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Financial and Non-Financial Risk: Vietinbank and Exim Bank

QUESTION

Risk Management analysis is the discipline of identifying business risk and determining solutions to business risk. Solutions often include a systems development component, but may also consist of process improvement, organisational change or strategic planning and policy development. Risk analysis as a discipline has a heavy overlap with requirements analysis sometimes also called requirements engineering, but focuses on identifying the changes to an organisation that are required for it to achieve risk management strategic. These changes include changes to strategies, structures, policies, processes, and information systems.

REQUIRED:

Conduct a financial risk and non-financial risk analysis. Write a report based on the past 10 years results and include the below vital points:

  1. Company business background, Board of director and Auditor analysis of the company.
  2. Provide analysis on relevant non-financial risk such as (operation risk, empowerment risk, information, technology risk, integrity risk and process risk) disclosure by the company.
  3. Evaluate respective financial risk by using ratios (Such as Z-score , liquidity risk, debt ratio, credit risk  and interest rate risk)    
  4. Provide relevant analysis based on your findings in part (a), (b) and (c) above with regards to the performance of the company and presentation of the assignment.        

Answer

Risk Management Analysis

Introduction 

Risk management is an essential part of business operations as there are various factors that can affect the business operations of a company. Importance of risk assessment and management increases in banking sector organization as these companies are very critical to the economy of a particular country. In past, there have been some cases when the collapse of a major bank has affected the economy of a country significantly. For example, the Global crisis in 2007 and 2008 was significantly contributed by the collapse of Lehman brother holding Incorporation which was one of the four largest financial sector organizations in the United States of America. On the base of this example, it can be said that banking sector organizations have a significant impact on the Economy of a country. In addition to that these organizations are holding investments done by the general public, this is also a significant activity (Bessis, 2015). This report will analyze the risk management procedures that can be very helpful for a business organization operating in the banking sector. For a better understanding of risk management, two examples of Exim Bank and Vietinbank has been taken. Vietinbank has been operating in Vietnam whereas Exim Bank is operating in Bangladesh. Both of these banks are operating in the different economy but risk management procedures adopted by Business organizations in this industry are generally similar to each other. This report will be focused on two categories of risk that are a financial risk and non-financial risk. In addition to that this report will also shed light on financial position and performance of the company on the basis of its performance in the last 5 financial years. Ratio analysis will also be used for this purpose.

Company profile

Companies that will be discussed in this report are Vietinbank that is operating in Vietnam and Exim Bank which is operating in Bangladesh.

Exim Bank

History 

Exim Bank stands for import-export Bank of Bangladesh Limited which was established by Mr. Shahjahan Kabir in the year 1999 (Exim Bank, 2018). This bank has been a significant contributor to world economic development and social development of Bangladesh. This bank was one of the first commercial bank started by any person in Bangladesh. Services offered by this bank include both retail banking and corporate banking. A major focus of this organization is providing financial assistance to small and medium-sized organizations and agricultural operations in Bangladesh. This bank has also contributed significantly towards social development with the help of its corporate social responsibility programs. In the year 2007, this Bank provided around it is scholarship eligible students in different colleges across Bangladesh. Over the period of time, it has significantly contributed to social development which is a positive sign for the economy. After 2007, they have initiated the Exim bank scholarship program which is providing scholarships in relation to different colleges in Bangladesh. This bank has also opened hospital named Exim Bank Hospital in Dhaka for providing medical healthcare services to poor people.

Board of directors

The vision of this company is stated on their official website as "Together Towards Tomorrow". The main objective of this bank is to provide effective services to its customers so that profitability and wealth of investors can be increased. Board of directors of the company includes 14 members. Mr. Mohammed Nazrul Islam Mazumdar is chairman of the company and Vice Chairman is Mohammed Abdul Mannan. Currently, managing director and CEO of the company is Dr. Mohammed Haider Ali Miah. Director of the company includes members that are very skilled and experienced (Exim Bank, 2018). They are expected to achieve all the goals and objectives set by the company. In addition to that various other communities are also maintained by a company such as executive committee, board audit committee, and Risk Management Committee. All of these committees have specific roles and responsibilities in the organization which is governed by a board of directors.

Auditor analysis

At the end of every financial year, an audit has been conducted by statutory auditors according to rules and regulations applicable in Bangladesh. Every year auditor of the company issues an unqualified report to the financial statements prepared by management. The unqualified report represents that there are no material misstatements in financial statements prepared during the financial year. In the last 10 financial years, a qualified report has not been issued which is a very positive sign for risk management strategies implemented by the organization. 

Vietinbank 

Vietinbank stands for Vietnam joint-stock commercial bank for industry and trade. This is a government-owned bank that is operating in Vietnam and it is one of the largest organizations in Vietnam in term of market capital. According to VNR 500 (list of top 500 companies in Vietnam), Vietinbank is listed at the 13th number.

This bank was established by State Bank of Vietnam in the year 1991 (Exim Bank, 2018). This was one of the first four commercial banks that was introduced under the two-tier banking systems in Vietnam. The primary business of this organization is to deal with larger government programs rather than directly dealing with individual people. This bank generally provides financial services to various government programmes initiated by the government of Vietnam. This organization is a government organization but 20% shareholding of this company is acquired by Mitsubishi financial group this is a private organization. 62% of total shareholding is acquired by the State Bank of Vietnam which is another government sector organization with makes Vietinbank a government organization. This organization also have around 9 wholly-owned subsidiaries and another subsidiary (Vietinbank Securities Co Ltd) in which this organization is holding around 75% of total share capital.

Board of Directors

Board of directors in this company includes 7 people. Mr. Le Duc Tho is the chairman of the company. In addition to that board of management and board of supervisors are also established by the company for specific purposes (Vietinbank, 2018). 

Auditor analysis

There was a fraud conducted by the management of the company in the year 2014 which was considered as one of the biggest banking fraud of 2014. Undertaker this fraud former head of Vietinbank i.e. Huynh Thi Huyen Nhu stole around 4 trillion VND from the company (Vietinbank, 2018). Other than this incidence auditor of the company has always issued an unqualified report to two financial statements.


Analysis of non-financial risks

The main objective of the segment is to analyze the risk management strategies faced by the management of both of these companies. Different type of risk will be analyzed from the perspective of both of these organizations and strategies will be discussed that are being used by these organizations to mitigate these risk factors.  

Operational risk

Operational risk can be referred to as the risk that reporting system and internal monitoring system implemented by the organization is not performing according to the expectations. These failures in a system implemented by the organization can have a negative impact on overall operations of the company (McNeil, Frey & Embrechts, 2015). These type of rays can arise due to two major factors i.e. inefficiency of technical controls implemented by the organization or error in the recording of financial transactions. It is essential that a proper risk mitigating factors are employed by the organization in order to avoid the above 2 mentioned factors.   

Exim Bank

Adequate control has been implemented by this Bank in relation to operational risk factors such as- 

Supervision- All the financial transactions recorded by the organization are supervised by an expert in the field of financial reporting. The supervision helps in the identification of errors and omissions at an initial level so that correction cost can be reduced to a minimum. Regular review is also conducted by top management of the company to make sure that there is no violation of regulations in the financial reporting framework.

Updating financial framework- the Regular update has been made by management of the company in the financial Framework installed in information technology systems that help in generation of different reports including financial statements at the end of financial year. The main purpose of this update is to eliminate all the technical factors that can affect the financial reporting system. 

Vietinbank 

Controls implemented by this organization are as follows- 

Skilled human resource capital- management of the committee has employed skilled and experience human resource capital for executing all the functions in relation to financial reporting. The employees are updated according to the financial framework used by Business organizations operating in Vietnam (Naeem, 2014).

Internal audit- internal audits are also conducted by management at the end of every quarter for identification of any error or omissions in financial statements. This internal audit helps in removing all the errors in financial statements before these reports are presented to the statutory auditor at the end of the financial year. 

Empowerment risk

This is the risk that arises due to Excess power provided to employees of the company. This risk factor results in a violation of rules and regulations implemented by the management of the company for effective operations. for example if Axis power is provided to sales staff then there are chances that certain rules and regulations in relation to documentation might not be followed by sales staff (Chad & Scheepers, 2016).

Exim Bank

First of all management of the company has established certain organizational values and beliefs that everybody working in the organization has to consider while discharging their functions. These values and beliefs include integrity, accountability, safety, and honesty. This will help in the development of an effective cultural environment in the organization which will reduce empowerment risk. Publishing this culture will also include implementation of certain policies and procedures for each and every department working in the organization. It is essential for every member to follow these policies and procedures as incentives and commissions will be based on how accurately they are following these regulations. 

Vietinbank 

Management of Vietinbank has used negative motivation program to make sure that employees are following the rules and regulations effectively. If the rules and regulations of the company are not followed by management then there will be some deductible from salary and commission payable to the employees. These terms and conditions are already included in the employment contract of every employee. Therefore it can be said that the management of Vietinbank has been following strict rules and regulations to avoid empowerment risk.

Information risk

Information risk can be defined as the risk of making important decisions in the organization on the basis of inheritance and irrelevant data. Therefore it can be said that disrespected is concerned with the accuracy and relevance of data that is available with the organization. This data includes the management data as well as financial data as decisions are taken by management on the basis of both of these data (Accenture, 2015). 

Exim Bank 

To maintain the accuracy of data management of the company is using information technology systems so that errors and omissions in financial data, as well as management data, is minimum. With the help of Information Technology chances of errors in the recording of financial transactions is minimum as different controls are inbuilt in these systems that can identify basic errors and omissions. Different reports can be generated with the help of the system which can help in the extraction of only relevant data to the management decision under consideration.

Vietinbank

Management of the company has been using following four steps to mitigating the occurrence of information risk-

  • Main sources of information risk are identified buy overall analysis of business processes used in the recording of financial statement.
  • These risk factors are given greeting according to their probable negative outcome.
  • Rating is also provided to the chances of occurrence of these risk factors. 
  • Better stakeholder management is also used by management in order to communicate with all the relevant stakeholders.

Technology risk

Technology risk can be defined as the risk that a business organization will not be able to cope up with the changes in technological changes in the business environment. Adapting business strategies according to technological changes is very important as a competitive edge cannot be maintained by the organization without such changes (Ahmed & Manab, 2016). 

Exim Bank and Vietinbank

Both of these organizations are keeping their business operations according to the changes in the technological environment. Technological environment in Bangladesh and Vietnam has been changing rapidly according to changes in other parts of the world. Technological advancement in these countries is not very advanced as compared to other developed countries such as the USA, UK, and Japan. The technological environment of these countries are changing rapidly especially in the field of business management as a business environment of these countries is very dynamic. 

Physical security of Information Technology systems implemented by the organization is also a very essential part of the technological risk. Adequate controls are implemented by this organization on physical security. The main focus of these controls is to mitigate the interference of unauthorized person in operations of the company and mitigating unauthorized actions taken by the authorized person. Therefore it can be sent that strategies of the company according to the latest technology is used by financial sector organizations in Vietnam and Bangladesh.

Strategic risk

Strategic risk can be defined as the risk factors that arise due to a sudden change in the political or economic environment in which business organization is operating. For example, Nationalisation of banking sector organizations can affect the economy of any country. This type of risk is very essential to analyze for a financial sector organization because of all the rules and regulations changes with the change in the economy and political environment (Ali, Akhtar & Sadaqat, 2011). 

Exim Bank

Management of the company keeps a tight overview of rules and regulations applicable to the company and the political environment. Statistical analysis tools have been used by management to predict the economic environment and factors that might effective business operations. It is the practice of the company to identify and keep a regular eye on key risk indicators that can affect political and economic environment in the country. 

Vietinbank

Strategies of the company are prepared in the manner through which the impact of economic or political changes is minimum on the business operations. For example, a major focus of the company is on key performance indicators therefore if there is any change in the political environment then key performance indicators will not be affected. 

Process risk

Process risk can be defined as the risk of business operations not conducted according to the approaches and strategies predefined by the management of the company. There are various reasons that can result in process risk such as human error, outdated technology used, quality of human resources, the complexity of process etc. It is important to analyze and manage these risk factors because it can affect overall operations and objectives set by the company.

Exim Bank

A major focus of this company is to manage the human resources capital employed by the organization. Majority of business processes and operations are conducted with the interference of human resources. Therefore it is important that human errors are mitigated to a tolerable level. For this purpose management of the company has a strict selection and recruitment policy is so that only skilled and experience the employees are taken for conducting important functions.   

Vietinbank

The focus of the organization is to mitigate the risk factor that can arise due to the inefficiency of information technology systems. Majority of business operations conducted in the organization such as human resource management, operational management, resource management, sales, and marketing etc. uses information technology. For this purpose management of the company keep effective maintenance of information systems and keep information systems updated according to the latest technology. 


Evaluation of the respective financial risk by using ratios

Financial risk can be defined as the risk of losing money due to various financial considerations such as liquidate, solvency, credibility and other financial factors. These factors are generally given more important as compared to non-financial risk factors as their impact on business operations can be very significant. Financial risk and also effect operability and existence of the company in the market (Brigham, Ehrhardt, Nason & Gessaroli, 2016). The segment of the reports will analyze different financial factors with the help of ratio analysis. Ratio analysis is a significant tool of financial statement analysis by analyzing various a particulars of financial data available in the financial statements prepared at the end of every financial year. These organizations are in operation for a long period of time and therefore it would be appropriate to identify the financial factors on the base of the financial statement prepared in the last 5 financial years.

Liquidity ratio

Liquidity ratio defines the liquidity position of the company in the market especially the short-term liquidity position. Two liquidity ratios will be used to analyze the financial position of the company in the last 5 financial years’ i.e. current ratio and quick ratio. These ratios help in comparison of short-term assets available with the organization and short-term liabilities that are required to be paid by the organization. 

Debt ratio

Stable capital structure is also an important aspect that should be considered while evaluating financial risk factors. All the sources of financing available with us organization working in the financial and banking sector can be divided into two categories i.e. equity sources and debt sources. Equity sources can also be referred to as internal sources of financing such as retained earnings, equity share capital, preference share capital etc. Debt sources are considered as a capital investment through external sources of financing in exchange of returns provided to financiers in form of interest and share of profit or ownership (Wahlen, Baginski & Bradshaw, 2014). It is important to maintain an effective balance between the sources otherwise it can result in financial risk and inefficient operations of the company.

Particulars 2013 (%)2014(%)2015 (%)2016 (%)2017 (%)
Vietinbank




Total debt 00000
Total equity5,40,74,6665,50,12,8085,58,67,7206,01,39,0706,34,69,665
Debt to equity ratio00000
Exim bank 




Total debt 122994859512795740289202018469543831496513322
Total equity2049914325223105291647252980314562765026772426467658254
Debt to equity0.601.2100.731.19


Vietinbank- In this cases it can be evaluated that the total debt used by the companies for financing their capital is zero. Therefore it can be said that debt to equity capital would also be zero. Vietinbank is financed by government and no source of finance from external sources has been used. Profitability of the company would be affected in a positive manner as the company is not required to make any payment in relation to interest expenditure. If the long-term perspective is considered then it can be said that this capital structure for both of these organization is not efficient. Generally, it is considered that the debt-equity ratio should be 2 ratios 1 i.e. total debt should be double the amount of total equity investment (Weygandt, Kimmel & Kieso, 2015). Therefore it can be said that the capital structure of this company is not very efficient.

Exim bank- Total debt-equity ratio in case of Exim Bank is much more efficient as there is a component of debt and equity. It is considered that the total debt component should be slightly higher as compared to the total equity component as it helps in controlling the ownership of the company. In addition to that total interest paid on the debt, the component is tax deductible which also helps in reducing the total tax paid to the government. Currently, management of the company is operating at a debt to equity ratio of 1.19, it can be said that there is an adequate balance between debt and equity component in the company (Faccio & Xu, 2018).   

Credit ratio 

Credit ratio can be defined as the ratio of total interest paid by the organization on long-term debt and total income generated by the company in a particular accounting period. This is the important ratio that is considered by the financier of outside loan or mortgage before providing any financial assistance to the company. It helps in evaluating whether business organization is equal to adequately pay all the interest on long-term debt acquired by the company. Credit risk of a company is an important financial risk indicator as a business organization cannot operate without paying return and interest to long-term finances. There are various provisions in corporate act applicable in every country in which there are provisions with which creditors of the company can apply for insolvency if banking organizations are not able to pay long-term debt and interest on such debt (Brown & Moles, 2014).

The formula for credit ratio–

EBIT/ Total interest on long-term debt   

In both of these companies, whole capital is financed with the help of equity capital. Therefore there is no interest that is required to be paid by both of this Organization in respect to total long-term debt. It can be said that total credit risk in both of these companies is negligible and company will not go under liquidation due to non-payment of interest. In the future, if the company requires any additional capital then it is suggested that management should procure finance with the help of external sources of financing. It is essential that there should be a balance between debt capital and equity capital of the company which will be developed as management increases the debt component in both of these organizations.            

Profitability ratio

These type of the issues health in understanding the profitability position of the company. Financial risk can be evaluated with the help of this ratio by evaluating profit generation capabilities of the organization. Profitability ratio helps in understanding whether the resources supplied by the company in business operations are able to generate adequate profit for stakeholders or not (Alessandri & Nelson, 2015). Two ratios that will be used for analyzing the profitability of both these companies are net margin ratio and return on equity ratios.

Net margin ratio 

Particulars 2013 (%)2014(%)2015 (%)2016 (%)2017 (%)
Vietinbank




Net margin 25.4122.4118.2819.7317.20
Return on equity 13.218.648.119.359.32
Exim bank 




Net margin 39.1043.1234.6445.3548.42
Return on equity 15.8019.0714.8518.0820.12

Vietinbank - It can be evaluated that the net margin ratio of Vietinbank is fluctuating from the financial year 2013 to 2017. Profitability of the company has been decreasing from the year 2013 where net profit reaches a maximum at 25.41%. Therefore it can be said that the financial performance of the company in the last 5 financial year has not been very effective. A similar trend can be analyzed in the case of return on equity ratio. Return on equity ratio in the case of 2013 was maximum and it has been decreasing substantially up to the year 2015. This ratio has increased in the year 2016 but again decreased in the year 2017. On the basis of both of this ratio, it can be evaluated that the profitability of the company has decreased in the current business environment as compared to profitability in the year 2013.

Exim Bank- net margin ratio in case of Exim Bank has been increasing constantly in the last 5 financial years except in the case of 2015 their profitability of company has decreased from 43.12% to 34.64%. The company has recovered substantially in the year 2016 their profitability has increased by 24% as compared to 2015. A similar trend can be analyzed in case of return on equity as the return on equity in the year 2015 has been minimum out of all 5 financial years. On the basis of both of this ratio, it can be said that the profitability of the company has been impressive except in the year 2015.

Efficiency ratios

These ratios help in understanding the efficiency of Management to use resources are employed by the company in the organization. It is important for the management of the company to employee effective human resource capital so that resources employed can be fully utilized to their potential (Embrechts & Hofert, 2014).

Particulars 2013 (%)2014(%)2015 (%)2016 (%)2017 (%)
Vietinbank




Asset turnover ratio 0.040.030.030.030.03
Return on asset  1.070.760.620.630.56
Exim bank 




Asset turnover ratio 1.661.901.421.501.83
Return on asset  4.244.404.103.303.78

Vietinbank- Asset turnover ratio and return on asset ratio represent prophets that are generated by the company with effective use of total assets employed in the organization. It shows the efficiency of the company to use its resources for the generation of profit. It trend analysis shows that the profitability of the company has been decreasing constantly in the last 5 financial years. It can be seen that both of these issues were maximum in the year 2013. On one hand, where the asset turnover ratio has been constant in the last four financial years return on asset ratio has been decreasing significantly on a constant basis.

Exim Bank- Asset turnover ratio in case of Exim bank is changing can basis but the amount of change is not that significant. It is calculated that the total asset turnover ratio in the year 2017 has increased by 10% as compared to 2013 which is a positive sign for the company. Increasing and decreasing trend can be evaluated in case of return on asset ratio but the comparison is made on a five-year basis then it can be evaluated that overall return on asset has decreased by 11%.  


Analysis based on the findings regarding the performance of the company

Vietinbank 

On an overall evaluation, it can be said that the financial performance of Exim Bank is substantially better as compared to Vietinbank. If the performance of the companies compared with the past performances of the company in the last 5 financial year, it can be evaluated that the company has not been operating at its full potential. Total revenue generated by the company has been increasing constantly but net margin ratio of the company has been decreasing. It is expected that if sales of a particular company are increasing then overall profitability would increase. There is a basic concept of Economics i.e. economies of scale which states that with time, time and resources used by the organization while performing a particular activity will decrease. On the basis of this theory, it is expected that the performance of the company to perform similar business activities over and over financial years would improve. This has not been the case for the management of the Vietinbank. 

The capital structure of the company is also not optimum as there is no debt capital in the organization as it is financed with the help of government equity. 64% of total equity has been held by the Bank of Vietnam which is a government organization and 20% shareholding of this company is acquired by Mitsubishi financial group. Rest of the capital is also acquired by equity sources with the help of investment made by different smaller organizations. The absence of debt capital will not be in favor of the company in long-term perspective (Habib, Masood, Taimoor, Mubin & Baig, 2014). It is recommended that the management of the company should raise some capital with the help of debt instruments.

The efficiency of the company has also not been very impressive in the last five financial years which is identified in terms of asset turnover ratio and return on asset ratio. Both of these ratios show that the efficiency of the company to use assets for generation of profitability is not very effective.

Exim Bank

Exim Bank is better as compared to Vietinbank on all the perspective i.e. solvency, profitability and efficiency. Profitability of the company has been increasing substantially including total revenue, profit before tax and net profit margin ratio. More and more investors will be attracted to invest in this organization because of the return on equity of this organizational substantial and increased significantly over the period of last 5 years. External investors will also not hesitate to do business with the company as solvency position of the company is strong.

The capital structure of this organization is also very strong as compared to Vietinbank as there is debt component in the organization as opposed to Vietinbank where entire capital is financed with the help of equity sources. This organization is currently operating at debt to equity ratio 1.19 that shows total debt component is higher as compared to the total equity component. This is a very positive sign for an organization that is operating in the market for a long period of time (Fabac, Klačmer, Zajdela & Kocijan, 2015).  

The efficiency of Management to use assets for the generation of profits is also better in case of this company as both return on assets and asset turnover ratio has been increasing constantly in the last 5 financial years.

Conclusion 

On the basis of this report, it can be concluded that the identification of two different factors that can affect operations of the business is very important. It is also important to analyze both financial as well as non-financial factors. Majority of business organizations only consider financial factors during the process of risk identification and management but it is important to consider non-financial factors as these factors can also have a significant impact on the business. The main objective of this report is to identify the non-financial and financial factors that can affect the business organization. Vulnerability to risk factors for a business organization operating in the financial sector is much higher as compared to other organizations. The economy of a country is dependent on the banking sector and vertical banking organization is not adopting the principles of risk management and it can have a significant impact on the economy. This report as compared two business organizations operating in the finance sector of two different countries i.e. Exim Bank operating in Bangladesh in Vietinbank operating in Vietnam. These organizations are compared with various financial and non-financial factors. On the basis of non-financial factor comparison, it can be said that both of these organizations have adopted effective strategies to cope up with the impact of risk factors. On the other hand, the financial performance of Exim Bank is better as compared to Vietinbank which clearly shows that risk management strategies in relation to financial factors are better in case of Exim Bank. 

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