VietNamNet Bridge – Ten domestic commercial banks have been piloting Basel II, a set of banking regulations put forth by the Basel Committee on Banking Supervision, since late last year, as part of measures required by the State Bank of Viet Nam (SBV) to restructure the local banking system.

Basel II is the second of the committee’s recommendations, attempting to integrate Basel capital standards with national regulations, by setting the minimum capital requirements of financial institutions with the goal of ensuring institution liquidity.

The SBV asked the 10 banks, including Vietcombank and Techcombank, to complete the pilot process by 2018, before the application of Basel II is expanded to other banks in the country.

Vietcombank Chairman Nghiem Xuan Thanh and Vikesh Mirani, Group Chief Financial Officer at Techcombank, talked to Viet Nam News reporters Vu Hoa and Ngoc Duy about how the process was going on at these two banks.

Your bank is among 10 Vietnamese banks that are piloting capital and risk management with Basel II standards. How is this process going on at your bank?

Thanh: In responding to the SBV’s requirements and international integration trends, Vietcombank’s management board has set the development strategy to become the leading bank in the country and the best bank in risk management by 2020. Vietcombank has been active in preparing for compliance with Basel II and setting out a suitable roadmap.

Vikesh: Techcombank started the Basel II implementation in 2012. The bank completed Basel II gap analysis with close support from one of the Big Four auditors (PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG) in 2014. The bank is in constant communication with the SBV and appraising the regulators of our progress and readiness.

What roadmap has your bank built for itself to manage capital and risks with these standards?

Thanh: To meet the requirements of expanding and developing business activities as well as meeting capital requirements under Basel II, Vietcombank has developed a roadmap to raise capital from various sources including issuing bonds to facilitate subordinated bonds, offering private placement to potential investors to raise charter capital, and stock dividends instead of cash dividends if the dividend policy is approved.

Initially, in 2016, Vietcombank had implemented plans to increase charter capital through surplus and retained earnings; and private placement in accordance with the capital increase plan which has been approved by the shareholder meeting.

Vikesh: Techcombank has built capital planning tools such as return on risk weighted assets (RORWA) and risk-adjusted return on capital (RAROC) that reflect average risk weights of different portfolios (retail, small and medium enterprises, wholesale banking, financial institutions, and treasury products) as well as associated financial return and allocated operational cost. These tools give us RAROC to effectively and efficiently manage business performance and pricing.

How does the application of Basel II benefit the Vietnamese banking system in general, and your bank in particular?

Thanh: Banks can reach the target of sustained profit growth in the future by implementing risk management standards in accordance with international practice which will help improve risk management capabilities. In addition, the application of Basel II will also improve the position of commercial banks in Viet Nam to other banks in the region in terms of management, thus supporting their activities in the international market.

In addition to the basic benefits seen in local commercial banks, the application of Basel II will help Vietcombank achieve its strategic targets to become a regional bank in the next three to five years. It has striven to become the bank which best applies risk management standards according to international norms.

The development of risk measurement models under Basel II and toward minimum capital management based on risk level of business operation will help (i) improve credit quality and operational efficiency; (ii) establish a pricing strategy based on risks; (iii) build a proactive portfolio management strategy; (iv) enhance bank ratings while reducing borrowing costs.

Vikesh: Implementing Basel II will bring about more robust risk management to ensure a safe and efficient banking system for Viet Nam. Public disclosures will reflect the bank’s risk and ensure market transparency. This will drive the bank’s motivation to manage risk under the watch of regulators, investors, and rating agencies.

Banks with robust disclosures and high capital adequacy ratio (CAR) will benefit from improved ratings, strengthening investors’ confidence. This will benefit the overall economy with greater capital flow efficiency as Viet Nam integrates in the global economy through international trade agreements such as the Trans-Pacific Partnership and the ASEAN Economic Community.

What challenges does your bank face in applying Basel II? Does the bank co-operate with an international organisation, or is it helped by a foreign advisor in implementing the standards?

Thanh: Vietcombank has faced with three big challenges in implementing Basel II.

Firstly, there is difficulty due to an uncompleted legal framework. Vietcombank has to build policies and a risk management framework which follows both Basel II standards and the central bank. However, the SBV is still in the process of finalising policies relating to this content. The central bank has not had guidance and this is only a draft version. Therefore, any changes in the central bank’s policy could cause difficulties to commercial banks, including Vietcombank, in the implementation of the Basel II roadmap. However, Vietcombank has made efforts in actively collaborating with SBV’s experts to remain updated on the situation and to take timely measures. Vietcombank has completed calculations and analysis of the quantitative impact on time as required by the central bank.

Secondly, Vietcombank has been short on human resources with enough knowledge and experience on Basel II, though it has established a Quant team. The bank still needs time to build adequate human resources for operating risk management under Basel II. Vietcombank has hired consultants to implement the project and provide training to our specialists.

Thirdly, Vietcombank has faced difficulties gathering enough data to measure and run analysis models, as banks need exact and abundant historical data. Therefore, it would take up to three years to collect enough data to build a model with a low error rate.

Vietcombank has worked with the best consulting companies to implement Basel II. In 2014 and the first half of 2015, the bank completed the gap analysis project and approved the overall roadmap for the implementation of Basel II with the consultancy of Ernst & Young.

Based on an overall roadmap including 82 component projects, Vietcombank has implemented 43 of them so far. The bank has itself implemented some projects such as completing the regulatory process and standardising the organisational structure, functions and duties. Some project components have been implemented with the support of experienced consultant companies in the field of risk management and Basel II compliance such as Oliver Wyman and PricewaterhouseCoopers (relating to building risk measurement under Basel II standards, the governance model, building a framework of risk management, developing risk management instruments under advanced practices and improving internal audit capacity).

Vikesh: Limited human capital in adopting Basel II regulations is one of the key challenges faced by all banks. We are working with international consulting firms and system vendors to ensure our readiness to the SBV requirements and implementing fundamental parts of Basel II like the rating system, value of risk models, and capital management according to BIS guidelines.

Besides capital and risk management plans, what strategies and policies does your bank have for its business activities in order to succeed in Basel II implementation?

Thanh: In addition to meeting with the capital requirements, Vietcombank has (i) continued to improve risk policies, procedures and management; (ii) standardised the operational model and functions from headquarters (iii) restructured the organisation (centralisation of credit processes and internal audit ); (iv) developed a database and data management framework, (v) improved operational capacity of the internal inspection system and internal audit, determining the position and role of the internal control system.

Vikesh: Techcombank implemented data governance strategies to improve both risk management & business processes. Additionally, we improved our training and development curriculum to enhance team member understanding, practice and compliance to succeed in our Basel II implementation before the SBV deadline.

According to the Basel Committee on Banking Supervision, the application of Basel II will impact lending interest rates and push up the costs of capital, and this will whittle away net profits of banks. What measures does your bank take to compensate for such declining profits?

Thanh: The increase in capital to ensure the capital adequacy ratio according to higher standards will certainly lead to decreasing profitability performance of equity in the short term. However, in the medium and long term, the improvement of risk management quality will help banks save provision costs, increasing profits and profitability.

Vietcombank, in recent years, especially in 2015, has seen impressive business results. The bank’s operations have achieved higher growth rates in comparison with the industry average while credit quality is tightly controlled, providing high annual profit growth of 17 per cent last year. Therefore, we believe that the effects of capital increase according to the requirements of Basel II standards on Vietcombank’s profitability would not be too big.

Vikesh: The cost of capital amongst others is determined by the market in terms of investor’s expected return on equity (ROE). Implementing Basel II may increase capital requirement however with a larger capital base, the banks would have increased safety and should therefore lead to a lower cost of capital with banks being perceived as less risky.

Techcombank with its customer centric approach has taken a number of strategic initiatives to improve product penetration and improvement of its core profitability.

VNS