Commercial Banks Vu Thanh Tu Anh
Lecture 5
COMMERCIAL BANKS
Commercial Banks Vu Thanh Tu Anh
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
Commercial Banks Vu Thanh Tu Anh
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
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
Commercial Banks Vu Thanh Tu Anh
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
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
Commercial Banks Vu Thanh Tu Anh
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)
Commercial Banks Vu Thanh Tu Anh
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
Commercial Banks Vu Thanh Tu Anh
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.
Commercial Banks Vu Thanh Tu Anh
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
Commercial Banks Vu Thanh Tu Anh
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
Commercial Banks Vu Thanh Tu Anh
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%
Commercial Banks Vu Thanh Tu Anh
The Role of Commercial Banking
System in Economic Development
Commercial Banks Vu Thanh Tu Anh
The Relative Role of Commercial Banks in the US, Germany, and Japan (1960 – 1996)
Commercial Banks Vu Thanh Tu Anh
The United States
0
50
100
150
200
250
1993 1994 1995 1996 1997 1998 1999 2000 2001
%G
DP
Bank loans Bonds Stocks
Commercial Banks Vu Thanh Tu Anh
The United States
0
50
100
150
200
250
1993 1994 1995 1996 1997 1998 1999 2000 2001
%G
DP
Bank loans Bonds Stocks
Germany
0
50
100
150
200
250
1993 1994 1995 1996 1997 1998 1999 2000 2001
%G
DP
Bank loans Bonds Stocks
Japan
0
50
100
150
200
1993 1994 1995 1996 1997 1998 1999 2000 2001
%G
DP
Bank loans Bonds Stocks
UK
0
50
100
150
200
250
300
1993 1994 1995 1996 1997 1998 1999 2000 2001
%G
DP
Bank loans Bonds Stocks
Commercial Banks Vu Thanh Tu Anh
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)
Commercial Banks Vu Thanh Tu Anh
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
Commercial Banks Vu Thanh Tu Anh
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)
Commercial Banks 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
Commercial Banks Vu Thanh Tu Anh
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
An Application of Theoretical Framework to
Analyze Activities and the Role of
Commercial Banking System
Commercial Banks Vu Thanh Tu Anh
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
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
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
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
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
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
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
Implications of WTO accession to Vietnam’s commercial banking system
Commercial Banks Vu Thanh Tu Anh
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
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%
Commercial Banks Vu Thanh Tu Anh
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%
Commercial Banks Vu Thanh Tu Anh
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
Commercial Banks Vu Thanh Tu Anh
Some important issues
Bank governance system Risk management Legal and regularoty framework Financial instruments
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