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1 MINISTRY OF EDUCATION AND TRAINING NATIONAL ECONOMIC UNIVERSITY Do Thi To Quyen INVESTMENT IN ENHANCING COMPETITIVE CAPACITY AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM Speciality: Development Economics (Investment Economics) Code: 62.31.05.01 SUMMARY OF ECONOMIC DOCTORAL THESIS Hanoi, 2014 2 This work has been completed at: National Economic University. Instructor: 1. Prof. Dr Tran Tho Dat 2. Asso.Prof.Dr Nguyen Bach Nguyet Judge 1: Asso.Prof.Dr Dao Van Hung Judge 2: Asso.Prof.Dr Trinh Thi Mai Hoa Judge 3: Dr Le Thanh Tam The Thesis shall be defended in front of the State level Thesis Assessment Council held at: National Economic University, No. 207 Giai Phong, Hai Ba Trung, Ha Noi At on The Thesis can be found in the library of: 3 PREFACE 1. The imperativeness of the Subject The effectiveness and stability in the system of commercial banks in Vietnam are under immense pressure after going through the economic recession. At the same time, they have to face increasing greater challenges in the open financial market. Therefore, the competitive capacity of domestic commercial banks should be reevaluated carefully from both theoretical and practical aspects. Joint Stock Commercial Bank for Foreign Trade of Viet Nam (VCB) is one of the major banks and holds significant market shares in key products, but it still have to compete intensely against others and is at risk of a decline in market shares. Hence, enhancing its competitive capacity is an urgent requirement for VCB. The solutions often proposed to raise the competitive capacity for VCB are building a business plan, developing the financial potential, modernizing technology, diversifying products, and enhancing customer service quality, boosting promotional campaigns and branding… However, these solutions need investment to be carried out. Therefore, investing in enhancing competitive capacity is considered the basic and essential task for VCB. The issue arising to VCB is how to build the investment strategy, mobilize and allocate capital into the appropriate assets and fields… to bring the most probable effects to VCB’s competitive capacity. VCB, the pioneer in the banking system as well as a typical bank that not only represents the state-owned bank but also carries new features of a joint stock bank, is an adequate and active example to do research on the issue of investing to enhance the competitive capacity. For this reason, I choose the subject of “Investment in enhancing competitive capacity at Joint Stock Commercial Bank for Foreign Trade of Vietnam” for my doctoral thesis. 2. Overview In recent times, there have been many researches on the issue of competition and competitive capacity of commercial banks in Vietnam, such as: Home researches: “Competitive capacity of commercial banks on the trend of integration” of Nguyễn Thị Quy, economic doctoral thesis “Solutions for commercial banks to enhance their competitive capacity and integrate by 2010” of Trịnh Quốc Trung, economic doctoral thesis “Solutions for commercial banks in Vietnam to enhance their competitive capacity in the context of global economic integration” of Lê Đình Hạc, doctoral thesis “Competitive capacity enhancement of commercial joint stock banks in Ho Chi Minh City in the context of integration” of Đoàn Đỉnh Lam… Those researches only focus on describing and evaluating factors in competitive capacity. However, the origin of those factors were not analysed and quantified specifically and scientifically. Those researches, thus, do not point out the role of 4 investment in enhancing the banks’ competitive capacity but just indirectly mention it while investment is the origin of many factors in competitive capacity. Foreign researches: The research of Professor Michael Poter is outstanding one about competitive capacity. It can be applied to all levels and sectors. However, his research is highly level. It should have flexible uses when applying to a certain subject and role of investment has not also been studied directly in his research. Therefore, this thesis focuses on investment in enhancing banks’ competitive capacity. It includes analysis and evaluation investment in enhancing bank’s competitive capacity through specific and typical figures of VCB, building the criteria for result and effect evaluation of these operations, proposal of the solutions for investment in enhancing competitive capacity to bring the hightest effect to VCB. 3. Research objectives - Developing and systemizing the theoretical issues in terms of investment in enhancing competitive capacity at commercial banks . - Through theory and practice, confirming a extremely critical role of investment in enhancing competitive capacity for development of them in general and VCB in particularly. Depending on each period, development strategy, competition strategy and characteristics, banks implement appropriate investments. - Finding out the solutions for investment inenhancing competitive capacity to bring the highest effect to VCB. 4. Research subjects and scope The research subjects are investment in enhancing VCB’s competitive capacity, results and effects gained from these operations. The research scope is investment in enhancing VCB’s competitive capacity in the last period (mainly 2005-2012). 5. Method for research Many scientific methods including analysis, synthesis, comparison, statistics, mathematics, logical deduction, etc. are applied in this thesis. In addition, the thesis combines description and analysis of the actual data to evaluate investment in enhancing VCB’s competitive capacityin the quantitative and qualitative manner. 6. New scientific contributions of the thesis - In theories: The thesis develops theoretical issues regarding to investment in enhancing banks’ competitive capacity systematically. Concepts, characteristics, roles, influencing factors of these operations are associated with characteristics of commercial banks. The thesis shows that operations of investment in enhancing banks’ competitive capacity depends on competition strategy, competitive tool the bank uses at each period. For this reason, competition strategy also influences capital mobilization and structure of capital. For purpose of showing close relationship between investment and banks’ competitive capacity at the same time evaluating effect of these operations, the thesis builds process of investment in enhancing banks’ competitive capacity, critera for results and effects of investment in enhancing banks’ 5 competitive capacity, including direct and indirect criteria, qualitative and quantitative criteria. - In practice: The actual situation of investment in enhancing competitive capacity at VCB is summarized and assessed by applying theories and practice on multiple angles. With the current characteristics, competitive position, the thesis points out that investment in enhancing VCB’s competitive capacity should attach special importance to improvement of technology, human resource and development brand and sales promotion. In the last time, structure of investment in enhancing competitive capacity at VCB was not irrational because investment has not been made right in the main points. The mobilization of capital with methods in accordance with VCB, management and supervision investment on the process, strategies also are the critical factors. By calculating criteria, the thesis shows that investment in VCB’s competitive capacity makes a positive impact on competitive capacity; but there still exists some limitations. Based on analysis of limitations, causes, the thesis puts forward the practical solutions to promote effect of investment in enhancing VCB’s competitive capacity. 7. Structure of the thesis Besides introduction, conclusion, the thesis consists of the following three chapters: Chapter 1: Basic contents of investment in enhancing competitive capacity at commercial banks. Chapter 2: The actual situation of investment in enhancing competitive capacity at Joint Stock Commercial Bank for Foreign Trade of Viet Nam. Chapter 3: Some solution of improving investment in enhancing competitive capacity at Joint Stock Commercial Bank for Foreign Trade of Viet Nam. CHAPTER 1: BASIC CONTENTS OF INVESTMENT IN ENHANCING COMPETITIVE CAPACITY AT COMMERCIAL BANKS 1.1. Competition and competitive capacity of commercial banks 1.1.1. Overview of the commercial banks 1.1.1.1. Concept and functions of commercial banks The commercial bank is financial institution that provides a list of the most diverse financial services, especially credits, savings, payment services and its business is for profit. The commercia bank plays an important role for economy because it has the following three basic functions: financial intermediaries, creating the means of payment, payment intermediaries. 1.1.1.2. Activities of commercial banks The commercial bank is a firm that provides a list of financial services to individuals and organizations. Thus, besides specific activities of a bank, the 6 commercial bank is also a firm with full normal activities like other firms, including investment in improving competitive capacity. 1.1.2. Theories of competition and competitive capacity of commercial banks 1.1.2.1. Concept of competition and competitive capacity of commercial banks There are many concepts of competition and competitive capacity in the different ranges, different angles. In my opinion, competition between banks is that the banks create and utilize the comparative advantages of supplying product and service in the same business environment to achieve the specific targets such as profits, sales or market share, enhance its position on the market in comparison with other banks. Bank’s competitive capacity is capacity the bank creates, maintains and continuously enhances its advantages to gain higher level of product and service quality than average level and/or have ability to reduce the relative costs, allowing the bank to increase profits, market share and ensuring its operations safely, healthily. Competition between banks carries many specific characteristics because the banks operate in financial services field which is sensitive and requires high stability, transparency: competing within cooperation; competing healthily; competing within the framework, regulation and supervision of the state bank through policies each period; competing under many diverse and sophisticated forms. 1.1.2.2. Competitive tools in banking Depending on business characteristics, competition strategy in each period and current competitive capacity, the bank selects the following competition tools: competition on prices; competition on products; competition on distribution system; competition on brand; competition on sales promotion programs. 1.1.2.3. Critera of commercial bank’s competitive capacity - Criteria for financial capability: scale of charter capital, equity, total assets, profit after tax, return on total assets (ROA), return on equity (ROE), capital adequacy ratio (CAR), non-performing loan ratio. - Criteria for operational capacity: sales, quality and market share of the products; ability to develop products and services. - Governance capacity: governance levels and monitoring capabilities of the board; response capability of the operating mechanism for market movements; quality and validity of implementing business policies and processes, processes of risk management, internal control; organizational structure; level of coordination between divisions and capability of adaptability, change of structure. - Technological capability: technological innovation ability; the level of meeting technology in supporting development of product, distribution channels, management, etc. - Staff capacity: scale, qualifications, number of trained personnel; professionalism, service attitude; rationality and effect of the labor structure. 7 - The capacity of the distribution channel system: a number of transaction points; distribution; the reasonableness of the distribution channel. 1.2. Investment in enhancing competitive capacity at the commercial banks 1.2.1. Concept and role Investment in enhancing competitive capacity at the commercial banks is that the bank uses the current resources (money and other sources) to continuously enhance the competitive advantages to achieve higher level of product and service quality than average level and/or have ability to reduce the relative costs, allowing the bank to increase profits, market share, ensuring safety, health in its operations. Investment in enhancing competitive capacity plays a vital role for each bank, helps the bank have competitive capacity and ability to win when competing through impacts improving the basic factors such as financial resources, operational capacity, technological capability, governance capacity, etc. 1.2.2. Characteristics - Using a large amount of capital. - Usually taking place because bank’s positions and competitive environment are changeable. - Including many operations but requiring a reasonable structure, depending on competition strategies. - Being influenced by external factors. - Taking place as process. 1.2.3. Operations of investment in enhancing competitive capacity at the commercial banks Depending on competition strategies, competition tools at each period, investment in enhancing competitive capacity may include the following operations : Investment in infrastructure development; Investment in technology improvement; Investment in human resource qualification improvement; Investment in development brand and sale promotion. 1.2.4. Investing capital for enhancing competitive capacity at commercial banks Equity consists of: initial capital, capital formed during business such as retained earnings, funds, etc. 1.2.5. Model and process of investment in enhancing competitive capacity at the commercial banks The model expresses close relationship, continuous interaction between competitive position of the bank and investment in enhancing competitive capacity. From this competitive position, through establishment of competitive strategy, the bank will identify capital scale and make capital allocation as target. Conversely, investment in enhancing competitive capacity makes decision of competitive position 8 of the bank which is result and effect of investment in enhancing competitive capacity . This relationship is ongoing because of changeable position of the bank and a process with repetitive steps including: Step 1: Assessing the competition situation. Step 2: Building competitive strategies, strategies and plans for investment in enhancing competitive capacity. Step 3: Performing investment. Step 4: Assessing the results and effects of investment in enhancing competitive capacity. 1.2.6. Criteria for result and effect of investment in enhancing competitive capacity at commercial banks 1.2.6.1. Criteria for result Depending on the targets of investment in enhancing competitive capacity at each period, the appropriate criteria in the following system will be used when assessing the results: (1) Group of criteria reflecting direct results: Criterion 1: Annual increase in trained staffs (∆ĐT) ∆ĐT = ĐTi – ĐTi-1 (1.6) Criterion 2: Changes in staff structure on qualifications Criterion (1) and (2) reflect changes in staff capacity. Criterion 3: Annual increase in number of transaction points (∆ĐGD) ∆ĐGD = ĐGDi – ĐGDi-1 (1.7) Criterion 4: Annual increase in number of automatic transaction points (ATM and POS) (∆ĐGDTĐ) ∆ĐGDTĐ = ĐGDTĐi – ĐGDTĐi-1 (1.8) (2) Criteria reflecting indirect results: Criterion 1: Annual increase in charter capital (∆VĐL) ∆VĐL = VĐLi – VĐLi-1 (1.9) Criterion 2: Annual increase in equity (∆VCSH) ∆VCSH = VCSHi - VCSHi-1 (1.10) Criterion 3: Annual increase in total assets (∆TTS) ∆TTS = TTSi – TTSi-1 (1.11) Criterion 4: Annual increase in profit after tax (∆LNST) ∆LNST = LNSTi – LNSTi-1 (1.12) Criterion 5: Annual increase in profitability ratios ∆ROA = ROAi – ROAi-1 và ∆ ROE = ROEi – ROEi-1 (1.13) 9 Criterion 6: Changes of capital adequacy ratio (∆CAR) ∆ CAR = CARi – CARi-1 (1.14) Criterion 7: Changes of asset quality (∆TLNX) ∆ TLNX = TLNXi – TLNXi-1 (1.15) Criterion 8: Changes of annual sales of main products (∆DS) ∆DS = DSi – DSi-1 (1.16) Criterion 9: Changes of annual market share of the main products (∆TP) ∆TP = TPi – TPi-1 (1.17) Criterion 10: Changes of income structure from business operations of the bank. (3) Group of qualitative assessment includes: Changes of technological capability; changes of governance capacity; changes of service quality. 1.2.6.2. Criteria for effect Criterion 1: Increased sales compared with investment capital (∆DS/Iv) ∆DS/Iv = (DSi – DSi-1)/ Ivi (1.18) Criterion 2: Increased market share compared with investment capital (∆TP/Iv) ∆TP/Iv = (TPi – TPi-1)/ Ivi (1.19) Criterion 3: Increased profit compared with investment capital (∆LN/Iv) ∆LN/Iv = (LNi – LNi-1) / Ivi (1.20) 1.3. Factors influence on investment in enhancing competitive capacity at commercial banks - Competitive strategies of the bank, - Resources of the bank, - Management level and experience of the leaders, - Corporate culture and awareness of staffs, - Policies and regulations of the State, - Overall development of national society and economy, - Level of competition and strategies of competing banks, - Openness of financial markets. Identifying influencing factors enables the bank to control investments avoid passive investment with ill effect or violation of the policy, guidelines of the State on its own initiative. 1.4. Experiences of investment in enhancing competitive capacity of Banks of China, Malaysia and lessons for Vietnam commercial banks Lessons learned from experience of the banks of China, Malaysia are: 10 - Improving capital mobilization for investment through effective channels such as: equitization, stock issuance, bond issuance into international markets. - Having strategies sticking closely on market, being flexible, not avoiding competition. - Powerfully investing in human resource and technology that is a bottom line to compete with foreign banks. Investing in the staffs to limit brain drain and increase quality of customer service. Investing in technology and scientific researches to develop modern banking services, wait in front of market. CHAPTER 2: SITUATION OF INVESTMENT IN ENHANCING COMPETITIVE CAPACITY AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM 2.1. The needs of investment in enhancing VCB’s competitive capacity 2.1.1. Overview of VCB Through 50 years of operation, VCB is considered as a reputable bank in Vietnam in sectors of forex trading, import and export payment and other banking and financial services. On basis of standing position of a wholesale bank and promoting retail operations, VCB has transferred from a wholesale bank into a universal bank. VCB, an equitized state-owned commercial bank, makes application of operating model and organizational structure towards separating retail and wholesale business from policy department, customer department, management and supervision department. The business operation result of VCB is satisfactory in the last time, and VCB is one of the most profitable banks. 2.1.2. Characteristics of VCB influencing on investment in enhancing competitive capacity 2.1.2.1. Characteristics of models and organization: In spite of being a jointstock bank, the State is still a controlling shareholder holds more than 77% shares, which influences orientation, competing objectives, competitive tools, etc; VCB is owned by many shareholders including strategic shareholders, so there should be unity and harmony in interests of the parties for investment decisions; VCB is a large bank with network across the country, which requires consideration of regional factors, geographical location when investing. 2.1.2.2. Characteristics of business operations: VCB has changed significantly through many periods. From a specialized bank, VCB transferred to multi-state commercial banks and then to commercial joint stock banks and occupied monopoly position in long time. In addition, VCB is a traditional bank with strengths in the sectors of wholesale, has good relationships with many partners, international organizations; however, its retail sector has not had many strengths. 2.1.2.3. Characteristics of competitive position