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DBA Dissertation Proposal

Restructuring an Emerging market: The case of Vietnam
by

Ngoc Nguyen

on 16 September 2014

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Transcript of DBA Dissertation Proposal

RESTRUCTURING
AN EMERGING MARKET

THE CASE OF VIETNAM
DBA Dissertation Proposal - Presented by Ngoc Nguyen
Committee Members
: Dr. Naser Abumustafa - Chair
Dr. Hamid Shomali - Reader
Dr. Admassu Bezabeh - Reader
Golden Gate University

AGENDA
Purpose of Study
Introduction
Literature Review
Research Questions
Hypothesis
Methodology
Statement of Expected Outcomes
Limitations
Recommendations
Suggestions for Future Research
INTRODUCTION
LITERATURE REVIEW
RESEARCH QUESTIONS
HYPOTHESES
METHODOLOGY
STATEMENT OF EXPECTATION
LIMITATIONS
Modifications of the reforming model based on the changes in economics and politics in the future.
References
CURRENT BELIEFS
SUGGESTIONS
FOR FUTURE RESEARCH
Examining the probability of success in such case that Vietnam follows the model of the 1997 reconstruction in Thailand and South Korea, its two neighbor countries
The Vietnamese banking industry is in need of a wise model for its reform
Research Design
Part I
: Lessons from Thailand and South Korea (1997) that could be applied to the Vietnamese economy at the moment - Using a qualitative primary research (interviews)
Part II
: Examining the effects of the Vietnamese Asset Management Corporation on solving the bad debts problem - Using both methods: quantitative (DEA model), and qualitative (interviews)
.
1. What is the role of the VAMC in the Vietnamese banking reform?



2. What are the impacts of interest rates and bank spreads on the performance of the Vietnamese banking reform?
H1
: The establishment and performance of VAMC support the Vietnamese banking restructure.
H2
: If the Vietnamese Government lower the interest rates and increase bank spreads, banks will have the ability to improve its performance.
Time frame chosen - 2017
Part I - Secondary Research
Data conducted from financial documents and analysis published from World Bank, Moodys, the State Bank of Vietnam, and the Banking Department
Part II -Primary research

2. 40 in- depth interviews with Vietnamese experts in the fields of banking, economics, law, and politics to test H2.
May include PESTEL and Porter’s Five Forces Model
Reduce corruption
Reduce their dependence on debts
Bankruptcy must be permitted
Assets should be sold at market prices
Eliminate costly bureaucratic procedures
Encourage foreign investments
Professionalize management

Biases in primary data
Financial data available may not reflect the most accurate information
Validity of the result towards Hypothesis 1: only data from 2013 is available for VAMC?
Fail to reject the hypotheses
1. Mathematical Model: Using the Data Envelopment Analysis to test H1 - Data of 15 banks from 2003- 2013
Inputs
1. Fixed Assets
2. Deposits from customers
3. Deposits and borrowing from other credit institutions
4. Interest and similar expenses
5. Salaries and related expenses (Salaries and allowance)
6. Fee and commission expenses, other expenses


Outputs
1. Loans and advances to customers
2. Deposits and borrowings from other credit institutions
3. Interest and similar income
4. Fee and commission income
5. Other income- Net income from investments in associates and joint- ventures
An experiment with data conducted from 2006 to 2012
Results
Abbreviated Name
Full Name
1. CTG
Vietnam Joint Stock Commercial Bank for Industry and Trade
2. VCB
Joint Stock Commercial Bank for Foreign Trade of Vietnam
3. BIDV
Joint Stock Commercial Bank for Investment and Development of Vietnam
4. AGRB
Vietnam Bank for Agriculture and Rural Development
5. MHB
Housing Bank of Mekong Delta
6. ACB
Asia Commercial Bank
7. EIB
Vietnam Export Import Commercial Joint- Stock Bank
8. HDB
Ho Chi Minh City Development Joint Stock Commercial Bank
9. MBB
Military Commercial Joint Stock Bank
10. ABB
An Binh Commercial Joint Stock Bank
11. NAB
Nam A Commercial Joint Stock Bank
12. NVB
Nam Viet Commercial Joint Stock Bank
13. STB
Saigon Thuong Tin Commercial Joint Stock Bank
14. TCB
Vietnam Technological and Commercial Joint Stock Bank
15. OCB
Ocean Commercial Joint Stock Bank

Sample - Lists of banks
QUALITATIVE RESEARCH - INTERVIEWS
Common Group Questions
1. On a scale from 1 to 5, as 1 refers to Pessimistic, 3 refers to Neutral, and 5 refers to Optimistic, what is the current state of the Vietnamese economy?

2. Do you think the interest rate and bank spreads in Vietnam is appropriate? If not, how much should they be set to improve the restructuring process?

3. What are effects of lowering interest rates on the Vietnamese banking industry?

4. What are effects of increasing bank spreads on the Vietnamese banking industry?



5. On a scale from 1 to 5, as 1 refers to Strongly Improve, 3 refers to Neutral, and 5 refers to Strongly Worsen, how do you think lowering interest rates and increasing bank spreads would affect the banking restructure process?

6. What is the role of the Government in the reform? When might the Government be completed to step in? Is there any case the involvement of the Government will slow down the improvement of banks?

7. What is the role of VAMC in the reform? On a scale from 1 to 5, as 1 refers to Strongly Disagree, 3 refers to Neutral, and 5 refers to Strongly Agree, do you agree that VAMC improves the restructuring process? Why/ Why not?

8. What are opportunities and challenges that VAMC might yield compared to and other emerging markets’ AMCs in the past?

9. From your points of view, what are well- performing banks and poorly- performing banks at this moment? Are there any banks that should be stopped and file for bankruptcy?

10. What is your opinion on the time frame of the reconstruction and what factors may cause delays to it?
INDIVIDUAL GROUP QUESTIONS- BANKING EXPERTS
A- BANKERS


1. How did your bank start on the reconstruction and how is the progress? What are some issues that your bank has encountered?

2. What are the strategy and plan/model does your bank follow to conduct the reconstruction?


B- MINISTRY OF FINANCE'S EMPLOYEES

1. What is the strategy/plan/model that the Ministry of Finance is working on, in terms of reforming the banking industry?

2. What is your opinion on the roles of State- Owned Banks, State- Commercial Banks, and the Ministry of Finance in the reconstruction?

The 1997 Financial Crisis in Asia
Causes
: current account imbalances, inappropriate quantity and quality of financial “overlending”, a general set of banking problems, and composition, maturity and size of capital inflows. (Corsetti, Pesenti, and Roubini, 1999)
Solutions
: seeking aids from the International Monetary Funds (IMF) and reforming banking industries
The Financial Reconstruction in Thailand in 1997
Causes
: consequence of the failure of monetary policy, capital flows, corruption, inflation, plus the fall of Thai Baht (Jansen, 2001)
1. Establishing the Financial Restructuring Authority (FRA) and Thai Asset Management Company (AMC)

2. Restructuring the financial system: Engaging seven local banks into merge and acquisition.

3. Controlling bad debts
Solutions
The Financial Reconstruction in South Korea in 1997
Causes
: substantial capital inflows, financial instability, and inappropriate policies, short- term external debts increasing while long- term borrowings decreasing -
"Double mismatch"
problem, plus Domino effect of chaebols (Kihwan, 2006)
Solutions
: seeking help from the IMF, increasing money supply and
lowering interest rates
, merging chaebols (Kim, 2010)
Lessons from the Financial Reforms in Thailand and South Korea in 1997
Kim (2010)
:

distinguishing financial liberalization from trade liberation,

good governance in the reform process,

and the importance of a comprehensive scope in market reform.

Rojas- Suarez (2001)
: interest rate on deposits and bank spreads were best performers in rating banks in emerging markets

Weaker banks yielded high deposit rates and low spreads.
Key success factors of the 1997 Financial Reform in Thailand and South Korea
1. The active role of the Government in issuing policies to help trigger the economic development and improve banking sector’s performance

(lowering interest rates and increasing bank spread)
2. The establishment of an organization to help solving the bad debt problem. (Thailand’s FRA and TAMC)

Overview of the Vietnamese Banking System
Vietnam has strongly emphasized that State-owned commercial banks should play an important role in the restructuring process.
The State bank of Vietnam (SBV) plays a role as the national central bank.
Its functions include managing monetary, banking, foreign exchange, issuing money of credit institutions, and providing cash services for the Government.
In the case that they do not want to be merged with others, SBV will buy or direct other credit institutions (both domestic and foreign) to buy back their shares.
Decision 254
Commercial banks and finance companies will be classified into three groups: Healthy, Temporarily short of finance, and Weak
Weak credit institutions will then have the choice of merging themselves voluntarily, or being forced to merge.
Effects of Lowering Interest Rates towards Banking’s Performance
When economic activity weakens and inflation raises, the central bank will reduce interest rate lower than natural interest rate
Rojas- Suarez (2001): Effects include

Real cost of borrowing gets lower
Stimulating consumer household expenditure.
Improving bank balance sheets and bank capacity to lend and boosting earnings and capital.
Promoting real estates investments purchases
A long-term low interest could lead to serious consequences for people who heavily rely on interest income.
Overinvesting in long-term assets for banks. If interest rates rise unexpectedly, banks might be exposed to substantial losses.
Macro economy could be led to a Japanese-style deflation if interest rates are kept low for a long term.
In the sense of short-term, low interest rates reduce the profitability of money market funds.
The current state of the banking industry in Vietnam
Quach (2010): Potential but remains significant problems.
2005- 2010: dramatic growth in both quantity and total assets.
High Nonperforming Loan (NPL) ratio
Small size
Credit growth is much higher than deposits and GDP growth
Income depends heavily on lending.
Total Bad Debts in 2011: $5 billion ( 3.1% of GDP) (Moody)

Challenge: Financial Crimes
2014: Biggest ever swindler case totaled 4,911 billion VND (about 188 million US dollar), obtained by Huynh Thi Huyen Nhu - an upper manager of Vietinbank who used fake documents and signatures to commit the fraud.
Similarities between the financial systems of Vietnam's currently and Thailand and South Korea's in 1997
Signal of a bubble in investment.
Generous short- term foreign investments
Increasing commercial deficit
Increasing real estate bubble
Real- estate credit loans: 50-60% of banks’ total assets.
Bad Debts Problem
Unstable Currency System

THE BAD DEBTS PROBLEM
“The general rule to avoid bad debt is: If you can't afford it and you don't need it, don't buy it.”
(Dave Roos- HowStuffWorks)
Dramatic changes of macroeconomic condition

Major liberalization of financial sector
Human Factor
Causes
Bad Debts in Emerging Markets - Lessons Learnt
Poland
- 1992: recapitalization of state-owned banks and restructure other indebted enterprises.
Ireland
- 2008: founding the National Asset Management Agency (NAMA), an asset management corporation
(Source: Kalra, 2012)
Malaysia - 1998
: founding Danaharta- a successful model of Asset Management Company, then reorganization of banking system
Indonesia
- 1998: founding Indonesian Bank Restructuring Agency (IBRA), recapitalization and seeking help from the IMF
South Korea- 1997: founding Korean Asset Management Corporation (KAMCO), which successfully supported the bad debts solution in 1997, and also later in 2008
Thailand- 1997: founding the Financial Restructuring Authority (FRA) in October 1997, and Thai Asset Management Corporation (TAMC) in 2001.
• Founding Asset Management Corporations (AMC)
• Getting aids from the Government
• Getting aids from the Federal Reserves
• Using reserved foreign exchanges to gain capitals
• Getting rid of bad debts
• Asset securitization.

Lesson Retrieved
Vietnam Asset Management Corporation (VAMC)
Established on May 31st, 2013

100% charter capital of VAMC was owned by the Vietnamese State -500 billion VND (approximately US$23 million
President: Dang Thanh Binh, Vice Governor of the State Bank of Vietnam
Purpose: Resolving bad debts of credit agencies, improving liquidity, safety, and effective operation of credit agencies and monetary market system
Lenders with bad debts of 3 percent or more are required to sell them to the VAMC.
- a debt that occurs when a firm believes that a debtor is unable or unwilling to pay and the business will never be able to recover the money owed (Ibarra, 2012)
Definition
How it works
: VAMC purchases bad debts and restructure loans, issuing zero- coupon five- year bonds in exchange for banks, who can use these bonds as collaterals for refinancing funds from the SBV
Revenues
come from:
• Selling debts and collaterals
• Financial investments, buying shares
• Fees from consultation, brokerage, resolving debts and collaterals
• Renting and Leasing collaterals
• Other incomes.

Costs
include:
• Buying and collecting debts costs
• Consultation and brokerage fees
• Selling debts, shares, and capital transfer fees
• Preserving, investing, repairing, upgrading property fees
• Risk reservation
• Interest paid for loans
• Other costs.

Updated Performance
: By 12/31/2013, VAMC succeeded in buying 38.900 billion VND of bad debts, relative to 32.400 billion VND in special bonds.

VAMC successfully bought bad debts from 35/36 credit corporations that had filed to sell bad debts to VAMC.

In 2012, Vietnam’s GDP was
5.2 %
- credit growth
8.9%
percent.

In 2013, GDP increased to
5.4 %
, credit growth nearly
10%
. (VAMC’s official Website, 2014)

Experts still expressed cautions:
Efficiency
towards the bad debts solutions?

Higher Inflation
?



Was the decision to found VAMC a golden key or a no?
The Data Envelopment Analysis
How does researcher plan to test the efficieny of VAMC?
Introduced by Charnes, Cooper and Rhodes (1978)
Concept: Measuring Efficiency
Efficiency = Total Inputs/ Total Outputs
This ratio is always < or = 1.
At 1, the firm reaches its maximum production - no waste. (Ngo, 2010)
Source: Reid, Kirkley, Squires, Ye (2000)
Measuring a Company's Efficiency
max u,v (u’qi/v’xi)

St: u’qj/v’xj <= 1         

j = 1,2,3….I                
u, v >= 0

N companies, each uses X inputs and Y outputs
From here, we could figure out the inputs and outputs of a company where its efficiency ratio is maximized while is always less than or equals 1.
How the research works
Choose inputs and Outputs
Run Model
Compare results - the banking performance before and after VAMC is established
Figuring out banks that perform well and badly
Choosing Variables
Luan, Loan, Nhut (2010)
- Intermediation approach
Inputs
: Fixed Assets, Labor Costs, Total Deposits
Outputs
: Fees and Income from interests and Loans
Researcher plans to:

Combine both intermediation and opperation approaches due to characteristics of the Vietnamese banking system.

Add 1 more input variable:
Other expenses
( advertising, PR, customer relations, and capacity)
Vujcic and Jemric (2001)
: 2 approaches

Operation approach
- Treating banks as firms that produce banking service.
Inputs: Costs
(interest expense, labor cost, other expenses).
Outputs: Revenues
(interest income, non- interest income).

Intermediation approach
-
Treating banks as financial intermediaries.
Inputs: Total deposits and total expense
(interest expenses plus non- interest expenses).
Outputs: interests
from loans and securities.
INPUTS
Fixed Assets
Deposits from customers
Deposits and borrowing from other credit institutions
Interest and similar expenses
Salaries and related expenses (Salaries and allowance)
Fee and commission expenses, other expenses
OUTPUTS
Loans and advances to customers
Deposits and borrowings from other credit institutions
Interest and similar income
Fee and commission income
Other income - Net income from investments in associates and joint- ventures
Data of these 15 banks from 2003- 2013 will be analyzed using the DEAP (Data Envelopment Analysis) version 2.1.

This is an available program to calculate results after data for inputs and outputs are entered.

The 15 banks chosen play a majority role and take part of more than 80 percent of the Vietnamese banking industry.
Presented on July 7th, 2014
(Coelli, 2005)
Q&A
Charnes, A., Cooper, W., & Rhodes, E. (1978). Measuring the efficiency of decision-making units. European Journal of Operational Research vol. 2, pp. 429–444.

Coelli, T.J., Rao, D.P., O'Donnell, C.J. & Battese, G.E. (2005). An Introduction to Efficiency and Productivity Analysis, Springer. 2014

Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel (1999). What caused the Asian currency and financial crisis?. Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373. 2014

Ibarra, Venus (2012). Bad Debts Practices of Selected Small and Medium Enterprises in the Philippines. Interdisciplinary Business Research. 2014

Jansen, Karel (2001). Thailand, Financial Crisis and Monetary Policy. Journal of the Asia Pacific Economy 6,1. 2001. p124- 152. 2014

Kalra, Sanjay (2012). Vietnam's Financial Sector. Presentation for Industrial College f the Amed Forces (ICAF). National Defense University. 2014.


Kim, Kwan (2000). The 1997 Financial Crisis and Governance: The Case of South Korea. Working Paper #272. The Helen Kellogg Institute for International Studies- University of Notre Dame.

Kim, Kwan (2006). The 1997-98 Korean Financial Crisis: Causes, Policy Response, and The International Monetary Fund. 20142014

Chuong Minh Luan, Tu Ngoc Huong Loan, Ho Minh Nhut (2012).
Application of DEA model and POOLED OLS to evaluate factors that affect the efficiency of Vietnamese SCBs' performances.
Youth.ueh.edu.2014.
http://www.youth.ueh.edu.vn/modules.php?name=Files&go=view_file&lid=294

Moody's Report on Vietnamese Banking (2014)

Ngo, Dang-Thanh (2010). Evaluating Vietnamese Commercial Banks Using Data Envelopment Analysis Approach (Vietnamese). Vietnam National University working papers, Hanoi.

Quach, L (2010). Vietnam Banking Sector Report. Research and Analysis Department. Vietcombank Securities. 2014

Rojas-Suarez (2001). "Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn from Financial Indicators," Working Paper Series WP01-6, Peterson Institute for International Economics.2014
Roos. Dave. Public Debt and the Economy. How Stuff Works. Retrieved on May 2014 from http://money.howstuffworks.com/personal-finance/debt-management/debt4.htm

Reid, C., Kirkley, J.E., Squires, D. & Ye, J (2004). An Analysis of the Fishing Capacity of the Global Tuna Purse-seine fleet. Retrieved May 2014 from http://www.fao.org/docrep/008/y5984e/y5984e0c.htm#fn14

Vietnam Asset Management Corporation's Official Website. sbvamc.vn

Vujcic, Boris and Jemric, Igor (2001). Efficiency of Banks in TransitionL a DEA Approach. Current Issues in Emerging Market Economies. The Croatian National Bank. 2014
Vietnamese Banking Market Share
Full transcript