HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

----------------

TREASURY MANAGEMENT
Analysis of Joint Stock Commercial Bank for Foreign Trade of
Viet Nam (Vietcombank)

Lecturer: PhD. Dao Thi Thanh Binh

Tutor: Nguyen Minh Hang
Tutorial: 03

Group: 04
Khuc Thi Hong Ngoc – 1904040085
Dao Thi Dung – 1904040022
Nguyen Phuong Hoa – 1904040045
Nguyen Thi Thanh Tuyet– 1904040106

Hanoi, May 13, 2022

 Table of Contents
INTRODUCTION ............................................................................................................. 1
DISCUSSION OF FINDINGS ......................................................................................... 2
I. Credit risk management............................................................................................. 2
1. Loans classifications ........................................................................................... 2
2. Non-performing loans......................................................................................... 4
3. Bad debts resolution with VAMC ...................................................................... 5
4. Capital adequacy and Basel compliance ............................................................ 6
II. Liquidity risk management .................................................................................... 8
1. Loan to deposit ratio (LDR) ............................................................................... 8
2. One-month liquidity ratio ................................................................................... 9
3. Liquidity risk factor ............................................................................................ 9
4. Liquidity reserve ratio ...................................................................................... 10
5. Cash Flows ....................................................................................................... 11
III. Interest rate risk management .............................................................................. 12
IV. Scenario analysis .................................................................................................. 13
1. Interest risk management .................................................................................. 13
2. Changing in liquidity position .......................................................................... 16
V. Hedging proposal ................................................................................................. 17
1. Forward contract ............................................................................................... 17
2. Future contracts ................................................................................................ 18
3. Forward rate agreements (FRA) ....................................................................... 18
4. Option Swap ..................................................................................................... 19
5. Swap ................................................................................................................. 19
CONCLUSION ................................................................................................................ 20
REFERENCES ................................................................................................................ 21
INTRODUCTION

Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) is one of three
banks with the greatese charter capital in Vietnam, as well as one of the most capitalized firms
on the stock exchange. According to Cafef, by the end of December 31 2021, despite the
negative effects of the pandemic on the whole economy, Vietcombank is still holding a
considerable amount of charter capital (47.325 billion VND) (Te, 2021). Furthermore,
according to Vietnam Report, Vietcombank has consistently placed first among the top 10
prominent commercial banks in Vietnam. The bank provides a variety of commercial banking
products and services to both individual and business clients, including deposits, loans, and
credit cards. Moreover, other services of the bank include international settlement, treasury
services, foreign exchange transactions, money transfer, sales financing, international trade,
and financial transaction services. With a large number of branches in Vietnam and abroad,
Vietcombank also engages in investment banking and real estate business through its
subsidiaries. Up to now, Vietcombank has maintained a steady trend of expansion, developing
by international collaboration and consolidating its position at domestically and abroad.
Though struggling with COVID-19, the banking industry still recorded remarkable growth in
several aspects, including technology development, customer base and profit after tax.
Moreover, the "champion" of bank profits is still Vietcombank. According to the recently
announced financial report of the fourth quarter of 2021, the total consolidated pre-tax profit
of this bank was at VND 27,376 billion, up 18.7% over the previous year. Remarkable growth
in fund mobilization and credit activities along with qualified liquidity ability is the result of
an efficient treasury management.
This report aims to get further information about VCB management, especially treasury
management recently. To better understand and have a better view of the situation of treasury
management of VCB, some typical factors, particularly VCB’s credit risk management,
liquidity risk management, interest rate risk management and scenarios evaluation for
proposing. Hedging strategy would be evaluated and analyzed carefully.

1
DISCUSSION OF FINDINGS

I. Credit risk management

1. Loans classifications

A loan classification system is known as an important component of a bank's credit risk

management and assessment process, which organizes loans and groups of loans with
comparable credit risk characteristics into risk categories. It illustrates the outcome of a
conclusion of a borrower's capacity and desire to repay the amount of borrowing through
lending agreement.
Loan classification and allowance for credit losses are made in accordance with Circular No.
02/2013/TT-NHNN dated 21 January 2013 issued by the SBV and Circular No. 09/2014 /
TTNHNN dated March 18, 2014 by the State Bank of Vietnam.
Vietcombank has divided the loan classification suitble to meet the needs of products and
services goal in order to approach the potential customers and buisnesses.
Therefore, loans are divided into 5 categories, which can be summarized as follows:
• Group 1- standard debts: Overdue debts of less than 10 days and assessed as capable
of fully recovering overdue principal and interest and fully recovering the remaining
principal and interest on time.
• Group 2 - special debts: Overdue debt from 10 days to 90 days or debt restructuring
debt for the first time
• Group 3 – Sub-standard loans: Overdue debt from 91 days to 180 days or debts
restructured for the first time less than 30 days according to the first restructured
repayment period
• Group 4 - Doubtful loans: Overdue debt from 181 days to 360 days or debts restructured
for the first time overdue from 30 days to less than 90 days according to the first
restructured repayment period
• Group 5: Loss loans: Overdue debt over 360 days or debts restructured for the first time
overdue for 90 days or more according to the first restructured repayment period

2
 (in VND million)
2017 2018 2019 2020 2021

Group 1
532,442,51 621,862,67 726,579,58 831,765,01
standar
2 9 2 4 951,130,995
d debts

Group 2
3,497,83
special 4,783,258 3,781,086 2,403,556 2,793,678
3
debts

Group 3
Sub-
684,223 291,788 610,223 668,690 743,995
standard
loans

Group 4
Doubtfu 3,584,263 1,160,507 584,634 223,292 965,987
l loans

Group 5
Loss 1,940,203 4,770,698 4,528,896 4,337,587 4,411,145
loans

Table 1: VCB loans to customer’s classification during 2017-2021

During the 5-year period from 2017 to 2022, VCB’s standard debts nearly doubled, reaching
more than 900,000 billion VND, this significant growth is mainly thanks to banks credit
growth. Group 4 doubtful loans reduced substantially, group 4 amount in 2021 is only more
than one fourth that of 2017, which took turns 965,987 and 3,584,263 respectively. It can be

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seen that group 3 and group 5 experienced upward trends while group 2 and group 4 tend to
decrease, which implies group 3 and group 5 loans are important components of credit growth
besides group 1 increases. Increase in these two group loans illustrated a bad signal for VCB
credit health. Explaining the increase in bad debt, Mr. Nguyen Le Ngoc Hoan, a Finance
expert, told Business Forum that in 2021, the banking industry will promote strong credit
growth to support customers to overcome the epidemic and economic recovery, the new
lending process, excluding debts that have been frozen, extended and restructured according
to the Circulars issued by the SBV, will inevitably generate new bad debts. In addition,
difficulties because of the prolonged COVID-19 pandemic, especially the 4th wave, which
lasted through many localities from April to September, making production, business, trade
and service activities in epidemic-affected localities. difficulties, also negatively affect the
ability to repay old and new loans of bank customers. Accordingly, bad debt will have to
increase above the year-end financial statements of banks.

2. Non-performing loans

Commercial banks' credit activities are one of their most essential business activities and a
substantial source of revenue. During procedures, however, there are several associated risks.
Credit risk is determined by the following basic factors.
(in percentage %)

Years 2017 2018 2019 2020 2021

NPL ratio (%) 1.11 0.97 0.78 0.62 0.63

Table 2: VCB Non-performing loan ratios 2017-2021

One of the most significant indications of credit risk management in a financial organization
is the non-performing ratio. It assesses income-generating assets, such as loans, that are 90
days or more past due. As a result, a high NPL ratio indicates a bank's bad performance. With
Vietcombank, the non-performing loans reached 1.11% in 2017, the highest in 5 years (2017-
2021). However, the bank's NPL ratio was 0.97 percent by the end of 2018. Under
international loan categorization criteria, Vietcombank was the first commercial bank in
Vietnam to reduce the true NPL ratio to less than 1%. From 2019 to 2021, the non-performing
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loan ratios of VCB had a downward trend. Specifically, it decreased by 0.19 percent in 2019,
the debt ratio of VCB was at 0.62% in 2020, and in 2021 it was 0.63%.

Overall, Vietcombank's NPLs are commensurate with the State Bank's NPL ratio of less than
2.0 percent, which was achieved in part owing to temporary State Bank actions to relax
requirements on bank bad debt recognition for companies affected by the Covid-19 outbreak.

3. Bad debts resolution with VAMC

According to the VAMC newspaper, the essential issue of the VAMC Company is to minimize
risks for credit institutions/borrowers, and the whole VAMC teamwork strives to contribute
positively to bad debt settlement activities, encourage reasonable credit development, assist
customers in overcoming difficulties, and expand production and business.

According to the Lao Động newspaper, Vietcombank was the first bank to properly process
and set aside all bad debts sold to VAMC, purchase them back, and enter them into a book
three years before the project was approved. By the end of 2018, Vietcombank has self-
managed about VND 22,600 billion in bad debts, accounting for 134 percent of the plan (2016-
2018 time); collected off-balance sheet debt amounted to 7,718 billion dong, accounting for
102 percent of the goal (2016-2018 era) (2016-2018 period). It can be seen that bad debt
balance as of December 31, 2018 is VND 7,189 billion, bad debt ratio is at 0.97%. Therefore,
Vietcombank is the first commercial bank in Vietnam to lower the bad debt ratio down to less
than 1%, as of December 31, 2018.

Recently, the bad debt ratio of Vietcombank tends to decreases despite of the effect of the
pandemic. Especially, in 2020 with the lowest ratio of 0.6% compared to the four previous
years even though the profit is still over 23 trillion VND. To meet this result, Vietcombank
has conducted a variety of policies to improve the economic situation. Since early 2020,
Vietcombank has implemented five lending interest rate decreases, the highest among credit
institutions, resulting in a profit drop of roughly 3.7 trillion VND. Besides, Vietcombank also
increased the amount of provisional funding for bad debts. It results in the increased credit
growth of 13.95 percent in 2019, well above the sector's 8 percent growth. It can be stated that

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Vietcombank has a solid bad debt management system, as well as procedures in place to deal
with any underestimation circumstances.

4. Capital adequacy and Basel compliance

By examining a bank's capacity to pay liabilities and respond to operational as well as credit
risks, the Capital Adequacy Ratio established criteria for banks. A bank with a high CAR has
sufficient capital to handle any possible losses. As a result, it is less likely to go bankrupt and
lose depositors' money. To safeguard depositors after the financial crisis of 2008, BIS - the
Bank of International Settlements began imposing stronger CAR standards.

The capital adequacy ratio is formulated below, with components explained in the following
part: CAR = (Tier 1 capital + Tier 2 capital)/(Risk-weighted asset)

In the formula, tier 1 capital, also known as core capital, is made up of equity, common stock,
intangible assets, and audited revenue reserves. Tier-1 capital is intended to withstand losses
without requiring a bank to shut down. Tier-1 capital is capital that is permanently and readily
accessible to cover a bank's losses without requiring it to cease operations.

Tier 2 capital, on the other hand, consists of unaudited retained profits, unaudited reserves,
and general loss reserves. In the case of a company's bankruptcy or liquidation, this capital
absorbs losses. Tier-2 capital is used to buffer losses in the event of a bank failure, therefore
it offers less coverage to creditors and depositors. It is used to withstand losses if a bank's
Tier-1 capital is depleted.

To limit the danger of bankruptcy, risk-weighted assets are used to establish the minimum
capital amount that banks and other organizations must hold. For each form of bank asset, the
capital need is based on a risk assessment.

Years 2017 2018 2019 2020 2021

Capital to asset ratio 11.63% 12.14% 9.60% 9.60% 10.01%

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 Table 3: Vietcombank capital-to-asset ratio from 2017 to 2021 (Unit: %)

In this section, Basel II will be used to evaluate and analyze Vietcombank’s performance. Out
of the three Basel Accords, Basel II is the second treaty released in 2004 which consists of
banking regulations applied internationally. Minimum capital requirements, regulatory
monitoring, and market discipline are the three primary "pillars" on which it is built. The most
essential aspect of Basel II is the minimum capital requirement, which compels banks to
maintain specified capital-to-risk-weighted-assets ratios.

The above table represents the CAR ratio of Vietcombank in the most recent five years from
2017 to 2021. To meet the Basel II standards, the capital adequacy ratio must be at a minimum
of 8%. It is evident that Vietcombank had made sure to meet the requirements throughout the
years, however, the number decreased in 2019 and 2020 at the same amount of 9.6%.

Figure 1: VCB charter capital over 10 years from 2011 to 2021

The chart illustrates Vietcombank’s charter capital in the last decade, from 2011 to 2021.
There was a noticeable surge in the charter capital during the year 2015-2016 and the bank
had consistently grown ever since. The bank had constantly made plans to raise its charter
capital each year, with the highlight in the year 2016, Vietcombank had raised the charter
capital twice by issuing bonus shares at a rate of 35% which had led to an increase of 9,327
billion VND in charter capital, as well as issuing subordinated bonds worth of 8,000 billion
VND to in which 6,000 billion VND belongs to Tier II capital.

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 II. Liquidity risk management

Liquidity management is crucial in ensuring the stability of a bank's operations. Liquidity

refers to a bank's capacity to fully and swiftly meet financial commitments deriving from
transaction activities to create funds such as deposit and loan payments, as well as other
financial transactions. It can be obviously seen that Vietcombank has implemented the bank’s
management to strictly meet the liquidity regulation of the State Bank Vietnam. Especially, in
the pandemic year, Vietcombank has well adjusted and prepared the unexpected liquidity
back-up plan

1. Loan to deposit ratio (LDR)

In order to assess liquidity management, the loan-to-deposit ratio is one of the indicators that
illustrates a bank's capacity to handle loan losses and client withdrawals. Investors can seek
for the banks' LDRs to ensure that there is enough liquidity to cover loans in the case of a
downturn that results in defaults.
L/D = Total Loans/Total deposits
The ideal loan-to-deposit ratio is 80% to 90%. A bank with a loan-to-deposit ratio of 100%
means the amount of money the bank receives from deposit is significantly the same amount
of money that the bank makes loan payment for customers per each unit. It also means a bank
will not have significant reserves available for expected or unexpected situations and face
liquidity risk. The State Bank of Vietnam generally stipulates commercial banks to have a
maximum LDR of 85 percent.
(in percentage %)
Year 2017 2018 2019 2020 2021
L/D 76.74 77.68 78.05 80.23 85
Table 4: Loan to deposits ratio of VCB from 2017-2021

According to the table, the L/D ratio is calculated based on the above formula. It can be easily
seen that this ratio increased slightly through four recent years. In 2020, the loan-to-deposit
ratio of Vietcombank is highest within the optimal ratio range, indicating that Vietcombank
had sufficient liquidity to handle any unexpected financial requirements. Moreover, it also can
8
specify the ability to operate without support from other business groups and the balance of
both sides of the balance sheet in Vietcombank’s liquidity management.

2. One-month liquidity ratio

Another way to estimate the liquidity risk of the bank is one-month liquidity ratio. These
indicators demonstrate the cash effect of liquidating “liquid” securities, as a liability. This is
also an effective measure of structural liquidity, with early warning of likely stress points.
(in percentage %)

Years 2017 2018 2019 2020

1-month liquidity ratio 155.6 91.8 86.9 83.9

Table 5. Liquidity ratio within 30 days by VND

It is necessary to review assumptions including “stickiness” assumptions regularly. From the

results in the table above, we can see this ratio in the first year is a significant number. Through
four years, the ratio trend is downward slightly but it is not a bad signal because the number
in total is very high (>80%). It means that the structural liquidity had a little bit of change
affected by the cash flow of investments or other fields in bank activities. In 2020, this ratio
decreases moderately to 83.9% due to the pandemic effect. The high number of the indicators
illustrates the high positive relationship between net cash flow and liquidity. It is clear that
Vietcombank can meet the repayment obligations far from the due date effectively in one
month. This indicator is known as the effective way because it helps the bank to update the
current economic situation periodically. Then, the bank can prepare strategies to adapt
promptly.

3. Liquidity risk factor

To come up with effective liquidity management, it is necessary to consider the liquidity risk
factor. It demonstrates the aggregate size of the liquidity gap in each branch or subsidiary of
Vietcombank. It will compare the average remaining asset duration to the average liability
duration and give the exact evaluation of Vietcombank’s liquidity.

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 Overdue Not overdue
Over Up to Up to Over 1 Over 3 - Over Over 5
3m 3m 1 -3 12 1-5 years Total
month month months years
s
Total 1,55 10,96 333,45 204,35 324,44 253,05 219,35 1,347,1
Asset 1,17 8,556 3,837 5,416 6,498 6,521 7,898 89,898
s 2
Total - - 409,09 234,13 306,85 66,793 215,26 1,232,1
Liabi 4,423 0,048 3,584 ,151 3,907 35,113
lities
Net 1,55 10,96 (75,64 (29,77 17,592 186,26 4,093, 115,054
Liqui 1,17 8,556 0,586) 4,632) ,914 3,370 991 ,785
dity 2
Gap
Table 6. Statement of liquidity gap in 2020 (million VND)

Following the data above, the highest liquidity gap is 186,263,370 million VND that indicates
the highest liquidity risk factor as well as the high liquidity risk. During 2020, the trend of net
liquidity gap is increasing until the liquidity of over 5 years (only 4,093,991 million VND).
Moreover, it is considered that the liquidity gap is a negative number in the liquidity of up to
1 month and from over 1 month to 3 months. The total net liquidity gap of Vietcombank in
2020 is a big number of 115,054,785 million VND. According to the statistics, the high net
liquidity gap has significantly affected Vietcombank's liquidity risk in 2020.

4. Liquidity reserve ratio

Liquidity reserve ratio is the percentage of the amount of liquid asset and the total liabilities.
The liquidity reserve ratio is a sort of ratio used to evaluate an organization's capability to pay
loans. The higher the ratio, the greater the bank's debt repayment ability.

Year 2017 2018 2019 2020

Liquidity reserve ratio 35.9% 24.1% 22% 19.2%

Table 7: Liquidity reverse ratio of VCB from 2017-2020

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Following the data above, we can see the ratio in the initial year is the biggest, although it is
just a modest ratio overall. Hence, it indicates that the bank's ability to pay debt on time to
meet maturity and unexpected payment needs in the long term is quite low. However, it
exceeded the standard of State Bank Vietnam for a liquidity reserve ratio of 10%. Therefore,
the liquidity risk management is effective compared with other banks. In the long term,
Vietcombank has met the requirements of Circular No.13 of State Bank Vietnam in terms of
its policy framework, liquidity risk management procedure. Besides using the liquidity
indicator, Vietcombank has continued to apply the new tools like minimum survival time
limits, liquidity stress according to situations, and ALM software system to advance the
profitability of liquidity risk management.

5. Cash Flows

Cash flow report is a crucial part in the bank operation that tells the analysis of the financial
situation of the company. To be successful, a company must always have enough cash on
hand. It needs funds to cover bills, repay bank debts, pay taxes, and acquire new assets. A cash
flow report assesses whether or not a company has adequate cash to manage all of this. The
main components of a cash flow statement contain three parts: cash flow from operating
activities, cash flow from investing activities, and cash flows from financing activities.

June-20 June-21

Cash flow from operating activities (62,010,032) (79,283,156)

Cash flow from investing activities 198,387 (451,766)

Cash flow from financing activities (747,619) (747,619)

Total net cash flows (62,559,264) (80,482,541)

Table 8: Vietcombank’s main cash flows and total net cash flows in
the first half of the year 2020 and the first half of the year 2021 (Unit:
million VND)

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The data from the table above represents the cash flows in three segments: operating,
investing, financing as well as the total net cash flows calculated by combining all the listed
cash flows. In this paper, it is decided that the figures in the first six-month period of each year
2020 and 2021 will be compared to clearly see the changes in VCB in terms of how well the
bank is managing its activities. The most noticeable point in the table is that nearly all the
numbers are negative except for cash flow from investing activities in the first half of 2020,
which was 198 billion VND. The total net cash flows up to June 2020 was - 62,559 billion
VND, after 1 year it had gone down to - 80,482 billion VND, almost a 30% increase in loss.
The bank’s performance in 2021 was not well, indicating that the cash inflows did not surpass
the cash outflows for both periods with a significant change in investing transactions, from
positive to negative. To deal with this matter, Vietcombank may seek improvements in the
statement of cash flows when all the dividends of shareholders are paid out in the finance
segment. In operating activities, the bank could also raise its capital and sell more of its fixed
assets to ease the loss in the investment segment.

III. Interest rate risk management

Interest rate risk has the greatest influence on banking activities, making it one of the most
damaging and severe forms of risk that a bank must manage. Since the unfavorable shift in
interest rates on the market for the value of financial instruments, interest rate risks have
influenced net interest income and net worth, which is the value of the owner's investment.
Vietcombank's managers, like VCB's, must have a specific risk management plan in place
when interest rates change.

Years 2017 2018 2019 2020

Interest sensitivity
gap (VND million) 60,919,427 73,889,512 94,907,770 115,054,785
Total assets (VND
million) 1,043,654,751 1,085,736,693 1,236,743,646 1,347,189,898
Gap ratio 5.84% 6.81% 7.67% 8.54%
Table 9. Interest rate risk

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The Interest-Sensitive Gap is calculated by subtracting the Interest-Sensitive Liabilities from
the Interest-Sensitive Assets. Then, we got the gap ratio to indicate interest sensitivity
management. It can be seen that the interest sensitive gap from 2017 to 2020 is always a
positive number which means the interest rate sensitive asset is greater than the interest rate
sensitive liabilities. When the market interest rates rise, the interest earned on assets will rise
faster than the cost of raising capital, resulting in an increase in the bank's profit, and vice
versa. The interest-sensitive difference has a significant influence on net interest income. If
market interest rates fall, VCBs with a positive gap will lose net interest revenue. As a result,
the bank's asset management board has devised a strategy for efficiently managing interest
rates risk assessment. Management can restrict short-term obligations and raise long-term
liabilities if interest rates rise and long-term capital mobilization versus short-term securities
investment.

IV. Scenario analysis

1. Interest risk management

According to investopedia, interest rate risk is defined as the risk of losses due to adverse
change in the interest rate against income, assets and liabilities and off balance sheet
commitment. Interest rate risk is measured by a fixed income security’s duration and can be
reduced through diversification of bond maturities or hedge by using interest rate derivatives.
The bank manages interest rate risk on banking books (IRRBB) according to indicators of
interest rate risk sensitivity, measures of decrease in net interest income or economic value of
equity.

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 Figure 2. Dollar gap analysis 2017-2021

In general, the $gap of VCB during the 2017-2021 period follows an identical pattern. Of the
6 time packages, 1-3 months, 3-6months, 1-5 years and over 5 years’ period show positive
gaps, whereas under 1 month and 6-12 month have negative gaps. It is worth noticing that the
Dollar gap is wider over the year, which indicates a larger mismatch and therefore, higher risk
for bank net interest income (NII). Poor performance in managing interest rate risk can greatly
reduce bank profit since the higher $gap value, the large NII change in terms of 1% fluctuation
in market interest rate. (In VND million)

Under 1-3 months 3-6 months 6-12 months 1-5 years Over 5
month years

RSA 328,982,484 348,953,279 285,860,265 118,711,117 200,857,497 33,446,133

RSL 747,657,499 181,756,939 133,440,417 181,639,889 22,663,561 5,375,918

$Gap (364,675,015) 167,196,340 152,419,848 (62,928,772) 178,193,936 28,070,215

NII if r (3,646,750) 1,671,963 1,524,198 (629,288) 1,781,939 280,702

↑1%

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NII if r 3,646,750 (1,671,963) (1,524,198) 629,288 (1,781,939) (280,702)
↓1%

Table 10: Dollar gap analysis and interest rate impact on net interest income (NII) 2021

The above interest rate impact on NII is calculated based on the following formula:

Change in net interest income = Overall change in interest rate (%) * size of the
cumulative gap ($)

It can be seen that VCB has a positive gap of 167,196,340; 152,429,848; 178,193,936 and
28,070,215 million VND for 1-3 months; 3-6 months; 1-5 years and over 5-year time buckets.
The bank will gain profit when the interest rate increases. Indeed, an increase of 1% in interest
rate makes net interest income from 1-3 months, 3-6 months, 1-5 years and over 5 years
considerably rise by 1,671,963; 1,524,198; 1,781,939 and 280,703 million VND. On the
contrary, increasing the 1% interest rate will reduce net interest income of under 1 month and
6-12 months by 3,646,750 and 629,288 million VND respectively. In terms of interest rate
risk management, VCB can take advantage of derivatives instruments such as interest rate
swap or options futures so as to minimize the exposed risk.

Figure 3: VCB Net interest margin (NIM), interest expense from 2017 to 2021

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The bank NIM steadily went up over time, reaching 3.2% in 2021. This increase is brought in
by considerable increase in interest rate income of VCB, in other word, interest income
increases at a higher rate than interest expenses. Despite expected credit growth in 2022, this
ratio is expected to stay the same or reduce a little bit as quoted interest rate is reduced to
support the economy in the post pandemic period, which will lower the interest income of
banks.
2. Changing in liquidity position

When a financial institution, a corporation, or an individual investor cannot satisfy its short-
term loan obligations, liquidity risk arises. Due to a shortage of buyers or an inefficient market,
the investor or corporation may be unable to turn an asset into cash without giving up capital
and revenue.
(Unit VND million)

Up to 1 month From above From above 3 From above 1 Over 5 years

1 to 3 months to 12 months to 5 years

2021 (101,917,970) 29,379,404 4,688,336 208,985,802 (16,725,651)

2020 (75,640,586) (29,774,632) 17,592,914 186,263,370 4,093,991

Table 11: Vietcombank net liquidity gap in 2020 and 2021

The table above summarizes the net liquidity gap in Vietcombank at the end of each year for
two consecutive years 2020 and 2021. Negative figures mostly focus on the short term in the
bracket of up to 1 month for both years. The difference between 2020 and 2021 is that 2020
experiences liability larger than assets in the bracket from 1 to 3 months, while the latter year
had that in the bracket of over 5 years. The surplus money would not expose the company to
liquidity risk; instead, it would expose it to interest rate risk, as a rise in the interest rate would
raise the interest expenditure on rate-sensitive liabilities. To deal with this matter, the bank
should encourage investment and loan activity while also increasing reserve capital to satisfy
short-term cash requirements. The remaining figures are positive in brackets from above 3
months up to 5 years.
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Looking at the statistics, it can be seen that Vietcombank in some way is exposed to liquidity
risk, the bank should either raise liabilities or make the assets more liquid. In order to gather
enough cash to satisfy short-term financial obligations, Vietcombank would focus on
diversifying its expenditures, credit activities, and access to capital markets. There may be
some difficulties in balancing the maturing liabilities and maturing assets for banks since it is
likely that mismatches will be shown in the financial statements.

V. Hedging proposal

1. Forward contract

A forward contract is an agreement to purchase or sell an underlying asset at a defined price

at a certain point in the future.
There are many types of futures contracts that are being traded on a daily basis around the
world:

 Stock/bond forward contract: is a type of forward contract with the underlying asset
being a stock/bond.
 Commodity forward contracts: the underlying assets are real commodities such as rice,
wheat, coffee, crude oil, etc.
 Foreign exchange forward contract: is a forward contract in which two parties agree to
buy and sell a certain amount of currency at a predetermined exchange rate at a
specified time in the future.
 Interest rate forward contract : is an agreement between two parties, agreeing that a
predetermined interest rate will be applied to a certain amount of capital at a future
payment time...

In Vietnam, at present, only foreign exchange forward contracts are popular, participants
include commercial banks, import-export companies, financial investment institutions to
hedge risks on exchange rate. For instance, Vietcombank engages in foreign exchange forward
transactions that allow customers to transfer, adjust, or minimize their foreign exchange risk

17
or other market risks while also serving Vietcombank's commercial objectives by forward
contract
2. Future contracts

Future Contracts is a legally binding agreement between buyer and seller to exchange an asset
of specific quality and negotiable price today. However, participants are required to trade the
asset on a predetermined future date at a predetermined price regardless of how the price
changes on the expiration date. That is why futures are used to prevent price fluctuations, to
help prevent losses due to the adverse price change.
Futures contracts based on a financial instrument or a financial index, including:
- Stock index futures contract
- Interest rate futures contract
- Currency futures contract
When using futures contracts in VCB, enterprise have the fix exchange rate, avoiding the risk
if the exchange rate fluctuates in the future and avoiding the possibility of market foreign
currency scarcity.
3. Forward rate agreements (FRA)

A futures interest rate contract is an agreement between two parties to pay interest on a future
settlement date. The contract maturity is described as six vs nine months, the interest for the
three-month period begins over a six-month period, the capital amount is agreed upon but
never transferred, and the contract is discussed.
An interest rate forward contract can also be understood as a loan that will commence at a
specific time in the future with a fixed interest rate (forward interest rate). There will be no
exchange of capital, but the parties (borrowers and lenders) will only pay each other a
determined difference based on the nominal principal value and the difference between the
agreed and agreed interest rates. actual interest rate at the time of payment. In this contract,
the buyer acts as the borrower for a specified amount (equal to the nominal value of capital)
at a fixed interest rate for a period of time. In contrast, the seller is the one who lends an
amount (equal to the nominal capital value) at a fixed interest rate for that known period.

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According VCB report in 2020, VCB become a leader in Vietnam’s foreign exchange market
with FX profit grows consistently (~10%), overall contributing ~5-8% of total operating
income.
4. Option Swap

An option is an agreed-upon contract between two parties, in which the buyer has the right to
do or not to exercise that is in his best interest, and the seller has always an obligation to the
buyer. Based on an underlying asset as collateral, the underlying assets are usually: indices,
stocks, commodities..
Call and put options are the 2 main rights in option contracts. The option holder is the
individual who paid a premium to purchase the option and has the option to exercise it or not.
The seller is the individual who produces the option and gets compensated for selling it. A
call option offers the buyer the right to acquire an underlying asset, while a put option gives
the buyer the right to sell it a buyer who wants to sell an underlying asset.
In Vietcombank, options contract assisting businesses in avoiding capital flow risks due to
exchange rate swings; the enterprise has the right to fix the exchange rate in accordance with
its interests for a reasonable cost and there are profitable investing opportunities based on
exchange rate forecasts.
5. Swap

A swap is a contractual arrangement between two counterparties whereby the parties agree to
make periodic payments to each other, or agree to exchange future cash flows in a certain
manner. predetermined and for a predetermined period of time. A swap contract comes into
effect from the inception date (also known as the valuation date) and terminates on the
contract's end date (also known as the maturity date).End users, intermediaries, and traders are
the three primary categories of participants in the swap market.
For example, VCB currently pays fixed rates for deposits and earns floating rates for loans.
The bank will now enter into an Interest Rate Swaps agreement with Bank B, in which it will
pay floating and receive fixed rates.In another scenario, which is more common, the two
parties establish a separate transaction with a financial intermediary such as a bank rather than
swapping payments directly. In exchange for balancing the two parties, the Bank receives a
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spread from the swap paymentA forward contract is an agreement to purchase or sell an
underlying asset at a defined price at a certain point in the future.

CONCLUSION

In conclusion, Vietcombank, especially the treasury department, shows great achievements

and performance in asset and liability risk management. With stable credit growth as well as
new deposits and low non-performing loan ratio, it is known as a good signal for VCB to seize
the opportunity to achieve higher and more sustainable profitability in spite of the pandemic
effect. By conducting a comprehensive analysis of current credit, liquidity, interest rate risk,
and analysis of scenarios for hedging recommendations, our article has strengthened the
credibility of VCB's effectiveness in transforming strategic planning, direction and
governance to respond to internal challenges and market changes. It is expected that
Vietcombank will reach advancements, and the bank might perform a constructive role in the
development of the Vietnamese economy by serving as a reliable finance source for both
international and domestic businesses.

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