Corporate Finance: INS3007 Report on Risk Management at Vietcombank

This report, prepared by students, examines risk management within Vietcombank, a Vietnamese commercial bank. It begins with an overview of risk concepts, including credit risk, and classifies different types of risks. The report then details the risk management process, encompassing planning, identification, measurement, control, assessment, and response strategies. A significant portion of the report focuses on Vietcombank's credit risk management, analyzing its status, credit management organization model, and the implementation of its credit risk management process. This includes a review of the bank's plan, risk identification methods, measurement techniques, control mechanisms, assessment procedures, and response strategies. The report also provides solutions and concludes with references, offering a comprehensive analysis of risk management in a real-world financial institution context. The analysis includes the impact of economic fluctuations and internal factors like employee ethics on credit risk.

INS3007
REPORT
RISK MANAGEMENT
STUDENT NAME:
Lê Hồng Mai (17071123)
Hoàng Khánh Linh(17071285)
Đào Thị Phương Anh(17071003)
PROGRAMME:
Subject Name: Coporate Finance
Due date: 1/12/2020

INS3007
CONTENTS
A. Concept of Risk Management................................................................1
I. Risk Concepts..............................................................................................2
II. Risk classification......................................................................................3
III. Risk Management Process........................................................................4
B. VIETCOMBANK CREDIT RISK MANAGEMENT...............................6
I. Status............................................................................................................6
II. Credit management organization model.....................................................9
III. Organizing the implementation of credit risk management......................10
1. Plan..............................................................................................................10
2. Identifying...................................................................................................10
3. Measuring....................................................................................................13
4. Control.........................................................................................................14
5. Assessing.....................................................................................................16
6. Response......................................................................................................17
IV. Solution......................................................................................................20
V. Reference.................................................................................................22

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A. CONCEPT OF RISK MANAGEMENT
I. Risk Concepts
 Definition: Credit risk
Risk of financial loss owing to counter party failure to perform its contractual
obligations. Credit risk is one of the main reasons for many bank failures.
 Credit risk management is one of the management contents of a
commercial bank, including: identifying and assessing the level of risks,
implementing measures to limit the likelihood of risks occurring and minimize
losses when credit risks occur.
The cause of credit risk may come from the decline in business efficiency,
financial capacity of bank's customers, the decline of the industry in which
customers operate, etc...
 Factors affecting credit risk, including:
- Due to changes in government policies:
When the economy fluctuates, such as inflation, unemployment, etc., the
government must immediately introduce new economic policies to limit the
negative impact on the country's economy, macro factors such as inflation,
unemployment, GDP growth rate affect the credit risk of banks.
- The cause is from the borrower:
This reason is one of the main causes of credit risk for banks. The bank can be
identified through the process of understanding and grasping the situation of
customers nationwide, during and after lending. Borrower's cause may arise
from business risk or financial risk of the borrower

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- Causes from the legal environment:
Business activities of commercial banks are related to many sectors of the
economy, highly social. When the legal system is stable and healthy, the
business environment Business of commercial banks will have many
advantages. In contrast, if the legal environment is unstable, there are many
gaps, it is easy to be exploited, causing embezzlement, appropriation of assets...
The unstable socio-economic situation leads to many difficulties in business and
people can not pay money leads to defaulting on their banks.
- Natural environment:
when a disaster occurs, customers and lenders will be at risk of great losses,
business plans and projects with no revenue ... That means banks must share
the risk with its customers
- Socio-economic environment:
The socio-economic environment in a country is influenced by fluctuations
from the world economy, which is the cause of generating risks in business
activities of the economy.
- The causes from inside the bank:
 One of the internal causes of the bank is ethical, professional
qualifications of bank staffs. Irresponsible bank staffs, weak
qualifications, weak ethics leading to lending to businesses and
individuals who are ineligible for loans with poor performance with
problematic credit records.
 In addition, credit risk also occurs due to poor ethics in loan security,
which does not appreciate the value of collateral or incorrect collateral
valuation.

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 There are also reasons such as inappropriate lending policies,
inappropriate lending regulations, incorrect credit appraisal or due to the
bank's failure to comply with capital guarantees.
 Example: By the end of the first quarter of 2020, due to the effects of the
epidemic, nearly 20,000 enterprises stopped operating, tens of thousands of
enterprises had to narrow their production and business, and the revenue
dropped sharply, leading to financial imbalance. Many people have lost their
jobs, their incomes have dropped, including customers of credit institutions, and
thus lost their ability to repay consumer loans.
II. Risk classification
III. Risk Management Process
1. Plan

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- Attitude of the company with risk ?
- The company’s ability to bear loss ?
- Focus on which customers ?
2. Identifying
- Classify the events through listening, observation, monitoring, take notes.
- Estimating chance of happening.
3. Measuring
- Quality
- Quantify
- Measure the variance by standard deviation, beta (market risk sensitivity),
Credit Metrix value at risk (VAR)
4. Control
- risk survey ( scale of credit and investment activities.,ratio of bad debts,
set up risk provisions...)
- To what extent do businesses accept risks? how to manage it ?
5. Assessing
- What issues are suitable for the company ?
6. Response
- Reject if the risk is not suitable with corporate teste, appetite

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- Accept
- Transferring: transfer the risk to other person. Ex: contract or insurance.
- Diversification: based on systematic and unsystematic risk. If the risk is
unsystematic, the firm can be diversified in order to reduce risk. Ex:
buying stock portfolio, buying more than 2 types of stock and have the
opposite trend growth (price) in order to get profit if one of these fall,
the firm still get gain in the other.
- Sharing: the risk burden will be shared on more than two persons. Ex:
joint stock company..
- Mitigating: all solutions in order to reduce probability, and if the risk
occurs, it will reduce the loss as low as possible.

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B. VIETCOMBANK CREDIT RISK MANAGEMENT
I. Status
Credit risk is the type of risk that most frequently occurs and has the greatest
impact on a bank's income. If credit risk is managed well, the bank can limit
potential risks. Good credit risk control will help the bank reduce unnecessary
losses and will help the bank have a credit competitiveness with other banks. To
assess credit risk, commodity sectors often use overdue debt ratio, bad debt
ratio and provisioning rate, in which the bad debt ratio is mainly used:
(Source: Financial statements of Vietcombank 2012 - 2016)
In 2013, due to the fluctuations of the economy, the total debt and bad debt ratio
of the whole banking system in Vietnam increased, in which Vietcombank's bad
debt was 7,475 billion dong and bad debt ratio was 2.73% high. most of the
years. However, in 2016, Vietcombank's NPL and overdue ratio were low at
1.46% and 1.03%, meeting the AGM's target of 3%.

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(Source: Financial statements of Vietcombank 2012 - 2016)
- Bad debts are classified by currency
The ratio of NPLs by currency varies greatly between currencies
Currency because Vietcombank's lending features are mainly denominated in
foreign currencies. As a result, the NPL ratio of the major loaned currency is
usually higher than the NPL ratio of the currencies with a low lending rate,
specifically:
(Source: Financial statements of Vietcombank 2012 - 2016)
The table above shows that the bad debt ratio by currency, the bad debt ratio in
foreign currency accounts for the largest proportion, as of 2016 it was 3314
billion dong, equivalent to 47.8% of the total debt. bad bank. Because at

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present, Vietcombank's lending activities are mainly borrowed in foreign
currency and lending in gold and domestic currency is not much.
- Bad debt by economic sectors
There are also differences between different economic sectors:
(Source: Financial statements of Vietcombank 2012 - 2016)
The above analysis shows that the bad debt ratio for businesses and
organizations at Vietcombank always accounts for a large proportion with
approximately 80%. Thereby, it shows that the level of risk in lending of
businesses and organizations is quite large.

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II. Credit management organization model
Broad of
Directors
Rrisk Management
Committee
Director
General
Risk Treatment
Committee
Customer Relations
Vice Managing
Director
Credit Risk Vice
Managing
director
Operational Vice
Managing Director
Professional
Departments at the
Head Office
Directors and Vice
Directors of Branches
Corporate
Customers
Department
Credit
Policy
Department
Credit Risk
Management
Department
Project
Investment
Department
Credit Policy
Department
Credit
Department
SME
Customers
Department
Individual
Customers
Department
Corporate
Customers
Department

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III. Organizing the implementation of credit risk management
1. Plan
Focus on the customer segment which have low risk such as the customers
have high income and the ability of credit – worthiness; building low-risk loan
products and hedging measures for each product (For example, for car loans,
customer has to buy car insurance and mortgage the assets formed from the loan
with certain types of vehicles....)
- Vietcombank is a bank with a low risk appetite, which building the right
development strategy, focuses on sustainable development and high
profitability.
2. Identifying
To identify credit risks, Vietcombank has set up related departments to receive
information about processing messages that show signs of credit risk checking.
Signs of credit risk may arise on its own, and may also arise from customers
during loan review. For the risk signs arising from banks, the Credit Risk
Management Division is responsible for regularly reviewing and evaluating
mainly based on the policies of credit growth banks, credit sectors. , loan terms,
target customers, credit reserves), but the credit officer force or administrative
capacity for group signaling from the client side, the bank's early identification
of credit risks right in the process of granting credit to customers.
The credit risk identification process is described through the following stages:
- Stage 1: Reception