Presented by Group 4:

Nguyen Thi Thu Ha

Pham Quang Huy

Quan Thi Hanh Mai

Bach Hong Nhung

National Economics Unviersity - Ha Noi

August 2011

TABLE OF CONTENT

CHAPTER 1: Introduction............................................................................ 3

A. Background........................................................................................ 4

B. Objectives........................................................................................... 4

C. Literature Review.............................................................................

CHAPTER 2: Methodology............................................................................

A. Moody.................................................................................................

B. S&P.....................................................................................................

C. Varizi’s Model...................................................................................

D. Altman Z-score..................................................................................

CHAPTER 3: FINDINGS..............................................................................

A. Qualitative Analysis..........................................................................

B. Moody Analysis.................................................................................

C. S&P Analysis.....................................................................................

D. Z-factor Analysis...............................................................................

E. Varizi’s Model Analysis...................................................................

CHAPTER 4: CONCLUSION.......................................................................

2

CHAPTER 1: INTRODUCTION

A. BACKGROUND

Nowadays, the risk associated with engaging in international relationships have increased sub-

stantially, and become difficult to analyze and predict for decision makers in the economic, financial

and political sectors. The field of risk assessment and risk management is becoming increasingly

more important in every facet of business. Financial risk management is a process to deal with the

uncertainties resulting from financial markets. It involves assessing the financial risks facing an orga-

nization and developing management strategies consistent with internal priorities and policies. Ad-

dressing financial risks proactively may provide banks with a competitive advantage. The ability to

ability to estimate the likelihood of a financial loss is highly desirable. However, standard theories of

probability often fail in the analysis of financial market because risks usually do not exist in isola-

tion, and the interaction of several exposures may have to be considered in developing an under-

standing of how financial risk arises. These interactions are difficult to forecast, since they ultimately

depend on human behavior. Besides, the process of financial risk management is an ongoing one;

strategies need to be refined when the market and requirements change. Refinements may reflect

changing expectations about market rates, changes to the business environment, or changing interna-

tional political conditions.

In this paper, we will identify the key issues for the bankruptcy. Three subjective banks selected

for this study are Maritime bank, Nam A Bank and Trust Bank. The data were collected in the time

period of three years, from 2008 to 2010.

http://www.msb.com.vn

http://www.nab.com.vn

http://trustbank.com.vn

3

B. OBJECTIVES OF THE RESEARCH

Our study focuses on two main purposes. The first one is to identify the major signals of financial

distress which lead to the bankruptcy of Vietnamese banks. When measuring the riskiness and pro-

viding bankruptcy alarm for these banks, we will provide both qualitative risks analysis (identified

based on the market, government policies, all factors that do not involve numbers) and quantitative

risks analysis (found using numbers from financial statements). Four different methodologies are

used to analyze the performance of the banks, which are Moody’s financial ratios, Standards and

Poor’ financial ratios, Z-score model and Vaziri’s model.

The second purpose of this study is to determine which of these four models is the most efficient,

which model gives more alarming signals for the bankruptcy of the banks so that banks can use that

model as strategy to limit the effect of risk.

C. LITERATURE REVIEW

Banking stability and systematic crises (Andrew Crockett)

Research on risk measurement and systemic risk-related issues, the focus of the conference, has

progressed substantially since 1995, when the first in this series of conferences was held. At the first

conference, centre stage was taken by the value-at-risk (VaR) methodology, which was then gaining

ground in academia and at leading financial institutions. Some papers explored how risk could be

quantitatively measured and what the meaning of such measures would be. Shortly thereafter, in

1997, the Asian crisis erupted, triggered by and itself triggering events that were beyond the bounds

envisioned by standard VaR methodology. As a result, discussions at the second conference in 1998

very much focused on the implications of the Asian crisis for risk measurement methodologies as

well as market microstructure theory’s lessons for market dynamics in times of stress.

In his opening remarks, Andrew Crockett explained the rationale for the focus of this third con-

ference and its emphasis on questions relating to the nature and sources of market liquidity, recent

advances in risk measurement methods, sources of banking crises and contagion effects across re-

gions and markets. As for the first two conferences in the series, the goal was to foster the exchange

between the policy and research communities. To this end, the co-organisers brought together a

broad mix of attendees: academics, public sector officials and industry professionals as well as cen-

4

tral bank staff. Overall, the conference generated a set of interesting discussions which sought to

both assess and further the current state of knowledge on issues related to risk measurement and sys-

temic risk and to identify areas of policy interest and for future research. These discussions focused

on three broad topics, which are summarized below under three headings.

Diamond and Dybvig, in their seminal paper, present a theory of banking based on liquidity risk

sharing, with banks emerging as providers of the required liquidity insurance. They show how, under

asymmetric information, bank runs can emerge in such a fractional reserve banking system. How-

ever, while allowing for the possibility of bank runs, the Diamond/Dybvig (DD) model is not able to

explain the causes of banking crises: bank runs, in their world, are essentially self-fulfilling prophe-

cies or “sunspot” events.

Extensions of the DD model, as surveyed by Allen and Gale’s contribution to this proceedings

volume, have therefore introduced uncertainty about asset returns to proxy for the impact of the busi-

ness cycle on the valuation of bank assets. In these models with aggregate shocks to asset returns, fi-

nancial crises are driven by fundamentals. Shocks to asset returns, by reducing the value of bank as-

sets, raise the possibility of banks being unable to service their commitments. Depositors, anticipat-

ing such difficulty, will tend to withdraw their funds early, possibly precipitating a crisis.

Despite its widespread use in theoretically analyzing financial instability, the DD model and its

various extensions do not provide a completely plausible description of actual patterns of banking

crises. Runs by depositors are rare. Therefore, banking crises have more typically started when the

interbank supply of credit was sharply cut or withdrawn. In addition, a purely bank-centric approach

to systemic risk may no longer be appropriate, given that financial markets tend to play a significant

role as propagation channels for disturbances involving the banking system and the real economy.

This is why Yutaka Yamaguchi, in his luncheon address, set out the need for any comprehensive

analysis of systemic risk to go beyond the narrow confines of the banking system, to cover the inter-

relations between the banking system, financial markets and the real economy. Indeed, one of the re-

curring themes of the conference was that much of the literature on banking crises and contagion, the

topics of the first two conference sessions, remained overly focused on a set of specific assumptions

and modelling conventions. As a result, while being more tractable, these models have provided only

limited analytical assistance to the policy community.

In the latest version of their 1998 model, the main focus of the first presentation at the joint re -

search conference, Allen and Gale introduce a market for long-term assets into the analysis, enabling

5

banks to liquidate these assets. Contrary to the original DD model, liquidation costs are therefore en-

dogenous. As a result, asset markets provide a transmission mechanism that serves to channel the ef-

fect from the liquidation of assets by some banks to other banks in the economy. If a sufficient num-

ber of banks are forced to liquidate their assets and the demand for liquidity rises above a certain

level, asset prices will move sharply. This may, in turn, force other banks into insolvency and exacer-

bate the original crisis. As a result, the model, compared with earlier theories, provides a more realis-

tic explanation of how and why financial crises may develop. It also highlights the importance of as-

set market liquidity for the evolution and, eventually, the avoidance of financial crises.

Carletti et al, in their presentation, tackled another major shortcoming of many analyses based on

the traditional Diamond/Dybvig approach: the failure to recognize the role of interbank credit. In

their model, banks compete in the loan market, while the interbank market serves as an insurance

mechanism against deposit withdrawals due to liquidity shocks. This setup enables the authors to in-

vestigate the influence of bank mergers on reserve holdings and the interbank market and, ultimately,

aggregate liquidity risk. Mergers affect bank balance sheets via increased concentration and poten-

tially enhanced cost efficiency, while also altering the structure of liquidity shocks. The model high-

lights the importance of functioning interbank markets for financial stability and sheds some light on

potential trade-offs between antitrust and supervisory policies. In the discussion, some conference

participants commented on the practical relevance of the model. In particular, it was noted that

nowadays central banks were usually ready to provide liquidity elastically to accommodate tempo-

rary fluctuations in liquidity. Given this willingness, it was argued, bank liquidity crises would be of

limited importance. However, it was felt that the paper generated important insights into how merg-

ers might affect liquidity in the money market and, by extension, how this would influence the exe-

cution of monetary policy operations.

The final presentation of the first conference session, which is summarized in Giannetti’s contri-

bution to this volume, shifted the focus to the emerging markets. Specifically, she argued that under-

developed financial markets, characterized by a lack of transparency, and easy access to foreign capi-

tal can help to explain overlending and crisis phenomena in emerging financial markets. According

to Giannetti, overlending due to investor moral hazard, that is the existence of explicit or implicit

guarantees, is merely a special case of a broader crisis model. In her model, based on incomplete in-

vestor information on the average quality of investment opportunities and the existence of soft bud-

get constraints due to capital inflows, bank-financed investors will rationally not require a risk pre-

mium until losses become substantial, even without guarantees on deposits. Based on this insight, the

6

paper suggests that well developed capital markets, by increasing the number of creditors, can elimi-

nate excessive reliance on bank-firm relationships and soft budget constraints, which will reduce the

probability of financial crises. This, in turn, lends support to the often advocated “sequencing” policy

prescription, demanding that countries should have appropriate financial structures in place before

removing capital controls and passively accommodating foreign investors.

7

CHAPTER 2: METHODOLOGY

To analyze and discover the problems under each researched banks, it is suggested to use four

critical methodologies, including: Moody’s Financial Ratios, Standards & Poor’s Financial Ratios,

Vaziri’s Financial Ratios and Z-Score Model. Those methods will be displayed and explained in the

following section.

A. MOODY

Coverage Interest Ratios

EBIT/Interest Expense EBITDA/ Interest Expense

Leverage Ratios Total Liability/Total Asset Equity/Total Liability Short Term Debt/Equity Book Value

Liquidity Ratios Current Asset/Current Liability Intangible Asset/Total Asset Cash/Net Sale Working Capital/Total Asset, Cash/ Total Asset

Profitability Ratio ROA

B. STANDARDS & POOR (S&P)

Coverage ratios EBIT/ Interest Expense EBITDA/Interest Expense Net Operating Income/Total Debt

Leverage Ratio Total Debt/EBIT Total Debt/EBITDA Total Debt/Capitalization

Profitability Ratios ROE Net Operating Income/Sale

8

C. VARIZI’S MODEL

Coverage Ratios Current Ratio Quick Ratio

Cash Velocity Time Interest Earn

Leverage ratios Total Liability/Total Asset Equity/Total Liability

Short Term Debt/Equity Book Value

Profitability Ratios ROE ROA Net Income/Total Asset

Retained Earnings/ Total As-set

Net Income/ Sale

Efficiency Ratios Asset Turnover Fixed Asset Turnover

Inventory Turnover Inventory to Net Working

Capital

D. ALTMAN Z-SCORE MODEL

In 1968, one statistical model was developed by Edward Altman, assisting to forecast bankruptcy

probability for the business. In reality, this method has been proved to predict quite well about fu-

ture’s destiny for the banks within 2 years. It is the easy to calculate method that has formula to use:

(1) For private firm:

Z’- Model: Z = 0.71 X1 + 0.847 X2 + 3.107 X3 + 0.420 X4* + 0.998 X5

Zones of Discrimination:

1.23 2.9

“Distress” zone “Grey” zone “Safe” zone

(2) For Non-Manufacturer Industrials and emerging market credit

Z’’- Model: Z = 6.56 X1 + 3.26 X2 + 6.72 X3 + 1.05 X4*

Zones of Discrimination:

1.1 2.6

9

“Distress” zone “Grey” zone “Safe” zone

Where:

X1 Working capital /

Total assetsIt is used as a measure if liquidity standardized by the size of the

firm.

X2 Retained earnings /

Total assets

Young firm tends to have lower RE/TE than the older firm. It is be-

cause that retained earning that firm decided to retain for invest-

ment. Young firm tends to hold more capital to invest more for new

projects.

X3 Earnings before in-

terest and taxes / To-

tal assets

The ratio measures the productivity of the assets or the earning po-

wer.

X4 Market value equity

/ Book value of total

liabilities

This ratio measures the extent to which total assets can decline in

value before total liabilities exceed book value of equity. In other

words, this indicates the asset cushion of the firm.

X4* Book value equity /

Book value of total

liabilities

This differs from X4 in that it uses the book value rather than the

market value of equity. This ratio is appropriate for a firm that is not

publicly traded, and hence the Z-model with this variable definition

is called the Z’-model or the private firm model.

X5 Sales/ Total assets This asset turnover ratio is intended to capture the sales generating

ability of the assets. Altman found this to be industry sensitive and

least discriminating between the bankrupt

10

CHAPTER 3: FINDINGS

A. QUALITATIVE ANALYSIS

In this section, the very first step we want to discuss about the big picture of Vietnam economy in

general during the period from 2008 to 2010 in order to penetrate the banks’ situation in those years.

Getting back to history, we only peak and describe some typical events in those years to illustrate for

readers some ideas about Vietnam circumstance at that time.

[2008] – The hash time to challenge the economics as a whole

The year 2008 has marked as the most extensive global economic downturn in many years, high-

lighted by the bankruptcy of a series of big names in international banking system. Facing with the

tough time, Vietnam Government and also the banking systems reacted immediately to the market

with the aim to stabilize the macroeconomic and society.

First of foremost, there were many changes in monetary policies with many adjustments in basic

interest rate, reserve requirement rate and exchange rate bid-ask spread. Significantly, it was the first

time form 1st Dec, 2005, the ba-

sic interest rate was adjusted

from 8.25% up to 8.75% and

12% on 19th May. Additionally,

SBV (State bank of Vietnam) of-

ficially capped the interest rate

no more than 150% the basic rate

based on the civil law of Viet-

nam.

As the chart is showing, we

can see that with the tightening

monetary policies all some essen-

11

Macroeconomics FactorsPink: Refinance rate; Blue: Base rate; Red: Discount rate

Figure: Illustration of some crucial interest rates in 2008(Source: vneconomy)

tial rates also decreased at the same time. Consequently, it created the more liquidity risk for com-

mercial banks, and the mobilization rate was the most fluctuated widely in 20 years development of

Vietnam. During this time, credit growth was the lowest in the year, kept increasing -1% per month

indeed.

Simultaneously, the exchange rate VND/USD was varied seriously and adjusted by SBV which

we have never seen in Vietnam history. In the early months, the market had the phenomenon of ac-

cumulation of foreign currency, and the exchange rate was down to the "bottom" about VND15,300

per USD. But in May, the "fever" of foreign currency scarcity placed stress on both the formal mar-

ket and the free market. Many businesses have bought with the price of VND 18,000 per USD, thus

the financing costs were pushed higher, affecting profitability.

Additionally, since 2008, SBV has approved registrations of establishment of new joint stock

banks Lien Viet Bank, Tien Phong Bank, Bao Viet Bank, and so on. Also in 2008, SBV issued the

permission for the first 100% foreign capital to set up in Vietnam such as HSBC, ANZ and Standard

Chartered. It opened a new era for the operation of foreign banks in Vietnam and the enhancement

the comprehensive competition amongst domestic and foreign banks.

At this time, the domestic banking systems faced many difficulties as followed:

Bad debts tend to be increased: in 2007, the bad debts ratio was in the range of 2% to 3%, but in

2008, many large banks announced the bad debts ratio is about 5% to 6%.

Most banks did not meet its targeted profit: in the beginning of the year, many banks’ profits

were affected due to liquidity risk. This was the first time in more than five consecutive years

that many banks had to adjust their business goals and targeted profits which were set at the be-

ginning of the fiscal year.

Many lending activities were limited: with tightening monetary policies and liquidity problems

forced many banks to suspend this activity. Besides, the strong and rapid decline of the stock

market and real estate led to credit risk for commercial banks.

In short, in 2008 the monetary tightening and loosening gradually policies created the frequency

of policy adjustment that unprecedented in history. There were 8 times to alter the base rate, refi -

nance rate, rediscount rate, 5 times to adapt reserve requirement, 3 times to loosen exchange rate and

2 times to modify the average increase rate of the interbank.

[2009] – Recovery after economics crisis 2008

Compared to 2008, monetary policy and operation of commercial banks in 2009 had been rela-

tively stable. At this time, the interest rate was stable and not fluctuated much. Specially, in Feb,

2009, Government began to implement the stimulus package included supporting interest rate played

12

the vital role to secure the financial system. This strategy created favorable conditions for banks to

reach their target customers and credit growth because of low interest rate.

Furthermore, the credit growth was over navigation. The stimulus package to prevent the eco-

nomic downturn led to the credit growth. However, it was still a problem that SBV had to pay more

attention to determine the time to increase the base rate in order to prevent inflation in 2010. As a re -

sult, the profits of banks were improved step by step.

[2010] – Market kept fluctuating

On 30th Mar, 2010, the Government has requested to terminate of operation of gold trading floors

due to the difficulty to manage the gold.

Unfortunately, Vietnam at that time was lowered credit continuously three times in one year by

three most prestige credit-ranking organizations in the world.

- Significantly, on July 2010, Fitch credited Vietnam down from BB- to B+ because of low ex-

change reserve and weak banking systems.

- In September, Fitch downgraded credit of Vietcombank and ACB to D/E from D due to high level

growth in loans and low quality loans.

- In December, Moody lowered confidence for Vietnam’s bonds to B1 from Ba3 by risks related to

balance of payment (BOP) crisis, the pressure on the currency devaluation and high inflation.

- At the end of December S&P announced a level of credibility down the national debt of Vietnam.

The lower credit ratings will be affected to the mobilization of international bonds by enterprises

in Vietnam in the near future; and the discount was spent to borrow a loan will raise.

USD raised in the highest

level about VND 21,500/USD on

Nov, 2010. Vietnam had 2 times

to lower the domestic currency.

On 4th Nov, 2010, Financial

Supervisory Commission an-

nounced that the State Govern-

ment agreed to pump up foreign

currency in the industry for pro-

13

(Source: cafef)

duction of essential goods and not pumped into export and the Government would not adjust the rate

until the end of the year.

Gold rose highest to 38.5 million VND increased 43.6% over the closing price in 2009. The Gov-

ernment announced that Vietnam had surplus import 71 tons of gold.

Many changes in regulation’s credit institution were set up:

- Adjusted Law of Banking and adjusted Law on Credit institutions are approved and start to be in

effect since 1/1/2011: mother bank is not allowed to provide credit for its own bank in the system.

- On 5th Oct, 2010, circular 13 about increasing the CAR (capital adequacy ratio) ratio in banks

from 8% to 9% was enforced.

Maritime bank [MSB]

In 2008, facing with the economic downturn, Maritime bank and Vietnam banking system have

experienced the real challenges in this tough environment. MSB still performed very well in meeting

the challenges and also created opportunities to deliver impressive business results and build MSB’s

images as one of the leading commercial banks in Vietnam.

From the table above, we can see that the result in 2008 gives us the positive signal compared to

the previous year. All total assets, capitalization mobilization, outstanding loans, and profit before

14

Banking system insight

tax were increased over 100% plan and NPL (non-performing loan) reduced to 1.59% (from 2.08%

in 2007). Even during the crisis but somehow everything was in the control of MSB.

In 2009, MSB had outstand-

ing loans of VND 23,800 billion,

which equal to 213% of the level

at the end of 2008 and 109% of

target agreed by BOD. This

growth can be attributed to the

introduction of new personal

credit products to meet borrow-

ing needs of many types of con-

sumers, which helped drive the

large increase in retail customers

overall. Besides, NPL made up

0.62% of the total loans outstanding-well below the 3% allowed by our shareholders. This is the re-

sult of MSB’s decision to focus on credit risk and bring its processes up to international standards.

This effort included strengthening credit inspection and monitoring.

In 2010, we quote here the basic measure performance of MSB as follow:

As we look at the table above, we can see that the total assets and the deposits both increased

double with three consecutive years from 2008 to 2010. Especially, the ROE of MSB raised so seri-

15

ous, that means that the leverage MSB used is so large, and MSB was ranked in the leading in the in-

dustry to generate great profit from the stockholder’s equity.

On the other hand, the NPL of MSB also leveled up underlying 2010. It raised about 1.25% com-

pared to 2009 and 0.38% with 2008. That created some signals for MSB to pay more attention on

controlling the bad debts.

Nam A bank

In 2008, business operation of Nam A bank evolved with many obstacles due

to the complexity of domestic and international economics, especially financial

crisis 2008. Moreover, with tightening monetary policies to control inflation and stabilize macro

economy of Government, all of them had great impact on the business of Nam A bank. Even in the

harsh time, Nam A bank has achieved some key result as followed:

- Nam A bank had strongly developed in the business of foreign exchange: to successfully develop

gold business on accounts, to equip and facilitate and modernize IT in order to promote foreign

exchange activities in 2009.

- The proportion of the outstanding debt of corporate loans had increased 4.28% higher than

2007. The development of corporate customers had facilitated enterprises to increasingly access

to the banking services.

- Overdue debts and bad debts were 2.56% which was less than the plan at the beginning of year

(1.8%) but it’s acceptable when compared to the banking industry (3.5% in 2008). Even Nam A

bank had to face with high rate of mobilization in the banking system; it still ensured the suffi-

cient financing resources for its operations.

In 2009, in the context of financial crisis and global recession, the domestic economy has to cope

with a lot of difficulties. Some targets experienced slow growth or dramatic decrease compared to

2008:

- The hug competition in many aspects amongst banks, especially in interest rates. This caused the

decline in profit from credit activities.

- To ensure the growth in the long run, Nam A bank had to reserve a substantial financial resource

to build the Corebanking sytem, restructure the organization model, build up the network, pro-

mote its brand name and strengthen the provision of banking products and services.

16

- Non-profitable assets of the bank have been developed but the result cannot come immediately in

2009.

In 2010, we have the result as the table here:

(Source: Annual report 2010 of Nam A bank)

Via the table, we can see that 2010 is the successful for Nam A bank when almost ratios are

met the target, except for bad debt ratio. It raised 0.47% compared with 2009. Hence, it makes BOD

have to pay more attention on this issue.

17

B. MOODY ANALYSIS

MARITIME BANK NAM A BANK TRUST BANK

Coverage Interest Ratios Year 2008 Year 2009 Year 2010 Year 2008 Year 2009 Year 2010 Year 2008 Year 2009 Year 2010

EBIT/ Interest Expense 1.2490 1.3638 1.2400 1.0187 1.1499 1.2282 1.2397 1.2095 1.2909

EBITDA/ Interest Expense 1.2573 1.3720 1.2453

Leverage ratios

Total liabilities/Total assets 0.9426 0.9444 0.9451 0.7812 0.8778 0.8501 0.8052 0.8173 0.8353

Equity/Total liabilities 0.0609 0.0589 0.0580 0.2801 0.1392 0.1763 0.2419 0.2236 0.1972

Short-term debts/Equity 15.5326 15.3633 15.0197 3.5350 5.9958 4.5940 4.0578 3.9482 4.6197

Liquidity Ratios

Current Asset/ Current Lia-

bility 1.1098 1.1591 1.0072 1.1533 1.1521 1.0311 1.1807 1.2937 1.1976

Intangible Asset/ Total Asset 0.0043 0.0022 0.0014 0.0635 0.0352 0.0301 0.0360 0.0468 0.0561

Working Capital/ Total Asset 0.0979 0.1360 0.0059 0.1186 0.1114 0.0214 0.1428 0.2119 0.1503

Cash/ Total Asset 0.0076 0.0072 0.0946 0.0533 0.0166 0.0244 0.0140 0.0097 0.0066

Profitability ratios

ROA 6.72% 5.90% 6.80% 11.80% 5.19% 6.86% 4.99% 5.02% 6.78%

18

It is the system of rating securities that was originated by John Moody in 1909. Moody’s financial ratios’ purpose is to provide in-

vestors with a simple system of gradation by which relative creditworthiness of securities may be noted.

19

In Moody’s Financial Ratios, it is divided into 5 kinds of ratios including: Coverage Interest Ratios, Leverage Ratios, Liquidity Ra-

tios, Profitability Ratio and some other ratios. Each type assists to describe one characteristic or distress’s potential to the business firm.

In this part, after applying Moody method into our research, there are some problems can be seen from our 3 researched banks: Maritime

bank, Nam A bank and Trust bank.

First of all, it is about interest coverage ratio. The lower the ratio, the more the company is burdened by debt expense. When an in-

terest coverage ratio was 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indi-

cates the bank was not generating sufficient revenues to satisfy interest expenses. As a result, in all 3 banks, due to the fact that those ra-

tios were just above 1 and stand from 1.2 to 1.4, lower than 1.5, it suggested that they all found difficult to pay its debt expense. Thus,

this is one of the first and critical problems for banks in Vietnam.

In leverage ratios part, there are also several different ratio, including (3) (4) (5) ratios. Those ratios assist to calculate how much debt

it has on its balance sheet. Generally, the more debt a company has, the riskier it is because there is very little left for stock holders in the

case company go to bankrupt and has to pay all of its debt first rather than for equity. From the table, we could see that banks used too

much debt to finance its activities. It was about 80% to 90% of total asset is due from asset. On the other hand, equity was too small pro-

portion in bank balance sheet. This too high ratio in total liability/total asset was one of alarming factor to banks. As a result, leverage

ratios showed those 3 banks were highly leveraged and most of the debt was borrowing.

Furthermore, Moody’s Financial Model also conveys liquidity situations in banks. Liquidity ratio determines a company's ability to

pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the safer banks are to cover short-term debts. Ide-

ally, the current ratio should be at least 2/1 or greater.  If it is less than 2/1, then it is necessary to investigate more about credit line.

When it is 1/1 or worse, many times credit is denied unless additional investigation about cash flow reinforces the ability to pay in the

short term liability. However, current asset/current liability ratios in 3 banks were all little above 1, indicating that the probability to fail -

ure of those 3 banks to quite high. Moreover, cash flow/ net sale and cash flow/ total asset ratio was too small to ensure liquidity for the

banks. If this situation was carried on, may be in the future, credit rating for those banks would be very low.

20

So far, in profitability ratios, ROA for 3 banks were only about 5 to 6%, suggesting little profit for bank operations. As a result, af -

ter analysis those ratios by Moody’s model, it can be concluded that Banks in Vietnam, representative by 3 banks under our research, did

not make big profits due to the fact that they had too much debt, use debt ineffectively and not use equity well to finance its operation

and not liquid enough to pay off their short term debt.

C. S&P

S&P has some ratios that are the same as those in Moody’s model, for example, EBIT/ Interest Expense and EBITDA/Interest Ex-

pense. However, In S&P Financial Method, it also suggests several things that Moody’s ratios do not mention.

Firstly, it should be talk about net operating income/total debt ratio. In general, the higher the coverage ratio is the better off a bank

will be as they are able to make their debt payments using funds from their net operating income. In other words, when the ratio is greater

than 1, it indicates that the bank has enough income generated from the investment property to cover all his debt obligations. Unfortu-

nately, those ratios under 3 researched banks are extremely low and less than 1. One more time, it implies the alarming part in Viet -

namese bank, having too much debt and then cannot pay by using operating income.

The next ratio is total Debt/EBIT. A high debt/EBIT ratio suggests that a firm may not be able to service their debt and can result in

a lowered credit rating. Conversely, a low ratio can suggest that the firm may want take on more debt if needed and it often warrants a

relatively high credit rating. Consequently, taking account into 3 banks, their ratios were always very high, more than 10 times, illustrat-

ing that those banks could not able to pay their debt in the properly manner.

MARITIME BANK NAM A BANK TRUST BANK

Coverage Interest Ratios Year 2008 Year 2009 Year 2010 Year 2008 Year 2009 Year 2010 Year 2008 Year 2009 Year 2010

21

EBIT/ Interest Expense 1.2490 1.3638 1.2400 1.0187 1.1499 1.2282 1.2397 1.2095 1.2909

EBITDA/ Interest Expenses 1.2573 1.3720 1.2453

Net Operating Income/ Total

debts 0.0166 0.0193 0.0156 0.0057 0.0095 0.0186 0.0128 0.0142 0.0213

Leverage ratios

Total debt/EBIT 14.027 16.008 13.896 6.6184 16.9253 12.4011 16.1472 16.2762 12.3187

Total debt/EBITDA 13.934 15.913 13.837

Total debt/ Capitalization 16.416 16.978 17.228 3.5696 7.1831 5.6710 4.1348 4.4723 5.0703

Profitability ratios

ROE 16.90% 21.75% 18.29% 0.75% 4.21% 6.37% 3.56% 2.93% 7.25%

Net operating income/ Sale 0.1987 0.2612 0.1892 0.0314 0.1255 0.1861 0.1569 0.1477 0.2189

The last but not least critical ratio in S&P Model is Return on Equity. This ratio measures the amount of net income returned as a

percentage of shareholders equity or Return on equity measures a corporation's profitability by revealing how much profit a company

generates with the money shareholders have invested. And for our 3 banks, those ratios were higher than ROA, not because of high net

income but due to very low equity used in banks. Given an example, it can be seen that for Maritime bank in 2010, net income was more

than 1.1 billion VND while total equity was just about 6 billion VND, 17 times less than total liability.

In summary, S&P help to answer the question what if the banks have profits with the money they borrow. However, data showed that

all bank were in heavy debt and not be able to pay those debt.

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D. ALTMAN Z-FACTOR

We will use this model created by Edward I. Altman to predict the bankruptcy possibility

of Maritime Bank, Nam A Bank, and Trust Bank. The Z’’-model should be applied to esti-

mated for non-manufacturer industrials and emerging market credits. The formula is:

Z = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4

(Source: http://en.wikipedia.org/wiki/Altman_Z-score)

With:

X1 = Working capital / Total assets

X2 = Retaining earnings / Total assets

X3 = EBIT / Total assets

X4 = Book value equity / Book value of total

liabilities

The rule of thumb for this model is:

Z > 2.6 Safe zone

1.1< Z < 2.6 Grey zone

Z < 1.1 Distress zone

The calculation for Z’’-scores of three bank is showed in the following table:

Maritime Bank Nam A Bank Trust Bank

2008 2009 2010 2008 2009 2010 2008 2009 2010

X1 0.0979 0.1360 0.0059 0.1186 0.1114 0.0214 0.1428 0.2119 0.1503

X2 0.0027 0.0025 0.0036 0.0017 0.0051 0.0096 0.0078 0.0054 0.0119

X3 0.0672 0.0590 0.0680 0.1180 0.0519 0.0686 0.0499 0.0502 0.0678

X4 0.0609 0.0589 0.0580 0.2801 0.1392 0.1763 0.2419 0.2236 0.1972

Z 1.1364 1.3162 0.5667 1.8337 1.2077 0.8109 1.5068 1.9140 1.6414

‘Grey’ ‘Grey’ Distress ‘Grey’ ‘Grey’ Distress ‘Grey’ ‘Grey’ ‘Grey’

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After estimating the Z-scores, the results show us quite unfortunate outputs. All three banks have

their Z-value less than 2.6 mostly, indicating they are possibly vulnerable to bankruptcy. In fact, the

Maritime Bank has recorded an average of 1.0064, Nam A Bank’s is 1.2841, and Trust Bank’s is

1.6874 for the period of 2008-2010. Particularly, in 2010, Maritime Bank and Nam A Bank falls into

the distress zone, with the Z-score less than 1.1. It shows all three banks are not in good financial

condition, warning that they need to more concern about their future operation.

However, the result of Z-model seems to be not correct. Although the 2008 Z-value of banks are

not attractive, they have not faced any potential bankruptcy problems since 2008. In fact, Maritime is

even said to have the highest ROE among banks in Vietnam market. Moreover, they has earned posi-

tive net incomes after taxes in both 2009 and 2010. Thus, we can conclude that Z-model is unappro-

priate to estimate the possibility of bankruptcy for banks.

Although the models of Altman are easy to calculate, there are several drawbacks. While the Z-

scores gains wide acceptance by experts and investors to predict the bankruptcy possibility of pub-

licly held manufacturing, private held and non-manufacturing companies, there are many arguments

that neither any Altman Z-models are sufficient enough for use with financial companies. The reason

is differences of financial companies' balance sheets, and their frequent use of off-balance sheet

items. A number of important issues affecting financial health of banks such as credit risks, interest

risks, default risks, etc are not addressed in the models. In other words, it should be noted that Z-

score is just a tool to predict probability of distress, a measure of economic bankruptcy, rather than

providing how exactly the banks would be based on historical data of their balance sheets and in-

come statements. Another shortcoming is that, according to empirical research, Altman’s model only

provide the highest accurate prediction for two years. Also, the model are quite insufficient when ap-

plying the same formula to estimating different types of industrial sectors with only four or five com-

mon financial ratios with assumption of linear relationship. As a result, we can conclude that the Alt-

man Z-factor model is not useful tool to analysis the banks’ financial health.

E. VARIZI’S MODEL

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MARITIME BANK NAM A BANK TRUST BANK

Coverage Interest Ratios Year 2008 Year 2009 Year 2010 Year 2008 Year 2009 Year 2010 Year 2008 Year 2009 Year 2010

Current Ratio 1.1098 1.1591 1.0072 1.1533 1.1521 1.0311 1.1807 1.2937 1.1976

Quick Ratio 0.7207 0.6507 0.7797 0.3348 0.5298 0.5059 0.4942 0.4504 0.5342

Time Interest Earn 1.2490 1.3638 1.2400 1.0187 1.1499 1.2282 1.2397 1.2095 1.2909

Leverage ratios

Total liabilities/Total assets 0.9426 0.9444 0.9451 0.7812 0.8778 0.8501 0.8052 0.8173 0.8353

Equity/Total liabilities 0.0609 0.0589 0.0580 0.2801 0.1392 0.1763 0.2419 0.2236 0.1972

Short-term debts/Equity 15.5326 15.3633 15.0197 3.5350 5.9958 4.5940 4.0578 3.9482 4.6197

Profitability ratios

ROE 16.90% 21.75% 18.29% 0.75% 4.21% 6.37% 3.56% 2.93% 7.25%

ROA 6.72% 5.90% 6.80% 11.80% 5.19% 6.86% 4.99% 5.02% 6.78%

Profit Margin 12.30% 17.31% 12.84% 1.17% 7.78% 11.27% 10.60% 6.83% 14.69%

Net income/Total assets 0.97% 1.21% 1.00% 0.16% 0.51% 0.96% 0.69% 0.54% 1.19%

Retained earnings/Total as-

sets0.27% 0.25% 0.36% 0.17% 0.51% 0.96% 0.78% 0.54% 1.19%

Efficiency ratios

Asset turnover 0.0789 0.0699 0.0781 0.1410 0.0661 0.0848 0.0655 0.0785 0.0813

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Fixed assets turnover 11.7175 17.2658 14.6433 1.9879 1.6911 2.3453 1.2909 1.4475 1.3230

Inventory turnover 0.1550 0.0995 0.2927 0.1830 0.0989 0.1543 0.0742 0.0682 0.1040

Inventory to Net working

capital3.5445 3.1953 31.7583 5.3404 4.0926 16.8737 3.7996 2.8714 3.3577

(Source: Financial statements of Maritime Bank, Nam A Bank & Trust Bank in 2008-2010)

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Coverage ratios

Falling in the gap 1.24 to 1.36, time interest earns mean Maritime Bank can be able to pay its in -

terests using its income generated during those 3 years. For Nam A Bank, this ratio is 1.02 in 2008

and increases to 1.23 in 2010. It is also the same story for Trust Bank with its average coverage ratio

is 1.247. Thus, we can say all three banks have its profit earned in years sufficient enough to pay in-

terest expenses.

How about the liquidity of the banks? According to financial statements, current ratios of these

banks are more than 1, thus we can. However, it should note that the ratios tend to decline. In fact, in

2010, three banks have their current ratios decrease about 0.1, compared to 2009. Banks need to take

closely look at this ratio’s movement in the future. Quick ratios of Maritime, Nam A and Trust Bank

are less than 1, thus they seem to be illiquidity when using only available current assets, excluding

loan amounts. As a result, we can conclude that all three banks are not well liquidity, however,

somehow they are still in safe position.

Leverage ratios

Leverage ratio of Maritime Bank shows

that total liabilities to total assets ratios are al-

ways more than 94%, and equity to total liabil-

ities just slightly higher than 0. So, Maritime

is highly leveraged, using a lot of debts to fi-

nance rather than its equity. It is highly risky if

the bank does not pay careful attention of its

operation and specifically, efficiency of using

high leverage.

Meanwhile, Nam A Bank and Trust Bank use safer level of debt, with the proportions of liabili -

ties are about 78% - 88%, but still high. For a bank, it is understandable for them to use mostly debt

to finance. Banks should take control over their leverage usage because high leverage ratios means

higher chance leading to bankruptcy when problems arise.

Profitability ratios

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2008 2009 20100%

10%20%30%40%50%60%70%80%90%

100%

Total liabilities to total assets ratios in 2008-2010

Maritime Bank Nam A Bank Trust Bank

Maritime Bank

Nam A Bank

Trust Bank

Firstly, according to its financial statements,

Maritime Bank’s returns on equity are quite high

during this period. In fact, in 2008, it is 16.90%, in

2009, 21.75% and it is 18.29% for 2010. ROEs of

Maritime are much more than Nam A Bank and

Trust Bank. Meanwhile, returns on assets are

around 6-7% in 2008-2010. As mentioned above

that Maritime uses mostly leverage to finance which

causes higher risk, then this large gap between ROE

and ROA is understandable. Net profit margin in

2008 is 12.3%, increasing to 17.31% in 2009, and

reduce in 2010 to 12.84%, which is quite high. As a

result, Maritime Bank can be said to have stably

good profitability, however, it needs to improve its

efficiency of using assets to generate income, rather

relying too much on debts. Its retained earnings to

total assets ratios are very low also due to the fact

that the institution seldom uses equity for profit

making.

The second is Nam A Bank. There are signifi-

cant growth in net profit margin. In fact, the margin

of Nam A increases from 1.17% to 7.78% in 2009

and 11.27% in 2010. This is great improvement.

However, there is an issue need to be addressed.

Due to increase in using debt, ROE increase very

fast when ROA decrease more than half from 2008

to 2009, thus Nam A Bank’s asset usage is quite in-

efficiency when using more debt financing. How-

ever, an increase to 6.86% of ROA in 2010 shows that Nam A Bank does have improvement. Since

the bank majorly uses debt to finance, the retained earnings to total assets are low.

Lastly, Trust Bank has its ROA increase stably to 6.78% in 2010. Its profit margin is fluctuated,

10.60% in 2008, falling to 6.83% in 2010 and increasing very fast in 2010 to 14.69%. The result is a

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more than double amount of ROE in 2010, 7.25%, compared to 2009’s with 2.93%. Trust Bank

seems to be also improving its assets usage in order to generating income.

Efficiency ratios

Generally, all three banks have its assets turnover around 6-9%, indicating that the institutions

are not well efficient at using its asset to generating income. The number indicates there is a need to

rethink current strategies and processes, with an eye toward making better use of available resources.

However, the numbers of the ratio in three banks show that they are still in a safe level.

Fixed asset turnover ratios are extremely high in those banks, especially Maritime Bank. This is

understandable since the proportion of fixed assets in bank is often not large..

Inventory turnover rates is generally good. Maritime Bank has the best inventory turnover, with

29.27% in 2010, implying that the bank does well at control their expenses of debt. Nam A has 2010

inventory turnover of 15.43%, while Trust Bank records 10.40%. Furthermore, inventory to net

working capital ratios are at very big number in all three institutions, giving that the banks are low

liquidity.

REVIEW: After analyzing the financial statements of Maritime Bank, Nam A Bank and Trust

Bank using, we can see that all three banks are somehow in safe level, but they have problems with

liquidity, high leverage utilization, and inefficient asset management. Also, the model helps to deter-

mine that banks has good profitability in 2008-2010, however, they reply too much on debt financing

to generate income. In addition, it is pleased to tell that three banks seem to have good control over

their cost of borrowing. In conclusion, we can predict that Maritime, Nam A and Trust Bank are not

vulnerable to bankruptcy, but there are several issues they should take attention to.

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CHAPTER 4: CONCLUSION

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