HANOI UNIVERSITY

FACULTY OF MANAGEMENT & TOURISM

TREASURY MANAGEMENT

BIDV ANALYSIS

Group 3 - Tutorial 3
Tutor: Nguyễn Thị Minh Hằng

Group members:
Tạ Quang Huy-1804040049
Nguyễn Quang Minh-1804040075
Nguyễn Thạc Nghiêm - 1804040078
 PEER EVALUATION FORM

Contribution Signature
Team member
(100%) (all members)
Tạ Quang Huy 100%
Nguyễn Quang Minh 100%
Nguyễn Thạc Nghiêm 100%

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 TABLE OF CONTENT
I. Introduction .....................................................................................................................................4
1. Main service ......................................................................................................................................4
2. Financial services ..............................................................................................................................4
a. Loans .................................................................................................................................................4
b. Deposit ..............................................................................................................................................4
3. Banking industry environment ..........................................................................................................4
a. Market share .....................................................................................................................................4
b. Money market....................................................................................................................................5
II. Analysis findings ............................................................................................................................5
1. Current macroeconomic situation .....................................................................................................5
a. GDP growth rate...............................................................................................................................5
b. CPI ....................................................................................................................................................5
c. Unemployment...................................................................................................................................6
d. Interest rate .......................................................................................................................................7
e. Foreign exchange rate ......................................................................................................................8
f. VN Index ............................................................................................................................................8
g. Gold price .........................................................................................................................................9
h. Foreign direct investment .................................................................................................................9
2. Liquidity............................................................................................................................................9
a. Liquidity risk .....................................................................................................................................9
b. Liquidity ratio .................................................................................................................................10
c. Liquidity management .....................................................................................................................12
3. Current credit ..................................................................................................................................13
a. Credit situation ...............................................................................................................................13
b. Credit indicators .............................................................................................................................13
c. Credit risk management ..................................................................................................................15
4. Interest risk management ................................................................................................................16
a. Interest-sensitive gap analysis ........................................................................................................16
b. Ability to mobilize capital and lending of BIDV .............................................................................17
III. Scenario’s analysis on the impact of Income and Capital ......................................................19
1. Change in interest rate ....................................................................................................................19
2. Change in liquidity position ............................................................................................................21
IV. Hedging proposals ......................................................................................................................22
a. Forward contract ............................................................................................................................22
b. Future contract ...............................................................................................................................23
c. Forward rate agreement (FRA) ......................................................................................................23
d. Swap ................................................................................................................................................24
e. Option..............................................................................................................................................25
V. Conclusion.....................................................................................................................................25
REFERENCE .................................................................................................................... 27

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I. Introduction
1. Main service
BIDV (Joint Stock Commercial Bank for Investment and Development of Vietnam) was founded
on 26 April 1957 as the Bank construction of Vietnam, under the Ministry of finance during the
country's economic recovery period, and it made significant contributions to the management and
allocation of capital for construction.
Since then, BIDV has become top three most valuable brands in Vietnam, according to Brand
Finance. In 2019, BIDV maintained its status as the largest commercial bank in Vietnam in terms
of total assets and charter capital, with total assets exceeding VND1.49 quadrillion, profit before
tax hit VND10,732 billion, up 14.3% from the previous year.
The success of BIDV can be attributed to the unity, unanimity, and unwavering efforts of more
than 26,000 workers, as well as the sharing, friendship, and companionship of domestic and
foreign financial institutions, companies, consumers, and partners. BIDV has steadily shone on the
road to overcoming obstacles and achieving success as a bank that stays true to its commitment to
staying competent, friendly, and modern.

2. Financial services
a. Loans
Loans to the economy increased in line with the State Bank's policy of concentrating on business
output, promoting national economic growth, and matching the economy's capital absorption
potential. Outstanding loans to the economy increased by 12.2 percent as a result of structural
changes and improved credit quality. The percentage of non-performing loans was low at 1.75
percent, risk arrangements were made in accordance with laws, and VND8,168 billion was paid
into the State budget. BIDV will continue to ensure that loans are securely handled and delivered
to qualified and profitable borrowers in the future.

b. Deposits
Total deposits from organizations and individuals reached VND1,187,093 billion in 2019, up 12.6
percent from the previous year, fulfilling the need for capital and bringing BIDV's total mobilized
capital to VND1,374,765 billion, up 12.1 percent from the previous year. Customer deposits
totaled VND1,114,163 billion, up 12.6 percent from the previous year and accounting for 12.8
percent of total customer deposits in the banking sector. Given the fierce competition among
banks, the positive results reflected BIDV's market place, as well as the confidence and loyalty of
300,000 business customers and nearly 10.4 million individual customers in the bank. In 2019,
BIDV successfully implemented the issuance of bonds to the general public as well as private
placements to financial investors, collecting more than VND19,000 billion in tier 2 capital terms.

3. Banking industry environment:

a. Market share:

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BIDV remained one of the top three banks in terms of foreign currency trading market share.
Direct insurance had a 3.9 percent market share in Vietnam, placing it eighth out of 29 non-life
insurance companies. The company's portfolio and fund certificate brokerage market share
increased by 2% to 3.11 percent in 2019, up from 3.04 percent the previous year.

b. Money market
Borrowing and lending transactions between BIDV and other credit institutions or other
institutions allowed to operate activities on interbank market. BIDV is a large-scale operation
with strong financial backing. It also has a wide client base and is involved on the interbank
market. Customers would benefit from BIDV because: To fund a liquidity deficit, a short-term
capital mobilization channel is used and profiting from one of the most powerful investment
tools.

II. Analysis findings:

1. Current macroeconomic situation:
a. GDP growth rate:
2020 was a year of difficulties with negative effects of Covid-19 pandemic, bringing the economies
down deeply. Vietnam was not an exception. However, the country’s economy managed to
maintain the GDP growth of 2.91% although it was not as high as the previous years.

Vietnam’s GDP from 2011 to 2020

b. CPI:
On December 27th of 2020, the General Statistic Office stated that the average CPI in 2020
increased by 3.23% compared with the average in 2019. The target set by the National Assembly
was below 4% and the CPI in December 2020 increased by 0.19% compared to that of December
2019, which was the lowest level in the 2016-2020 period. The impact factors were: food
commodity prices increased by 4.51%, price of food products increased by 12.28%, drugs and
medical equipment prices increased by 1.35% as the complication of Covid-19 and finally, the

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tuition fees rose according to Decree No. 86/2015 / ND-CP, making the price index of educational
services group in 2020 increase by 4.32% compared to 2019. On the other hand, the pandemic
made the people’s demand for travel and tourism decrease, which led gasoline and oil drop by
23.03% and package tour groups decreased by 6.24% over the previous year.

Vietnam’s CPI from 2016 to 2020

c. Unemployment:
Unemployment Rate in Vietnam saw a 10-year record of high unemployment rate of 2.48%, which
was 0.31% higher than the previous year. It was the impact of the Coronavirus pandemic that 32.1
million Vietnamese people lost their jobs. The service sector was the most affected with 71.6% of
workers involved, followed by the processing and manufacturing industries (64.7%) and
agriculture (26.4%).

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 Vietnam’s unemployment rate from 2011 to 2020

d. Interest rate:
Never before had the interbank VND interest rates remained at a record low level for such a long
time, perhaps only because of the unprecedented shock in the history called Covid-19. Specifically,
after being anchored around 2.5-3.5% / year in the first 4 months of 2020, the interest on the
interbank market quickly dropped to 0.2-0.3% / year and almost remained unchanged for most of
the rest of the year. The interest rate curve also tended to be flatter when the difference between
long-term and short-term interest rates narrowed significantly (1-month and 1-week terms dropped
sharply from 1.3% / year to 0.2% / year).

Vietnamese interest rate of interbank from 2019 to 2020

The State Bank sent a strong easing message throughout 2020 with series of solutions such as
cutting a series of executive interest rates (3 adjustments with a total reduction of 100-200 points
depending on type of interest rates); regulating money supply in order to ensure abundant liquidity
in the hole system with a net injection of nearly 300 trillion dong into the market and maintaining
money supply growth around 13-14%. Moreover, the State Bank also issued some documents to
facilitate maximum interest rate reduction, sharing difficulties with customers.

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 SBV’s interest rates from 2011 to 2020
e. Foreign exchange rate:
Unlike the past years when the VND often depreciated against the USD, in 2020, it had appreciated
slightly by about 0.2% against the USD while the foreign exchange market had almost no pressure
at the end of the year.

Vietnam’s foreign exchange rate from 2017 to 2020

f. VN Index:
Vietnam’s stock market surged in 2020 despite the Covid-19 epidemic. At the end of the year, the
VN-Index increased by 142.88 points or 14.86%. The HNX-Index also jumped and nearly doubled
in 2020. Specifically, the HNX-Index added 100.61 points, equivalent to an increase of more than
98%. Although experiencing a strong plunge in the first quarter of 2020 due to the impact of Covid-
19, Vietnamese stock market had recovered strongly. The increase of approximately 15% of the
VN-Index in 2020 is double the increase of 7.7% of that in the whole 2019.

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 VN-Index from 2020 to 2021

g. Gold price:
Gold prices in 2020 end up to be the strongest since 2010. Closing the last session of 2020, the
domestic gold price was listed as 55.4-56.25 million VND/tael (buy in - sell out) for DOJI Jewelry
Group, making profit of 12.65 million dong/tael for investors compared to the previous year’s
opening session. Meanwhile the Company VBDQ Saigon listed 55.55-56.12 million/ volume
bought and sold. If investors invested in SJC gold for 1 year, they would earn 13.37 million dong/
tael.

h. Foreign direct investment:

Due to the impact of the Covid-19 epidemic, production and business activities were affected. The
investment capital for implementing foreign investment projects in 2020, although lower than that
of 2019, had improved (decreasing by 2% compared to 2019). Many FDI enterprises were
gradually recovering and maintaining well operations for production and business and to expand
projects. The adjusted investment increased by 10.6% over the same period in 2019. There were a
lot of foreign investors interested in, trusting and willing to invest in Vietnam despite the
pandemic.

2. Liquidity:
a. Liquidity risk:
The current and potential risk of a bank’s failure to fulfill its financial obligations as they come
due is referred to as liquidity risk. A bank may experience sudden and unexpected cash outflows
as a result of large deposit withdrawals, large credit disbursements, unexpected market
fluctuations, or the crystallization of contingent obligations. The other reason may be that some
other incident has caused counterparties to stop trading with or lending to the bank.
𝑵𝒆𝒕 𝒍𝒊𝒒𝒖𝒊𝒅𝒊𝒕𝒚 𝒑𝒐𝒔𝒊𝒕𝒊𝒐𝒏 = 𝑺𝒖𝒑𝒑𝒍𝒊𝒆𝒔 𝒇𝒐𝒓 𝒍𝒊𝒒𝒖𝒊𝒅𝒊𝒕𝒚 − 𝑫𝒆𝒎𝒂𝒏𝒅𝒔 𝒇𝒐𝒓 𝒍𝒊𝒒𝒖𝒊𝒅𝒊𝒕𝒚

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NLP > 0: liquidity surplus
NLP < 0: liquidity deficit

b. Liquidity ratio:
Liquidity ratios are a way to measure companies’ ability to repay current debt obligations without
raising external capital as well as their margin of safety. It is important to calculate banks’ liquidity
so as to detect the risks they could get and plan to solve them. Thus, with the data from the balance
sheets, we provide some related factors for the liquidity calculations of BIDV as below:

in VND Million 2018 2019 2020

Total assets 1,312,866,249 1,489,957,293 1,516,685,712
Cash, gold and gemstone 10,507,558 14,116,720 12,294,193
Balances with Central Banks 50,185,159 135,255,429 49,432,144
Placement with other credit institution 81,792,629 43,718,603 62,191,227
Short-term loan 611,216,895 699,730,635 763,667,195
Trading securities 673,639 6,346,190 10,169,711
Derivatives and other financial assets 79,755 92,130 167,933
Investment securities 133,188,297 138,284,421 125,114,962
Liquid assets 887,643,932 1,037,544,128 1,023,037,365
Loans to other credit institutions 22,430,353 10,717,769 23,295,457
Loans to customer 988,738,780 1,116,997,985 1,214,295,916
Total Loans (VND Million) 1,011,169,133 1,127,715,754 1,237,591,373
Deposit from MOF 24,163,904 10,158,479 5,622,261
Term deposits held by the State Treasury 51,000,000 87,865,000 0
Deposits from other credit institutions 22,064,492 28,904,853 40,828,386
Deposits from customers 989,671,155 1,114,162,624 1,226,673,942
Total Deposits (VND Million) 1,086,899,551 1,241,090,956 1,273,124,589
Loan-to-deposit ratio 93.03% 90.86% 97.21%
Liquid assets/ Total assets 67.61% 69.64% 67.45%
Total Loans/ Total assets 77.02% 75.69% 81.60%

Loan-to-deposit ratio (LDR) shows the bank’s liquidity by comparing total loans to total deposits
over the same time period. Given as a percentage, if the ratio is too high, the bank may not have
enough liquidity to meet any unexpected fund requirements. In contrast, too low of LDR will

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reduce the bank’s opportunities of earning the profits that it could have. LDR is calculated by
dividing Total Loans to Total Deposits.
𝐿𝐷𝑅 = 𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛𝑠 / 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠

It is suggested that LDR should be around 80% to be appropriate, or sometimes up to 90%. If the
index gets too close to 100% (the bank loans out as much as the amount it received in deposits),
the situation of liquidity will be much more concerning. However, currently there is no figure that
can assure how much LDR is reasonable. It also depends on each bank and each period.

It can be clearly seen that BIDV’s LDR was very high in 3 years, starting from 93.03% in 2018.
One year later, the ratio was reduced by 2.17% despite the rise in total loans of about 11%, which
was explained by the 14% increase in total deposits. In 2020, BIDV faced a surge of 6.35% in the
ratio as the highest of the 3 years due to a 19% higher amount of total loans while total deposits
only made a slight increase. The outcome illustrates that BIDV attempted to loan as much as it can
to take full potential for the profit. However, this move might get the bank into a serious situation,
of which the liquidity was not in a safe zone. As the risk existed, BIDV may have not been able to
repay its other firms or customers’ deposits for unexpected withdrawals.

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 Unit: million VND

On the other hand, the Liquid assets/ Total assets of BIDV stayed around 67% for 3 year and only
peaked to 69.64% in 2019, explained by the rise in the amount of balances with the Central Banks
to above VND 135 million of million, which was more than the sum of that in 2018 and 2020. For
only one year did the bank have a high balance with the Central Banks. Therefore, its ability to
stand against liquidity shock was lower in 2020. Furthermore, the bank’s Total loans/ Total assets
also increased from 77.02% (2018), through a slight dip at 75.69% (2019), to 81.6% (2020), telling
us that the liquidity risk was higher.

c. Liquidity management:

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In order to reduce liquidity risk, BIDV maintains a suitable structure of assets and liabilities while
strengthening the capability of raising funds from various sources. There are policies in place to
manage highly liquid assets (such as ALM) and to control future cash flows and liquidity status
on a daily basis. Expected cash flows and collaterals availability are also calculated in case of need
for funds.

3. Current credit:
a. Credit situation:
Bank credit is the total amount of money that can be borrowed by an individual or a firm from a
bank or other financial institution. Bank credit depends on the borrowers’ ability to repay any loans
and the total amount of credit available to lend by the banks. Current credit situation of BIDV was
illustrated by numerous performances in credit activities of the bank and by far, it was rated by
Global rating agency Moody’s that the long-term foreign currency deposits was upgraded to Ba3
from B1. The long-term local currency deposit and long-term issuer rating were affirmed at Ba3.
Moody’s ratings proved the steady improvement in BIDV’s asset quality. The bank’s strength
continued to be the funding factor. Hana Bank receiving new share issuance from BIDV improved
BIDV’s equity. The bank’s plan was to issue new shares to foreign investors over the next few
years, which would be credit positive if successful.

b. Credit risk indicators:

Credit risk is the possibility that the bank may lose money because its customers, clients and
counterparties do not perform or cannot manage to perform their contractual obligations. There
are numerous indicators that can be used to calculate the credit risk.

The first one is Non-performing Loan or Bad debt, which is the total amount borrowed for which
the customers do not make payments within a given time period. According to the Circular No.
17/2019/TT-NHNN, the bad debt ratio must be lower than 3%.
𝑵𝑷𝑳 = 𝑶𝒗𝒆𝒓𝒅𝒖𝒆 𝒄𝒖𝒔𝒕𝒐𝒎𝒆𝒓𝒔 𝒍𝒐𝒂𝒏𝒔/ 𝑻𝒐𝒕𝒂𝒍 𝒍𝒐𝒂𝒏𝒔

In VND million 2018 2019 2020

Overdue customers loans 19,212,213 19,622,254 24,380,550

Total outstanding loan 1,011,169,133 1,127,715,754 1,237,591,373

NPL ratio 1.90% 1.74% 1.97%

It can be seen from the table that BIDV’s bad debt ratio had stayed in a safe zone for 3 years. The
ratio decreased by 0.16% from 2018 to 2019 then met a rise of 0.23% in 2020. It showed that the
bank handled the credit risk safely in all 3 years, staying below 2%. However, to be more specific,
the rise of the bad debt ratio in 2020 (1.97%) can be explained by the crisis that the Covid-19 had
caused when almost every aspect of society, including the economy, was negatively affected.

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The provision for loan losses is used as an allowance for uncollected loans and loan payments,
which covers different kinds of loans losses.

In VND million 2018 2019 2020

Provision for loan losses 12,404,309 14,632,136 19,055,948

Provision to bad debt ratio 64.56% 74.57% 78.16%

𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 𝑡𝑜 𝑏𝑎𝑑 𝑑𝑒𝑏𝑡 = 𝑃𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛 𝑓𝑜𝑟 𝑙𝑜𝑎𝑛 𝑙𝑜𝑠𝑠𝑒𝑠 / 𝐵𝑎𝑑 𝑑𝑒𝑏𝑡

The provision for loan losses in the 3 year showed a gradual increase from VND 12 thousand
billion to VND 19 thousand billion. Although the Covid-19 pandemic effect made the bad debt
increase (26.9% from 2018 to 2020), the provision to bad debt ratio, which is calculated to see the
relationship between provision and bad debt amount, did not see any reduction but rather rose from
64.56% in 2018 to 78.16% in 2020, undisrupted. Thus, it can be concluded that BIDV actually had
a careful preparation to face the unexpected default loans from its customers.

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 Unit of provision for loan losses: VND million

c. Credit risk management:

According to the Annual Report of BIDV in 2020, BIDV controlled and managed credit risk by
setting credit limits based on the risk tolerance level that it specified for individual customers and
each industry, and setting up the medium and long-term credit limits suitable for the structure of
mobilization.

The bank had established a credit quality review process to provide early identification of possible
changes in financial position, repayment ability of debtors based on qualitative and quantitative
factors. The credit limit for each customer was set by the use of the credit scoring system, in which
each customer was classified at a certain risk level, which was updated regularly. BIDV controlled
and managed credit risk by establishing an authorization limit for each brand based on its credit
portfolio quality, management capability and geographical potentiality.

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 BIDV had developed a number of customer policies in order to select good customers and have
suitable and consistent policies applicable to each of them. The bank provided a diversified range
of products to meet the customers’ demands and established credit appraisal and approval
procedures at branches and the Head Office for consistent implementation to mitigate operational
risks. In addition, in order to strengthen secured methods for loans and minimize operational risks,
the Bank has also issued detailed guidance on guarantees for loans.

On January 17th 2020, BIDV and Deloitte Consulting organized to announce and handover the
results of the project MRA&ICAAP, which was implemented in 12 months with the scope of
covering regulations on overall risk management and internal assessment of capital adequacy. The
handover results from the project were the foundation to help BIDV get ready to comply with the
provisions of Circular 13/2018/TT-NHNN - Basel II, which would have effect in 2021, affirming
the bank’s position as one of the leading institutions in the Vietnamese business market.

4. Interest-rate risk management:

a. Interest-sensitive gap analysis:

Overdue Non- Up to 1 1-3 3-6 6-12 1-5 Over 5 Total

interest month months months months years years (million VND)
bearing
Total
19,575,139 78,569,116 371,929,392 431,328,356 376,093,186 153,216,709 45,732,285 60,742,473 1,537,186,656
assets
Total
0 42,996,234 498,316,230 282,377,124 268,822,246 311,908,605 27,753,250 4,865,411 1,437,039,100
liablilities
Interest
19,575,139 (126,386,838) 148,951,232 107,270,940 (158,691,896) 17,979,035 55,877,062 100,147,665
sensitive
35,572,882
gap

Table 1: Interest-sensitive gap of BIDV in 2020

In order to manage the risk of banks, interest-sensitive gap management known as the most popular
interest rate hedging strategies is used as an effective tool. As can be seen from the table 1, assets
and liabilities of BIDV are divided in 8 categories to measure the interest-sensitive gaps: overdue,
non-interest bearing, up to 1 month, 1-3 months, 3-6 months, 6-12 months, 1-5 years, and over 5
years.

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For up to 1 month, 6-12 months BIDV showed the negative gap (interest-sensitive assets < interest-
sensitive liabilities). The losses will happen if interest rates rise because the net interest margin
will be reduced. The reason led to negative gap in up to 1 month maturity is that the deposits and
borrowings from other institutions and customer deposits (VND 47,709,645 million and VND
447,873,215 million) are much greater than loan to customer and debt purchased and investment
in securities (VND 285,987,277 million and VND 1,235,216 million). Similarly, negative gaps in
other maturities 6-12 months were the results of the much larger of deposits and borrowings from
other institutions and customer deposits compared to loan to customer and debt purchased and
investment in securities.
From the figures of table 1, it is clearly that positive gaps existed in overdue, non-interest bearing,
1-3 months, 3-6 months, 1-4 years and over 5 years tenors. If interest rates fall, losses will happen
because the net interest margin will be reduced. Positive gaps happened because of the much higher
of loan to customer and debt purchased and investment in securities compared to deposits and
borrowings from other institutions and customer deposits. For example, in term of 1-3 months, the
loan to customer and debt purchased was VND 398,142,506 million being three times as much as
the number of customer deposits (VND 254,551,081 million).

b. Ability to mobilize capital and lending of BIDV

It can be seen that the ability to raise capital and lending has great influence to interest-sensitive
gap.

CUSTOMER DEPOSIT
(UNIT: VND BILLION )
1,400,000
1,214,296
1,200,000 1,116,998
988,739
1,000,000

800,000

600,000

400,000

200,000

0
2018 2019 2020

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Total deposits from organizations and individuals reached VND 1,295,533 billion, an increase of
9.1% compared to 2019, meeting the demand for capital; increasing BIDV’s total mobilized capital
to VND1,402,248 billion. Of which, customer deposits hit VND1,226,674 billion, up 10.1% from
2019, accounting for 11% of customer deposits of the whole banking sector.

CUSTOMER LOAN
(UNIT: VND BILLION )
1,400,000
1,214,296
1,200,000 1,116,998
988,739
1,000,000

800,000

600,000

400,000

200,000

0
2018 2019 2020

Total outstanding loans and investments reached VND1,438,520 billion, of which outstanding
loans to organizations, individuals and corporate bonds reached VND1,214,296 billion, up 8.5%
and accounted for 13.4% of the total loans of the whole sector.
By segment: Target customer segments all achieved good growth:
- Retail banking: continuing to lead the market-by-market share, growing 13.7% from 2019,
accounting for 35.7% of total outstanding loans.
- Wholesale banking: Growing 1.8%% from the start of the year, of which outstanding loans to
SMEs grew well by 16%, higher than the average credit growth rate.
3. Risk management organization
BIDV operates a risk management model with three layers of protection, in which the first layer
is the Business Unit, the second layer is the Risk Management Division, and the third layer is the
Committee. full-time, internal audit. Each layer of protection has a set of specific responsibilities
for risk management and control, ensuring that risks are controlled under two centralized and
independent mechanisms. The governance mechanism is shown as follows:

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The risk management division at BIDV operates on the framework and policies on risk
management and risk appetite that have been established at BIDV. The risk management division
is responsible for implementing the risk identification issues based on the Bank's risk profile in
each specific business segment (credit risk, market risk, operational risk). After identifying the
risks facing the bank, the Risk Management Division will provide risk indicators, measure,
quantify and set limits for these indicators, from which there are activities. track quota and report
to levels dynamically. The reporting mechanism is divided into many different alert levels
corresponding to different levels of reporting: Reporting to Business Unit leaders, Reporting to
Head of Risk Management Division, Reporting to Association. Board of Directors (through
meetings of ALCO Committee, Committee of Risk Management).
III. Scenario’s analysis on the impact of Income and Capital:
1. Change in interest rate:

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The following graph presents the bank's yield curve, showing the current deposit interest rate for
individual customers (small investors). The upward-sloping curve indicates that the business has
been kept in a good condition. Comparing the interest rate of deposit and lending, which is not
much higher than the peers, BIDV is showing its ability to make a profit from such a pair of interest
rates.

BIDV Yield Curve

10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1 months 3 months 6 months 12 months 18 months 24 months 36 months

Borrowing Lending

The table below shows the prediction of change in interest rates of BIDV throughout upcoming
periods based on the previous financial statements:

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 Up to 1 1-3 3-6 6-12 1-5 years Over 5 years
month months months months
NII
(126,386,838) 148,951,232 107,270,940 (158,691,896) 17,979,035 55,877,062
(base case)
change in -631,934.19 744,756.16 53,635.47 -793,459.48 89895.175 279,385.31

NII if
interest
increase
0.5%
change in 631,934.19 -744,756.16 -53,635.47 793,459.48 -89895.175 -279,385.31

NII if
interest
decrease
0.5%

2. Change in liquidity position

Liquidity risk arises when the Bank may not be able to meet the debt payment obligations when
these liabilities are due or the Bank has to accept to mobilize capital at an additional cost to meet
the debt repayment obligations.
In order to minimize liquidity risk, the bank maintains appropriate assets and liability’s structure
while at the same time enhancing the ability to raise funds from various sources. The bank has
policies in place to handle highly liquid assets and to monitor future cash flows and the liquidity
on a regular basis. Expected cash flows and availability of current secured assets also are evaluated
in case of capital need.

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 Up to 1 1-3 months 3-12 months 1-5 years Over 5 Total
month years (million VND)

Total assets 191,662,509 258,916,460 507,433,747 260,594,689 299,004,112 1,537,186,656

Total liablilities 10,877,749 275,102,162 565,851,984 38,623,209 46,583,996 1,437,039,100

Interest sensitive -319,215,240 -16,185,702 -58,418,237 221,971,480 252,420,116 100,147,556

gap

It can be seen from the table, BIDV had negative liquidity gap for up to 12-month time buckets,
the remaining are positive liquidity gap. It means that BIDV would be unable to fulfill short-term
financial obligations for time buckets of up to 12 months, while for the remaining time they are in
excess liquidity position.
In order to raise enough cash to meet short-term financial obligations, BIDV needs to concentrate
on diversifying its investment, lending activities and access to capital markets. Meanwhile, the
banks almost always face positive or negative mismatches between maturing assets and maturing
liabilities due to the difficulty of matching them. In the best scenario, BIDV would have a positive
liquidity gap as the time bucket of more than 1 year, allowing the Bank to deploy excess liquidity
in money market instruments, thereby creating new assets. In the worst-case scenario – a negative
(short-term) scenario, the Bank should finance market borrowing or repurchase agreements to meet
short-term financial obligations.

IV. Hedging proposals

Due to the high exposure to the risk, BIDV has applied some popular hedging tools in term of
derivatives such as: Forward contract, Future contract, Forward rate agreement (FRA), Swaps and
Options to minimize the occurrence of risks occurring during the operational activities.
a. Forward contract

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A forward contract is a deal between the investor and the seller to exchange commodity on a
specific date in the future. It is an OTC instrument with requirements set for the distribution of the
underlying commodity at any stage in the future. (Investopedia, 2020)
Suppose, for example, that BIDV buys $10 million in Treasury bonds. Bonds are usually priced at
fair value, and the YTM is equivalent to 6%. As long-term debt, BIDV acknowledges that they are
vulnerable to interest rate risk. If it is expected an increase in interest rates in the future, the future
price of such bonds would decline and result in significant capital losses. In this case, however,
BIDV will enter into a contract to offer such bonds at the current par value price at a future date.
As a result, the bank partners with another group – XYZ Corporation – to offer $10 million in
Treasury bonds at a cost of one year from today. By entering into this forward deal, the bank can
be able to hedge against interest rate risk.

b. Future contract
Interest rate difference risk in the future may be protected via interest rate futures. The role of the
future contract is to decide the demand for interest rates, debt and equity. Future contracts have
form of standardized exchanges. Similar to forward contracts, futures contracts involve agreements
to place the sale and purchase of goods at a fixed price in the future. Banks enter into futures
contracts to determine the size, interest rate and maturity of nominal cash that needs to be borrowed
in the future. However, there are slight differences between two types of contracts. There will not
occur the actual trade in forward contract but it will be happening the futures contract. The buyer
of a futures contract takes a long role in recognizing the duty to buy the underlying commodity
before the futures contract ends. The issuer of the futures contract is in a short role, claiming the
duty to supply the underlying commodity at the expiry date. (Investopedia, 2020)
For BIDV, if $GAP is positive, to benefit from future prices, the bank should purchase contracts
as a decline in interest rates which could contribute to future prices rising. On the other side, with
the negative difference, if there happen a moving in the opposite direction and the future price will
collapse, BIDV is compelled to sell the contracts as the interest rate and net interest income.

c. Forward rate agreements (FRA)

FRA is an OTC (over-the-counter) derivative instrument that trades as part of the money markets.
It offers investors with borrowing or lending action with a notional sum of cash for a term of up to

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12 months at the negotiated interest rate (FRA rate). The buyer of the FRA borrows stated sum of
money when the lender loans that amount of money. Once an FRA is exchanged, the lender
borrows a given principal amount at a fixed interest rate over a defined period of time. If there is
a change in interest rates, the transaction would be covered if investors traded between the period
during which the FRA was exchanged and the date on which the FRA came into effect. When
interest rates fall, the investor would compensate for the difference between the cost at which the
FRA was exchanged and the actual rate at which the FRA was purchased (Investopedia, 2019).

So far as BIDV is concerned, assume that BIDV (as the seller) enters into a fixed rate / pay floating
forward payment arrangement with XYZ Bank (as the purchaser) with a six-month term based on
a notional principal sum of $1 million. The variable standard is the 3-month LIBOR and the fixed
(exercise) standard is 7%. BIDV will point to this as a 7 percent "3v6" FRA on XYZ Bank's $1
million notional sum. On the basis of this example, the bank should cover the danger by taking a
long position because it was susceptible to a loss in rising interest rates or to a rise in interest rates
(with a positive dollar gap). On the other side, since BIDV has a negative dollar balance, a short
period is preferring to cover the loss in interest rate.

d. Swap
In BIDV, swap has become a good instrument in term of hedging the interest rate risk in operation.
According to the BIDV Official website (2021), it is stated that its swap is the simultaneous
purchase and sale of the same amount of foreign currency-which includes only two currencies used
in the transaction, and the payment term for the two transactions is different. The exchange rate
for the two transactions is determined at the time the contract is signed. One party is the fixed-rate
payer, and this rate is determined at time of trading swap; another party is the floating-rate payer.
In addition, BIDV revalue their currency swap contract periodically (Annual report, 2019). Any
Gains or losses that realized or unrealized are all recorded in the “Foreign exchange differences”
in the consolidated balance sheet, then will be transferred to the consolidated income statement at
the end of the year (BIDV Official website (2020). Hence, the differences in their interest rate
swaps are recorded in the consolidated income statement on an accrual basis. For instance, this is
the significant example to illustrate the swap activity in the bank:

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 e. Option
In BIDV, it has made efforts to develop commodity derivative, called “Option”. The transaction
is done between a buyer (Customer) and a seller (BIDV), where the option buyer has the right, but
not the obligation to buy or sell a foreign currency at a predetermined rate for a previously agreed
duration. If the buyer chooses to exercise the right, the seller shall have the obligation to sell or
buy the amount of foreign currency at the predetermined exchange rate.

The holder of an option is the person who has paid a premium to buy the option and has the choice
as to whether to exercise or not. According to BIDV Official website (2021) their target customers
are who desire to buy/sell call/put options on foreign currency. It is stated that, the bank offer
option contract to hedge exchange rate risk for customers, increase profit when exchange rate
changes in favorable directions. Moreover, the exchange rate, amount of money and exercised date
are all determined at the contract date. Meanwhile, the customers have to pay premium to buy
options (call/put). However, the premium and fees for option contract is quite costly.

V. Conclusion:
In conclusion, our report has illustrated some main categories such as: the current macro situation,
the banking industry environment, the liquidity risk management, the credit risk management, the
scenario analysis on the impact of income and capital. Moreover, our study also focused on the
hedging proposals of BIDV. The bank is doing its best by maintaining its steady activities, ensuring
strong and stable workflow and well-managed assets and liquidity through ALM. From the report,

25
it is clearly seen that BIDV, a well-organized operation, is successfully in keeping its position as
one of the Big4 of banks in Vietnam not only because of its management strategies, but also the
diversification in bank services that meets the customers’ need.

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