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HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

TOPIC TREASURY MANAGEMENT 2021

ANALYSIS OF CREDIT, LIQUIDITY, INTEREST RATE RISK,

SCENARIOS ANALYSIS ON THE IMPACT OF INCOME AND CAPITAL,
AND HEDGING PROPOSAL FOR VIETTINBANK 2018-2020

Member 1. Nguyen Thi Hoai Huong Tut 4 1604040050 3TC18

:
2. Vuong Thi Nam Kieu Tut 4 1804040056 2TC18
3. Ngo Phuong Linh Tut 4 1804040063 2TC18
4. Nguyen Thi Duc Tut 4 1804040039 2TC18
Course: TRM Spring 2021
Due date: 14 May 2021

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HA NOI 2021

Peer contribution

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Abstract

Vietnam’s banking industry was expected to weaken in 2020 as a result of decrease in

credit growth, rising loss provision and along with worsening of asset quality, and
inadequacy of capital in this a weak economic environment. However, in the beginning of
2021, credit growth and asset quality improved. That should a good signal of recovery in
bank profits.
The aim of this research on ViettinBank (2018-2020) is to analyze risk exposure
including credit, liquidity and interest rate risk and set up different scenarios to detect the
bank have problem.

The final result indicates that ViettinBank did not meet capital requirement, however
liquidity is not shown problematic.

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Table of content

Abstract.....................................................................................................................................3
I. Introduction..................................................................................................5
1.1. Financial crisis and covid-19 pandemic.......................................................................5
1.2. Background of ViettinBank..........................................................................................5
II. Analysis of liquidity risk, credit risk, interest rate risk.................................7
2.1. Liquidity risk................................................................................................................7
2.2. Credit risk....................................................................................................................9
2.3. Interest rate risk........................................................................................................13
2.4. The impact of inflation in bank’s performance.........................................................16
III. Scenarios analysis on the impact of income and capital and hedging proposal............16
3.1. Recession scenarios..................................................................................................16
3.2. Credit risk hedge.......................................................................................................19
3.3. Interest rate risk hedge.............................................................................................20
Reference.................................................................................................................................22

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I. Introduction

I.1. Financial crisis and covid-19 pandemic

After a decade of the Great financial crisis 2007-2008, covid-19 pandemic clearly gives fear
to bank industry. In the historical records, a sudden stop lending by bank might feed a
warning signal of recession in the economy. Furthermore, as a domino effect, recession also
damages to bank via credit losses, declines in the value of investment, reduction in a bank
revenue. Even worse, the situation can spiral downward as damage to banks cuts into credit
availability, force bank to cut back further.

However, Viet Nam has performed well in comparison to the rest of the world by considering
following key macroeconomic factors:

• GDP has continued to growth over the 6 months of 2020, albeit at a slower pace than
in the past.
• Inflation has been contained despite the easing of monetary condition by the SVB,
which lead to the expansion of credit by commercial banks to business
• Country has been able to cope with the pandemic by maintaining a trade surplus.

I.2. Background of ViettinBank

The background of Viettinbank is summarize as a following table

Type Joint-stock company

Traded as HOSE: CTG
Industry Financial services
Founded 1988
Headquarters Hanoi
Area serves Vietnam
Key people Lê Đức Thọ (Chairman); Trần Minh Bình (Diretor)
Owner State Bank of Vietnam
Website www.viettinbank.vn

In the following parts, we will discuss and assessing risks related in the bank and propose
hedging plans which the bank can employ to reduce the uncertainty situation.

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II. Analysis of liquidity risk, credit risk, interest rate risk

II.1. Liquidity risk

When discuss about liquidity problem, in general, it is important to look back for the lessons
from Global financial crisis in 2007-2008. It is a shadow pictures to the economy of
numerous nations, including Viet Nam. However, Vietnamese banking system has not
seriously suffered from the impact of this catastrophe since it only at the beginning of
integration. The difficulties its banking system has been faced to the extent of: Limitation of
carrying out international transactions that impacts negatively on Viet Nam’s short-term
loans. The consequence is that many bank’s profits have reduced, NPLs increased including
ViettinBank, hence, the impact for banking system can remain in several year.
Due to that fact, liquidity risk should be detected, analyzed and managed carefully in bank
and in any financial institutions. That is the very first step in order to prepare for the future
unexpected events because, practically speaking, the economic cycle is, in fact, fluctuated
and most of the time future prediction is beyond the human ability.
Follow that, in this part we are going to examine the liquidity situation of ViettinBank over
three year from 2018 to 2020: discussion of fundamental liquidity; statement of structural
liquidity maturity gaps
II.1.1. Liquidity risk background
Liquidity problem occurs when banks do not have enough cash to meet depositor withdrawal
request. When a bank is in cash-strapped situation, it is may forced to borrow or quicky
liquidate some of its assets at less than market value in order to meet unexpected withdrawal
demands. Moreover, it can happen because banks finance long
Funding liquidity and funding liquidity risk

Those two terms sound similar however they are different concepts

Funding liquidity is defined as the ability to settle obligation with immediacy. If the bank in
the trouble of illiquid, it simply means that bank is unable to settle obligation in time and
bank default can be the possible consequence then both shareholders and depositors will
incur losses. On the other hand, funding liquidity risk derives by the chance that over the
specific horizon the bank will become unable to settle obligation immediacy. Therefore, we
can see funding liquidity risk has two components: future cash flow in- and outflow; and
future price of obtaining liquidity from different sources. In another words, to distinguish
those two terms, we can consider the number of possible results and also time horizon.
Funding liquidity is a binary concept since only 2 possible outcomes: able to settle or not able
to settle obligations. Funding liquidity risk has infinite outcomes because it is in the relation
with the changes in future cash flow and future price (future price is a very random factors).
in addition, the combination of different scenarios creates uncounted results.

To detect liquidity risk, it is worth to trace back statement of structural liquidity and maturity
gaps of the bank
II.1.2. Analyze statement of structural liquidity and maturity gap of ViettinBank

Statement of structural liquidity is reported as per their maturity profile (bucket) and play a
vital role for ALCO to draw ideas of mismatches depending on cash inflow and outflow of
each bucket. It can serve as early warning signal of impending liquidity problem.

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The tables below illustrate Viettin bank statement of structural liquidity in short form and
also compare the maturity gaps over 3 years
*The detailed tables are provided in indexes section

2018 (Million VND)

Overdue Due
Over 3 from 1m to from 3m to from 1y to
months 3 months 1month 3m 12m 5y above 5ys Total
Total 199,026,76
assets 14,171,811 5,799,721 0 205,405,641 310,087,496 198,698,165 247,105,721 1,180,295,315
Total 293,698,63
liabilities 5 227,652,703 412,188,529 134,176,537 28,842,235 1,096,558,639

Gap 14,171,811 5,799,721 -94,671,875 -22,247,062 -102,101,033 64,521,628 218,263,486 83,736,676

2019 (Million VND)

Overdue Due
Over 3 from 1m to from 3m to from 1y to

months 3 months 1month 3m 12m 5y above 5ys Total

Total
assets 11,403,411 5,677,439 193,677,695 219,886,697 340,424,709 204,983,813 285,724,696 1,261,778,460
Total
liabilities 319,486,667 261,284,108 440,464,470 107,212,074 34,423,650 1,162,870,969
-
Gap 11,403,411 5,677,439 -125,808,972 -41,397,411 100,039,761 97,771,739 251,301,046 98,907,491

2020(Million VND)
Overdue Due
Over 3 from 1m to from 3m to from 1y to

months 3 months 1month 3m 12m 5y above 5ys Total

Total
assets 9,592,414 2,799,154 229,460,871 229,005,709 392,517,058 213,416,411 277,776,322 1,354,567,939
Total
liabilities 321,826,292 210,210,526 477,512,740 210,821,995 34,883,605 1,255,255,158
Gap 9,592,414 2,799,154 -92,365,421 18,795,183 -84,995,682 2,594,416 242,892,717 99,312,781

Maturit
Over 3 from 1m from 3m to from 1y to
y Gap months 3 months 1month to 3m 12m 5y above 5ys Total
- -
5,799,72 22,247,06 102,101,03 64,521,62 218,263,48
2018 14,171,811 1 -94,671,875 2 3 8 6 83,736,676
- -
5,677,43 125,808,97 - 100,039,76 97,771,73 251,301,04
2019 11,403,411 9 2 41,397,411 1 9 6 98,907,491
2,799,15 18,795,18 242,892,71
2020 9,592,414 4 -92,365,421 3 -84,995,682 2,594,416 7 99,312,781

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Maturity gap 2018-2020,

unit: Thousand VND
300,000
250,000
200,000
150,000
100,000
50,000
0
-50,000
-100,000
-150,000

2018 2019 2020

Graph: Maturity gap, 2018-202, ViettinBank

According the graph, in general, positive gaps are seen at the buckets of above 5 years; over
3 months and three months maturity in all periods and also gap positive in the year of 2018
and 2019 for bucket from 1 year to 5 years maturity. However, negative maturity gaps are
clearly draw from 1 month maturity up to 1 year. It can be seen that in the 2 tails of the
graph, maturity gaps are positive and in the middle period they are mainly negative. A
positive maturity gap shows that value of rate sensitive assets is more than the value of rate
sensitive liability and vice versa.
Moreover, the gaps in 1 month maturity, from 3 months up to 1 year statically significant.
The larger the negative gap, the higher degree of potential risk or more volatile.
And also, the upfront discussion of funding liquidity risk depicted that this problem has the
component of future value of the instruments. It makes sense that longer repricing periods
have higher sensitivity to the change in interest rates and repricing means that its most likely
to happen the interest rate in the long future is very different from the past.
II.2. Credit risk

Obviously, the best indicator of credit risk is overdue debt. Overdue debt is unavoidable in
the context of a credit relationship. Overdue debt rates are always of interest to administrators
because they can result in doubtful accounts, irrecoverable debts, or bad debts.

II.2.1. Credit risk factors

This factor represents the proportion of credit items in assets; a high proportion of credit
items indicates a high profit and a high credit risk exposure.

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Unit: million VND

Item 2018 2019 2020

Total assets 1,164,289,661 1,240,711,475 1,341,436,468

Outstanding loans 864925948 935,270,945 1,015,333,270

Credit risk factor 0.74 0.75 0.76

Table 1.1: Credit risk factor

The table shows that the credit item in the bank's total assets is quite high, resulting in an
increase in profit. In principle, credit risk increases accordingly. However, the bank had
strengthened the appraisal and strict control of loan projects, and the bank's credit operation
remains effective, to the extent that special-mentioned debt in 2020 is half that of 2019; bad
debt accounts for a small proportion of total outstanding loans.The table depicts the
significant impact of outstanding loans on total assets; total assets will fluctuate in the event
of a credit operation difficulty.

II.2.2. Analysis of overdue debt structure

Based on Decision No. 493/2005/QD-NHNN and additional Decision No. 18/2012/QD-
NHNN dated 25/04/2012 made by the Governor of State Bank overdue debts are classified
into 5 groups as follows:

Group 1 (Standard debt)

Group 2 (Special-mentioned

debt) Group 3 (Sub-standard

debt) Group 4 (Doubtful debt)

Group 5 (Bed debt - possibility of principal loss)

Overdue debts are categorized from group 2 to group 5, while bad debts are classified from
group 3 to group 5. To put it another way, overdue debts include both group 2 and bad debts.

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Unit: million VND

Comparison Comparison
2018 2019 2020 2019 vs 2018 2020 vs 2019

Total
outstanding 864925948 935270945 1015333270 70344997 8.13% 80062325 8.56%
loans

Group 1 846022474 918780095 1003015015 72757621 8.60% 84234920 9.17%

Group 2 5194126 5677439 2799154 483313 9.30% -2878285 -50.70%

Group 3 2139221 2062615 1857241 -76606 -3.58% -205374 -9.96%

Group 4 2016689 1546701 1611589 -469988 -23.30% 64888 4.20%

Group 5 9553438 7204095 6050271 -2349343 -24.59% -1153824 -16.02%

Table 1.2: Analysis of overdue debt structure

Despite an increase in outstanding loans, overdue debts in groups 2 - 5 in 2020 decreased

substantially, as seen in the table above. Over the years, the bank's standard debt (group 1)
has always made up a large percentage of overall overdue debts, reaching 97.81% in 2018,
98.24% in 2019, and 98.79% in 2020. Although debt of group 2 had risen slightly from
5194126 million in 2018 to 5677439 million in 2019, in 2020, it plummeted to 2799154
million. From 2018 to 2020, the debts of groups 3, 4, and 5 were effectively managed, which
decreased steadily.

Over the last three years, there has been no discernible trend in the number of outstanding
debts. However, it is clear that the bank has made significant efforts to manage overdue
debts. The bank's standard debt is still held at a rate of over 98%, which is regarded as a
major success. In 2020, the Covid-19 pandemic has a great impact on enterprises in Vietnam,
including domestic private enterprises and foreign direct investment (FDI) enterprises. The
support in interest rate from the Government facilitated the business activities of enterprises.
Therefore, despite economic difficulties, in 2020, enterprises had carried out actively and
effectively construction work, projects, etc. Many enterprises specializing in garment,
information and communication, electrical equipment manufacturing, real estate, agriculture,
fisheries, etc. receiving loans from the bank can earn high profit and be able to repay debt on
schedule.

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II.2.3. Bad debt situation over the years

Unit: million VND

Loan classification 2018 2019 2020

Total outstanding loan 864925948 935270945 1015333270

Bad debt 13709348 10813411 9519101

In which:

- Substandard debt 2139221 2062615 1857241

- Doubtful debt 2016689 1546701 1611589

- Bad debt - possibility of

principal loss 9553438 7204095 6050271

NPL-to-total outstanding loan ratio 1.59% 1.16% 0.94%

Table 1.3: Bad debt situation over the years at the bank

In general, bad debt has been decreasing over time. In 2019, the NPL ratio was 10813411
VND million, down VND 2895937 million from the previous year. In 2020, NPL was VND
9519101 million, a decrease of VND 1294310 million from the previous year.

The overall NPL-to-total outstanding loan ratio, according to current State Bank regulations,
is between 3 and 5 percent. This ratio at the bank is just around 0.94 percent to 1.59 percent,
which is much lower than the permissible limit, as seen in the table above. This implies that
the bank's credit operations are stable, safe, and effective. The bad debt situation is always
under control, with the bank completing a comprehensive settlement.

I.1.1. Risk reserve fund

Unit:million VND

2018 2019 2020

Remaining balance 8302823 13059964 12945694

Provision For Credit Losses (PCL) 5011682 8644513 6326933

Use of risk provisions -254541 -8758783 -6711225

Balance at the end of the year 13059964 12945694 12561402

Table 1.4: Reserve fund at the
bank

As can be seen from the table, the bank's establishment of credit risk reserve funds and risk
treatment over the years demonstrates that the bank has put forth significant effort in the

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process of overcoming risk. Viettin bank has been steadily restructuring loans, cleaning up
financial activities, managing outstanding debts, etc. It also applied measures to credit
activities in order to enhance professionalism and bring productivity to work in order to
improve credit quality and minimize risk. Furthermore, the bank has established an adequate
provision to cover risk in banking activities by making risk provision at the prescribed rate
based on the classification of overdue debt and cost identification, and using the risk offset.
This strategy aids in reducing the bank's debt burden, relieving psychological strain on credit
officers and the bank's leadership in the case of a credit risk during the period when the
collateral is to be enforced.

I.2. Interest rate risk

Interest rate risk (IRR) is an integral part of banking business, which can be a source of
profitability and shareholder economic value (Basel committee on banking supervision). IRR
usually occurs when there is a large fluctuation in the input interest rate and the output
interest rate. Excessive IRR, which is an important element creating the failure of the bank,
threatens the bank’s earnings and capital base. Changes in interest rates may have an impact
on a bank's net interest income, level of interest-sensitive income, and operating expenses.
Moreover, due to the fact that present value of future cash flows changes when interest rates
have a new tendency of increasing or decreasing, which effect on underlying asset, liability
and off- balance sheet instruments (Basel committee on banking supervision). Consequently,
interest rate risk management, predicting interest rate trend changes is a crucial issue that
every bank would have its efficient strategies to minimize the risks and maximize the
institutional value/profit.
In Vietnam, interest rate decisions are regulated by the State Bank of Vietnam (SBV). This
picture shows the annual interest rates of Vietnam from 2017 to January 2021. It can easily
be seen that the interest rates have a gradual decreasing trend from 6.5% down to 4%.

Graph : Interest rate in Viet Nam

The central bank must have the adjustments in the interest rates due to the strong relation
between IRR and environmental risks such as monetary, fiscal and economic policies of the
Government. The purpose is to manage the national financial market (Hien, 2013).
I.2.1. Sources of interest rate risk

There are many different sources that causes interest rate risk in commercial bank such as
Gap risk, Basis risk (also known as Spread risk), Net Interest position risk, Embedded
Option

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Risk, Yield Curve risk, Price risk, Reinvestment risk.Specially, According to research
gate,the three most important sources of risk are Basis risk, Gap risk and Yield curve risk.
The first main source of interest risk is Basis risk which is connected with the imperfect
correlation in the adaptation of interest rate to assets and liabilities with otherwise similar
maturities and revaluation. In the case of a change in an interest rate, these differences in
adaptation of interest rate can cause an adverse impact on the value of the bank. Secondly,
Gap risk works on the principle that groups of assets and liabilities will be sensitive to
interest rate changes over their maturity. Finally, Yield curve risk is also one of the main
sources causing interest rate risk. Specifically, Yield curve risk arises when changes in the
value, slope and shape of the yield curve have an adverse impact on financial flow and value
of the bank.
I.2.2. Measure of Interest rate risk Tools
I.2.3. Gap analysis
Gap analysis is a method of asset-liability management. It represents the imbalance between
the rate sensitive asset (RSA) and rate sensitive liability (RSL), which directly affect net
interest income (NII) of the bank. To hedge the gap, banks have to maintain the RSA equal
to RSL. Here is the summary of the consequences of the gap.
GAP Change in IR Change in NII
Negativ
e RSA < RSL Increase Decrease
Negativ
e RSA < RSL Decrease Increase

Positive RSA > RSL Increase Increase

Positive RSA > RSL Decrease Decrease
Zero RSA = RSL Increase No impact
Zero RSA = RSL Decrease No impact

Interest-sensitive Assets (ISAs) are assets that have maturities of less than one year and loans
with interest rates depending on market interest. On the TSN side, interest-sensitive
Liabilities (ISLs) are capital mobilization with a maturity of less than 1 year and other
deposits associated with fluctuating interest rates in the market.
The difference between these 2 assets:
GAP = ISAs - ISLs
If interest-sensitive Liabilities is greater than interest-sensitive Assets, the difference is
negative (GAP <0); If the interest rate in the market increases, the cost of raising capital will
increase more than the interest earned from lending, thus, the bank's income will decrease.
Conversely, if the interest rate falls, the bank's income increases.
In case the interest-sensitive Assets is greater than the interest-sensitive Liabilities (GAP> 0),
if the interest rate in the market increases, the interest rate earned from investing in TSC will
increase faster than the cost of mobilizing capital that means the bank's income will increase.
Conversely, if the interest rate in the market falls, the bank's income falls.

Components 2018 2019 2020

ISA 1,123,695,270 1,202,502,511 1,290,914,474
ISL 488,022,574 474,870,439 393,442,988
Interest Sensitivity Rate (ISA/ISL) 2.3025477 2.5322749 3.2810712
Interest Sensitivity Gap 635,672,696 727,632,072 897,471,486
Net Interest Margin 2.07% 2.86% 2.85%
Net Interest Income 22,518,086 33,199,037 33,199,037

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Table 1: Interest sensitive Assets & Interest sensitive Liabilities from 2018 to 2020 (Million
VND)

According to the above table, Vietinbank’s gap experienced a positive gap during the period
2018 to 2020. Interest - sensitive Assets are larger than interest sensitive Liabilities, thus this
bank has a positive gap and is asset sensitive. Both Relative IS GAP and ISR ratio illustrates
an Asset -sensitive financial bank (Relative IS GAP >0 and ISR greater than one).
With positive interest-sensitive GAP, the risk will occur in the case of decreasing interest.
Interest income will rise faster than interest expenses which leads to the increasing of NIM.
The net interest margin of VietinBank in 2018, 2019 and 2020 is 2.07%, 2.86% and 2.85%
respectively as given in the table which grew steadily indicating the management and staff
have been able to keep well the growth of revenues ahead of rising costs.
During the period from 2018-2019, Vietinbank experienced an increasing NIM that rose
from 22,518,086 million VND in 2018 to 33,199,037 million VND in 2019.
Nevertheless, The NIM is nearly constant in 2020 (33,199,037 Million VND), almost the
same as that of 2019 due to the impact of COVID- 19.
I.2.4. Duration Gap (DGAP)
Another method to hedge with interest risk is the Duration gap (DGAP) model which focuses
on managing net interest income, recognizing the timing of all cash flows for every security
on a bank's balance sheet. It is known as the mismatch of asset and liabilities timing. This
indicates the time value of money. Unlike GAP analysis focusing on rate sensitivity or the
frequency of repricing, duration gap analysis focuses on price sensitivity. DGAP along with
interest rate change directly conducts the gain or loss of a bank's net worth (Hien, 2013).
Because of complicatedly processing more numbers and specific patterns in unwell-defined
assets, DGAP measurement is ignored in this research. However, we cannot deny that this
method provides a better vision for total portfolio rather than individual account
measurement. Here is the table shows the relationship of net worth, duration gap and interest
rate

Duration Gap Change in interest rate Change in net worth

Positive Increase Decrease

Positive Decrease Increase

Negative Increase Increase

Negative Decrease Decrease

Zero Increase No impact

Zero Decrease No impact

I.2.5. Vietinbank Interest risk management

Currently, Vietinbank has applied relatively fully the interest rate risk management tools
according to international practices and continues to research and develop strategies and
measures to manage interest rate risk according to a roadmap in line with the requirements,
demand of the State Bank such as: building debt management software, adjusting loan
repricing terms to suit capital.

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Since 2018, VietinBank has established a system of regulations, and banking interest rate risk
management processes in accordance with international practices and Basel II regulations,
implemented interest rate risk management in accordance with the principles of "3 rounds of
control". Vietinbank has also completed the construction and officially implemented the Debt
and Asset Management (ALM) software system.

In addition, Vietinbank also adjusts the revaluation term of the loan corresponding to the
term of capital valuation, controlling the repricing term difference within the permitted range.

It can be said that the interest rate risk management and management of Vietinbank is quite
good. In 2020, the impact of disease COVID-19 has a direct impact on the economy and
profitability of banks. However, Vietinbank has maintained total capital income compared to
2019, with NIM of 33,119 037 million VND.

II.3. The impact of inflation in bank’s performance

Inflation is important for banks because they deal in financial instruments,that is, instruments
dominated in fixed VND amounts. When a bank makes a loan, for example,it accepts a
nominal financial instrument as debtor obligation to the bank. When a bank borrows, it issues
nominal financial instruments to creditors as evidence of its obligation.
Year 2018 2019 2020
Inflation rate 2.80% 3.54% 3.77%
Loan Volume
(VND) 1,025,237,943,000 941,574,705,000 869,161,114,000
Lending Rate 7.73% 7.71% 7.94%

Table 2: The relationship between inflation, lending rate and lending volume
According to the above table, there was the positive relationship between inflation rate and
the base lending rate charged by the bank, as inflation levels rose, so did the bank’s base
lending rate both from the key informant figures, showing that inflation has a significant
effect on Vietinbank lending rate. Moreover, it can be seen that inflation has a moderate
effect on Vietinbank new lending volumes; however, an increase in base lending rate
contributed most towards the reduction in the lending volumes. The given table also revealed
that a rise in inflation led to a high rate of loan defaulting activities in the bank.
Overall,it is indicated that a rise in the inflation figures contributes to an increase in the base
lending rate. Secondly, rise in inflation also affects the loan default rate, since the banks are
forced to increase their interest charges, seriously affecting customer ability to service their
loans, on the other hand rise in inflation may lead to an influx of less creditworthy borrowers
who may easily default on their repayment obligations.
The banks should have policy on minimum base lending rate to be charged on loans and in
order to maintain this, the bank would need to diversify to other sources of incomes streams
such as aggressively undertaking non interest related activities e.g.collection of commission
and fees, to cushion it during high inflation period when the uptake of loans dwindle since
the organization has no control of macroeconomic factors affecting the inflation of the
country. Secondly the bank can encourage borrowers to take fixed interest loan repayment
offers, rather than the flexible repayment models to reduce the rate at which loans are
defaulted as a result of fluctuation of the repayments amounts.
III. Scenarios analysis on the impact of income and capital and hedging proposal
III.1. Recession scenarios
After a decade of the Great financial crisis 2007-2008, covid-19 pandemic clearly gives fear to bank
industry. In the historical records, a sudden stop lending by bank might feed a warning signal of

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recession in the economy. Furthermore, as a domino effect, recession also damages to bank via
credit losses, declines in the value of investment, reduction in a bank revenue. Even worse, the
situation can spiral downward as damage to banks cuts into credit availability, force bank to cut back
further.

In this section, we are going to discuss about new capital and liquidity standards reduce recession
related risk. And scenarios of recession on the impact of profit and also capital in Viettin Bank

I.1.1. New capital and liquidity standards

According to BIS (Bank for International Settlements), banks are now required to have much more
capital than before crisis. Before crisis, Basel III stipulated a minimum of Tier 1 capital to RWA of
4%. In the post-crisis under the latest version of the Basel standards, this ratio increases to 7% of
which 4.5% absolute minimum plus 2.5% capital conservation buffer. The benchmarks of Basel III
capital of BIS are illustrated bellow

BASEL III Ratios

Capital ratios, percent
Common equity All Tier 1 Capital Total Capital
Minimum 4.5% 6% 8%
Conservation buffer 2.5%
Minimum plus 7% 8.5% 10.5%
conservation buffer
Countercyclical buffer 0-2.5%
*Common equity or other fully loss-absorbing capital
Source: BIS
Table: BIS Basel III ratios

The adoption of Basel standards in Viet Nam

In the period 1999-2006, Basel I was implemented (SVB never informed officially the adoption
explicitly, but incorporated some benchmark ratios into Vietnam banking regulation). From 2006-
2013, Basel I was applied fully to regulate banks in Vietnam. However, the great financial crisis
2007- 2008 affected badly on banking system and that resulted in the changes of policies related to
bank’s capital. Since 2014 the economy and bank system of Vietnam are more integrated, Basel II
was introduced and SVB, step by step, cleared a road map for Basel implementation. The following
table will summarize the shifts of Basel standards in Viet Nam.

Basel components Implementation Law regulated and date

Basel I Simple rules on Decision 297 (25 August Informal adoption
prudential ratios: 1999)
• Tier 1 at 8%
•CAR (Tier1 and Tier Decision 457 (19 April Informal adoption
2) at 8% 2005)

Basel I as supervision Prime Minister’s Formal adoption

standard Decision 112 (24 May
Implement Basel II 2006)
guidelines
Basel II Decision 112/2006-PM: Circular 13/2010 (20
• CAR separate and May 2010)
consolidated at 9%
• Total liquidity reserves
at 15%.
• Requirement on stress-
testing and scenario
analysis

Basel III • CAR at 9% Circular 36/2014 (20 Informal adoption

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•Liquidity ratio (proxy) November 2014)

LCR 30days: 50% for
VND; 10% for other
currencies
• NSFR:10%
Source: SVB
Table: Basel implementation in Viet Nam

ViettinBank’s CAR and liquidity ratios

From the period of 2018 to 2019, the bank’s CAR is greater than 9%, which means the bank has
completely achieved SVB Basel II bench mark, however due to unexpected situation in the economy
2020, CAR only at 8.6% which is not satisfied Basel II requirement.

Capital Adequacy Ratio 2018 2019 2020

NPL/Gross loan 1.60% 1.20% 0.94
CAR >9% >9% 8.60%
Source: consolidated annual report 2020

Table: CAR, consolidated report

The issuance of VietinBank's capital raising bonds was an annual activity being carried out since
2015 until now in order to meet the SBV's regulations on operating limits and prudential ratios, as
well as to improve CAR ratio as they claimed in annual report

I.1.2. Optimistic case

As the new standards was introduced and carried on, the bank will be safer. The bank might will not
need to cut back on lending since the high level of capital and liquidity will reassure their funders
and customers and allow a gentle slowdown in credit provision. Moreover, recession will not
translate as quickly to problems in the bank because of bank’s greater safety margin. This optimistic
view is seasonable since new standards on requirement of the amount of capital was applied to
prepare for the future recession. Or in another way, policy makers intended the new rules to enhance
financial stability, assure the financial system to continue to provide needed credit and other services
to the economy

I.1.3. Pessimistic case

However, it is possible that when recession goes deeply, the banks will face the situation that
customers will systematically default on loans. Viettin bank, as their annual report, reached the
requirement of regulatory minimum capital, however, the recession-related risks have become
higher, not lower, increased requirement. And, in this context, it more likely to happen the “domino”
effect in this chaotic situation of financial distress leads to more costs incur and less profits since the
economy stops its working mechanism. In the liquidity side, many empirical researches proved the
strong relationship between liquidity ratio and probability of bankruptcy in banking system.
Logically, in a liquidity crisis, liquidity problems at individual institutions leads an acute increase in
demand and decrease in supply of liquidity, referred to a simultaneous lack of liquidity across many
institutions a finally an entire financial system. The following chart illustrates liquidity situation of
ViettinBank over 3 years

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Chart: Liquidity ratios

According to the chart, the liquidity ratios are relatively consistent over the period, it proves that the
bank is stable in term of liquidity.

To sum up, lately ViettinBank did not meet requirement of CAR due to many reasons, however
liquidity is not really problematic in this bank
In the following parts we will discuss more details on major risk exposures and how the bank hedge
against risks.

I.2. Credit risk hedge

III.2.1. Optimistic case

In the optimistic case, the bank's NPL ratio will continue to decline from 0.94% in 2020 and
always remain below 3%. Because bad debt decreased, the rate of provision for bad debt at
VietinBank continued to increase. That means the bank has enough backup and is ready to
handle it if needed.

III.2.2. Pessimistic case

In case of pessimism, if the NPL ratio is too large (greater than 3%), the Bank may be put
under special control by the State Bank and then the Bank's reputation will be reduced. Those
who have deposits at the Bank will massively withdraw their money and terminate the
relationship. This is serious intangible damage that cannot be valued. When bad debts arise,
the Bank also has to spend a lot of expenses on debt handling such as staff costs, travel
expenses, meeting costs to handle debt,etc. In addition, the bank also loses opportunity costs
for new loans, slow credit turnover and so on. All of which lead to reduced cost efficiency
and reduced profitability of the Bank.

III.3.3.Hedging proposal

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Provision is recognized as an expense in the consolidated income statement and is used

to deal with bad debts. According to Circular 02, the Bank establishes a Risks Settlement
Committee to deal with bad debts if they are classified in group 5, or if the borrower is an
organization that is dissolved, goes bankrupt, or is a dead or missing personnel.

Besides, credit derivatives in general are used to hedge credit risks. They can be thought of as
a series of methods for "grooming" a bank's loan portfolio. Credit derivatives allow for more
effective risk-return combinations without jeopardizing consumer relationships. Credit
derivatives are also versatile contracts that can be used to protect against other mutually
agreed-upon incidents like the reference party's rating being downgraded or a credit spread
moving adversely.

The most popular credit derivatives are credit swaps which are divided in two categories:
pure-credit or default swap and total-return swap. In a pure-credit or default swap, a bank
pays a small fee to the swap counterparty on a regular basis. If the bank's borrower defaults,
which is the credit risk the bank is trying to avoid, the counterparty compensates the bank for
its loss according to the contract's terms. If the credit accident does not occur, the option
expires, and the bank is responsible for the payment as a cost of credit insurance. The total-
return swap is a bit more complex, and it entails some market risk due to interest rate
fluctuations. The bank's cash inflow is normally indexed to its cost of funds. Without a credit
case, the bank joins a standard interest swap in which it pays fixed and earns floating. The
bank hedges its cost of funds if the index rate rises. The bank's fixed payment is decreased by
the depreciation of the loan's value whether the borrower's credit risk is negatively and
positively correlated with increasing interest rates.

III.4. Interest rate risk hedge

Interestrateistheprimarywelspringofbanks.In
terestratehikesconectdirectlytotheprofitabi
lity
ofthebankingsector.Therelationshipispositive
.Therefore,bankshavetopreparethestrategiesf
or
thevulnerabilityofinterestratefluctuations.W
hatbanknedsistheincreaseinchaninginterestra
te.
Becausebankcanprofitoffthespreadbetwenthetw
o-sideloaningactivitiesofdepositorsand
lendingcustomers.Thejumpininterestratedirec
tlyrunsintotheprocedsofearningsandcashyield
s.
However,thechangeininterestratecannotbeadjusted
byitsownbank.Itisaffectedmostlyby
macroeconomicfactors.Themajoroneisbytheincrease
ofoilpriceforoildrilers.[CITATION Mar19\l106
].Besides,whentheinterestrateincreases,morepeop
lesekforloans,banksmake moreprofitfrom
thedifferenceoflendinglongrunandinvestingshorte
rm,whichreflectsthegrowth ineconomy.

IncaseofVietinbank,wesetupthescenariosinc

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reaseordecreaseinterestratebyintherangefro
m 1-2% tose itseffectsonprofitsofthebank

Scenarios of interest rate and their impact on profit

The change in NII for any given bucket of ∆NIIi is measure as

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∆NIIi = $Gapi*∆r where:

•
Gapi is the dollar size of the Gap between RSA and RSL for each bucket
•
∆r is the change in level of interest rate

Maturity Over 3 from 1m to from 3m to from 1y to

3 months 1month above 5ys
Gap months 3m 12m 5y

2020 9,592,414 2,799,154 -92,365,421 18,795,183 -84,995,682 2,594,416 242,892,717

∆NIIi
∆r Over 3 from 1m to from 3m to from 1y to
months 3 months 1month 3m 12m 5y above 5ys
-1%
(95,924.1) (27,991.5) 923,654.2 (187,951.8) 849,956.8 (25,944.2) (2,428,927.2)
-2%
(191,848.3) (55,983.1) 1,847,308.4 (375,903.7) 1,699,913.6 (51,888.3) (4,857,854.3)
0
9,592,414.0 2,799,154.0 (92,365,421.0) 18,795,183.0 (84,995,682.0) 2,594,416.0 242,892,717.0
1%
95,924.1 27,991.5 (923,654.2) 187,951.8 (849,956.8) 25,944.2 2,428,927.2
2%
191,848.3 55,983.1 (1,847,308.4) 375,903.7 (1,699,913.6) 51,888.3 4,857,854.3
Table:scenariosofinterestrateimpactsonNI,baseca
se2020

Overal,mostlythedolargapsofthebankarepositi
ve,exceptforthematuritiesof1monthandfrom
3monthsto1year,sointhatcasethebankwilbebete
roffifinterestincreasesandviceversa.Inthe
long-
run,Vietinbankexpectsanincreaseininterestra
techangewhichresultsingrowthinthebank
profits.However, in the reality, interest rate is still remain lower compare to the past
time as the folowing chart. It is clearly that ViettinBank’s profit is decreaseed

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Reference

Hall, M., 2019. How Interest Rate Changes Affect the Profitability of Banking. [Online]
Available at: h-do-int affect-profitability-banking-sector.asp#:~:text=Interest%20rates%20and%20bank%20profitability,bank
%20can%20earn%20by%20investing.

Janda, Karel and Zetek, Pavel, 2013. Macroeconomic factors influencing interest rates of microfinance
institutions in Latin America , s.l.: University of Economics, Prague, Charles University in Prague.

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