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One stop financial service conglomerates is financial institution which simultaneously engages in multi businesses such as banking,
insurance and securities. Recently, banks are increasingly become one stop financial service conglomerates because of 2 main reasons.
Firstly, increasing competition from other financial institution squeeze the profit margin banks earn from traditional services like offering
checking account and savings deposit, making loans« Thus, finding new sources of income is necessary. Secondly, expanding the list of
services is an effective way for bank to diversify its risks. For example, bank loss from loans and investment when market rate fluctuates can
be offset by fee revenue from increasing sales of other financial service kinds such as stock underwriting, insurance policies selling or
financail advising, equipment leasing and cash managing.
From my point of view, one stop financial service conglomerate may be a good idea for bank to maximize profit at acceptable risk.
However, to enter in new fields with new service offering to customers, bank needs to prepare a lot of things. In which, a sufficient level of
capital is essential to promotes public confidence, reassure regulators and creditors about its financial strength and provide fund for new
facilities purchasing, employee training, services marketing and selling. It is also the reason why the minimum capital of bank required by
Government increase rapidly recent year.
In fact of Vietnam, recently has emerged many conglomerate financial firm with bank origin or primarily banking involving. To name
some, BIDV includes bank, financial leasing company, insurance company, and asset managing company; ACB engages in retail and
investment banking, fnancial leasing, debt managing and securities services; or HSBC provides clients with a full line of financial banking
services including: commercial banking, global banking, securities service, cash management, personal financial service« This trend
probably develops faster when interest rate keeps rising and credit grows slowly as now. To ensure positive and growing net income as well
as attract customer and compete with other financial institutions, banks have no choices but find new source of revenue from new services
offering to customers. However, from the statistics, in 2010, many banks see little rise or even drop in service revenue. The main cause is
that these banks only diversified revenue sources, but failed to focus on developing value-based products. In addition, accompanying with
enlarging scale and new ectors of service, banks need to raise and maintain a sufficient level of capital as stated before, at least, equals to the
minimum requirement of government. It is a difficult task for small and medium bank, and many of them have to choose to be merged into
larger banks.
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Interest rates are determined, not by individual banks, but by the collective borrowing and lending decisions of thousands of participants in
the money and capital markets. They are also impacted by condition of the economy as whole, infaltionary pressures, government control
and especially, changes in perceptions of risk by participants in the money and capital markets such as default risk, liquidity risk, price risk,
reinvestment risk, term or maturity risk, and call defaurisk«
No financial institutions can completely avoid the risks caused by changing interest rate. When interest rate goes up, fixed rate securities
and loans loss their value, which in turn may reduce market value of total bank assets or record loss if bank decide to sell. Rising interest
rates will also lessen net income if bank is rate sensitive liabilities. By contrast, when the interest rate is down, bank will lose income if it has
more rate-sensitive assets than liabilities.
In Vietnam, both lending and saving interest rate are very high compared with many countries in the world. In detail, banks are paying 13-
13.5 percent in interest rates for deposits, and lending at 18-19 percent per annum. Some banks are even lending at 1.8 percent per month.
There are many reasons for this increasing rate such as: high inflation rate (CPI in 2010 November is about 8.96 percent incomparison with
the same period the last year); demand for cash at the end of year of individuals, business firms and other financial institutions leads to
reduce deposit and increase loans asked; aggressive competition among banks to attract deposits, pressure from keeping exchange rate
constant«
If banks continue keeping the deposit and lending interest rates at overly high levels, they will have to face two risks. Regarding the first
risk, high level of lending rates decrease demand for loans while the deposit keep falling into bank followed by rising interest expense.
Secondly, most of the deposits at banks now are short term deposits. Especially, even registered long term deposits, are in fact, also short
term deposits. Banks may tell clients that the deposits will be written down as long term deposits, but clients will be able to withdraw money
at any time. But banks cannot ask for the loans back from borrowers at any time. Liquidity is short and bank may go to bankruptcy in the
worst case.
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Off balance sheet activities are activities involve contingent commitments or contracts which generate income for a bank or help hedge
against risk, but are normally not captured as assets or liabilities under conventional accounting procedures. Contribute most of off balance
sheet items are unused commitments, standby credit agreements and derivative contracts.ÊÊ
The problem with these off balance sheet transactions is that they often expose a financial institution to considerable risks that are not
showed up in conventional financial statement and thus may be missed out by bank shareholders, regulators... For example, standby credit
agreements - promises of a lender to pay off an obligation of one of its customers in case that customer cannot pay, always carry credit risk
(customer fails to pay his debt), and funding risk (the potential inability of the bank to fund a large draw from the normal source). Similarly,
commitment loans and derivative contracts are followed by many kinds of risks such as liquidity, interest, counterparty risks. Moreover, the
fact shows that volume of off balance sheet items far exceeds the volume of conventional assets or liabilities, therefore, the scales of risk and
loss are larger.
In case of Vietinbank, one of largest commercial banks in Vietnam, in 2009, it recorded nearly 27,000 billion VND as contingent items,
approximates 12% of total liabilities. In that, letters of credit accounted for more than half amount, followed by credit guarantees and other
guarantees. They presented Vietinbank with the danger that customer who are guaranteed by Vietinbank would fail to meet their obligations.
In this worst case, these contingent liabilities would become bank¶s actual liabilities, due and payable. Therefore, bank have to consider
these activities carefully, large collateral should be required as well as provision for loan loss should be set aside for any occurrence.
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Recently, in US, composition of deposits has changed with the trend that increases number of higher interest bearing time and saving
deposits account while decreases number of regular checking deposits and lower interest accounts. Besides, customers also pay a lot of
attention on hybrid accounts which bring feature of both checking account and interest bearing deposits. The reasons behind the changes
above come from the expected high inflation rate, government deregulation, stiff competition among depository institutions and better
educated customers.
Management has several reasons to be concerned about the trend because the bank¶s fund are shifting into accounts bearing significantly
higher interest cost, while the bank is suffering substantial erosion in its core deposits represented by regular (passbook) savings deposits
and small cheching accounts. Thus more interest sensitive funds are supplanting deposits that are more loyal and less interest elastic. The
bank may find its profits are likely to be squeezed by higher interest rate costs and its earnings maybecome more volatile if market interest
rates experience significant changes in the period ahead because a greater portion of the bank funding is coming from more interest sensitive
deposits. A possible offseting advantage is the shift away from deposits that can be withdrawn without notice (regular and special checkingg
accounts and passbook savings deposits) toward longer term deposit instrument with fixed maturities, giving the bank a somewhat longer
term and, perhaps, somewhat more predictable funding base
The fact shows that if institutions do not wish to conform to customer preferences, they will simply be outbid for deposits by those who
do. Therefore, banks always compete with each other in providing best return deposit account and a lot of extra benefits at little or almost no
fees.
In the case of ACB, one of the biggest commercial bank in Vietnam, total deposit went up year by year, rising from approximately 55,000
billion VND in 2007 to nearly 90,000 billion VND in 2009. There are 3 main type of deposits held in ACB: current, term, and saving
account. In that, saving account always contribute most with 70 ± 75% the total amount. Especially, in 2009, the amount of saving deposit
increased 135% in comparison with 2008 and 170% if compared with 2007. While saving accounts kept increasing over years, current and
term accounts decreased sharply in 2008 and rose back in 2009. However, current accounts decreased more and increase less. Hence, the
percentage current accounts contribute to total deposit decreased while the percentage term accounts contribute to total increased. In short,
from the 3 year numerical data of ACB, we can see that saving and term deposits are increasing weight compare with current deposit, which
is as same as the trend in US recently.
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Three major questions or issues a lender must consider in evaluating nearly all loan requests are:
1. Is the borrower creditworthy?
2. Can the loan agreement be properly structured and documented?
3. Can the lender perfect its claim against the borrower's earnings and any assets that may be pledged as collateral?
Among them, the most difficult to answer in the case of Vietnam is the first issues: borrower creditworthness assessment. There are
three main reasons. Regarding the first, bank officers in Vietnam have very little information when they analyze loan request. It becauses
business firms and individuals as well are always reluctant to provide information about themselve. In addition, although there are 3
institutions commit to provide credit information on organisation and individuals in Vietnam, in fact, only CIC operates effectively.
However, the amount of information CIC introduces is very limited and up to now, it has not published the criterias are used in their rating
process. Thus, the reliability of CIC rating is not high enough to banks based on solely. The second reason is that bank officers are averagely
lack of skills and experences needed to precisely judge loan requests. No united model to follow also makes difficulties for them. Finally,
there is few and unclear regulations for credit rating in Vietnam. Banks and credit rating firms need more guidelines to assess
creditworthness.
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Increasing in both saving and lending rate over time has a lot of effect on the loan portfolio held by commercial bank in Vietnam. In fact,
high lending rate makes credit grow slowly, which in turn may hurt bank income. Worrying about that, many banks consider making loans
out as an urgent mission now. One measure that banks are using is boosting retail banking, especially consumer loans. Besides, many banks
are cooperating with real estate companies to provide loans for house and apartment purchases in big cities. Nevertheless, in fact, consumer
loans account for a small proportion in the credit structure while the cost of them is high. Therefore, commercial banks still must rely on
lending to production and business sectors to raise their credit growth rate.
In case of ACB, one of the biggest commercial banks in Vietnam, total loans increased year by year, from approximately 32,000 billion
VND in 2007 to nearly double in 2009. Analyzing by maturity, short term loan contributed more than half of total loans and gradually
increased in weight. Long term loan ranked 2nd and the lowest was medium loan. Analyzing by type of customers, in 2007 and 2008,
individual loan was larger than business loan. However, the reverse happened in 2009 when individual loan lose weight from 54% to 37%
total amount. Finally, analyzing by the industry involving, individual and community service loans contributed most but with the declining
weight from 47% in 2007 to 37% in 2009. Growing much in 2009 were loans for financial services, manufacturing and processing, trading,
contruction, warehousing, transportatition and communication; hotel and restaurant. All of them served the development of industrial and
service sectors. Especially, in 2009, loans for financial service increased by 145 times compared with the previous year. By contrast, loan for
real estate was stable at 500 ± 600 million VND and account for small portion of total loans. Finally, loans for agriculture and forestry
decreased in amount of VND as well as in weight. In conclusion, from 2007 and 2009, ACB made more loans out to business customer,
especially in industry and service sectors. Besides, short term loans accounts for larger part than medium and long term loans. These
findings are somewhat complian with assessment about the situation of Vietnam as whole.