annual report of commercial banks In the period of 2008-2017, commercial banks had a high rate of net interest income in total income including VPBank (87%), VIB (83%), Vietinbank (82%). Maritimebank and Sacombank have the highest proportion of non-interest income compared to other banks, which is 33% and 31% respectively. Commercial banks need to maintain and improve the quality by ensuring publicity, transparency, simple procedures, easy accessibility to attract more customers and maximize utilities and customer's choice. Net interest income accounted for the highest proportion of total income at 76.6% in 2017, followed by income from other activities (10.3%), income from securities trading and income from equity contribution accounted for a small proportion of total income. Net interest income in 2017 increased by 24% to 2,364 million VND, net income from service activities increased by 51.7%, equivalent to VND 559 million, net income from securities investment in 2017 decreased by 19.8%, equivalent to VND 38.5 million compared to 2016. Branches of foreign banks have lower interest income than domestic commercial banks. HSBC's net interest income is 61.62% in 2016, and 64.94% in 2017, ANZ’s in 2016 was 62% and plummeted to 49.48% in 2017. Countries in the Euro area have a relatively high proportion of non-interest income in total income, which was 40.39% in 2013. 140
7. Share capital contribution 170 2017 2016 149 Other operating profit Million VND 1203 940 Net profit on security investment 156 195 Net profit on security trading 177 108 Net profit on foreign exchange and gold 383 332 Net Profit from services 1640 1081 Net interest profit 12220 9857 0 2000 4000 6000 8000 10000 12000 14000 Figure 4. Average income structure of commercial banks Source: Annual report of commercial banks 4. Solutions to promote sustainable development of Vietnamese commercial banks 4.1. Raise equity of commercial banks The objective of raising equity of banks is to meet the requirements and regulations on safety and expansion of banking business. According to Circular 36/2014/TT-NHNN and Circular No. 19/2017/TT-NHNN, there are quite a number of indicators calculated according to the bank's own capital such as minimum CAR (9%), the credit level for a customer or a group of related customer must not exceed 15% and 25% of the equity, respectively; The ratio of capital contribution to buy shares must not exceed 40% of charter capital and the reserve fund of the bank. Thus, if a bank wants to expand credit limit for customers, increase capital investment or improve IT system, facilities and risk management system, they must increase their charter capital. In order to increase capital, it is necessary to take measures in the short-, medium- and long-term, including: retaining earnings, sources from reserve funds to supplement charter capital, issuing shares, increasing capital contribution from existing strategic shareholders, issuing long-term deposit certificates, issuing convertible bonds, mobilizing more strategic partners, issuing shares on international financial market. 141
8. Foreign investors simultaneously withdrawing capital in many credit institutions recently put pressure on CAR and equity. Thus, Vietnamese commercial banks need to have plans to increase their capital to ensure CAR according to international practices and sustainable development. Remaining sufficient capital helps the banks expand their business operations, such as opening more branches, diversifying products and services, contributing capital to joint ventures. Moreover, increasing the equity may ensure the ability to protect stakeholders’ interests when facing risks or losses. In addition, to reach sustainable development, commercial banks need to have sufficient capital to finance green projects such as renewable energy, green technology, anti-climate change and biotechnology. 4.2. Improve assets quality of commercial banks The Government issues Resolution 42/2017/QH14 on pilot settlement of bad debt of credit institutions to deals with pilot policies for settlement of bad debts and treatment of assets tied to bad debts. New in the Resolution No. 42/2017/QH14 is that credit institutions, branches of foreign bank, trading organizations which handle bad debts can publicly and transparently sell bad debts and collaterals to the eligible credit institutions at market prices, probably greater or smaller than the principal balance of the debt. Settlement of bad debts of the commercial banking system in past few years has witnessed positive changes from completing the policy mechanism, bad debt has reduced in term of rate but not in term of debt ratio, debt group 4 and 5 tend to increase in 2017. Solutions to resolve bad debts can be as follows: (i) Completing the legal framework on debt trading market which still has many limitations, as the market participants are limited in accordance with the law, the seizure and handling of security property has many legal obstacles, rights and responsibilities. Debt and seller's responsibility have not been clearly defined. Currently, only VAMC and DATC of the Ministry of Finance operate effectively, while 28 Asset Management Companies (AMC) of commercial banks have very limited resources and most of them only handle internal debt for the parent banks themselves. Therefore, it is necessary to complete a legal framework on the debt trading market for various types of participants, continue to strengthen capital capacity for VAMC, DATC, optimize asset portfolio and sell at reasonable prices to increase the ability to convert these debts into cash. These solutions help to boost the debt trading market effectively. (ii) The SBV has taken drastic measures to properly and adequately determine the size and structure of NPLs, including potential bad debts and forcing commercial banks to deal with bad debts, and selling bad debts at reasonable prices. 142
9. (iii) Implementing measures of securitizing bad debts, restructuring debts and issuing shares to companies, handling bad debts through cooperation and joint ventures with companies for the purpose of sharing risks and increase the ability to recover capital from handling these debts; Valuation, classification of bad debts and selling it on the stock market. (iv) For some weak banks (e.g. poor asset quality and poor liquidity), strong measures need to be applied: forced to merger or closure. 4.3. Improve management and administration capacity of commercial banks, apply management methods according to international standards Strengthen management and administration capacity of commercial banks in accordance with international principles and standards. The bank's governance model must legitimate right and obligation of the Board of Directors (BOD), the Executive Board (EB), and the Supervisory Board (SB) to ensure all stakeholders’ interests. The structure of the Steering Committee has to ensure the independence of the BOD to remain a clear separation between ownership and executive rights, and take advantage of management capacity and experience of the relevant members of the bank. Each bank identifies their stakeholders in different way, generally, the major stakeholders of commercial banks including shareholders, suppliers, customers, executives and management agencies. It is necessary to clearly separate the powers of SB and BOD, so that SB must be able to protect the rights and interests of other stakeholders when the bank's operations are at risk. Moreover, SB must be able to prevent and control conflicts of interests of related parties. In order to implement sustainable development, commercial banks need to be transparent and objective in information disclosure, improve the quality of explanation according to the transparency principle of ISO2600. Especially, transparency in decisions and activities that affect society and the environment. Commercial banks must clearly, accurately and fully present their policies, decisions and activities, including the understanding and impacts of banks on society and the environment. Strengthening the governance apparatus, implementing transparency in information disclosure and accountability are key factors when implementing sustainable banking model. Currently many international investors consider quality of bank's management system and human resources as an important factor when choosing business partners. Financial safety, avoiding environmental and social risks, the interests of stakeholders has become key concerns instead of maximizing profit as before. The evident can be found in green investment funds, sustainable investments are increasing in both size and volume. 143
10. 4.4. Diversify products and provide sustainable finance Diversify activities of commercial banks towards the purpose of reducing business risks, thereby increasing the bank's ability to accept and support risks. The main business activities of commercial banks focus on credit, investment, and other services such as payment, guarantee, fiduciary, foreign exchange trading. Vietnamese commercial banks’ income mainly comes from interest because the bank's credit granting activities accounting for over 70%, this figure in some banks are up to nearly 90%, revenues from services and investment activities only accounting for a small proportion. Thus, banking business depends too much on granting credit when businesses encounter difficulties will cause bad debts. The asset quality of commercial banks depends on the quality of loans of customers, when customers face risks in payment, making risks in banking business increase. Therefore, commercial banks need to diversify types of services and products in order to increase competitiveness, penetrate into international markets and minimize risks due to diversification of product portfolio. Promote the provision of non-credit services such as investment activities, diversify e-payment services, corporate and personal financial advisory services, and provide consulting services on environment and society for SMEs. Besides, commercial banks develop green financial products to enhance brand value and connect with customers. Currently, the Government and ministries have policies to support the development of green economy, towards sustainability, commercial banks need to focus on resources to develop environmentally friendly products and socially responsible. To achieve this goal, commercial banks need to build the principles of sustainable implementation throughout the entire headquarters and branches. At present, there are many organizations that have developed principles of sustainable development for general and specific organization in financial sector, with a focus on environmental, labor and human rights principles, and anti-corruption. To provide green finance, commercial banks need to build and thoroughly implement environmental principles, including: raising awareness about environment, renewable energy, climate change for officials, bank staff, moving forward to support customers how to prevent environmental challenges, implement initiatives to promote environmental responsibility, especially in credit decisions and invest in environmentally friendly technologies. Green projects, renewable energy, energy saving technologies and energy conservation measures are often long-term investment and require large capital resources. Therefore, providing financial resources for these banks’ product. There should be measures to support businesses in accessing capital. 144
11. Commercial banks need to conduct market research and analysis related to the environment and desires of each customer segment, in order to identify and classify their green financial needs, from which products are designed to be suitable for each customer group. For customers who are not highly aware of environmental issues, commercial banks need to take measures to stimulate customer demand for green financial products and services through marketing, media, and education campaigns. Sustainable banking products are not only about providing credit, supporting capital for green projects, but also positively impacting on the environment, but also expanding into savings products, insurance and consulting services. E&S issues, establishment and operation of green investment funds, mobilization from green bonds. 5. Conclusion The study evaluated sustainable development situation of 12 Vietnamese commercial banks. The results show that, although the legal framework for banking safety has been issued and amended, many banks still fail to meet the requirements of Basel II. Bad debt has decreased in proportion; however, the scale has increased. The bank's income is not sustainable because it relies much on credit activities, if customers fail to pay their debts, bad debts will be created for the bank. Based on the current situation of sustainable development process of Vietnamese commercial banks, the study proposes some solutions for Vietnamese commercial banks. First, these commercial banks need to improve their stability and health, including raising capital to protect shareholders, investors and customers from losses, improving asset quality. Secondly, improving governance capacity according to international practices and finally providing more sustainable financial products. References 1. The State Bank of Vietnam (2014), Circular 36/2014/TT-NHNN stipulating minimum safety limits and ratios for transactions performed by credit institutions and branches of foreign banks, dated November 20, 2014. 2. The State Bank of Vietnam (2017), Circular No. 19/2017/TT-NHNN amending and supplementing a number of articles of Circular No.36/2014/TT-NHNN dated November 20, 2014 stipulating prudent limits and ratios in the operations of credit institutions and foreign bank branches, dated December 28, 2017 3. The State Bank of Vietnam (2016), Circular No. 41/2016/TT-NHNN prescribing prudential ratios for operations of banks and/or foreign bank branches, dated December 30 2016. 4. National Financial Supervisory Commission (2017), Financial Market Overview Report. 145
12. 5. BIS, 2018, Basel III Monitoring Report, Basel Committee on Banking Supervision, ISBN 978-92-9197-634-8 (online). 6. ISO 26000, (2010) Guidance on social responsibility. INTERNATIONAL STANDARD. Websites: 1. %20Cronin.pdf, accessed on August 20, 2018. 2. 3. KPMG, 2018 Sri Lanka Banking Sector: Status quo as of June 2018. accessed on February 15, 2019. 146