NATIONAL ECONOMICS UNIVERSITY

CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS

BACHELOR’S THESIS
Major: Finance

TOPIC: ANALYZING CREDIT RISK MANAGEMENT

AT VIETNAM MARITIME JOINT-STOCK
COMMERCIAL BANK

VU MAI LOAN

HANOI, 2018
 NATIONAL ECONOMICS UNIVERSITY
CENTRE FOR ADVANCED EDUCATIONAL PROGRAMS

BACHELOR’S THESIS
Major: Finance

TOPIC: ANALYZING CREDIT RISK MANAGEMENT

AT VIETNAM MARITIME JOINT-STOCK
COMMERCIAL BANK

Student: Vu Mai Loan

Major: AEP
Class: Advanced Finance 56B
Student’s ID: 11142552
Supervisor: Ass. Prof. Dr. Le Thanh Tam

HANOI, 2018
 ACKNOWLEDGEMENTS

It would not have been possible to complete this thesis without the kind support and
help of many individuals and organizations. I would like to extend my sincere thanks
to all of them.
I would like to express my special gratitude and sincere thanks my teacher Ass. Prof.
Dr. Le Thanh Tam for the assistance and support.
I express my deep sense of gratitude to Lecturers and Professor at my Center for
Advanced Educational Programs.
I am very much thankful to Maritime Bank for their guidance and constant supervision
as well as for providing necessary information regarding the internship and for their
support in completing my thesis.
Hanoi, 2018
 TABLE OF CONTENTS

CHAPTER I. INTRODUCTION...........................................................................1
1.1. Literature review.........................................................................................1
1.2. Rationale of the study.................................................................................2
1.3. Research objectives and questions..............................................................3
1.4. Research subject and scope.........................................................................3
1.5. Research methodology................................................................................3
1.6. Research structure.......................................................................................4
CHAPTER II. THEORETICAL BACKGROUND.................................................5
2.1. Credit risk in commercial banks.................................................................5
2.1.1. Credit activities of commercial banks 5
2.1.2. Credit risk concepts and characteristics 7
2.1.3. Credit risk classification 8
2.1.4. The consequences of credit risk 9
2.2. Credit risk management at commercial banks...........................................11
2.2.1. Definition of credit risk management 11
2.2.2. The need of credit risk management 12
2.2.3. Factors affecting credit risk management 13
2.2.4. The process of credit risk management 16
CHAPTER III. DATA COLLECTION AND DISCUSSION.................................26
3.1. Introduction to Maritime Bank.................................................................26
3.1.1. History and Development 26
3.1.2. Vision, Mission & Core value 27
3.1.3. Organization structure 28
3.1.4. Major products & services 31
3.1.5. Competitors 32
3.2. Operational performance of Maritime Bank in 2015-2017 period............32
3.2.1. Measuring operating efficiency 33
3.2.2. Measuring profitability 34
3.2.3. Fund mobilization 35
3.2.4. Uses of funds 37
 3.3. Status of credit activities at Maritime Bank..............................................38
3.3.1. Credit activities 38
3.3.2. Credit quality 41
3.4. Status of credit risk management at Maritime Bank.................................43
3.4.1. Structure of credit risk management operations 43
3.4.2. Credit management process 44
3.4.3. Policy of loan provision 52
3.5. Assessment of credit risk management at Maritime Bank........................53
3.5.1. Achievements 53
3.5.2. Limitations 54
3.5.3. Reasons for limitations 55
CHAPTER IV. RECOMMENDATIONS...............................................................58
4.1. Development orientations of Maritime Bank for the 2018-2022 period. . .58
4.2. Recommendations.....................................................................................58
4.2.1. To Maritime Bank 58
4.2.2. To SBV 64
CONCLUSION.......................................................................................................67
REFERENCES .......................................................................................................68
 STATUTORY DECLARATION
I have read and understood the violations of academic honesty. I pledge my personal
honor that this report was conducted by me and did not violate the requirement of
academic honesty.
Hanoi,

Vu Mai Loan
 ABBREVIATIONS
BOD Board of Directors
BOM Board of Management
CIC Credit Information Center
Maritime Bank Vietnam Maritime Joint-stock commercial bank
ROA Return on Assets
ROE Return on Equity
SBV State Bank of Vietnam
SME Small & Medium-sized enterprises
VAMC Vietnam Asset Management Company
 LIST OF TABLES
Table 3.1. Operational Efficiency Indicators of Maritime Bank 2015-2017................33
Table 3.2. Profitability ratios of Maritime Bank 2015-2017........................................34
Table 3.3. Liabilities components of Maritime Bank 2015-2017.................................35
Table 3.4. Customer Deposits by groups of customers 2015-2017..............................36
Table 3.5. Assets components of Maritime Bank 2015-2017......................................37
Table 3.6. Total outstanding loans of Maritime Bank 2015-2017................................38
Table 3.7. Loans to customers by maturity 2015-2017................................................39
Table 3.8. Loans to customers by ownership 2015-2017.............................................39
Table 3.9. Loans to customers by sectors 2015-2017..................................................40
Table 3.10. Credit quality of Maritime Bank 2015-2017.............................................41
Table 3.11. Customer risk ranking of Maritime Bank..................................................47
Table 3.12. Provision rate............................................................................................52
Table 3.13. Provision for loan losses at Maritime Bank 2015-2017............................52

LIST OF FIGURES
Figure 2.1. Credit risk management process................................................................16
Figure 3.1. Chartered capital of Maritime Bank 2000 - June, 2017.............................26
Figure 3.2. Vision, Mission and Core Values of Maritime Bank.................................27
Figure 3.3. Organization chart of Maritime Bank........................................................28
Figure 3.4. Non-performing loan rate at commercial banks in Vietnam at the end of
Q3, 2017...............................................................................................................42
Figure 3.5. Credit risk management structure of Maritime Bank.................................43
Figure 3.6. Credit rating process for enterprises at Maritime Bank.............................46
Figure 3.7. Credit rating process for individual customers at Maritime Bank..............47
 CHAPTER I. INTRODUCTION
1. Literature review
There are many different studies on credit risk or directly related to credit risk
management in business activities of commercial banks. In the framework of the
thesis, I mention some notable papers related to the thesis topic:
The Basel Committee, (2004), The Basel II Accord, introduced a number of credit
risk measurements such as the Simple Standardized Approach (SSA), the
Standardized Approach (SA), and the Internal Ratings-Based Approach (IRB).
Basel II proposes credit risk management procedures and tools such as Risk
identification through financial and non-financial indicators, internal ratings;
Measurement of risk through the value-at-risk (VAR) model; Risk management
through credit policy; Loan portfolio management.
Ass. PhD. Phan Thi Thu Ha, (2007), Commercial Banks, National Economics
University: The brochure presents the basics of management and operation of
commercial banks. The book contains 12 chapters, giving readers an overview of
banking system, capital and capital management, asset and asset management, and
other bank operations. There are 3 chapters introducing and deepening the study of
credit activities, credit operations, credit policies, credit risk and credit risk
management. The brochure also indicates some measures to limit the credit risk.
Cao Thi Lan Huong, (2010), Master thesis "Credit Risk Management to improve
business performance at Maritime Bank": The thesis has outlined the content of
credit risk, credit risk management in commercial banks. The document also
analyzes the status of credit risk management of Maritime Bank in 2007-2009
period, thereby finding some causes of these shortcomings and offering solutions to
raise higher efficiency in credit risk management at Maritime Bank. However, the
thesis had not made a specific assessment of the bank's credit risk management
process and has not come up with solutions to this process.
Research gap: These above topics focusing on credit risk of commercial banks in
the previous period had not been studied deeply in credit risk management at
Maritime Bank in the current integration period. These situations were not analyzed
and assessed to update the current period 2015-2017.

1
From the overall assessment of the previous thesis, in general there have been no
comprehensive and systematic research on credit management at Maritime Bank
taking updated to the present time from 2015 to 2017 and orientations to 2022.
2. Rationale of the study
The thesis is researched with the purpose of interpreting theoretical and practical
issues about credit risk management at commercial bank in Vietnam, then proposal
to Maritime Bank to improve credit risk management.
Theoretical aspects:
In general, the issue of credit risk management in financial institutions has always
been mentioned but has not been paid much attention. The overall purpose of the
management of credit risk is to help a decision-maker understand the situation,
along with the likely outcomes. Therefore, from a theoretical point of view, credit
risk management needs to be systematically researched so that it can propose some
practical solutions which are possible be applied in practice.
Practical aspects:
With the increasing opening of the financial market, the banking sector in Vietnam
has expanded rapidly in recent years. In particular, the credit growth in 2017 has
increased by approximately 17%, while GDP increased by only around 7%.
However, this activity always implies high risks, especially in emerging economies
like Vietnam because the information system is not transparent and incomplete; and
the level of risk management is still limited. Credit risk not only damages the assets
but also affects the reputation of the bank itself as well as the entire banking system.
If these risks are not processed promptly, it can lead to a chain collapse in banking
system and in the economy.
Many Vietnamese commercial banks, especially joint stock commercial banks,
having foreign strategic partners, are strongly improving risk management model,
but it needs to take time to become effective. The requirement for each commercial
bank in our country today is to have a risk management procedures in accordance
with general practice, the specific conditions of each commercial bank and the
realities of the economy.
It cannot be denied that credit risk is a problem that any Vietnamese banks need to
actively manage and Maritime Bank is inevitable. At present, Maritime Bank is
actively participating in application of Basel II standard which can enhance the

2
process of credit risk management. However, the bank's current bad debt ratio is
approximately 2.3% and tends to increase. Despite of falling below the threshold,
the ratio is still quite high compared to other joint-stock commercial banks. This
indicates that the Maritime Bank’s credit risk management is still inefficient and
existing some aspects which need to be concerned in order to consolidate business
performance.
Realizing the importance of the issue in both theory and practice, I chose the topic
"Analyzing credit risk management at Vietnam Maritime Joint Stock Commercial
Bank" as the subject of my graduation thesis in the hope of better understanding of
the bank's credit activities. This is aimed at contributing to the efficient use of
capital, benefiting the banking industry and society.
3. Research objectives and questions
The overall objective of the research is understanding the credit risk management of
commercial banks in general and Maritime Bank in particular.
The specific objective of the research is synthesizing and systemizing the basic
theory of credit risk management.
The research answer three following questions:
- What is the fundamental theorem of credit risk management in commercial
banks?
- Why credit risk management is essential for commercial banks?
- How Maritime Bank’s credit risk is managed? Achievements and Limitations.
- How to improve credit risk management at Maritime Bank?
4. Research subject and scope
The subject of the research is credit risk management at Maritime Bank.
The scope of the research focuses on the credit risk management for lending
activitiy at Maritime Bank in 2015-2017 period. The reason is that lending is
accounted for a large proportion and is one of the most concerned issues in banking
activities. Therefor, the thesis scope concentrates on credit risk management for
lending.
5. Research methodology
The study is involved in secondary data collected from various types of reliable
sources. Firstly, the research data was collect from published book related to risk
management as well as credit management in banking system. These sources

3
consist of textbook, research works, reference books, journals and legal policies
from international authors and Vietnamese publishers. Secondly, internal sources of
secondary data were collected such as the bank’s financial statements, business
operation result statements, documents and policies of Maritime Bank.
The research methods to take advantage of each methodology as well as analyze the
data more effectively. For purpose of research, the study involved the use of data
collection method in combination with comparative methods, desk review, and
simple statistical calculation. To take an in-deep look at credit risk management, the
method of data collection is based on the secondary information collected from
previous research documents to build the theoretical framework. Then, it is applied
a case-by-case analysis and provides appropriate recommendations.
6. Research structure
The study includes 4 following chapters:
Chapter I: Introduction
Chapter II: Theoretical background
Chapter III: Data collection and analysis
Chapter IV: Recommendations

4
 CHAPTER II. THEORETICAL BACKGROUND
2.1. Credit risk in commercial banks
2.1.1. Credit activities of commercial banks
a. Concepts of credit
According to Merriam Webster, lending, also called “credit”, is the financing by
one party (the lender) to another party (the borrower) in which the borrower repays
the loan to the lender for a period of time and usually accompanied with interest.
Therefore, credit reflects the relationship between the two parties - One side is the
lender, and the other is the borrower. The relationship between the two parties is
constrained by credit mechanisms, loan agreement terms, interest rates, etc.
Bank credit is supposed to bring the highest profit for banks’ operation. The basic
content of definition of “credit” in banking system reflects the economic
relationship between lenders and borrowers and the alienation of money or assets in
a certain period of time. In other words, credit can be defined as a legal contract
where one party receives resources or wealth from another party and promises to
repay him on a future date along with the interest. Practically, bank credit is
understood that “the bank trust and give the authority to use capital in a certain
period of time and at the date of payment, borrowers must pay banks
unconditionally all the principals and interests”. Credit activities is the most
important operation of commercial bank.
b. Characteristics of credit
There are four characteristics of credit including trust, reimbursement, timeliness
and risk.
Firstly, credit relations are based on trust. The term "credit" derived from
"Credium" in Latin that means "belief" or "trust" and base on this, the parties will
perform lending activities in form of money or assets in a certain period of time.
Credit relations only arise when the lender trusts in the borrower's ability and
willingness to repay the loan. It can be said as a prerequisite for establishing credit
relations.
The second characteristic is reimbursement. For credit relations, this is the most
basic feature and repayment is the standard for distinguishing credit relations from
other financial relations. The amount of funds transferred must be repaid both in

5
time and in value comprising two parts: principal and interest. Interest is the cost
that the borrower pays for the temporary use of the loan.
Thirdly, the concept of timeliness in credit means that the borrower is only allowed
to use the loan temporarily for a certain period of time. Starting from the nature of
credit is credibility, the lender believes the borrower will repay on a certain future
date.
Fourth, credit exposure is more likely to risk. Due to the information asymmetry
and the lender do not understand all about the information of the borrowers, credit
relations always exist a certain level of risk, especially credit risk.
c. Classification of bank credit
Based on the term of credit:
Short-term credit: Credit activities under 1 year, used to raise cash for cyclical
inventory needs, accounts payable and working capital.
Medium-term credit: Credit activities from 1 to 5 years, used to provide loans to
meet the demand for fixed asset procurement, technical innovation, expansion and
construction of small facilities with quick repayment terms.
Long-term credit: Credit activities more than 5 years, used to purchase or expand
fixed assets such as major equipment and real estate.
Based on guaranty:
Secured credit: The credit that all loans are equivalent to mortgage, in various forms
such as pledge, mortgage, discount and guarantee.
Unsecured credit: The type of credit that a loan generates without a collateral but
only based on trust. This type of loan is usually applied to traditional customers who
have a long and fair relationship with the bank. This client must have a healthy and
reputable financial situation with the bank as full ability to repay.
Based on purposes:
Real estate loans: The loan is to finance the purchase of real property – land, homes,
furniture, apartments, etc.
Financial institution loan: include credit to banks, insurance companies, and other
financial institution.
Agriculture loans: are extended for the purpose of plating, harvesting crops and
feeding livestock.

6
Commercial and industrial loans: are granted to business to cover purchasing
inventories, paying taxes, and meeting payrolls.
Consumer loans: include credit provided directly to individual or indirectly through
retail sellers, which are for the purposes of covering personal expenses such as
purchase automobiles, home appliances, medical care, etc.
Lease financing receivables: where the lender buys equipment or vehicles and
leases them to its customers.
Miscellaneous loans: include all loans not listed above.
Based on repayment methods:
Installment credit: The borrowers must repay principal and interest periodically.
Non-installment credit: The borrowers must pay the entire loan at maturity.
Credit on demand: A type of credit where the collection of the debt is made in
accordance with the borrower's repayment requirements on the basis of the
borrower's ability and within the agreed term of the agreement.
2.1.2. Credit risk concepts and characteristics
a. Concepts of credit risk
Credit activity is the main business activity of commercial banks, bringing the
highest profit but also the biggest risk to commercial banks. According to the Basel
Committee (2000), Principles for the Management of Credit risk, p.1 "Credit risk is
most simply defined as the potential that a bank borrower or counterparty will fail
to meet its obligations in accordance with agreed terms."
Shelagh Heffernan, (2005), Modern Banking, Wiley, p. 104, 105 stated that “Credit
risk is the risk that an asset or a loan becomes irrecoverable in the case of outright
default, or the risk of an unexpected delay in the servicing of the loan”.
Maritime Bank, (2016), Risk Management Framework QC.RR.008, p.7: “Credit
risk is the risk causing a negative impact on a bank's income or capital, which is
created by the failure of the creditors to perform partially or fully its obligations
under the bank's commitment.”
It is the fact that, the bank traditionally makes money by taking the credit risk. If the
bank has a large proportion of medium or low quality loans on its assets, the return
will be higher, and the bank can profit from taking that risk.

7
In general, there are many definitions of credit risk but this thesis can draw some
basic contents of credit risk as follows:
- Credit risk exposes when the borrower made a delay in performing the debt
repayment obligation.
- Credit risk will lead to financial losses to the bank, in case of serious losses it
can even lead to bankruptcy.
- Risk in credit activities is objective so risk cannot be excluded but we can
limit risks and keep them to an acceptable level.
Because the lending activities play an important role in intermediary function, credit
risk that a borrower defaults on a bank loan usually incurred with banks. The
failures of banking system are mainly linked to a high non-performing loans (NPL)
ratios. Therefore, credit risk continues to be central to efficient risk management.
b. Characteristics of credit risk
Credit risk is necessary: Credit risk has always existed and associated with
activities of commercial banks, the bank can limit credit risk to the lowest level but
cannot remove it entirely.
Credit risk is indirect: A bank is an intermediary financial institution which has an
important position in the market economy. It is a currency trading organization
whose primary and regular activities are taking deposits from customers with
accountability of repaying, and using that money to lend. Therefore, when a
borrower faces a business risk such as fire, flood, war, bankrupt partner, product
counterfeit, can indirectly lead to a negative impact on the bank.
Credit risk is diverse and complex: the diversity of credit risk can be characterized
by several types: moral risk, mechanism risk, inspection and control risk, etc.
2.1.3. Credit risk classification
a. Based on the forms of credit risk
Transaction risk is a form of credit risk that is caused by limitations in the process
of trading and reviewing loans and assessing customers. Transaction risk consists of
three main components: risk of selection, risk of guarantee and risk of operation:
● Risk of selection: The risk involved in the process of credit assessment and
analysis, when the bank selects effective loans to make loan decisions.

8
 ● Risk of guarantee: The risk arising from guaranteed standards such as
collateral types, collateral holders, and other terms of loan agreements.
● Risk of operation: the risk involved in the management of loans and lending,
including the use of a credit rating system and the techniques for dealing
with credit issues.
Portfolio risk is a form of credit risk that is caused by limitations in the management
of a bank's loan portfolio, which is divided into two categories: internal and
collective risk.
● Internal risk: The risk that comes from the elements, specific characteristics,
internal characteristics of each borrower or economic sector.
● Concentration risk: The risk occurs when the bank concentrates too much
loan capital on some customers, provides too many loans to enterprises in the
same economic sector; or in the same geographic region; or the same type of
high risk loan.
b. Based on the causes of credit risk
Credit risk can also be divided into objective and subjective risks based on the
underlying cause of the risk.
Objective risk: A risk is due to force majeure causes such as natural disasters,
enemy sabotage, borrower accident, death, missing...
Subjective Risk: A risk that is created by the borrower or the lender intentionally or
unintentionally such as: the borrower uses funds not for the improper purpose
causing capital loss; or risk due to non-compliance from the bank employees...
2.1.4. The consequences of credit risk
a. To commercial banks:
Credit risk reduces the credibility of commercial banks
In the current trend of fierce competition, almost Vietnamese commercial banks are
trying to open transaction points in regions and territories throughout Vietnam.
Banks are making an effort to provide diversified service products, serving the best
for its customers. Banks always puts the prestige on the top priority, minimizing all
bad information or the mass media affecting the operation of the banks. If a
commercial bank has a high ratio of bad debt to total outstanding loans, or there is
information about the bank's failure to recover the debt, or the bank is put under

9
special control of the bank, the prestige of the bank was seriously damaged. At that
time, there will be no individual or organization who will use the services of the
bank anymore because they do not know whether the money they put into the bank
is safe and profitable.
Credit risk reduces the solvency of commercial banks
In order to have enough capital to provide credit to customers, the bank must
mobilize from organizations and residents. In other words, banks as borrowers
raising funds from organizations and residents to finance credit. If defaults due to
uncollected debts are incurred, the bank will narrow the source of payments to
residents and other economic organizations as creditors. In addition, if a borrower
does not have the ability to repayment the loan, it leads to a decline in assets’
present value. If the losses are too high, the cost of raising finance of the bank could
be increased, and in extreme, it incurs insolvency for the bank.
Credit risk reduces profitability of commercial banks
According to the State Bank's regulations, all debts which are not standard debts of
the bank are required to make provision, the ratio of provision for loan loss depends
on the level of risk and collateral. This means that, the higher risk of non-
performing loans and collateral assets are, the higher provisions will be made. The
greater the amount of allowance is, the greater the bank’s cost of capital, thus, profit
will decrease.
Credit risk leads to the risk of bankruptcy.
As mentioned above, credit risks affect the bank's reputation, liquidity and
profitability. If these problems continue to erode and corrupt the bank's capital, the
road to bankruptcy is inevitable.
b. To the economy:
Credit risk lead to domino effect
Most banks now use short-term funds to finance long-term debt, which means that
the time it takes for a bank to collect a loan can not be as fast as the time it takes the
customer to withdraw. As a result, credit risk can indirectly lead banks to face
liquidity risks such as the risk of maturity mismatches between capital inflows and
outflows. Once the credit risk has occurred, the creditworthiness and the solvency
of the bank would be damaged seriously, the people and the organization will be
rushed to withdraw money and terminate the relationship. The customers of Asia

10
Commercial Bank dragged to withdraw money at the transactions when the
information that General Director of this bank escaped due to his criminal act is the
most obvious demonstration.
These consequences of credit risk can create domino effect. If a commercial bank
occurs issues related to credit risk, resulting in loss of liquidity as mentioned above,
it will cause the chain effects for the economy as follows:
- When the liquidity of the bank is reduced, the bank will not be able to
continue funding capital for legal entities, individuals and must recover
capital before maturity. Hence, the beneficiaries who are financed by the
bank are greatly affected to their business and production.
- Chain reaction created to other commercial banks: When the public's trust in
a bank decreases, they will gradually lose confidence in other banks, which
in turn triggers a withdrawal reaction at those banks.
- Chain reaction created to other economic sectors: the bank collapsed leading
to economic recession, purchasing power decreased, unemployment
increased, and social instability.
2.2. Credit risk management at commercial banks
2.2.1. Definition of credit risk management
According to Dr. Ir. Tony Van Gestel, Prof. Dr. Bart Baesens, (2009), Credit risk
management, Oxford University Press, p.1, “Credit risk management is a process
that involves the identification of potential risks, the measurement of these risks, the
appropriate treatment, and the actual implementation of risk models”.
Basel Committee, (2000), Principles for the Management of Credit risk, p.1, “Credit
risk management is to maximize a bank’s risk-adjusted rate of return by maintaining
credit risk exposure within acceptable parameters”.
Credit risk management is a broad concept with many different contents in the
management of a commercial bank. Therefore, there are many ways to understand,
there may be many different concepts on this issue. However, concepts be used is
that Credit Risk Management is the process of developing and implementing
credit strategies, and policies including identifying, measuring, treating and
monitoring credit risk to achieve safety goals, sustainable development. Credit
risk management at an acceptable level aims to prevent, limit and reduce bad debts
and overdue debts in credit activities, which in turns increasing revenue, reducing

11
expenses and raising the quality and efficiency of business activities in both short
and long term at commercial banks.
2.2.2. The need of credit risk management
a. To commercial banks
In commercial banking, credit activities play a very important role and account for a
majority of banking activities. Normally, total outstanding loans account for more
than half of total assets, and credit income accounts for ½ to two thirds of total bank
income. Credit activities, however, often implies risks that are caused by poor
quality of credit risk management policy. Therefore, the risk management in each
bank is extremely necessary. Credit risk management helps banks take advantages
to bring in significant revenue, especially in determining the accurate risk of each
customer.
Improving credit risk management can provide the best services and products to
customers, which in turn enhance the bank’s image. Through providing a well-
qualified product to customers, commercial banks can gain trust from customers,
increase customers’ scales, develop credit activities, but still ensure an acceptable
credit risk level.
Credit risk management helps banks mitigate the loss of assets due to credit risk.
b. To customers of commercial banks
A good credit quality makes customers easy to access loans and satisfy their capital
needs. Customers use the loan for the right purpose, which in turn develop business
activities, promote the strength of the loan, and ensure the ability to pay debts on
time. Therefore, thanks to the banks credit risk management capabilities, it can help
projects bring in more profits and strengthen credibility for the enterprises.
Credit risk management helps increase liquidity for the bank, thereby ensuring the
ability of repayment depositors. As a result, the deposit interest rate could be higher
when the bank manages the credit risk better.
c. To the economy
On the macro perspective of banking system and economy, requiring effective
credit risk management becomes imperative to create a healthy financial market,
promote the development of economy. Managing credit risk of commercial banks is
a foundation to perform effectively intermediary credit function in the economy
sector, boost the manufacture, money circulation for the society and stabilize the

12
money market. The reason is that credit ensures the connection between investment
and savings and balances the capital in the economy.
Credit risk can lead to the bankruptcy of a bank, creating a domino effect that leads
to the panic of a series of banks and badly affecting the entire economy. In addition,
credit risk also affects the world economy because in the context of integration and
globalization of the world economy today, the economy of each country depends on
the regional and the world economy.
2.2.3. Factors affecting credit risk management
2.2.3.1. External factors
The thesis use PEST model to determine external factors affecting credit risk
management of a commercial banks, as follows:
a. Political factors
Unfavorable legal environment
The legal environment of Vietnam is still inadequate, the policies of economic
management often change suddenly that affect the business environment in
Vietnam, causing many economic organizations cannot timely adjusted business
plans. Credit risk can be created by some following reasons related to unfavorable
legal conditions:
- The Government adjusts policies and laws that affect the business and
production, leading to difficulties in repayment of debts.
- The project is banned or discontinued in accordance with the law.
- Goods or services are banned or restricted circulation, leading to the closure
or stagnation of the market
For example, by the time of 2001, motorbike business flourished with the product
lines from China, Korea; therefore, many enterprises invested in this field.
However, in 2002, the government issued a regulation that each person can only
own one motorbike. This new regulation significantly reduces the purchasing power
of the car. This has a great impact on the operation ability of enterprises, which has
led to difficulties in repaying loans.
The factors mentioned above are the main factors affecting to credit quality of
commercial banks.
b. Economic factor

13
Unstable economic environment: The rapid and unpredictable fluctuation of the
world market is the main reason affecting the business operation of the borrower.
For example, Vietnam's economy is still highly dependent on agricultural industry
(farming, food processing and raw materials); Crude oil, processing is very sensitive
to weather risk and world prices. Therefore, Vietnamese enterprises are easy to be
vulnerable when the world market fluctuates. The difficulties caused by quota
restraint in the textile and garment industry, or dumping lawsuits in the fishery
sector, etc. directly affect business activities of enterprises in particular and banking
system in general. Iron and steel products are heavily influenced by world steel
prices. The rise in billet prices has caused some domestic steel producers to stop
producing because of the high cost of production while slump in consuming the
products. These fluctuations in the world economy take significant impacts on
credit performance of commercial banks.
The trend of international integration: The process of financial liberalization and
international integration has also resulted in the inevitable consequence of bad debt
growth since it creates a fierce competition environment. This situation causes
enterprises, who are regular customers of banks, face the risk of losing money and
the harsh selection of the market. In addition, the competition between domestic and
international banks in the context of economic integration also causes the local
banks to face the increasing credit risk because the large customers, who have
financial strength, has been attracted by foreign banks with new products and
services with more convenience.
c. Social factors
Customers’ ability and willingness: It is the fact that many customers have business
plans very feasible, the business sector has many advantages; however, when
starting to meet the conditions for capital, due to the shortcomings in capacity and
experience, customers are unable to cope with market fluctuations which can lead to
ineffective business operations as planned. In addition, a borrower who may be
attempting fraud and deliberately evading debt repayment is clearly undesirable and
bring credit risk to the bank.
Using the loan for improper purposes: In order to withdraw money from the bank,
customers tries to make forged documents to use the capital for other purposes as
not stated in the loan agreement. The misuse of loans in many cases is due to
borrowers are willing to take risks in the expectation of higher returns, but the
results are not as expected. There are cases where customers have not been able to

14
repay loans at first bank, and deliberately find ways to get loans at another bank and
carry out the debt swing, which causes customers default in debt repayment timely
and sufficient to the bank.
d. Techonogical factors
Effective management of credit risk is linked to the bank’s development of
technology. The advanced technology can increase the speed of decision-making
and simultaneously reduce the cost of controlling credit risk. By monitoring
banking processes, technology can aid the faster detection and resolution of credit
risk issues and significantly reduce credit and compliance risk exposure. By
automating and applying the best risk management practices can ensure compliance
with existing regulatory standards.
Another important use of technology would be to help organisations understand
what the impact of a default would be and how to recover from it. Modelling the
potential impact of a default can help organisations take appropriate preventive
measures and better calculate and monitor the limits of risk exposure. One example
of impact on credit risk management is early-warning detection techniques to
identify potential losses and exposures proactively.
Currently, technology era has significantly changed the banking system.
Technology could help banks develop a strong data management and advanced
analytics in staying competitive. Rising customer use of digital-banking services
and the increased data this generates create new opportunities and risks. Banks can
integrate new data sources and make them available for risk modeling. However,
banks need to have adequate IT system to handle these enormous number of
historical data.
2.2.3.2. Internal factors
The following internal factors which caused by banks can affect negatively to credit
risk management.
Loose credit policy and procedure of commercial banks:
- The credit orientation has not reached the strategic level, not comply with the
principle of the market that the profit and risk are acceptable.
- Swollen by economic syndrome, by trends of economic development.

15
 - To compete, seize the market segment and customers without noticing
whether the bank has advantages in this field or inadequate preparation for this
field.
- Crediting techniques are poor, unmodern and not diversified.
- The process of definition of credit limit for customers is too simple. Credit risk
management and post-lending control have not been focused, just formally.
Lack of information:
- Bank has not built up a complete customer data system, and there is no cross-
checking channel.
- Credit analysis and loan decisions are almost exclusively based on information
provided by clients, personal relationships.
The quality of credit officers:
Credit officers, credit appraisal officer lack professional qualifications. They are
unable to appraise clients’ borrowing plan as well as lack experience to detect any
problems, and not enough ability to recognize how the socio-economic situation
affects the business fields of the customers. This leads to incorrect lending
decisions. Credit officers who are good professional skills, experience to accurately
assess the feasibility of the projects, identify the authenticity of the financial
statements and detect any tricks of customers. In addition, credit officers standing in
front of the temptation of money, had colluded with customers to seize the bank's
money.
2.2.4. The process of credit risk management
Figure 2.1. Credit risk management process

Idetification Measurement Treatment Monitoring

Source: Dr. Ir. Tony Van Gestel, Prof. Dr. Bart Baesens, (2009), Credit risk management, Oxford
University Press

2.2.4.1. Risk Identification

Banks must take methods to detect credit risk early to refuse to lend (in the case
before lending) or to prevent timely (in the case after the loan). Early warnings of
credit risk can be divided into following groups:
Group of signs related to credit relations with banks:

16
 - Over a period of time, customers’ accounts tend to be difficult in payroll,
decline in account balances; request frequently for assistance in liquid capital
from various sources.
- Customers have some signals such as late payment of principal and interest,
loan requests exceed expected demand.
Group of signs related to market
- Customers have difficulty in product development.
- Change in the economic environment: the exchange rate, interest rate,
consuming tastes, new technologies, and added competition.
- Change in legal environment: tax policy, the conditions for establishment
and operation.
- Products are highly seasonal.
Group of non-financial signs: ethical issues of customers, degradation of the
enterprise’s infrastructure
2.2.4.2. Risk Measurement
After identifying credit risks, the banks should consider the level of risk to help the
Executive Board determine the risk which should be monitored and controlled.
Banks often uses screening mechanism to choose well-qualified customers for
lending. The methods are normal used to assess risk including qualitative model and
quantitative model. There are many different methods of measuring credit risk,
however, within the limits of the thesis, some methods are commonly used as
follows:
a. Qualitative models:
This approach classifies into 6 groups of indicators (also called the 6Cs method) as
follows:
Character: The loan officer must be convinced the customer has a well-defined
purpose for requesting credit and a serious intention to repay. Banks assess
customers’ character depending on:
- Customer past payment record
- Experience of other lenders with this customer
- Purpose of loan
- Customer’s trach record in forecasting business or personal income
- Credit rating

17
 - Presence of co-signers or guarantors of the proposed loan
Capacity: The loan officer must be sure the customer has the authority to request a
loan and the legal standing to sign a binding loan agreement.
- Identity of customer and guarantors’ capacity
- Copies of legal documents
- Description of history, legal structure, owners, operations, products and
suppliers for a business borrower
Cash: The borrower must have the ability to generate enough cash to repay the loan.
- Past earnings, dividends, and sales record.
- Adequacy of past and projected cash flows
- Turnover of payables, receivables, inventory; capital structure and leverage.
- Recent performance of borrower’s firm
Collateral: The borrower must post adequate net worth or own enough quality
assets to support the loan.
- Ownership and liquidity of assets
- Degree of specialization of assets
- Liens, encumbrances and restrictions against property
- Insurance coverage
- Lender’s relative position as creditor in placing a claim against borrower’s
assets
Conditions: The loan officer and credit analyst must be aware of recent trends in the
borrower’s line of work or industry and how economic conditions might affect the
loan.
- Customer’s current position in industry and expected market share
- Customer’s performance vs. comparable firms in same industry
- Sensitivity of customer and industry to business cycles and changes in
technology
- Impact of economy conditions and legal environment
Controls: Whether the changes in law and regulation could adversely affect the
borrower.
- Applicable laws and regulations regarding the character and quality of
acceptable loans
- Correctly prepared loan documents

18
 - Inputs from noncredit personnel (economists or political experts) on external
factors affecting loan repayment.
The 6Cs model is relatively simple, but it depends too much on the level of
accuracy of the information collected, as well as the subjective assessment of credit
officers.
b. Quantitative models:
These approaches are considered classical models for credit risk assessment. Here
are some models of credit risk quantification which is used most often
● Ratios to measure credit risk
Non-performing loans rate = Non-performing loans/Total loans
Non-performing loans is the sum of borrowed money upon which the debtor has not
made his scheduled payments for at least 90 days. In other words, it includes loans
in group 3, 4 and 5. When customers do not meet their agreed repayment
arrangements for 90 days or more, the bank must put more provisions on the
assumption that the loan will not be paid back. This reduces its capacity to provide
new loans. The NPL rate is the most important indicator reflecting the credit risk at
commercial banks. NPL rate indicates the quality and risk of the bank's loan
portfolio, how many are classified as NPL over 100 loans. The ratio of non-
performing loans over total outstanding loans must be below 3% according to the
international policy. This rate is higher than industry average and tends to increase,
which may be a sign that banks are having difficulties in managing the quality of
their loans. Conversely, this rate is lower than in previous years, indicating the
quality of credits improved. Or perhaps the bank has a policy to remove bad debts
or change the classification of debt.
Loan Loss Provision Coverage Ratio = (Pretax Income + Loan Loss Provision)/Net
charge-offs
The loan loss provision coverage ratio is an indicator of how much money the bank
need to cover its loan losses. A higher ratio means the bank can withstand future
losses better, including losses beyond the loan loss provision.
Charge-off rate = Net charge-offs/Total outstanding loan
The bad debt will be removed and offset by the loan loss provision. This means that
the bank expects that it has no chance to collect a debt and charges it off its book.
The bank keeps track with charge-off rates to monitor the performance of the loans.

19
Thus, if a bank has a high debt charge-off rate, it shows that the credit quality is not
efficient.
● Pricing the loan:
Any bank will wish to ensure the “price” of a loan exceeds a risk adjusted rate, and
includes any loan administration costs, that is:
RL = i + ip + fees

Where:
RL: interest rate charged on the loan

i: market interest rate, such as LIBOR or an equivalent term

ip: risk premium, negatively related to the probability of the loan being repaid
The bank requires a risk premium as a component of required rate of return to
compensate for the high risk that the bank may incur when lending. The riskier the
borrower, the higher the premium. If the risk profile of the loan is altered, the rate
should change accordingly to the appropriate risk level.
The method is found to be easy to calculate. However, the guidelines may also be
difficult to implement in highly competitive markets. To maintain an adequate
business return, the bank must keep the risk premium as competitive as possible.
Moreover, the process of calculating the risk premium, which depends on the
characteristics of each individual borrower, is difficult to determine.
● Expected loss measurement:
EL = PD * LGD * EAD
EL: Expected loss
PD: Probability of default
LGD: Loss Given Default
EAD: Exposure at Default
PD, LGD and EAD are the most important factors that banks frequently refer to in
credit decisions. A PD is assigned to each risk measure and represents as a
percentage the likelihood of default. PD is typically measured by assessing past-due
loans. The calculation is for a specific time frame and measures the percentage of
loans that default. LGD is unique to the banking industry or segment, measures the
expected loss and is shown as a percentage. LGD represents the amount
unrecovered by the lender after selling the underlying asset if a borrower defaults on

20
a loan.  A bank may figure its expected loss by multiplying, the variable, exposure
at default (EAD), with the probability of default (PD), and the loss given default
(LGD). Based on the results of the expected loss calculation, banks will develop
applications in credit risk management on a number of aspects including credit risk
calculations, and measurements.
The main benefit to financial institutions using expected loss measurement is the
simple calculation. It can be easily calculated within simple models that create
directionally consistent expected loss numbers. However, an accurate LGD variable
may be difficult to determine if portfolio losses differ from what was expected.
Additionally, deriving the variables takes time and considerable analysis. PD and
LGD represent the past experience of a financial institution but also represent what
an institution expects to experience in the future which is quite difficult to observe.
● Z-score model:
Finding a tool for identifying potential bankruptcies of customers is always one of
the top concerns for risk researchers. The Z-score is a tool widely recognized and
practiced around the world.
This model depends on: (1) Borrower’s financial indicators – X; (2) The importance
of these indicators in determining the probability of a borrower’s default in the past.
The model is described as follows:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.64X4 + 1X5
Z-score is a composite measurement to classify credit risk for borrowers and
depends on 5 sub-score:
X1 = Working Capital/ Total Assets
X2 = Retaining earnings/ Total Assets
X3 = EBIT/ Total Assets
X4 = Market value of Total Equity/ Book Values of total liabilities
X5 = Sales / Total Assets
The Z-score is used as a mean to classify credit risk for borrowers. The higher the
Z-score is, the lower the default probability of a borrower is. Conversely, when the
Z value is low or a negative number, the customer may be ranked into the group of
high risks of default.
Z < 1.8: High risk customer
1.8 < Z < 3: Unspecified
Z > 3: Customer is not likely to default

21
The technique of credit risk measurement of Z-score model is relatively simple.
However, it exists some drawbacks:
- The model only classifies customers into 3 level of risk, while the level
of potential risk for each customer varies many types.
- There is no compelling reason to argue that the parameters reflecting the
importance of the indicators in the formula are invariant.
- The model does not take into account some of the qualitative factors but
can play an important role in the risk measurement.
● Credit scoring:
Banks can use credit ratings from well-known international organizations such as
Moody, Standard & Poor or build an internal credit rating. Although the usage of
external credit ratings is increasing but still loans to unrated clients form the major
portion of banks’ credit portfolio. This necessitates that banks should
simultaneously use their internal resources to know their customers to such extent
and in such a manner, which help them to effectively and efficiently manage their
portfolios.
Scoring method is a relatively scientific measurement to quantify risks. It bases on
the operational status and characteristics of credits in the past to predict credit
operations which have similar characteristics in the future. Credit officers can
evaluate the level of risk through financial indicators and non-financial criteria of
each corresponding borrowers’ group.
A suitable customers’ credit rating affects directly to lending activities of the bank.
When efficiently used, a well-structured credit rating system helps the credit
officers monitoring borrowers to have consistent check on credit assessment. It also
helps in the implementation of active credit risk management both at the individual
transaction and at the overall portfolio levels. A well-established credit rating
system can be integrated into decision making process of management and also
helps banks in determining the break-even interest rates needed to cover the loan’s
expected losses so that banks demand appropriate margin for the credit risk or
unexpected losses.
However, there are some drawbacks of applying credit scoring. Firstly, the results
of credit rating can be biased rating and mispresentations. It is difficult for credit
officers to collect all of the information of borrowers. Secondly, rating is done on
the present and the past historic data of the company and this is only a static study.

22
Thirdly, some sales officers, who try to increase granting volume for their own
benefits, can conceal material information. Lastly, there is a difference in rating
between banks and rating agencies. Therefore, it cannot relect actual credit situation
of customers.

 VaR model:
Value at Risk is the methodology used to estimate the risk to which a bank is
exposed, and also for determining, the banks’ minimum capital required to cover
this risk. It measures the maximum loss likely to be lost in a portfolio in a given
period, and for a given confidence interval. Standard capital market risk of the Basel
Committee requires that VaR be calculated daily and capital requirements related to
the risk are met daily. Capital requirements are expressed as the maximum value of
the previous day's VaR and the average of daily VaR indicators for the last 60
working days.
Advantages of VaR model:
VaR is easy to understand. VaR is measured in price units (dollars, euros) or as
percentage of portfolio value. This makes VaR very easy to interpret and to further
use in analysis.
For risk reporting, VaR can be used in a variety of ways such as setting limits or
risk targets, capital allocation, or risk-adjusted performance measurement.
Therefore, VaR can be used efficiently as a strategic tool.
Problem with VaR:
The VaR does not give the precise amount of losses. There is no upper bound of the
loss. For example, if a bank reports VaR ≥ $1 million at the 99th percentile, it
means that losses in excess of VaR would be expected to occur 1%. However, it
gives no specific amount how much VaR will be exceeded – it could be $2.5
million, $450 million or $1 billion.
The simpler VaR models depend on the assumption that financial returns are
normally distributed and uncorrelated. There was evidence that VaR can be possible
to be manipulated.
2.2.4.3. Risk Treatment
When a loan is classified as a bad debt, the bank will move to the bad debt
settlement department to mitigate the risk. Risk treatment is the use of techniques,
tools, and strategies, etc. to prevent, avoid or minimize the losses from credit risk to

23
the bank. It is necessary for bank to choose an appropriate risk management method
after identifying and measuring the risk. In general, there are many different
methods to solve credit risk as follows:
Risk avoidance: A simple way to treat risk is to avoid risk. This implies that the
bank should not invest in products that are too risky or for which the risk is not well
enough understood. Avoidance does not mean that they avoid all risk, a strategy
may aim to select the good counterparts and not invest in counterparts with too high
probability of default, loss or exposure of risk. Alternatively, they may decide to
invest only small proportions in such counterparts, which can reduce the
concentration risk.
Risk reduction: Risk reduction or mitigation implies that bank should takes a part
of the risk, but not the full part of it. The bank can reduce the risk by a variety of
methods such as:
- For high-risk counterparts, the bank may require collateral that the bank can
sell or manage in case of a default. The value of the sold collateral reduces
the risk for the bank.
- Exemption of interest for customers is the bank's decision not to collect all
(interest-free) or a part (reduction of interest) of loan interest.
- Restructuring is method that the bank implements for the purpose of debt
settlement. Bank can restructure the loan’s approved conditions or the loan’s
repayment period.
Risk acceptance: Risk acceptance is typically applied for low-risk assets. Risk is
easier accepted when it is well diversified: investments are made in various sectors
and countries, where it is unlikely that high losses will occur simultaneously in all
sectors and in all countries. One type of risk acceptance is Debt forgiveness which
is the bank's acceptance to write customer's debt-related obligations off. Then, the
bank use provision to deal with credit risk.
Risk transfer: Bank transfers the risk to another bank, insurance or company.
Insurance companies, called financial guarantors, exist that provide guarantees to
credit risk. Debt selling is that the bank transfers a part or all of the debt and
concurrently transfers the creditor's rights to the debt purchaser and receives
payment from the debt purchaser. In addition, the bank can use derivative
instruments such as Credit Default Swap (CDS), Credit option, etc. in the case of
default of the underlying counterpart.

24
2.2.4.4. Risk Monitoring
Aiming to prevent and control the risks that may arise in banking operations,
ensuring that all department and individuals in bank comply with legal regulations.
Implementing strategies and policies to ensure safety and efficiency in banking
operations. Credit risk control includes 3 following stages:
- Pre-lending review: Control the process of setting up policies, lending
procedures; Control the process of compiling loan applications and
appraising loans; and examine the completeness, legality and accuracy of
loan applications and related dossiers;
- Control during lending: Review the credit contract; check the disbursement
process including reconciling customer claims with current data to prevent
fraud, false records, and denial of the secured assets; investigate the use of
loans for the right purposes; supervise loan regularly.
- Post-Lending Control: Debt Recovery Control, Independent Internal Credit
Control, and Revaluation of Credit Policy to learn from experiences.

Conclusion of chapter 2
Credit risk management is considered as a top concern of banks, especially
commercial banks. Credit risk, if not properly evaluated, can cause heavy losses,
even leading to collapse. In chapter 2, the thesis focused on clarifying basic credit
activities; Clarifying credit risk at commercial banks. Particularly, the study focused
on analyzing the concepts and contents of credit risk management at commercial
banks. Through this chapter, the thesis has built a theoretical framework for credit
risk management, which create a foundation for analyzing the case of Maritime
Bank in the next chapter.

25
CHAPTER III. DATA COLLECTION AND DISCUSSION
3.1. Introduction to Maritime Bank
3.1.1. History and Development
Vietnam Maritime Joint Stock Commercial Bank (Maritime Bank) was officially
established as the first joint stock commercial bank of Vietnam on July 12, 1991 in
Haiphong City, according to license no.0001/NHGP issued by the Governor of the
SBV. Maritime Bank has always described itself as a credible institution and has
been constantly expanding its operation with nearly 300 transaction points,
diversifying its products and services to meet the increasing demands of customers.
To achieve today's success, Maritime Bank has undergone two main stages of
challenge and development.
The first period from 1991 to 2005 was a stage of formation. Maritime Bank started
operation with only 24 shareholders and chartered capital of VND40 billion. In this
period, Maritime Bank became the first bank in Vietnam to obtain a license to
provide banking services for international transactions. In 2005, Maritime Bank
moved the head office from Haiphong to Hanoi and expanded operations
significantly through 16 branches and transaction points nationwide.
Figure 3.1. Chartered capital of Maritime Bank 2000- June 2017

12000 11750 11750 11750

9000
8000

6000

3000
1500

109 200
0
2000 2004 2008 2012 2015 2016 6/2017

Chartered capital

Source: Maritime Bank Annual Report

The second period from 2009 until now, the bank has taken measures to rectify,
expand the scale, and improve service quality. In 2009, Maritime Bank officially
signed the consultancy contract with McKinsey to build up the development

26
strategy. In 2010, Maritime Bank also introduced the new brand identity with the
new logo and moved the head office to 88 Lang Ha Street, Hanoi. In 2014,
Maritime Bank was chosen by Governor as one of the first 10 banks to deploy Basel
II. Especially, in 2015, Maritime Bank experienced a material merge with Mekong
Development Bank (MDB), becoming one of the five largest joint stock commercial
banks in Vietnam in terms of branch network and chartered capital. In this year, the
bank reached 270 transaction points, 1.3 million individual customers and more
than 30,000 corporate and financial institution customers, and chartered capital of
VND11.75 trillion.
With continuous efforts, Maritime Bank reputation has deserved many prestigious
awards. Particularly in 2016, the bank celebrated 25 years of establishment, with the
acknowledgement of millions of customers, partners and is proud to be “The Best
Commercial Bank in Vietnam” from the International Finance Magazine (IFM);
“Leadership in Debit Volume and Effective Card Usage Programme” by
MasterCard; “Vietnam Domestic Foreign Exchange Bank of the Year 2016”
awarded by Asian Banking & Finance. These international awards again affirmed
for Maritime Bank products, services, reputation and competitiveness in the
financial and banking markets in Vietnam.
3.1.2. Vision, Mission & Core value
Figure 3.2. Vision, Mission and Core Values of Maritime Bank

Source: Maritime Bank Website

In line with the vision of becoming the best joint - stock commercial bank in
Vietnam, Maritime Bank’s slogan is “Creating sustainable values!” and it has set
forth a mission which is to build a bank that is so good that everybody wants to join
and no one wants to leave.

27
Based on three core strengths of the bank: large capital base, extensive network of
branches and friendly, united team, our fundamental strategy is to leverage core
strengths to deliver the best experiences to customers, shareholders, suppliers,
community and staff in everything we choose to do.
With clear vision and strategy, Maritime Bank have been focusing on embedding 7
core values into our daily activities.
• Responsibility and Integrity
• Openness and solidarity
• Understand Customers thoroughly
• Excellent execution
• Continuous improvement
• Compliance
• Caring for community

With the above vision and strategy, the bank will complete its missions which are to
bring the highest benefit to customers, to focus on the interests of workers and
shareholders, to build a strong corporate culture, and to contribute effectively to the
development of the community.
3.1.3. Organization structure
Figure 3.3. Organization chart of Maritime Bank

28
 Source: Maritime Bank Annual Report

a. The General Assembly of Shareholders (GAS)

As a joint-stock company, the General Assembly of Shareholders with the
participation of all shareholders with voting rights, acts as the highest decision-
making body of Maritime Bank.
The GSM have the following rights and duties:
• Deciding the type of shares and total number of shares;
• Electing, dismissing members of the board of management, members of the
board of supervisors;
• Considering and handling violations committed by the board of directors and
the board of supervisor causing damage to the bank and shareholders of the
bank;
• Reorganizing and dissolving the bank, deciding to amend and supplement the
bank's charter;
• Approving annual financial statements for the previous year, and making the
decisions on the development orientation of the bank for the upcoming year.
b. The Board of directors (BOD)
The general responsibilities of Board of Directors are:
• Approved the financial and business plan, and key projects for the whole bank
and each division.
• Approved the reports and documents presented to the GAS.
• Approved the selection of the auditor for the Bank.
• Carried out the resolutions of the GAS according to legal regulations and the
Bank’s requirement.
• Approved the amendment and issuance of new regulations and policies as
proposed.
• Approved proposals for asset purchase & sale, credit, investment, budget
allocation to projects & units, and others that were beyond committees’ scope
of authority.
Members of Maritime Bank’s Board of Directors:
1 Mr. Tran Anh Tuan Chairman
2 Mr. Tran Xuan Quang Vice Chairman

29
 3 Mr. Huynh Buu Quang Member & CEO
4 Mr. Vu Duc Nhuan Member
5 Mr. Nguyen Duc Hoan Independent Member
Committees under the board of directors
• Human resources committee
• Credit & Investment committee
• Risk handling committee
• Risk management & Audit committee
• Strategy Management committee

c. The Supervisory Board

On behalf of the GAS, the Supervisory Board including three members:
• Monitors the activities of the BOD and concurrently plays the role of the Audit
Committee in accordance with international practices;
• Controls the Bank’s financial and business activities; checks annual financial
reports and other financial activities;
• Supervises compliance with applicable laws and internal Bank regulations; and
• Supervises the internal auditing function by directly managing the Bank’s
Internal Audit Division.
Nevertheless, the Supervisory Board regularly works with the BOD and BOM to
exchange views and advice on risks or key findings in the course of its operations.
d. Board of Management (BOM)
The Board of Management of Maritime Bank defines the long-term goals and the
strategies for the bank and sets forth the principles and directives for the resulting
corporate policies. It coordinates and monitors the most important activities,
develops and deploys managerial staff, allocates resources and decides on the
Bank’s financial steering and reporting.
Councils under the board of management
• Risk Management Council
• Risk Handling Council
• ALCO Council
• Operation Council
• Credit & Investment Council

30
Board of Management controls daily business activities of Maritime Bank through 6
specialized banks, 4 advisory divisions and 5 operational & supporting divisions.
Each specialized bank is composed of professional departments such as product
development, sales and business management departments whose functions are to
provide customized solutions and products that meet the needs of customer. The
division into specialized banks helps Maritime Bank to ensure the best service
quality for each customer segment as well as position the risk appetite in line with
that segment, which in turn improving efficiency of overall operational
performance.
Supportive and operational activities are carried out by 05 Supporting Divisions and
4 Advisory Divisions to ensure stable operation of the Bank and serve business
activities of specialized banks. Their goal is to achieve the overall strategic
objectives as a whole.
3.1.4. Major products & services
Maritime Bank offers diversified and flexible services, credit and transactions
products & services which are served best to variety of customer needs. Providing
modern banking services with international standards, Maritime Bank always goes
along with the innovation of the economy, contributing to raising the production
capacity and competitiveness of enterprises, becoming a reliable source of capital
for national key projects, for national key economic sectors in the context of
economic integration. For individual customers, Maritime Bank is their family's
bank, which provides the benefits to customers through optimized product packages
based on the actual needs of each customer group. For corporate customers,
Maritime Bank is a group banking that provides financial solutions for both
businesses and their partners to optimize business efficiency, drive growth and
sustainability.
Maritime Bank has functions as a financial intermediary that offers full range of
financial services as follows:
Deposit, Bank account, Cash Management: Maritime Bank provides safe and
convenient internet banking anytime, anywhere with the strong security technology.
Maritime Bank experienced consultant teams accompany with each corporate
customer, providing the best support and service.
Credit: Maritime Bank provides appropriate loan upon the individual customers or
enterprises’ needs for various activities including short-term, medium-term and

31
long-term loan. Maritime Bank’s credit service brings tremendous profit due to its
competitive interest rates, simple and fast procedure not exceeding 5 working days.
Trade Finance: Maritime Bank offers diverse solutions that meet all needs with
high financing limit and has preferential interest rates, compared with traditional
working-capital financing.
International Payment: Maritime Bank is pioneer in terms of past transaction
processing with reasonable fees such as announcing L/C exports within 02 days,
free consultant services.
Guarantee: The guarantee issued by Maritime Bank is widely accepted by local and
international banking partners with low margin ratio, diverse types of services and
competitive fee.
3.1.5. Competitors
Competitive environment in banking and finance sector actually launched in 2001,
and went sharply from 2006 when Vietnam officially joined WTO. There are many
foreign banks are operating in Vietnam such as HSBC, ANZ, Deutsche Bank
Vietnam, Citibank…; or joint venture bank as IVB (Indonesia-Vietnam Bank),
VRB (Vietnam- Russia bank), SBV (Singapore Vietnam Bank), etc.
Many joint-stock commercial banks newly established and upgraded as
Techcombank, VIB, ACB, SeABank, Sacombank, Eximbank, VPBank. This
intense explosion in banking system sparked a competition to penetrate and expand
market share through network expansion, diversification of products and services,
competitive prices and interest rate, etc. Some foreign banks like HSBC, ANZ
initiated the deposit products and services in Vietnam to compete with banks in
Vietnam in the area of mobilization. The group of commercial banks are seen as
direct competitors of Maritime Bank.
The State-owned banks as Vietcombank, BIDV, Vietinbank, Agribank… began to
realize the importance of improving the competitive position through improving
service attitude, quality of services. These state-owned commercial banks with the
advantage of the patronage capital and sponsor and support from the Government
keep dominant roles in the banking services system.
3.2. Operational performance of Maritime Bank in 2015-2017 period
Through nearly three decades of operating from 1999 to 2018, Maritime Bank has
achieved many targets about the development in total assets, outstanding loans,

32
funds mobilization, equity and profit, etc. In recent years, the macro economy of
Vietnam has developed optimistically with stable political situation, which has
made effort for firms’ development. These factors have encouraged enterprises to
need capital to invest in machinery, technology and expand the scale. In the
favorable conditions, Maritime Bank reached internal targets and sustainable
development. The business results primarily of Maritime Bank through 3-year
period from 2015 to 2017 are shown in the following aspects:
3.2.1. Measuring operating efficiency
In 2016, after restructuring portfolio, Maritime Bank’s net interest income increased
impressively by 50% thanks to growth in customer loans, efficient control of bad
debt ratio as well as asset structure, mobilized capital. Due to growth of net revenue
and strict cost-management, total pre-provision profit in 2016 jumped sharply by
179% compared to 2015. In 2016, the bank continues to make provisions under the
restructuring plan to ensure operational safety, thus provisions increased by 231%
over the previous year. Accordingly, after-tax profit in 2016 reached 20% increase
compared to 2015.
However, 2017 saw an inefficient operation of the bank. In which the operating
efficiency indicators are negative growth. After-tax profit of 2017 was only VND
122 billion, decreasing by 12% y/y. The reason was that the bank experienced a
significant increase in interest expenses while interest income has declined. In
addition, the bank continues to invest in technology and network development (total
investment in technology in 2017 up to VND 200 billion). However, thanks to the
provision expenses for loan loss was reduced by more than 40%, the pre-tax income
of Maritime Bank in 2017 was reached around VND 164 billion, equivalent to the
income in 2016. According to the annual report in 2017, Maritime Bank's net
income was 115% higher than the plan set by the Board of Directors at the
beginning of the year, of which core lending to customers was increased by 50%
compared to the previous year.
Table 3.1. Operational Efficiency Indicators of Maritime Bank 2015-2017
Unit: Billion VND
2017 2016 2015
Total Interest income 6,123 6,348 6,406
Total Interest expense 4,521 4,095 4,819
Net interest income 1,602 2,253 1,587

33
 Growth rate -29% 50%
Net non-interest income -421 -346 -902
Net income before provision 1,181 1,907 685
Growth rate -38% 178%
Provision for credit losses 1,017 1,743 527
Pretax net operating income 164 164 158
PROFIT AFTER TAX 122 140 116
Growth rate -12% 20%
Total Asset Turnover 1.05% 2.06% 0.66%
Equity Turnover 8.61% 14.02% 5.03%
Source: Maritime Bank Annual Report

Based on the table above, Maritime Bank’s Total Asset Turnover and Equity
Turnover reached a peak of 2.06% and 14.02% respectively in 2016. Whereas, these
numbers of 2017 decreased to 1.05% and 8.61%. The Asset Turnover ratio can
often be used as an indicator of the efficiency with which a company is deploying
its assets in generating revenue. Similarly, equity turnover indicates the efficient
shareholders’ equity use to generate sales. These low ratios show that Maritime
Bank use its assets and equity inefficiently to generate sales.
Overall, 2016 experienced the best growth in operational performance of the
Maritime Bank, while 2017 saw a decline in business activity. This is due to the fact
that banks are in the stage of reforming their processes and products, focusing on
technology systems, while the banking market is in fierce competition.
3.2.2. Measuring profitability
Table 3.2. Profitability ratios of Maritime Bank 2015-2017

2017 2016 2015

Industry Maritime
average Bank
ROA 0.69% 0.12% 0.14% 0.11%
ROE 10.2% 0.89% 1.03% 1.01%
Source: Maritime Bank Annual Report

The ROA/ROE is a profitability ratio that measures the ability of a firm to generate
profits from its assets/shareholders’ investments in the company. This is an
important measurement for potential investors because they want to see how

34
efficiently a company will use their money to generate net income. However, the
group of profitability indicators such as ROA, ROE both showed that the
performance of Maritime Bank was not effective compared to the average banking
sector. Return on assets was only around 0.11% to 0.14%, much lower than the
industry average of 0.69%. Compared to 10% of average industry, the bank’s ROE
was only approximately 1% over 3-year period, which indicated that Maritime Bank
has not optimized the resources to bring a adequate profit to the shareowner.
Maritime Bank's profitability was still limited because of low-yielding assets
accounting for a high proportion of the balance sheet, and the high cost of credit.
The positive outlook of Maritime Bank reflects the ongoing effort to address the
problematic assets, thus it can be used to improve asset quality and profitability.
Given the large scale and nature of the Maritime Bank's outstanding loan portfolio,
Maritime Bank can significantly improve asset quality in 2018.
3.2.3. Fund mobilization
With the orientation of developing Maritime Bank into a multi-functional bank,
meeting the fast-growing demand for capital needs to maximize profits, Maritime
Bank has deployed a variety of products and services. In a more and more
aggressive business environment, Maritime Bank has focused its resources and
developed its professionalism to exploit its advantages to maintain its capital
mobilization, as follows:
Table 3.3. Liabilities components of Maritime Bank 2015-2017

2017 2018 2019

Billion % Billion % Billion %
Amounts due to the
2,020 2.05% 4,386 5.55% 5,027 5.54%
Government and the SBV
Deposits and borrowings from
29,534 29.98% 10,536 13.34% 17,399 19.18%
other credit institutions
Customer deposits 56,849 57.70% 57,587 72.89% 62,616 69.04%
Derivatives and other financial
53 0.05% 52 0.07% 164 0.18%
liabilities
Valuable papers issued 7,349 7.46% 4,218 5.34% 3,297 3.64%
Other liabilities 2,713 2.75% 2,227 2.82% 2,054 2.26%
Total liabilities 98,518 100% 79,006 100% 90,694 100%
Source: Maritime Bank Annual Report

Deposits from customers

35
During the period 2015-2017, the fund mobilization from customer deposits of
Maritime Bank was gradually reduced through the years, from nearly VND 63
trillion to VND 57 trillion. Deposits from customers continued to be structured in
the direction of increasing stability for the bank in accordance with the strategy of
increasing the proportion of deposits from individual customers, reducing the
proportion of deposits from enterprises. Specifically, the proportion of corporate
and public sector clients fell from 37% of customer deposit at the end of 2015 to
31% at the end of 2017. In contrast, the proportion of deposit from individual
increased from 63% to 69% of total deposits by the end of 2017, accounting for the
bulk of customer deposits. In particular, the proportion of deposit from individual
customers in 2016 increased sharply to 76%.
The reason is that the bank has diversified its products and policies to attract more
money from individuals. Maritime Bank considered the exploitation and
mobilization of potential sources in the civilian population and economic
organizations as a leading target in their business. To maintain steady growth in
core deposits, the bank has promoted the brand advantage to mobilize capital from
residential customers who are behaviorally more stable, enhanced competitiveness
by strengthening the salesforce and customer service. Branches of the bank have
taken the initiative in marketing, innovating the transaction style, actively
approaching the lowest cost funding sources, diversifying mobilization forms with
flexibility.
Table 3.4. Customer Deposits by groups of customers 2015-2017

2017 2016 2015

From enterprises 17,536 31% 13,935 24% 22,839 37%

From Household/ Individual 39,312 69% 43,651 76% 39,515 63%

Total 56,848 100% 57,586 100% 62,354 100%
Source: Maritime Bank Annual Report

Borrowings from non-deposit sources

While the largest proportion of funds sources for almost banks is deposits, the non-
deposit borrowings also play a vital role in generating profitability for banks. As
can be seen in table …, the bank’s mobilization came from a full range of sources,
in which borrowings from other credit institutions was accounted for largest parts.
Especially, in 2017, the activity of borrowings from other credit institutions soaked
shapely to nearly VND 30 trillion, tripling the number of 2016. Issuing valuable

36
paper also grown dramatically from VND 3 trillion in 2015 to above VND 7 trillion
in 2017. These papers generally have higher interest rate than term deposit, with
longer term ranging between one and five years. This kind of longer-maturity
source brings more stability to finance long- and medium-term asset growth, which
can ensure the safety of asset structure. Other borrowed funds include borrowings
from SBV, derivatives and other liabilities. The total number of borrowings from
non-deposit sources jumped to VND 41.6 trillion in 2017, doubling the number in
2016 at only VND 21.4 trillion. Maritime Bank might not have enough deposits to
cover the new loan and needed to seek out the other non-deposit sources to meet
customers’ credit needs.
Overall, the structure of funds changed dramatically in 2017 due to the shift from
ordinary deposits to borrowings from other credit institutions and valuable papers.
3.2.4. Uses of funds
Table 3.5. Assets components of Maritime Bank 2015-2017

2017 2016 2015

Billion % Billion % Billion %
Cash, gold and gemstones 1,997 1.78% 1,868 2.02% 1,529 1.47%
Balances with the SBV 3,448 3.07% 1,546 1.67% 2,212 2.12%
Placements with and loans to
8,602 7.66% 7,563 8.17% 11,456 10.98%
other credit institutions
Securities held for trading 66 0.06% 97 0.10% 117 0.11%
Loans to customers 35,784 31.88% 33,667 36.36% 27,490 26.35%
Investment securities 44,902 40.01% 32,502 35.10% 48,901 46.88%
Long-term investments 9 0.01% 9 0.01% 9 0.01%
Fixed assets 572 0.51% 649 0.70% 823 0.79%
Other assets 16,859 15.02% 14,705 15.88% 11,774 11.29%
Total assets 112,239 100% 92,606 100% 104,311 100%
Source: Maritime Bank Annual Report

Over the year, Maritime Bank has maintained the safety and efficiency of fund use.
By the end of 2017, total assets of the Bank had continued to be consolidated,
increasing by 21% from over VND 92 trillion to more than VND 112 trillion. The
main asset items accounting for the majority part of total assets and generating
income for the bank include loans to customers, investment securities, etc. In
particular, loans to customers grew slightly, reaching nearly 36 trillion, up 3%
compared with that of 2016. In 2017, Maritime Bank continued to be a successful

37
year in securities investment and investment. Maritime Bank still maintained its
position among the top 3 banks to establish the market on VBMA. Investment
banking always plays an important role in generating profit for Maritime Bank.
Investment activities were continued to enhance and diversify with a range of
portfolio such as Government bonds & bills, Bonds and equity securities issued by
economic entities, derivative products, etc. in order to boost profitability and ensure
the liquidity of the bank. Therefore, securities for investment accounted for a large
proportion of total assets, at around 40% in 2017. Net income from investment
securities of the bank increased significantly by 71% from VND 602 billion in 2016
to VND 1,030 billion in 2017. By the end of 2017, investment securities had
reached VND 44,902 billion, accounting for 40% of total assets. As a result, the
bank has gained high trust from regulators such as SBV, Treasury, Ministry of
Finance, and Stock Exchange Committee and achieved some prestigious awards
including Best Market Maker Contribution of VBMA; Most traded members on
VBMA.
3.3. Status of credit activities at Maritime Bank
3.3.1. Credit activities
Credit is one of the basic businesses of a bank. It is a major lucrative activity, and
always accounts for a large share of total assets. It can be seen a growth in
outstanding loans of Maritime Bank in the period 2015 – 2017, as follows.
Table 3.6. Total outstanding loans of Maritime Bank 2015-2017

2017 2016 2015

Total outstanding loans (Billion VND) 36,213 35,119 28,091
Growth rate 3.12% 25%
Average industry’s growth rate 17% 18.7%
Source: Maritime Bank Annual Report

In general, over 3-year period, Maritime Bank’s total outstanding loans experienced
a positive growth rate. Specifically, in 2016, total outstanding loans increase sharply
by 25%, being higher than the average growth rate of banking system (18.7%)
according to General Statistic Office. The outstanding loans in this year grew
rapidly because the bank was recovering, inflation was curbed, credit was boosted,
and demand for loans increased. This number of 2017, despite of positive growth,
there are signs of slowdown. The growth rate in 2017 was only approximately 3%,

38
being much lower than average rate. Hence, the urgent challenge of the bank is to
innovate products, attract customers, and in turn increase sales.
a. Based on maturity
Table 3.7. Loans to customers by maturity 2015-2017

2017 2016 2015

Short-term loans 47.87% 36.19% 30.24%
Medium-term loans 29.53% 41.97% 37.45%
Long-term loans 22.61% 21.84% 32.32%
Source: Maritime Bank Annual Report

In 2015, loans in three categories were distributed equally, each accounting for over
30% of total outstanding loans. 2016 is the year of strong growth of medium-term
loans, accounting for 41.97% of total outstanding loans. However, the largest
proportion in 2017 were short-term loans, accounting for approximately half of total
outstanding loans, while medium- and long-term loans were about 30% and 23%
respectively. This shows that the bank has shifted its credit structure from longer-
term loans to shorter-term loans. Maritime Bank is now focusing more on the
design of short-term credit products instead of the medium- and long-term credit as
in previous years. This change is consistent with current trends and market demand.
Moreover, through short-term lending, the risk of market price and economic
inflation can be minimized. The SBV adjusted the roadmap to apply the maximum
ratio of short-term funds used for medium- and long-term loans, which will create
favorable conditions for commercial banks to promote short-term lending. The
incremental trend of short-term loans shows that the bank has invested more in
credit quality, which led the capital of the bank more stable.
b. Based on ownership
Table 3.8. Loans to customers by ownership 2015-2017

2017 2016 2015

State-owned enterprises 2.40% 2.67% 1.23%
Limited companies 21.93% 19.18% 23.34%
Joint-stock companies 47.71% 46.27% 47.45%
Private companies 0.50% 0.58% 0.77%
Foreign invested enterprises 0.62% 0.46% 0.23%
Household/ Individual 26.84% 30.84% 26.97%

39
 Source: Maritime Bank Annual Report

In general, over three-year period, the majority of the credit structure of the
Maritime Bank is joint-stock companies, accounting for almost half of total
outstanding loans. It was followed by retail banking including loans for household
and individual, which accounted for approximately 30% of total outstanding loans.
They recognized the great potential in this segment with abundant customers'
demand. The third largest segment, accounting for about 20% of total outstanding
loans, was corporate loans. The remainder was lending to state-owned enterprises
and private companies. The proportion of lending to corporate customers was on the
downward trend. The reason was that the current market environment was highly
volatility with a lack of credit demand from well-qualified enterprises with the
fierce competition. However, Maritime Bank still enhanced management and
identified the strategic SSE segment. The weak capital structure but good
performance and financial transparency are features of the super-small-enterprises
segment which required more funds for investment.
c. Based on sectors
Table 3.9. Loans to customers by sectors 2015-2017

2017 2016 2015

Agriculture, forestry aquaculture 1.73% 0.74% 0.91%
Mining 0.76% 0.97% 1.45%
Processing, manufacturing 10.16% 6.63% 9.19%
Electricity & water supply 0.58% 0.11% 0.26%
Construction 11.01% 5.02% 3.79%
Trade, repair motor vehicles 38.69% 40.23% 34.74%
Transportation & logistics 3.94% 5.06% 9.78%
Services 0.41% 0.45% 1.13%
Finance, banking & insurance 5.24% 1.53% 1.22%
Real estate 22.82% 33.48% 34.87%
Scientific research 1.19% 0.79% 0.70%
Other services 3.46% 5.00% 1.96%
Source: Maritime Bank Annual Report

Credit activities at Maritime Bank always plays an important role in supporting

other sectors in the economic, contributing a certain part in the development of

40
many provinces in Vietnam. The loans structure of Maritime Bank reflects the
balance among economic sectors that appropriate with the general target
development of the economy. In term of sectors, the Maritime Bank focuses largely
on commercial loans, real estate and manufacturing. Lending for trade sectors grew
from nearly 35% in 2015 to 39% in 2017. Whereas, real estate lending declined
from 35% in 2015 to approximately 23% in 2017 due to the signs of slowing down
of commercial real estate sector. Instead, there was a boom in construction sectors
that the percentage of construction loans rose dramatically from only 3% in 2015 to
11% in 2017.
3.3.2. Credit quality
As one of the 10 banks selected by the SBV to be the pioneer in implementing
Basel II compliance, the Maritime Bank established the Basel II Project Steering
Committee and the specialized risk model to implement the project.
Table 3.10. Credit quality of Maritime Bank 2015-2017
Unit: Billion VND
2017 2016 2015
Total loans 36,213 35,119 28,091
Nonperforming loans 806 830 958
Non-performing loan sold 107 134 209
Net charge-offs 290 520 279
Nonperforming loans/Total loans 2.23% 2.36% 3.41%
Net charge-offs/Total loans 0.80% 1.48% 0.99%
Source: Maritime Bank Annual Report

Because financial firms tend to hold little owners’ capital in value of their assets,
credit risk management is very essential for the bank in cases that customers are not
willing to repay the loan on the due date. Maritime Bank has selected reputable
corporations, effective projects and close cooperation in capital management.
Moreover, Maritime Bank also successfully implemented risk management systems
to effectively control risks associated with large volume of products. The bank also
implemented policies on debt growth at a reasonable level, to ensure safety and
quality in development. As a result, from 2016 till now, Maritime Bank’s credit
quality was improved and remained under strict control with a gradual decrease in
non-performing loan rate, staying below the prudential limit of 3% of total loans, at

41
2.36% and 2.23% respectively – much lower compared to the end of 2015, at
3.41%.
However, the NPL ratio was quite high compared to other commercial joint stock
banks. By the end of September 2017, bad debt ratio of Maritime Bank was lower
than that of only two commercial banks which were VPBank and NCB. However,
these were fundamental differences between these banks’ conditions. Firstly,
VPBank has a very strong performance in consumer credit. Currently, outstanding
loans of FE Credit (a subsidiary of VPBank) accounts for one fourth of VPBank's
outstanding loans. Meanwhile, the bad debt ceiling of 3% applies only to
commercial banks. Secondly, NCB was among the group of weak banks when
deciding to restructure itself; thus, its bad debt ratio was at an extremely high level.
Over the years, Maritime Bank has implemented reconstructing of investment
portfolios and provision for risk disposal, which caused a high provision expense.
Provisions made for on-balance-sheet items and for NPLs are sold to Vietnam Asset
Management Company (VAMC). In 2017, although Maritime Bank had higher total
outstanding loans, the charge-offs or sale of debts to VAMC was lower than that of
2016. The proportion of the net charge-off over total loans in 2017 was 0.8%,
whereas this number in 2016 and 2015 were approximately 1.5% and 1%,
respectively.
Figure 3.4. Non-performing loan rate at commercial banks in Vietnam at the end of Q3, 2017

3 2.89

2.37
2.23
2.08
1.93 1.92
2
1.35
1.15 1.21 1.19
1.05
1 0.89
0.43

0
MSB VCB CTG BID MBB TCB VPB ACB SCB SHB LPB TPB NCB

NPL rate

Source: Annual Report of Commercial Banks

3.4. Status of credit risk management at Maritime Bank

3.4.1. Structure of credit risk management operations
Figure 3.5. Credit risk management structure of Maritime Bank

42
 Source: Maritime Bank, (2013), Credit Risk Management Framework

BOD is responsible for approving and periodically reviewing strategies, policies

and CRM frameworks; establishing management structures to implement strategies,
policies and CRM frameworks; identifying the credit risk appetite of Maritime Bank
over certain periods.
The Bank implements the principle of three barriers to the protection of credit risk
as follows:
a. Business Units
The first barrier is the business units and supporting units. These units are directly
responsible for managing and controlling risks at their units, specific tasks as
follows:
- Timely identify, analyze and assess credit risk for each customer when
performing the function.
- The duties of the credit department are customer search, demand analysis,
credit proposal and customer and loan management after approval.
- Monitor and control customers, use of measurement tools to assess risk and
minimize credit risk.
- Consolidate, report on credit risk.
b. Risk Management Committee/ Council/ Divisions
The second barrier layer is responsible for formulating policies and measuring
credit risk, supporting and instructing banking units to implement risk management
policies, measures and frameworks, ensuring operational safety for the bank.
- Review and recommend a BOD on credit risk framework and credit risk
appetite at the Maritime Bank;

43
 - Develop, implement and monitor policies for asset management and
valuation;
- Report, analyze and recommend risk-related issues in the credit portfolio and
asset portfolio.
- Supervise compliance, credit limit, credit balance, classification and
provision for credit losses.
- Manage, report information and data related to credit activities throughout
the system.
- Develop, update, and disseminate credit risk matrix.
- Risk Analysis and Modeling Unit: develop and manage tools for measuring
and assessing credit risk.
- Evaluate the performance of credit risk measurement tools and models.
c. Internal Audit
The third barrier is the Internal Audit Board, which is responsible for providing
independent judgment to BOD on the effectiveness of strategies, policies,
regulations and credit risk management at the Maritime Bank.
- Provide consultants in terms of improvements in auditing.
- Identify shortcomings in the management of credit risk, and make
recommendations to improve restrictions.
- Coordinate and share information for the Credit Risk Management
Department on issues related to credit risk management.
3.4.2. Credit management process
In order to meet the credit risk management objectives, Maritime Bank has issued a
number of internal regulations, loan procedures, loan appraisal, pre-audit, and post-
audit of loan disbursement, debt classification and provision for loan losses, etc.
Maritime Bank is now implementing a strict credit risk management framework.
This process is in line with the Vietnamese economy and towards international
standards.
3.4.2.1. Credit risk identification
Credit risk identification is the determination and assessment of credit risk that
affects the ability of Maritime Bank to complete business strategies on the basis of a
comprehensive risk matrix. There are some methods to define credit risk
Early Warning System (EWS)

44
Early warning system is a series of signs that customers are likely to incur risks,
which may affect their ability to repay. Early warnings always appear before
customers lose their ability to repay; therefore, it is necessary to regularly monitor
the signs of risk that affect the customers’ ability to repay both principal and interest
on time. As a result, Maritime Bank can promptly take measures to handle risks.
EWS is used for different types of customers to proactively identify and manage
customers who are most likely to default on their debt. The system includes two
early indicators:
Indicators from internal sources (Automatic) including:
- Cash flow to account at Maritime Bank;
- Rate of using credit limit in Maritime Bank;
- Analysis of substantial losses in the past: allows the bank to anticipate
additional potential risks.
Indicators from external sources (semi-automatic/ manual)
- Credit Information Center (CIC);
- Periodic loan review;
- Periodic reporting of Financial analysis;
- Risks that are discovered, provided by any part of the Maritime Bank system.
- Analyzing the causes and factors causing credit risk:
(i) Objective factors (economic environment, legal environment,
development of the sector);
(ii) Subjective reasons from customers (operational performance, repayment
history, financial ability, liquidity);
(iii) Causes of the Maritime Bank (inappropriate credit policy, poor credit
monitoring, breach of credit rules)
Advantages:
Maritime Bank has systematically built and put into operation the EWS tool to help
alert the bank of any possible damages. The system uses a variety of sources from
customer information or from CIC.
Disadvantages:
The Bank has not really paid much attention on identifying credit risks. That is
reflected in the poor early warning system whose the information collected is not

45
really enough to timely reflect the status of customers, resulting in difficulty in
measuring and treating credit risk.
Potential risk needs to be identified from the first communication with customers.
However, credit officers, who are young and inexperienced, face many difficulties
in screening information to help identify signals of credit risk. The identification of
credit risk from customers through direct communication is one of the most
important factors in credit risk management, but currently is not paying much
attention.
3.4.2.2. Credit risk measurement
Credit risk measurement and assessment play an important role in risk management.
Maritime Bank has developed systematically a number of quantitative and
qualitative tools to measure the risks in order to provide the basis for the
management, control and adjustment of credit risk.
Quarterly or as necessary, the Risk Management Department reviews and
implements risk identification, measurement and assessment so as to be aware of
changes of current and potential risks.
In addition to using credit rating from external agencies such as Moody, Fitch,
Standard & Poor's, Maritime Bank has developed a credit risk measurement system
at both the individual transaction and overall portfolio levels.
a. At individual transaction level:
Maritime Bank Rating is an internal credit rating system developed by the bank.
Maritime Bank Rating is used to measure and assess the level of risk of the clients.
An effective internal credit rating model is critical to control and manage credit risk
for the bank.
Rating process for enterprise customers:
Figure 3.6. Credit rating process for enterprises at Maritime Bank

Identify Score Score non-

Identify Credit
Identify industry ownership financial financial
scale rating
structure indicators indicators

Source: Maritime Bank’s documents

Step 1: Identify industry

Step 2: Identify scale

46
Step 3: Identify ownership structure
Step 4: Score financial indicators
Step 5: Score non-financial indicators
Step 6: Credit rating
Customer Credit Score = Financial Score*Weight of financial indictors
+ Non-financial score*Weight of non-financial
indicators
Weight of financial indictors = 35%
Weight of non-financial indictors = 65%
In the case of unaudited financial statements, the financial ratio accounts only 30%,
the enterprise customer loses 5% of its weight because the accuracy of the
information in the financial report is not verified.
Rating process for individual customers:
Figure 3.7. Credit rating process for individual customers at Maritime Bank

Score personal information

Step 1

Score repayment-ability
Step 2

Score relationship with bank and other financial institutions

Step 3

Score business plan

Step 4

Identify risk of repayment source

Step 5

Identify risk of credit product

Step 6

Credit rating
Step 7

Source: Maritime Bank’s documents

Customers are ranked in 1 out of 10 categories as follows:

Table 3.11. Customer risk ranking of Maritime Bank

Ranking Meaning
1 AAA Ability to repay the loan of customers in this group is extremely
good.

47
 2 AA The repayment capacity is not much less than the highest rated
customers.
Ability to repay the loan of customers in this group is very good.
3 A Customers may be more resistant to the negative impact of
external factors and economic conditions.
Ability to repay the loan of customers in this group is good.
4 BBB Customers are fully capable of repaying loans.
The adverse economic conditions and changes in external factors
are more likely to degrade the customer’s ability to repay.
5 BB Customers are at low risk of losing the ability to repay.
Customers are facing many potential risks or the impacts of
negative conditions, which are likely to lead to decline in the
ability to repay.
6 B Customers are more likely to lose the ability to repay.
Business conditions of economic disadvantages are likely to
affect the ability to repay the loan.
7 CCC Customers are currently declining solvency; repayment capital of
the customers depends on economic conditions.
In case adverse factors occur, they are more likely to be unable to
repay.
8 CC Customers are currently declining ability to repay.
9 C Customers have made the procedures for bankruptcy or similar
actions but the repayment is still being maintained.
10 D Customers are in the case of inability to pay the loan.
Source: Maritime Bank’s documents

Expected Losses
In addition, the bank is gradually establishing a model for measuring the probability
of default (PD), the risk-weighted value for customers (EAD), the expected loss
ratio (LGD). It then calculates the expected losses (EL) for each customer, creating
the foundation for the provisioning and the application of risk premium for each
possible credit under the Basel II roadmap.
b. At overall portfolio level:

48
According to the Basel II roadmap, banks will develop tools to support credit risk
measurement.
- Unexpected loss measurement for the credit portfolio to determine the level
of capital needed to ensure the bank's safety for the credit portfolio.
- Develop and monitor a set of criteria for credit portfolio management,
thereby forecasting volatility and evaluating the quality of the portfolio.
- Build stress tests and tools to predict the status of the credit portfolio in the
worst conditions.
Advantages:
- Maritime Bank has developed basic credit risk measurement tools including
customer credit rating system and is building other tools such as expected
loss measurement. The system analyzes customers’ credit status through
financial indicators and non-financial indicators.
- The Bank is increasingly deploying other measuring methods to meet
international standards such as the unexpected losses calculation or tools for
risk measurement at an overall portfolio level.
Disadvantages:
- The criteria for customer rating system is very sketchy and not based on
adequate financial information of enterprises and individuals. For instance, it
does not analyze and evaluate the volatility of enterprises and indicators to
forecast business development. The bank is paying too much concern about
credit risk based on historical data without considering future prospects;
therefore, due to a low credit limit, customers can switch borrowing at
another bank which in turn reduces the bank’s potential profits.
- Customer rating system is manual and simple with excel software, little
evaluation criteria, based largely on qualitative indicators. In addition,
different industries need different indicators to accurately reflect customer
status.
- There are two types of indicators for ranking customers: financial and non-
financial indicators. However, in process of scoring customers, especially for
non-financial indicators, some credit officers lack accuracy in customer
assessment so it does not reflect the actual business.
- There are no means for measuring the level of risk at the overall portfolio
level or stress test scenarios to predict the credit portfolio in the worst

49
 conditions. Maritime Bank is only in the process of collecting data and
building up the database storage infrastructure, but it has not yet applied the
measure of probability of default that forms the basis for calculating
expected losses, the provisioning and risk premium rate.
3.4.2.3. Credit risk treatement
Based on the results of the credit risk measurement, Maritime Bank actively
controls and mitigates credit risk on both the individual transaction and overall
portfolio level to bring the bank's credit risk status to the desired level which is
determined in the risk appetite in each period.
Depending on the actual situation and the implementation schedule in accordance
with Basel II, Maritime Bank controls and mitigates credit risk through:
- Building credit risk appetite and credit limits to actively and flexibly control
credit risk at the selling stage.
- Policies and programs of credit products.
- Buying and selling qualified debt.
- Securitization of credit assets
- Use of derivative instruments.
- Use risk-based price to offset expected loss for each credit.
- Handle high-risk loans, bad debts through debt recovery and bad-debt
trading.

Advantages:
Depending on each specific circumstance, Maritime Bank has flexibly adapted
various methods to mitigate credit risk.
Disadvantages:
The bank uses only traditional methods such as risk avoidance, risk reduction or
risk acceptance, and has not used flexible risk transfer to handle credit risk. Due to
limited technical expertise while the derivative market is unfamiliar to Vietnam
financial market, the use of derivative instruments for risk treatment has not been
practically used at the bank. There are no guideline documents on practicing
derivatives in order to hegde credit risk.

3.4.2.4. Credit risk monitoring

50
Credit risk monitoring must be conducted regularly, comprehensively, with reports,
full data recording as a basis for analysis and evaluation.
- The business units, the Credit Management Center monitor credit risks for
each single loan while performing the credit approval procedures (before,
during and after the imbursement process) through the collection,
management of credit records, the actual inspection of customers and
security assets.
- The Credit Risk Management Center monitors credit risk on the credit
portfolio based on systematic data.
The bank supervises credit risk via a set of credit risk management measures which
are implemented on the following levels:
- Portfolio loan
- Sub-portfolio loan
- Credit product
- Customer
The results of credit monitoring should be reflected in the credit reports in writing
to the Board of Directors, the Board of Supervisors and the Board of Supervisors.
The minimum requirements for reporting credit risk management are accurate,
timely, and complete.
Credit risk reports address three goals:
- Comprehensively reflect the bank's credit risk status at all times;
- Evaluate the level of effectiveness, performance of credit risk management at
each level;
- Address existing issues and violations; analyze the impact and make
recommendations.
Advantages:
Maritime Bank has focused on monitoring and reporting periodically to executive
committees after granting loans to take appropriate measures to improve the credit
risk management process.
Disadvantages:
The management of the loan after disbursement has not been focused in terms of
time as well as the content of inspection. Post-control process should be carried out
periodically by credit officers or whenever there are signs of risk exposure.
However, credit officers usually cast a cursory glance by calling customers without

51
directly checking the customers’ situation as well as collateral conditions. As a
result, the bank cannot detect timely the extraordinary signs related to the loan.
3.4.3. Policy of loan provision
a. General provisions
In accordance with the requirements of Circular 02, as at 31 December 2017 the
Bank is also required to make a general provision at 0.75% of total outstanding
loans excluding loans to other credit institutions and loans classified as loss (group
5).
b. Specific provision
Table 3.12. Provision rate

Group Provision rate

1 Standard debts 0%
2 Special mentioned debts 5%
3 Sub-Standard debts 20%
4 Doubtful debts 50%
5 Loss 100%
Source: Maritime Bank’s Annual Report

The proportion of provision for loan loss at Maritime Bank over the years is shown
in the following table:
Table 3.13. Provision for loan losses at Maritime Bank 2015-2017

2017 2016 2015

Pretax Income (Billion VND) 164 164 158
Total outstanding loans (Billion VND) 36,213 35,119 28,091
Provision for loan loss (Billion VND) 429 452 601
Net charge-offs 290 520 279
Provision rate (%) 1.18% 1.29% 2.14%
Loan loss provision coverage ratio 2.04 1.18 2.72
Source: Maritime Bank Annual Report

The percentage of loan loss provision is relatively depended on the amount of non-
standard debts. From 2015 to 2017, the NPL ratio of the bank was high, leading to
the relatively large proportion of loan loss provision. By 2017, the ratio of provision
shrunk to 1.18%, while the rate in 2015 and 2016 were 2.14% AND 1.29%

52
respectively. The provision was used to cover a number of factors associated with
potential loan losses. The provision rate is an indicator of how many outstanding
loans are estimated to be irrecoverable. As a result, a reduction in the provision rate
reflectd a decline in irrecoverable NPLs as well as a better credit quality than the
years 2015 and 2016. This suggested that the credit risk control system of Maritime
Bank is gradually improving.
The loan loss provision coverage ratio is an indicator of how much money a bank
kept on hand to cover the loan losses. Compared to 2015, Maritime Bank saw an
increase in the net charge-offs, but the loan loss provision coverage ratio reduced
from 2.72 to 2.04, which indicated a potential insolvency for the bank.
3.5. Assessment of credit risk management at Maritime Bank
3.5.1. Achievements
In 2017, Maritime Bank actively managed credit risk in terms of overall portfolio as
well as in each segment of customers and sectors. Maritime Bank always pays
special attention to the management of risky debts, non-performing loans. As a
result, bad debt ratio is always below 3% as regulated by SBV. The Risk
Management Division plays an important role in supporting specialized banks to
standardize their credit portfolio, thereby improving credit quality, minimizing bad
debt, maximizing profitability for the bank.
Maritime Bank has adopted a centralized credit risk management system that is
clearly defined in terms of processes and functions between risk management, sales
and operations. The separation between the three functions aims to minimize risk
while maximizing the professional skills of each position of credit officers.
Maritime Bank focused on risk management by group of customer segments, group
of sectors, in combination with improving the quality of appraisal before, during
and after the loan imbursement. In addition, the Maritime Bank also enhanced
remote monitoring for all branches, providing early warning system to prevent risks,
and conduct post-audit work to detect timely a number of credit programs and credit
transactions which did not comply with conditions, processes.
Maritime Bank has recently introduced a range of tools to assist in the measurement
and analysis of credit risk such as the Internal Credit Rating System, Early Warning
Systems, and Expected Loss Measurement. These instruments have been used
effectively by the bank in the measurement and supervision stage. Depending on

53
each different specialized banking, different sets of indicators are applied. That
showed the flexibility of Maritime Bank in managing credit risk.
The professional capacity of credit officers is increasingly consolidated and
effective. This is due to the fact that functional divisions are further specialized so
as to ensure objectivity, and independence in loan appraisal for identifying potential
risks. At the same time, by rating the customers’ status through the well-established
internal rating system, the whole system of Maritime Bank identified early and
anticipate the problematic signs of loans to take timely measures.
3.5.2. Limitations
a. At the stage of risk identification
The credit risk identification of Maritime Bank is quite simple and has not been
seriously considered by credit officers. The identification process only depends on
the EWS with information collected incompletely, not reflecting the potential risks.
Especially quantitative indicators such as managerial qualification of the business
owner, the ethics issues of the borrower, etc have no guidelines for accurate
assessment. The technology system does not meet the need to provide timely and
adequate information to credit officers.
b. At the stage of risk measurement
Maritime Bank mainly measures credit risk through personal information and a
credit information system from Credit Information Center (CIC) of the
SBV. They only provide data about outstanding loans and loan
classifications of customers and lack of non-financial information or
management capability of business leaders. Therefore, the use of this
information for the appraisal process is not efficient, which did not meet
the requirements to ensure credit safety.
Credit risk measures of the Maritime Bank are quite simple, sketchy. Maritime
Bank only uses a number of methods such as internal credit rating system, early
warning system to measure credit risk. The expected loss estimation system is
currently in the research and development phase for deploying in the next coming
period. Even many types of useful methods such as VaR and Z-scores have not been
studied and put into use.
Majority of criteria in internal credit rating systems rely on non-financial indicators,
which are often based on subjective assessments by credit officers. Therefore, the

54
financial ratios play a vital part in credit rating but are accounted for a minority
proportion.
c. At the stage of risk treatment
Maritime Bank has not flexibly applied tools to address credit risk. In particular,
some modern approaches for risk prevention such as derivative
instruments, asset-backed securities, credit insurance, etc. have not yet
commonly been applied. The bank has not had any specific guilelines or
procedures for credit risk managers to efficiently use these types of
intruments in order to hedge credit risk.
d. At the stage of risk monitoring
The stage of post-control has not been really paid much attention. Compared with
other banks, Maritime Bank has no separate instructions, no specialized
departments to perform the post-disbursement control. That causes dispersion in
reporting cases of credit risk exposure to executive commitees.
3.5.3. Reasons for limitations
a. External reasons
Transparency in the financial statements of enterprises in Vietnam is very low
compared to other countries in the same region. Therefore, it is difficult for
Maritime Bank to make accurate assessment of customers’ credit situation through
the quantitative criteria of the Maritime Bank is difficult a. As a result, the customer
rating represents a formality and does not evaluate the actual situation of customers.
Customers use the loan for an improper purpose, especially the loans of individual
customers. Individual customers are often used loans for business purposes because
personal loan applications are often simpler. In addition, there are cases where a
owner of a company taking the company's name to borrow money but actually serve
his/her individual needs or vice versa.
Due to the fluctuation of the market, it affects the customers’ income to repay the
loans. Especially, small and medium sized enterprises imply high volatility and high
risk; however, this group which is accounted for 70% of total enterprises in
Vietnam can bring an enormous profit for the bank.
Due to the management capacity of the borrowers, when facing economic
fluctuations, companies experience losses in revenues, being hard to recover capital,
and having no source of loan repayment.

55
Due to the trend of international integration, it increses international trades and
socio-economic efficiency; however, it also created a competitive and potentially
risky environment.
b. Internal reasons
From staff
Relationship managers are inexperienced and lack professional skills in customer
evaluation. The customer’s assessment and evaluation are inaccurate because credit
officers do not analyze customers closely so they evaluate subjectively without
actual basis. However, training courses at Maritime Bank for credit officers has not
been paid much attention and implemented professionally and comprehensively.
Each credit officer can only attend one training course which introduces the process
and credit products within 10-15 days. The trainers are the head office staff who
develop training programs and materials by themselves. Therefore, the training
program not actually bring efficiency in practice.
They sometimes do not comply strictly with the credit process and the conditions of
granting credit. Credit officers focus on disbursement and debt collection without
paying attention to the supervision and inspection of customers after disbursement.
For instance, customers are experiencing financial difficulties, misuse of loan funds,
or depreciated collaterals, but the bank fails to detect any risks and causes bad
debts. The internal inspection is still formalistic.
In addition, the phenomenon of brain drain due to no appropriate policy of
compensation, salary. Beside staff who directly sell credit products, Maritime Bank
implements the same compensation scheme for each credit officer, while other
banks apply salaries based on KPI for disbursement. Therefore, salary regime of
Maritime Bank is not reflected productivity, which not only reduces the efficiency
of human capital, but also makes some skilled officers move to other banks.
From system
The legal document system of Maritime Bank is sketchy, lacking synchronism.
Therefore, it is difficult for staff to comply with procedures systematically and
professionally. Maritime Bank currently has a tighten credit policy, thus, it limits a
lot of profitability for the bank. For instance, Maritime Bank is evaluating
customers in the past without looking at future cash flow streams. The bank is
paying too much concern about credit risk based on historical data, therefore it

56
maintains low limits which in turn reduces potential profits or even customers can
switch borrowing at another bank.
Effective management of credit risk is linked to the bank’s development of
technology. The advanced technology can increase the speed of decision-making
and simultaneously reduce the cost of controlling credit risk. Whereas, compared to
competitors, information technology system of Maritime Bank is obsolescent which
can create some certain obstacles in management of credit risk. Specially, the core
banking of Maritime Bank is BDS which is quite a backward system which clients’
relationship managers cannot easily and continuously monitor the clients’ credit
status.
Conclusion of chapter 3
To carry out the research objectives of the thesis, chapter 3 focuses on the detailed
situation of realities of credit risks and credit risk management of Maritime Bank in
recent years. Based on this, the thesis assessed the situation and highlighted
advantages, disadvantages in credit risk management of Maritime Bank. These
evaluations are the basis for proposing a system of solutions in the next chapter.
By solving the contents of chapter 3, the thesis argues that during the period of
deepening international economic integration, with complicated macroeconomic
developments in Vietnam and abroad, Maritime Bank continues to be one of the
leading commercial banks in Vietnam for risk management. The main reason is that
Maritime Bank is constantly improving and enhancing its credit risk management.
However, the credit risk management of the Maritime Bank continues to pose a
number of issues that need to be resolved in a synchronized and practical manner in
line with the trend of international integration.

57
 CHAPTER IV. RECOMMENDATIONS
4.1. Development orientations of Maritime Bank for the 2018-2022 period
The period from 2015 to 2017 witnessed efforts and positive results in operational
performance of Maritime Bank. The bank also achieved a significant milestone in
terms of size, structure, quality and efficiency. However, there are some existing
limitations and even potential risks in the operation. Hence, the bank has developed
business plan for the 2018-2022 period, oriented sustainable growth. The specific
contents are as follows:
- Strengthen the operational capacity and business efficiency
- Improve financial capability through strict controls over non-performing loan
ratio.
- Exploit the tastes of customers on product portfolio of the bank in order to
take advantage of opportunities and increase revenues.
- Select carefully and focus on investment areas to bring the highest efficiency
- Improve the quality of staff in order to complete functions of each division.
Development orientations of credit risk management of Maritime Bank
Central objective of Maritime Bank’s credit activities is to strictly control credit
growth in line with the scale and growth of capital; increase customer network; limit
outstanding loans customer under group 2 to ensure good credit quality. To achieve
the desired business objectives while keeping risks within permissible limits,
Maritime Bank needs to strengthen risk management, especially credit risk.
Recently, Maritime Bank has hired a strategic consulting firm in the finance and
banking market, McKinsey, to analyze the general environment in Vietnam
including the financial and banking environment; strengths, weaknesses,
opportunities, and challenges of Maritime Bank. Based on considering the whole
operation of Maritime Bank in the past, they identify specific development targets
and strategies for Maritime Bank in the next coming period.
4.2. Recommendations
4.2.1. To Maritime Bank
4.2.1.1. Recommendations for credit procedure and policies
• Objective: To offer credit products, credit policies in line with Maritime
Bank’s current risk appetite and credit risk management strategy.

58
 • Content:
In long term, Maritime Bank should diversify products of credit into various types
of forms, economic sectors or even geographical areas. This brings them
advantages of expanding the scope of credit activities, developing fine reputation
and achieving the purpose of risk diversification. To gain these goals, Maritime
Bank should outline an appropriate business strategy as follows:
- Expand lending to various economic sectors in which Maritime Bank has
comparative advantages.
- Avoid focusing lending to some special enterprises or industries.
- Avoid excessive lending to a number of customers to prevent dependence
and sudden risk.
- Diversify loans in terms of maturities to ensure a balance among short-,
medium- and long-term loans, maintain the steady development and avoiding
credit risks due to changes in the interest rate market.
- Diversify of credit products: Diversification of credit products enable risk
distribution by asset category, reducing the damage due to the risk for a
certain type of property.
- Increase quantity of syndicated credit: In fact, with the rapid development of
the economy, there are many demands for huge amount of capital that a bank
cannot fully meet and are difficult to determine the level of risk that may
occur. In this case, a group of banks forms a joint association for project
appraisal in order to share the potential risk as well as ensure the rights and
obligations of each party.
The bank should define an appropriate credit risk appetite. It is the fact that
Maritime Bank's growth rate of total outstanding loan over the years is too low
compared to the banking sector in general. Thus, the profit from credit activities of
the bank seems to be “treading water” compared to the dramatic growth of the rival
banks. The main reason is that Maritime Bank's risk appetite is much tighter than
other banks of the same size. VPBank, for example, has emerged on the consumer
credit products, as they are willing to take risk, so their credit growth rates in
previous years were very impressive. Not only VPBank, many other banks are also
trending to change risk appetite. Therefore, if the risk appetite is too tight, it will not
be possible to extend credit and miss out on big revenue streams.
• Expected outcome:

59
Introducing a credit product policy that matches the bank's risk appetite is the basis
for developing an efficient credit risk management strategy. Because credit risk is
indispensable, which may only be limited but not eliminated, Maritime Bank needs
to determine the appropriate risk appetite and ensures credit risk at acceptable level,
while bringing profits to the bank.
4.2.1.2. Recommendations for credit risk management process
• Objective: To increase the efficiency of credit risk management process
• Content:
More specialization between functional divisions along with the centralized
credit risk management model
Derived from the practical requirements of credit operations, as recommended by
the Basel Committee and based on the general conditions of legal, market,
technology, people in Vietnam, I recommend that Maritime Bank should enhanced
centralized risk management model.
At the head office, the bank should separate the credit decision function with the
credit management function on the basis of clearly assigning responsibilities and
functions between credit appraisal, credit approval, credit management, and credit
risk management.
At each branch, it should separate each department in accordance with each
function such as sales, credit analysis and operational functions.
- Relationship manager is responsible for understanding customers' needs,
guiding clients to complete the loan application.
- Credit analysis department is responsible for information checking,
collecting additional information, analyzing the general situation of clients
including financial situation, borrowing purpose and collaterals.
- Credit supporting officer is responsible for processing, circulating and
distributing records among related departments.
In addition, operational divisions need to specialize their staff in each customer
segment, avoiding the need to handle too many types of paperwork. For example,
customer service for priority customers is classified as low risk but high demand; or
service for risky customers, but bringing more potentially profitable.
Reviewing, modifying and supplementing the process

60
Maritime Bank needs to revise its current regulations, amend or supplement a
uniform credit process in order to minimize the credit risk that may incur. In
particular, the bank should not consider collaterals as the basis for fully securing
credit. Credit officers should pay attention on determining of customers’ repayment
capacity and other types of less risky collateral such as valuable paper.
Improving the efficiency of credit risk management should focus on four stages in
the process:
Risk identification:
The bank needs to focus on developing a more comprehensive EWS system,
assessing customers in different aspects. The bank also needs to diversify its
customers’ information collecting channels beyond CIC. Credit officers need to
know how to capture essential information through direct communication with
customers, direct empirical tests, or indirectly gathering information from
acquaintances, media, etc.
Risk measurement:
When rating customers’ credit, credit officers should be more active. They should
not evaluate customers based on only their financial report, they need to visit
companies to check and conduct report monthly or quarterly. They need to conduct
constantly revaluation of collateral asset and keep track of market factors and the
economy that affects the customer's repayment capacity.
The Maritime Bank's internal credit rating system needs to add some future
customer rating indicators such as methods of forecasting cash flow of the business
in the future in addition to past performance indicators. Based on the profit that the
business will bring in the coming years to make a loan decision instead of just
looking at the existing collateral assets of the business. Immediately, in order to
improve the credit rating system, a quickwin method is that the bank needs to
review a set of specific criteria that must understand borrowers thoroughly, as well
as the purpose and structure of the credit, and its sources of repayment. In the long
run, credit risk department should combine with IT divisions to establish a
specialized and automated system to easily score customer’s credit.
To become a commercial bank with a modern and efficient risk management
process, Maritime Bank should use diversified types of quantitative methods such
as VaR, Z-Score, etc. Especially, according to Basel II, Maritime Bank should
quickly develop and put into use VaR models to estimate market risk exposure.

61
Risk treatment:
Quick-win: The bank needs to guide and introduce to credit risk managers the
financial instruments, especially derivatives, to generate effective credit risk
management. Lecturers are experienced professors who expertise in field of
derivatives.
Long-term: Credit risk management division assures flexibility in risk treatment,
diversifies the use of financial instruments to effectively handle credit risk. The
bank needs to use a variety of measures to hedge against credit risks such as use of
derivative instruments. The conditions for implementing CDS are:
- The bank needs to have a credit monitoring system and a rating of borrowers
to accurately identify potential customers.
- The bank should set of a professional division to undertake the CDS
business. This help the bank to diversify its portfolio.
However, Vietnam’s derivative market has not yet developed, derivative products
are still simple. It is necessary for SBV to approve credit institutions to provide
CDS in order to create a new tool for commercial banks to avoid risks.
Risk monitoring:
The bank should continuously monitor, review the loan after granting. For each
debt, credit officers actively follow up his customers’ activities, continuously
monitor their production and business premises to check the situation and send them
debt reminders and track if their deposit accounts arise credit balance. Chief Credit
Managers in charge re-check credit process implemented by relationship managers,
credit appraisers and other credit supporting officers in order to redefine timely
whether any step was ignored or violated.
One of the most important stage in credit risk management is the inspection and
internal control. Supervisors complete the job of credit officers and somehow
prevent, detect and timely correct errors in the credit process. Supervisors are often
who with long experience in the credit extension, so they can easily detect
violations in the credit process.
• Expected outcome
If approval stage is done well by the bank, it not only helps creditors make accurate
and effective investment decisions but also create the similarity between the
repayment term (principal and interest) and the income of the borrower. Hence, it

62
can limit the probability of solvency of customers, limit the risk of credit to the
bank.
Credit risk management followed a concentrated model ensures a tight and clear
credit decisions as well as ensures long-term competitiveness.
Complying strictly the 4-step credit risk management process will help Maritime
bank take timely measures of the credit risks that may occur, and minimize bank’s
losses.
4.2.1.2. Recommendations for employees
• Objective: To improve the professional skills of employees
• Content:
Quick-win:
Provide a detailed, completed and easy-to-understand guideline about Maritime
Bank’s credit products and procedures to credit officers. When a client applies for a
loan, on the basis of customer documents, credit officers need conduct financial
audits (analysis of debt, sources and ability to pay debts of customers); carefully
examine the efficiency of the project, the project's operation capability compared to
its designed capacity; and the factors affecting sources of loan repayment. The
customers’ information collected should be carefully analyzed to determine exactly
to avoid risk due to customers using deceptive tactics, fake loan applications or
taking advantage of legal loopholes to use the same mortgaged property for several
loans at different banks.
The bank’s officers must regularly attend training sessions to reinforce professional
knowledge and skills; timely and accurately absorb policies of SBV; attend training
to prevent frauds that cause serious damage to customers’ assets and the bank’s
reputation. Especially, young and inexperienced credit officers need to open on-the-
job training or training courses in matters related to policies, credit procedures,
products and management systems. For experienced staff, Maritime Bank should
open specialized training courses focusing on customer appraisal skills and
advanced risk management, etc. The bank may invite top experts in the fields of
finance and banking to convey valuable experience and skills to the staff.
In long term:

63
Standardizing Maritime Bank employees, especially credit supporting officers. They
should specialize for each product segment in order to optimize time and resources.
The principles of specialization are based on the followings:
- Determine in a scientific way the daily workload of the employee with the
time needed to arrange the appropriate process (subdivision of jobs) and set
norms for each part of the work.
- Select a proficient individual. Standardized operations are along with
standardized equipment, tools, materials, while providing a comfortable
working environment. Each employee is tied to a highly-specialized position.
- Implement the regime of salary payment according to the quantity of
products and the bonus level in excess of the norms in order to encourage the
efforts of the employees.
In addition, the bank needs to have compensation and remuneration policies to
retain skilled and experienced staff as well as to attract highly qualified staff from
other banks. For credit officers, banks need to apply rewards according to
disbursement revenues or incentive KPI to encourage the performance of
employees.
• Expected outcome:
Human resource is a prerequisite for success of an organization. Thus by improving
the professional skills of employees, the bank can save labor costs and promote
work efficiency, income for the bank simultaneously. Proficient staff who complies
with the credit procedures also limit the occurrence of undesirable credit risk, thus
facilitating credit risk management to be more efficient.
4.2.2. To SBV
• Objective: To support commercial banks in general and Maritime Bank in
particular to improve the effectiveness of credit risk management.
• Content:
Completing the legal framework
In recent years, the SBV has made significant achievements in creating a legal
corridor for risk management in commercial banks such as Circular No.
36/2014/TT-NHNN about stipulating minimum safety limits and ratios for
transaction performed by credit institutions and branches of foreign banks, a series
of circulars on cross ownership, the safety ratios of commercial banks, etc.
However, there are still some shortcomings in implementing this decision as well as

64
obstacles in compliance with standards and international practices. While the world
is starting to follow the new Basel III roadmap, Vietnam is still far away from
adopting Basel II standards. As a result, the SBV should continue to provide
guidance and support on the development of methodologies and regulators that are
in line with the practices of Vietnamese commercial banks in a consistent manner
with the application of regulations in management. The government should develop
solutions to improve internal control and audit methods in credit institutions moving
towards international standards.
The active and flexible management of monetary policy and fiscal policy and the
development of effective monetary market are always positive factors for credit risk
management in the business operation of credit institutions. The SBV should
continue to manage monetary policy and fiscal policy in order to stabilize the
domestic currency, economic growth and ensure the operation of the banking
system in a safe and sustainable manner.
Strengthen inspection and supervision of credit institutions and build an early
warning system
The SBV should supervise credit risk management in banking system more closely,
avoiding the phenomenon that commercial banks incurred credit risk before
conducting management. At the same time, the government must regularly check
and control bad debts of commercial banks through the system of SBV in the
provinces and cities.
Over the past time, the monitoring system of the SBV has been insufficient and
unconvincing. Therefore, the solution for strengthening the supervision of SBV is to
enhance the intensity of inspection and the quality of management simultaneously.
The SBV inspectorates should have close links with commercial banks to ensure
that sources of information can be extracted at any time of inspection rather than
waiting for the commercial banks to submit the required reports. Since SBV can
provide early warning system to warn of potential risks in credit activities for
commercial banks. In addition, SBV needs to apply the principles of the
performance monitoring framework guided by Basel Committee, and adhere to
prudential rules in the inspection process.
Enhance the role of the Vietnam Credit Information Center
The SBV should take comprehensive measures to consolidate and develop the
Vietnam CIC, ensuring that information is provided adequately, accurately and

65
timely. Accordingly, CIC information provided to credit institutions needs to be
richer and more diverse, not only domestic information but also international
information and information of FDI enterprises. The information provided by CIC
should also ensure the synchronism and update of information on tax and other
financial obligations, outstanding loans of counterparties to enterprises.
• Expected outcome:
SBV completes an appropriate regulation and policy system which can facilitate the
bank's credit growth in a safe and effective manner. Putting credit institutions under
intensive supervision helps to improve credit quality, reduce risks and reduce bad
debt rates of banks in general and Maritime Bank in particular. Nevertheless, it also
indirectly facilitates for enterprises to easily use capital, expand production, which
in turns promotes economic and social development.
Conclusion of chapter 4
To carry out research objectives of the thesis, in Chapter 4, the thesis focused on the
following contents: Given the direction of Maritime Bank in the coming time as
well as the volatility of current financial market and money market in Vietnam, it is
necessary to strengthen, renovate and improve credit risk management of
commercial banks in general, and Maritime Bank in particular.
Based on the data collection and discussion in Chapter 3, in Chapter 4, the thesis
proposes a system of suggestions in the direction of strengthening credit risk
management of Maritime Bank and enhancing governance effectiveness of SBV.

66
 CONCLUSION
Banking is the field that is extremely sensitive and exists potential risk. Especially,
during the trend of integration, commercial banks have to deal with different types
of risk, especially credit risk. However, in Vietnam, because the starting point of
commercial banks is relatively low compared to the regional average, paying
attention on profitability is considered a top priority. Therefore, credit risk
management system of commercial banks in general and Maritime Bank in
particular still presents many limitations, and has not been conducted
professionally. As a result, how to strengthen credit risk management process is an
urgent task and being paid special attention by SBV as well as commercial banks.
The thesis using appropriate research methods has systematized the foundation of
credit risk management, including the concepts, contents of credit risk and credit
risk management. Through the analysis of current situation of credit risk
management at Maritime Bank, the thesis proposed a system of suggestions to
improve the credit risk management capacity at the Maritime Bank, as follows:
Firstly, the thesis shows some quick-win proposes that can bring immediate benefits
and deliver quickly to enhance bank credit risk management. A number of measures
such as providing guidelines of credit products and procedures for sales officers and
credit support officers; providing training courses guided by professors and experts;
supplementing or rebuilding appropriate indicators for credit rating system for each
customers’ segment.
Secondly, the thesis also provides long-term proposes that can bring valuable and
sustainable benefits for credit risk management at Maritime Bank. One of the long-
term measures that banks should prioritize is to improve compliance with
procedures and build IT systems to meet international standards in the credit risk
management process, especially in the risk measurement and treatment stage.
Thirdly, the thesis also proposes to the SBV to create a stable legal environment and
economic environment, supporting and promoting the sustainable development of
credit institutions.

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 REFERENCES
1. Ass. PhD. Phan Thi Thu Ha, (2007), Commercial Banks, National Economics
University
2. Basel Committee (2000), Principles for the Management of Credit risk
3. Cao Thi Lan Huong, (2010), Master thesis "Credit Risk Management to
improve business performance at Maritime Bank"
4. Dr. Ir. Tony Van Gestel, Prof. Dr. Bart Baesens, (2009), Credit risk
management, Oxford University Press
5. Maritime Bank, (2013), Organizational Apparatus QC.BM.001
6. Maritime Bank, (2016), Credit Risk Management Process QT.RR.009
7. Maritime Bank, (2016), Risk Management Framework QC.RR.008
8. Maritime Bank, (2016), Annual Report, Retrieved from
https://www.msb.com.vn
9. Maritime Bank, (2017), Annual Report, Retrieved from
https://www.msb.com.vn
10. Peter S. Rose, Sylvia C. Hudgins, (2013), Bank management & Financial
services, McGraw Hill, ninth edition
11. Shelagh Heffernan, (2005), Modern Banking, Wiley
12. State Bank of Vietnam, (2005), Regulation on the debts classification,
provisioning and use of provisions against credit risk in the banking activity of
credit institutions

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