1. Lecture 5
COMMERCIAL BANKS
Commercial Banks Vu Thanh Tu Anh

2. 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

3. Overview of the Commercial
Banking System in Vietnam
Commercial Banks Vu Thanh Tu Anh

4. 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.
Commercial Banks Vu Thanh Tu Anh

5. 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
Commercial Banks Vu Thanh Tu Anh

6. 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)
Commercial Banks Vu Thanh Tu Anh

7. 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
Commercial Banks Vu Thanh Tu Anh

8. 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)
Commercial Banks Vu Thanh Tu Anh

9. 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%)
Commercial Banks Vu Thanh Tu Anh

10. 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
Commercial Banks Vu Thanh Tu Anh

11. 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

12. 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

13. 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
Commercial Banks Vu Thanh Tu Anh

14. The Role of Commercial Banking
System in Economic Development
Commercial Banks Vu Thanh Tu Anh

15. The Relative Role of Commercial Banks in the
US, Germany, and Japan (1960 – 1996)
Commercial Banks Vu Thanh Tu Anh

16. The United States
250
200
150
%GDP
100
50
0
1993 1994 1995 1996 1997 1998 1999 2000 2001
Bank loans Bonds Stocks
Commercial Banks Vu Thanh Tu Anh

17. 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
Commercial Banks Vu Thanh Tu Anh

18. 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
Commercial Banks Vu Thanh Tu Anh

19. 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
Commercial Banks Vu Thanh Tu Anh

20. 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

21. 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
Commercial Banks Vu Thanh Tu Anh

22. 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)
Commercial Banks Vu Thanh Tu Anh

23. An Application of Theoretical Framework to
Analyze Activities and the Role of
Commercial Banking System
Commercial Banks Vu Thanh Tu Anh

24. 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
Commercial Banks Vu Thanh Tu Anh

25. 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.
Commercial Banks Vu Thanh Tu Anh

26. 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)
Commercial Banks Vu Thanh Tu Anh

27. 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
Commercial Banks Vu Thanh Tu Anh

28. 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.
Commercial Banks Vu Thanh Tu Anh

29. 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 Banks Vu Thanh Tu Anh

30. 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)
Commercial Banks Vu Thanh Tu Anh

31. Implications of WTO accession to
Vietnam’s commercial banking system
Commercial Banks Vu Thanh Tu Anh

32. 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
Commercial Banks Vu Thanh Tu Anh

33. 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%
Commercial Banks Vu Thanh Tu Anh

34. 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
Commercial Banks Vu Thanh Tu Anh

35. 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

36. Some important issues
 Bank governance system
 Risk management
 Legal and regularoty framework
 Financial instruments
Commercial Banks Vu Thanh Tu Anh