<span class="text_page_counter">Trang 1</span><div class="page_container" data-page="1">

<b>Hanoi, 29 May 2020<small>th</small></b>

</div><span class="text_page_counter">Trang 3</span><div class="page_container" data-page="3">

<b> 1. General introduction...5</b>

<b>2. Vietcombank’s risk management committee...5</b>

<b>II.LIQUIDITY REPORT...6</b>

<b>1. Minimum capital adequacy ratio CAR:...7</b>

<b>2. Cash stas index...8</b>

<b>3. Lending capital ratio...8</b>

<b>4. Loan-to-deposit ratio (LDR)...9</b>

<b>5. Deposit structure index...10</b>

<b>III.IRR REPORT...10</b>

<b>IV.SCENARIO ANALYSIS OF CAPITAL AND INCOME...12</b>

<b>1. Scenario analysis of capital...12</b>

<b>2. Scenario analysis of Income...14</b>

<b>V. CURRENT CREDIT...15</b>

<b> 1. Capital and mobilized capital analysis...15</b>

<b>2. Mobilized capital analysis...16</b>

<b>VI. CREDIT SITUATION ANALYSIS...17</b>

<b>VII. HEDGING PROPOSAL...18</b>

<b>1. Supporting tools that VCB are using to minimize credit risks...18</b>

<b>2. Credit derivatives are used by VCB to mitigate the credit risk...19</b>

<b>REFERENCES...21</b>

</div><span class="text_page_counter">Trang 4</span><div class="page_container" data-page="4">

Risk management in banking refers to the practice of scientific and systematic risk approach toidentify, control, prevent and minimize the potential losses and negative impacts that risk bring.How a scheme is rationally developed and executed to manage potential losses is thecharacteristics of risk management Therefore, this paper is dedicated to the purpose of giving abrief look about the risk management procedures of Vietcombank and providing the differentialanalyses about Current credit, Liquidity, IRR of Vietcombank and Scenarios analysis on theimpact of income and capital, Hedging proposal. Hopefully, this paper will give an overview ofthe risk management of Vietcombank.

</div><span class="text_page_counter">Trang 5</span><div class="page_container" data-page="5">

<b>I.INTRODUCTION1. General introduction</b>

Join Stock Commercial Bank for Foreign Trade of Vietnam, formerly known as Bank for Foreigntrade of Vietnam – Vietcombank. It was established on April 1, 1963 from the Foreign ExchangeBureau (of the State Bank of Vietnam). Vetcombank has been constantly developing withexcellent business achievements and considered as the highest ratings among Vietnamese banksby international credit rating firms with its total assets of over VND 1 quadrillion (US$43.1billion) by the end of 2018. Moreover, in 2009, this bank was officially listed on the Ho ChiMinh Stock Exchange (HOSE) with the code VCB (Annual report 2018). In addition, it’s profitin 2018 approximated 18.4 trillion VND which increased 63.5% from 2017. In 2019,Vietcombank successfully raised charter capital to VND 6,200 billion, surpass Vietinbank to takethe lead among Vietnamese banks.

Vietcombank has not only a wide working network with 537 branches and transaction officesthroughout the country but also develop a huge system of 2105 correspondent banks over 131countries and regions. Vietcombank has also developed an autobank system with over 2.300ATMs and more than 43,000 merchants nationwide and gained the trust of more than 10 millionretail customers and nearly 30.000 corporate customers. Thanks to the process of building thebanking system as well as developing and upgrading services, Vietcombank has achieved thetrust of customers as well as the prestigious awards today.

<b>2. Vietcombank’s risk management committee</b>

Vietcombank’s risk management committee is established of Board of Directors for the aim ofapproving appropriate policies and directions with regard to various types of risks such as creditrisk, market risk and operational risk in each period, including defining ratios, limitation and riskappetite of the Bank. Vietcombank’s risk management committee is led by Mr. Nguyen ManhHung- a member of BOD

</div><span class="text_page_counter">Trang 6</span><div class="page_container" data-page="6">

Liquidity is the ability to respond immediately to customers' demand for withdrawals at any timeand it is an important factor determining the safety of the operation in any credit institution. Itcan be said that liquidity is a very sensitive issue in business activities of banks. If the bank failsto meet customers' demand for withdrawals in time, the unfavorable information will spreadquickly, leading to a series of customers rushing to withdraw money. As a result, this might causeinsolvency or that bank might face a risk of bankruptcy, affecting the operational stability of thewhole system.

In order to estimate the liquidity management activities at Vietcombank, we base on thesecriteria:

<b>1. Minimum capital adequacy ratio CAR: Measures ratio of Equity / Assets converted</b>

according to different risk levels.

Capital adequacy ratio represents the amount of equity available to support the bank's businessoperations. Currently, the minimum capital adequacy ratio under Circular No. 41/2016 / TT-NHNN takes effect on January 1, 2020 is 8% which was 9% before. Accordingly, CAR of thebank period 2012-2018 was:

:Car ratio 2012-2018

(Source: Documents for investors Q4/2019 Vietcombank)In fact, on November 28, 2018, VCB was officially approved by the State Bank of Vietnam toapply Circular 41 one year earlier than the effective period that makes it to be the first bank tomeet Basel II standards in Vietnam. Hence, this ratio in 2019 was 9.6%. In general, the averageCAR of the bank is in compliance with the regulations and tends to increase.

</div><span class="text_page_counter">Trang 7</span><div class="page_container" data-page="7">

<b>2. Cash status index: calculated by (Cash + demand deposits at the State Bank (SBV) +</b>

demand deposits at credit institutions (CIs)) / total assets. The higher this index is, thebetter the liquidity.

<b>3. Lending capital ratio: Calculated by outstanding debt / total assets, reflecting the loan</b>

level on the bank's total assets. The higher this ratio is, the lower the liquidity.

Outstanding loans 631,866,758 734,706,891

Total assets 1,074,026,560 1,222,718,858

</div><span class="text_page_counter">Trang 8</span><div class="page_container" data-page="8">

Lending capital ratio 58.83% 60.09%Lending capital ratio 2018-2019 (Unit: million VND)

(Source: Summary of the 2019 consolidated financial statements VCB)VCB's loan capacity in 2018 was 58.83%, slightly rising in 2019 to 60.09%. It can be seen thatmaintaining the loan ratio helps banks limit liquidity risks to ensure profitability and safety forthe bank's operations.

<b>4. Loan-to-deposit ratio (LDR): Outstanding loans / deposits to customers. This indicator</b>

reflects how much the bank lends compared to the mobilized capital, showing theefficiency of the bank's mobilized capital

Outstanding loans 631,866,758 734,706,891

Deposits to customers 801,929,115 928,450,869

Loan-to-deposit ratio (LDR)

78.79% 79.13%

Loan-to-deposit ratio (LDR) 2018-2019 (Unit: million VND)

(Source: Summary of the 2019 consolidated financial statements VCB)According to the old regulations in Circular 36/2014 / TT-NHNN, the maximum LDR ofcommercial banks is 90%; Joint stock commercial banks, joint venture banks, banks with 100%foreign capital are 80%. The higher this ratio, the lower the liquidity and the higher the level ofliquidity risk. Therefore, when the LDR ratio increases, the liquidity of banks decreasesaccordingly. The data in Table 3 shows that VCB's LDR has been stable in 2018 and 2019, wellcomplying with the State Bank's regulations on the ratio of loans to mobilized capital.

<b>5.Deposit structure index: This index shows the percentage of deposit mobilization compared to</b>

term deposits at commercial banks, which accounts for what percentage.

</div><span class="text_page_counter">Trang 9</span><div class="page_container" data-page="9">

2018 2019

<b>Deposit structure index 2018-2019 (Unit: million VND)</b>

(Source: Summary of the 2019 consolidated financial statements VCB)

Deposits are the most important part of the liquidity supply component of commercial banks.The index of the bank has remained at 40% which shows that the demand for liquidity is alwayshigh. As customers can withdraw at any time, so the bank must prepare liquidity to ensuresufficient supply of customer needs in each period. In addition, term deposits of banks tend toincrease over the years, this also confirms customer confidence and appropriate bank policies.In general, over the past years, the organization and implementation of safety in businessactivities in accordance with the regulations of the State Bank were also relatively clear, effectivein the management of liquidity risk reflected in the treatment of banks. managing liquidityrequirements arising at a reasonable cost, thereby, the reputation and brand of VCB weremaintained and promoted in the domestic and foreign financial markets.

IRR or interest rate risk is the risk that the future cash flows of a financial instrument willunexpectedly fluctuate due to changes in market interest rates. Risk exposure exists wheneverthere is a maturity date mismatch between assets and liabilities, or between principal and interestcash flow. Interest rate risk is not necessarily a negative thing when changing in interest ratescould increase the net asset value of a banking institution would be regarded as positive.Vietcombank could face the risk generated by negative changes of interest rate on income, assetvalue, value of liabilities and value of off-balance sheet. For interest rate risk management, there

</div><span class="text_page_counter">Trang 10</span><div class="page_container" data-page="10">

are two ways to measure, for instance, gap analysis and duration analysis. In this report, we willbase on gap analysis measurement since it is challenging to find figures for the duration analysis(focused on changes between economic value and position that occur given a small change in thelevel of interest rate). Basically, gap analysis or simple maturity schedules can be used togenerate simple indicators of interest rate risk sensitivity of both earnings and economic value tochanging interest rates. Therefore, the maturity gap method can be generated by grouping RSA(rate sensitive assets) and RSL (rate sensitivity liabilities). For banking, RSA are bank assets,mainly bonds, loans and leases, and the value of the following assets is sensitive to changes ininterest as well as either repriced or revalued as interest rates change. On the other hand, RSL arebank liabilities, mainly interest-bearing deposits and other liabilities, and the value of theseliabilities is sensitive to changes in interest rates and these liabilities are also repriced or revaluedas interest rates change. The table below shows the figures for gap analysis that given by theannual report of Vietcombank in 2018:

<b>Up to 1 month(VND million)</b>

<b>From 1 to 3 months(VND million)</b>

<b>From 3 months to 6 months</b>

<b>(VND million)</b>

<b>From 6 months to 12 months(VND million)</b>

<b>RSA</b> 347,221,336 275,152,851 162,491,240 85,065,018

<b>RSL</b> 595788028 131,585,942 117,529,937 128,070,854

(248,566,692) 143,566,909 44,961,303 (43,005,836)

Source: Vietcombank Annual Report in 2018According to the table, we can see that Vietcombank has a negative gap from the period up to 1month and the time from 6 months to 12 months, for that reason, an increase in the marketinterest rates could cause a decline in net interest income (NII). For the other periods, there has

</div><span class="text_page_counter">Trang 11</span><div class="page_container" data-page="11">

been a positive gap which caused a decline for both the market interest rates and in NII.Subsequently, the dollar gap can pose a significant threat to Vietcombank’s earnings and capitalbase. In 2018, Vietcombank became one of the first banks to apply interest rate risk managementtools and limits to daily management activities (management of the difference in reprising thegap between RSA and RSL, NII sensitivity and economic value of equity (EVE sensitivity)). Atthe same time, Vietcombank also uses appropriate derivative products to minimize the negativeimpact of interest rate fluctuation. For the efficiency of interest rate risk management,Vietcombank is implementing ALM/ FTP software system for enhancing the level of automation.

Scenario analysis is a method of predicting future values of portfolio investments based onpotential events. In other words, it’s a method of estimating what will happen to portfolio valuesif a specific event happens or doesn’t happen. If this happens, then what? This process is alsoused in company operations outside of the investment world. Most managers perform scenarioanalysis in their business decision-making process to determine the best course of action to takefor the organization to maximize profits (best-case scenario). They also use this technique toexamine the worst possible solution (worst-case scenario) and anticipate potential losses andoperational problems. In this part, we will discuss how the changing in capital and income ofVCB.

<b>1. Scenario analysis of capital</b>

Total asset 787.935 1.035.293 1.074.027 1.222.719Shareholder’s equity 48.102 52.558 62.179 80.883

Total deposit/Totalassets ratio

58,5% 52,5% 58,8% 60,1%

Non-interest income 6.352 7.469 10.870 11.153Total operating income 24.886 29.406 39.278 45.730

</div><span class="text_page_counter">Trang 12</span><div class="page_container" data-page="12">

Total operatingexpense

Source: Annual report of Vietcombank from 2016 to 2019

According to general report, ending the year 2019, Vietcombank achieved profit before taxamounting to more than 23,000 billion, an increase on the 80% compared to the year 2018 andnearly tripled in comparison with the scale of the profits the year 2016-the year the Bank beganto move to business restructuring phase texture. Moreover, profit of Vietcombank putting on thegrowth in total assets and credit growth is lower than in previous years, as well as froma commercial bank with policy interest rates heading the lowest on the market. The scale ofprofits more than 23,000 billion comes on also far beyond the predictions from 20,000-21,000billion that some investment organizations launched in the year 2019.

Specifically, end of 2019, total assets of Vietcombank only increased 4%; credit growth does noteven run out of targets of the State Bank allowed, only 14.9% increase. According the table, mostof index have trend to increase significantly from 2016 to 2019. About shareholder’s equity, itgrows by 32 billion through 4 years to demonstrate that it can remain and ensure daily activitiesof the bank. Meanwhile, the sharply rising of non- interest income between 6.352 billion and11.153 concludes that it promotes the operation of the service, diversifies bank’s revenue sourcesin recent times to reduce dependence on credit. Vietcombank can gain this amount from servicesactivities, foreign exchange trading and interest income from other activities. Vietcombank isbecoming to change ability of customers into credit that can reduce the risk of their account.

<b>2. Scenario analysis of Income</b>

</div><span class="text_page_counter">Trang 13</span><div class="page_container" data-page="13">

<b>2015201620172018CAR</b> 11.35% 11.04% 11.13% 11.63%

<b>Market capitalization</b> 116.994 127.514 195.359 92.440

<b>EPS</b> 1.626 1.566 2.526 3.584

<b>DPS</b> 1.000 800 800 800

Source: Annual report of Vietcombank from 2015 to 2018

On 28/12/2018, Vietcombank has officially been approved by the Government to increase capitalthrough the sale of shares for foreign investors, with the total transaction value amounted to6,168 billion. The successful sale stock for GIC- the Fund Singapore Government has affirmedthe prestige, status and the potential development of Vietcombank and the increased confidenceof investors with regard to foreign bank operations in Vietnam. The capital increase successfullyleading to raise capital for safe standards of Vietcombank and bring back the surplus resourcesfor the State amounting to 3,783 billion. Moreover, Vietcombank has been approved to bethe first bank in Vietnam meets safety standards under Basel II by Vietnam Government Bank.We can see that CAR ratio of bank is approximately 11%, which is suitable with it ofrequirement with big bank, 9%. The numbers of share also increase until 4 years from 2665 to3597 and remaining at 3597 in 3 years. In contrast, Dividend payout ratios reduce by 2% tocompare with 10% in 2015. Both share price and market capitalization have positive trend togrow substantially, especially in 2017 but these amounts reduce at final year. Earnings per shareof Vietcombank also develop strongly during 4 years. However, Dividend per share has oppositeside with earning per share. Briefly, Vietcombank is one of the biggest banks with strong Incomeand Capital in Vietnam.

<b>1. Capital and mobilized capital analysis</b>

</div>