I Overview of commercial bank

I. History and background

The origins of commercial banking was found in ancient civilizations. Temples and
palaces served as safe places for storing and lending. Over time, the places
functioned as the financial centers. After that, merchant bankers appeared in
Europe. These people controlled the finance and promoted trade between different
regions. They provided loans, exchanged currencies, and offered services similar to
modern commercial banks
The modern commercial bank definition emerged in the 17th and 18th centuries.
The appearance of many banks as Bank of Hindustan,The Eastern Bank,
Berenberg Bank, Bank of England, etc. The modern commercial banking industry
in the United States began when the Bank of North America was chartered in
Philadelphia in 1782. With the success of this bank, other banks opened for
business, and the American banking industry started.
In World War II, the banking industry was secured from destruction. As the banks
and the Fed, the war required financial maneuvers involving billions of dollars.
This massive financing operation created companies with huge credit needs that, in
turn, spurred banks into mergers to meet the demand. These huge banks spanned
global markets.
The most significant development in the world of banking in the late 20th and
early 21st centuries has been the advent of online banking, which in its earliest
forms dates back to the 1980s but really began with the rise of the internet in the
mid-1990s.The development of smartphones and online banking apps accelerated
the trend. Banks have also diversified their services by offering investment
banking, wealth management, and insurance products.
Today, commercial banks are an integral part of the global financial system. They
play a vital role in facilitating economic activities, providing funding for
businesses, and managing individuals' financial needs. However, they also face
challenges such as regulatory compliance, cybersecurity risks, and adapting to
evolving customer expectations in an increasingly digital era.
II. Legal structure and ownership
Commercial banks can be either independent or owned by a bank holding company
(BHC). Although some multibank holding companies (owning more than one
bank) exist, one-bank holding companies are more common. More banks are
owned by holding companies than the other one.
Private Sector Banks: which are owned by shareholders (individuals or
corporates). They accept deposits and distribute loans to individual customers,
small businesses, and medium-sized businesses.
Public Sector Banks: For public banks, majority equity lies in the hands of the
government. Nationalized banks provide financial services to mass customers at
affordable rates.
Foreign Banks: As the name suggests, these financial institutions operate in
foreign countries but have head offices in the parent country. The bank’s foreign
branches take deposits, extend loans, engage in securities trading, and facilitate
foreign exchange functions.

III. Business model and operations

Business model: The commercial bank business model is similar to the traditional
bank model, but it pays attention on serving businesses rather than individuals.
Commercial banks offer a wide range of products and services, including savings
and checking accounts, loans, and investment services. They make money by
charging fees for their services and earning interest on the money they lend. For
commercial banks, revenues come primarily from interest on loans, accounting for
70-80% of their total income. The rest of their revenue comes from fees for
services, such as account maintenance, ATM, and credit card fees.
Operation: The primary operations of commercial banks can be most easily
identified by reviewing their main sources of funds, their main uses of funds, and
the off-balance sheet activities.
A. Sources of funds
Deposit accounts
1. Transaction deposits
A demand deposit account, or checking account, is offered to customers who desire
to write checks against their account or make payments using debit cards. From the
bank’s perspective, demand deposit accounts are classified as transaction accounts
that provide a source of funds that can be used until withdrawn by customers (as
payments are made with debit cards or checks are written). Another type is the
negotiable order of withdrawal (NOW) account, which pays interest as well as
provides checking and debit card services. Because NOW accounts at most
financial institutions require a larger minimum balance than some consumers are
willing to maintain in a transaction account, traditional demand deposit accounts
remain popular. Electronic Transactions are offered by mobile apps that allow
customers to deposit checks through their smartphone, view their accounts, and
pay for purchases and have their account debited for the amount.
2. Savings deposits
Savings accounts continue to attract savers with a small amount of funds, as such
accounts often have no required minimum balance. Banks also offer various other
savings accounts, which require a minimum balance or the payment of a monthly
fee. The savings account is usually linked to the customer’s checking account, and
the customer can transfer funds from one account to the other, but it not permits to
check writing.
3. Time deposits
Time deposits are deposits that cannot be withdrawn until a specified maturity
date. The two most common types of time deposits are certificates of deposit (CDs)
and negotiable certificates of deposit (NCDs).
4. Money market deposit accounts
Money market deposit accounts (MMDAs) differ from conventional time deposits
inthat they do not specify a maturity. From the depositor’s point of view, MMDAs
are moreliquid than retail CDs but offer a lower interest rate. They differ from
NOW accounts in that they provide limited check-writing ability (a limited number
of transactions is allowed per month), require a larger minimum balance, and offer
a higher yield.
Borrowed Funds
1. Federal Funds Purchased
It allows depository institutions to accommodate the short-term liquidity needs,
represent a liability to the borrowing bank and an asset to the lending bank that
sells (or loans) them, e interest rate charged in the federal funds market is called
the federal funds rate.
 2. Borrowing from the central bank
Central bank also provides loans to commercial banks, sometimes referred to as
the discount window. The interest rate charged on these loans is known as the
primary credit rate.
3. Repurchase agreements
A repurchase agreement (repo) represents the sale of securities by one party to
another, combined with an agreement to repurchase the securities at a specified
date and price. Banks often use a repo when they need funds for just a few days.
4. Eurodollar borrowings
In some foreign banks (or foreign branches of U.S. banks) accept large short term
deposits and make short-term loans in dollars. Because U.S. dollars are widely
used as an international medium of exchange, the Eurodollar market is very active
Long-Term Sources of Funds
1. Bonds issued by the bank
Like other corporations, banks own some fixed assets, such as land, buildings, and
equipment. Common purchasers of bonds are households and various financial
institutions, including life insurance companies and pension funds. Banks are less
likely to issue bonds compared to most other corporations because they have fewer
fixed assets than corporations that use industrial equipment and machinery for
production
2. Bank capital
Bank capital generally represents funds acquired through stock issues or retained
earnings. In either case, the bank has no obligation to pay out funds in the future.
Bank capital as defined here represents the equity or net worth of the bank. Capital
can be classified as primary or secondary. Primary capital results from issuing
common or preferred stock or retaining earnings, whereas secondary capital results
from issuing subordinated notes and bonds.
B. Uses of funds
1.Cash
Banks must hold some cash as reserves to meet the reserve requirements enforced
by the Central Bank. They also hold cash to maintain some liquidity and to
accommodate withdrawal requests by depositors. Because banks do not earn
income from cash, they hold only the minimum amount of cash necessary to
maintain a sufficient degree of liquidity
2. Bank loans
Types of Business Loans A common type of business loan is the working capital
loan (sometimes called a self-liquidating loan), which is designed to support
ongoing business operations
3. Investment in securities
Banks purchase various types of securities. One advantage of investing funds in
securities rather than making loans is that the securities tend to be more liquid. In
addition, banks can easily invest in securities, whereas more resources are required
to assess loan applicants and service loans. However, banks typically expect to
generate higher rates of return on funds used to provide loans.
4. Federal Funds Sold
Some banks frequently lend funds to other banks in the federal funds market. The
funds sold, or lent out, will be returned (with interest) at the time specified in the
loan agreement. The loan period is typically very short, such as a day or a few
days. Small banks often act as providers of funds in the federal funds market
5. Repurchase Agreements
From a lender’s perspective, the repo represents a sale of securities that it had
previously purchased. Banks can act as the lender (on a repo) by purchasing a
corporation’s holdings of Treasury securities and then selling them back at a later
date. This kind of transaction provides short-term funds to the corporation.
6. Eurodollar Loans
Branches of U.S. banks located outside the United States, as well as some foreign-
owned banks, provide dollar-denominated loans to corporations and governments.
Such Eurodollar loans are common because the dollar is frequently used for
international transactions. Eurodollar loans are short term and denominated in large
amounts, such as $1 million or more.
7. Fixed Assets
Banks must maintain some amount of fixed assets, so that they can conduct their
business operations. However, this is not a concern to the bank managers who
decide how day-to-day incoming funds will be used. They direct these funds into
the other types of assets already identified.
8.Proprietary Trading
Banks also engage in proprietary (or “prop”) trading, they use their own funds to
make investments for their own account and manage investment portfolios in
which they pool funds provided by clients and then invest those funds on behalf of
the clients
Off-balance sheet activities
Commercial Bank Balance Sheet A commercial bank’s sources of funds represent
its liabilities or equity, and its uses of funds represent its assets. Each commercial
bank determines its own composition of liabilities and assets, which determines its
specific operations
Banks commonly engage in off-balance sheet activities, which generate fee income
without requiring an investment of funds. However, these activities create a
contingent obligation for banks. The following are some of the more popular off-
balance sheet activities:
1. Loan commitments
A loan commitment is an obligation by a bank to provide a specified loan amount
to a particular firm upon the firm’s request. The interest rate and purpose of the
loan may also be specified. The bank charges a fee for offering the commitment.
2. Standby letters of credit
A standby letter of credit (SLC) backs a customer’s obligation to a third party. If
the customer does not meet its obligation, the bank will. The third party may
require that the customer obtain an SLC to complete a business transaction
3. Forward contracts on currencies
It is an agreement between a customer and a bank to exchange one currency
for another on a particular future date at a specified exchange rate. Banks engage in
forward contracts with customers that desire to hedge their exchange rate risk
4. Interest rate swap contracts
 Banks also serve as intermediaries for interest rate swaps, whereby two
parties agree to periodically exchange interest payments on a specified notional
amount of principal. Once again, the bank receives a transaction fee for its services
5. Credit default swap contracts
Privately negotiated contracts that protect investors against the risk of default on
particular debt securities. Some commercial banks and other financial institutions
buy them to protect their own investments in debt securities against default risk;
other banks and financial institutions sell them.
IV.Financial performance
Valuation of a Commercial bank
Commercial banks are commonly valued by their managers as part of their efforts
to monitor performance over time and to determine the proper mix of services that
will maximize the bank’s value. Banks may also be valued by other financial
institutions that are considering an acquisition. A bank’s value depends on its
expected future cash flows and the rate of return required by investors in that bank.
The bank’s expected cash flows are influenced by economic growth, interest rate
movements, regulatory constraints, and the abilities of the bank’s managers. In
general, the value of commercial banks is favorably affected by strong economic
growth, declining interest rates, and strong management abilities
Assessing bank performance
It is very basic but still offers much insight about a bank’s income, expenses, and
its efficiency. It is use to measure as a percentage of assets, which allows for easy
comparison to other banks or to a set of banks within the same region. Analysts
typically compare a bank’s performance with that of other banks of the same size.
Evaluation of a bank’s ROA
A commonly used measure of a bank’s overall performance is its return on assets
(ROA). The ROA is influenced by all previously mentioned income
statement items and, therefore, by all policies and other factors that affect those
items and determined by movements in market interest rates, as many banks
benefit from lower interest rates.. It identifies some of the key policy decisions that
influence a bank’s income statement and also highlights some factors not
controlled by the bank that affect the bank’s income statement. In addition, the
ROA is highly dependent on economic conditions. Another useful measure of a
bank’s overall performance is its return on equity (ROE). A bank can increase its
ROE by increasing its financial leverage, but its leverage is constrained by capital
requirements.
II Products and services
1. Types of accounts and deposits.
Types of Accounts:
Payment account:
Payment accounts are the most popular accounts owned by many people today.
When customers want to own a payment account, they just need to contact the
registered bank and an account will be granted. The purpose of using a payment
account to replace cash for transactions.

Saving account:
A savings account is a type of account used to deposit savings in a bank.
Depending on the user's purpose, you can open a short-term or long-term savings
account. Depositing a savings account is considered one of the most traditional
ways to invest today.

Credit card account:

With this card, customers can spend within the limit set by the bank even when
there is no money in the account. Customers must repay this amount to the bank
when the statement is due. If the customer does not pay this amount to the bank on
time, interest will be charged. A credit card account allows you to defer payments,
shop online, and access various loyalty programs.

Loan account:
Loan accounts are issued by banks to customers to record customer loans. Use this
account so the bank can control the customer's loan and repayment time.be safer
and less risky than other investment methods.

Types of Deposits:
Demand deposits:
This is the type of account where the customer deposits money into the bank and
does not confirm a specific time to withdraw the money. For this account, the bank
will pay very low or no interest because customers can withdraw and transfer
payment at any time. Banks usually do not actively use this capital source but need
to reserve a sum of money to ensure they can pay immediately when the customer
needs it.

Term deposit:
This is a type of deposit account that customers deposit in the bank and have an
agreement on the deposit term. Term deposits are a type of deposit that is relatively
stable because the bank determines the customer's withdrawal time to make
payments to customers on time. The bank can proactively use that money for
business purposes during the term of the asset.

Saved money:
This is the type of account where customers deposit money into the bank to earn
interest. Interest rate is the method the bank will pay based on the amount
deposited by calculating the account balance at the end of the day and
accumulating daily. When customers deposit money, the bank will provide the
customer with a book that the customer must store and bring with them every time
they go to the bank to withdraw or deposit money.

2. Lending products and services.

Unsecured loan:
An unsecured loan is a flexible form of bank loan that does not require you to
provide collateral and can use the loan money for personal purposes. You can use
the loan amount to buy things, travel or meet other consumer needs.

Mortgage loan:
Mortgage loans are a traditional form of lending by banks. With this form, you will
put your assets such as real estate, cars... as collateral for the loan. The bank will
grant a loan amount based on the actual value of the property.
In case you cannot repay the debt, the bank has the right to confiscate the property
you have pledged. Mortgage loans often have lower interest rates than unsecured
loans due to the guarantee from assets.

Installment loan:
This is a form of loan in which the borrower will repay the debt according to the
previously agreed term, through monthly installments. This means you will pay
interest and part of the principal every month until the debt is completely repaid.
Normally, the borrower will need to pay a part of the property value in advance
with their own money, in order to receive an installment loan to pay for the
remaining value of the property.
Installment loan products commonly applied today are home loans, car loans and
installment shopping loans. These are products welcomed by many customers
because they meet real-life needs.

Overdraft loan:
This is a form of loan where the bank allows you to spend more than the current
balance in your account, helping you meet your flexible payment needs when
necessary. Each bank will have different overdraft policies and limits and will
often require you to provide proof of income.

3. Investment products and services.

1. Savings:
This is the simplest and safest form of investment.
Interest is paid at a fixed rate throughout the deposit period.
Customers can choose to deposit savings with many different terms.
2. Buy and sell foreign currencies:
Customers can buy and sell different types of foreign currencies at commercial
banks.
Commercial banks provide foreign currency transaction services with competitive
exchange rates.
3. Stock trading:
Customers can open a securities account at a commercial bank to buy and sell
stocks, bonds...
Commercial banks provide securities investment consulting services to customers.
4. Investment fund:
An investment fund is a form of collective investment, managed by investment
experts.
Customers can participate in investment funds with small capital.
There are many different types of investment funds with different levels of risk and
return.
5. Insurance:
Insurance is a form of investment that helps customers protect themselves and their
assets against risks.
Commercial banks provide many different insurance products such as life
insurance and non-life insurance.
In addition, commercial banks also provide other investment products and services
such as:
Gold
Real estate
…
4. Other financial services.
Cash management service:
Designed to help businesses manage cash flow effectively. These services may
include automated collection, centralized banking (centralizing deposits from
multiple locations) and payment services (electronic bill payments).
Commercial finance:
Support businesses participating in international trade. These services may include
issuance of letters of credit (ensuring payment to exporters), document collection
processing (ensuring complete documentation for international transactions) and
foreign exchange services (conversion currency for international transactions).
Investment banking services (Limited) :
Although not as diverse as specialized investment banks, some commercial banks
offer a limited number of investment banking services to corporate clients. These
services may include assisting businesses in raising capital through bond issuance
or advising on mergers and acquisitions.
Safe deposit box:
Provides a secure physical location for customers to store valuable items such as
jewelry, important documents or family heirlooms
Commercial payment services:
Provides businesses with tools to accept electronic payments (debit and credit
cards) from customers. These services may include point-of-sale terminals, online
payment processing, and merchant cash advances (short-term loans based on a
business's expected credit card sales). Karma).
Online Banking and Mobile Banking:
Enables customers to conveniently manage their finances electronically. Features
may include online bill pay, account transfers, mobile check deposit, and real-time
account tracking.
Wealth management services (For individuals with high net worth) :
Some commercial banks offer wealth management services to high net worth
customers. These services may include personal investment advice, portfolio
management and estate planning assistance.
III Target market and customer segmentation.

1. Who are the main customer of the commercial bank?.

1. Personal:
Includes people of all ages and incomes.
Commercial banks provide them with services such as:
Open a checking and sav ings account
Send money
Withdraw money
Transfer money
Pay the bill
Credit
Buy and sell foreign currencies
Use ATM card/debit card/credit card
Participate in insurance services
2. Enterprise:
Including small and medium enterprises (SMEs) and large corporations.
Commercial banks provide them with services such as:
Open a checking and savings account
Send money
Withdraw money
Transfer money
Pay the bill
Borrow capital
Buy and sell foreign currencies
Bank guarantee
Collect and pay for household expenses
Cash management service
Trade finance services
3. Government:
Includes government agencies and state organizations.
Commercial banks provide them with services such as:
Open an account
Send money
Withdraw money
Transfer money
Pay the bill
Borrow capital
Release Stock
Account management service
4. Other banks:
Commercial banks may also provide services to other banks, such as:
Transfer money
Pay the bill
Borrow capital
Buying and selling foreign systems
IV Strength, weakness, opportunities and threats of commercial bank
STRENGTH
1. Focus on customer service:
Providing high quality customer
service will narrow the distance
from the other competitors
2. Competitive loan product: the
bank will provide many types of
loan product with many endow
interest rates with attract many
customers and small business
company
3. Secure banking platform: the
bank have the responsibility to
protect the information of the
customer account
4. One on one customer support: by
focus on giving support to
potential customer, this will help
WEAKNESS
1. Limited brand recognition: As a
starter in the banking area,
commercial bank may have to
face many difficulties in building
their brand reputation.
2. High overhead costs:
Maintaining and use the capital
in developing facilities, training
employees and technology ,
which may lead to use a lot of
cost and lower profit margin
3. Increase competition: Like any
other banks, commercial bank
also have to face the intense
competition from other banks
and may have to suffer some
form of unhealthy competition
from opponent.
4. Technology issues: Nowadays,
the world is changing constantly
and so does the technology. The
 us build a good relationship with
them. This also gain the upper
hand in building our reputation
of the bank service compare to
other banks.
OPPOPTURNITIES
1. Community focus: the bank
usually choose small business to
give their services and to build
good relationship with them
2. Customer service: providing
customer high quality service
can help the bank create good
impression of customer and also
help them become loyal
customer of the bank.
Online banking: providing a safe
and secure online banking platform
that can be access in any location
can convince users use the services.
3. Strong relationship: one on one
customer support can create
benefit for both the banks and
small business company.
digital technology and many
other techniques adapt to our
life. In order to catch up with the
trend and to serve customer
better, the bank have to
constantly updates their
technology and this can cost
them a lot of money.
THREATS
1. Competition from established
banks: the pursue customers to
use the bank product instead of
their familiar banks can be quite
challenging.
2. Economic downturn: during time
of economic hardship, small
business may not pay their loans
in the term, this can have
negative effect in the bank‘s
profitability.
3. Fraud and cyber attack: the bank
services have to deal with the
risk of cyber attacks from the
hackers try to steal the personal
information of customers to use
for their personal goal or other
fraudulent activities.
4. Inflation and interest rate: The
economic inflation and the
fluctuations of interest rates can
lead to the detrimental effect on
the profitability of commercial
bank.
 SWOT analysis of a commercial bank (Swot Bank Analysis, 2023)
V Future recommend for the commercial bank
The future of commercial banking is likely to be more digital, more complicated,
and simply more demanding than in the past. While future growth prospects could
remain rooted in solid relationships, corporate customers increasingly expect new
sources of value from their banks in advice, the diversity of products and services,
and new business models. Here are some advice for the future of commercial bank:
Adapt AI and machine learning
Due to the impact of the “The industrial revolution 4.0”, many device using digital
transformation AI have been created. These exciting technologies can help sales
and marketing teams identify aspects and predict customer needs and propensity to
buy. They also enable dynamic deal pricing for micro-segments, as well as
automatic decision-making processes, credit rule sets, and exceptions. By adopting
AI and machine learning, banks can accelerate the maturity of treasury functions
and credit risk analysis. Most commercial banks all seeing the potential of these
technologies to differentiate themselves from competitors in the market.
Continue renew tech to match the need of market
The commercial banking market is witnessing the disintermediation by the
disruptors who are innovating through technology-enabled solutions. For instance,
automated document population, e-verification, verifiable external data validation
to simplify servicing assessments, financial spreading, and deal structuring, which
rapidly reduces the time to make a credit decision.
A digitalized workforce
A digital business model, which using advanced data and analytics and digital
channels to offer self-service, should have significantly lower costs and serve
customer better. Person-to-person relationships are expected to continue with
relationship managers (RMs) being deployed in a more targeted manner: to
profitable clients; in situations where extensive personal care and attention is a
unique selling point; when clients need industry or sector expertise that technology
cannot deliver; and for complex, escalated service enquiries that cannot be
resolved digitally For example, data enables peer comparisons and provides early
indicators of client attrition, enabling fast action to help improve retention.
(Nguyễn Ngọc Hoàng, 2022)