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When integrating into regional as well as global economies, every company should improve its competitiveness by all means in order to secure a firm position on the market. In the banking sector – an important sector in the economy – this becomes even more important. There are many criteria to evaluate a bank’s success, of which credit quality is an extremely important criterion. In a market economy, it is any bank’s opportunity as well as challenge. This is especially true when credit is the main activity of Vietnamese banks as a whole. While competing, enterprises in various areas should support one another for co-development. Banks and major industries such petroleum has close and long lasting relationship. Whereas petroleum industry need huge amount of capital, banks have funds that need investing. However, when making decisions on investment, a bank must make sure its investment is profitable. Based on knowledge gained from the Master course as well as personal working experience; being a bank manager in charge of the department specializing in lending to corporate customers, including big petroleum companies, the author has completed the research on “Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch”. By applying theoretical knowledge and practical data, the author has generalized and analyzed the main aspects of investment projects, project content appraisal, appraisal process, profit assessment criteria of investment projects in general and projects concerning petroleum field in particular. From a master degree researcher’s viewpoint, basing on practical work on credit appraisal for projects in the field of petroleum, demonstrated by one of Vietinbank’s specific lending projects in petroleum field: the loan for acquiring 50% equity of Block No 67 Oil Mine in Peru, in this thesis, the author has assessed results as well as limitations of project appraisal process of VietinBank in general and the Hanoi Branch's in particular. The author has also recommended some solutions so the bank can improve the credit appraisal cycle for projects in the field of petroleum. When completed the Master course, the author has bridged the gaps in theory and applied the findings to the work, obtaining an overall picture of reality and improving himself. As an experienced person working in financial field, the author has always been interested in the field’s complicated and interesting nature. It is expected that the author will be more successful in personal career thanks to the obtainment of comprehensive theoretical and practical foundation from the course.
Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch JEAN MOULIN LYON UNIVERSITY 2013 VIETNAM UNIVERSITY OF COMMERCE MASTERs OF FINANCE AND CONTROL THESIS Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch Prepare by: NGUYEN Quang Duy Supervised by: Prof ABADIE Laurence Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 Hanoi – August 2013 ACKNOWLEDGEMENT I would like to express my gratitude to all those who gave me the possibility to complete this thesis Foremost, I would like to give my sincere thanks to my tutor, Prof ABADIE Laurence for her patience, motivation and enthusiasm Her guidance helped me in not only studying well but also choosing the thesis topic The comments and remarks she shared with me were tremendously helpful and valuable for the learning, writing and completion of this master thesis Furthermore, my special thanks go to Mr Vu Manh Chien, who is in charge of the Program for Vietnamese master students, for his suggestion of ideas and introduction of thesis topics to us He has also given to all of us great support throughout the entire course so that we could have best condition to study I would also like to express my sincere gratitude to our International and National Teachers and Professors who have willingly shared and given us their precious and immense knowledge and experiences during the course Thanks to their teaching we became higher developed in personal capacity to more successfully fulfil our career My great thanks go to the leaders of VietinBank – Hanoi Branch for allowing me time to participate in the master course as well as providing with valuable data for my thesis Last but not least, I would like to give my special thanks to my friends and my family for their support that enabled me to complete this work Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 CONTENTS Page I INTRODUCTION II DEVELOPMENT Chapter THE BASICS OF CREDIT APPRAISAL FOR COMMERCIAL BANK 1.1 General concepts about investment projects and credit appraisal of commercial bank 1.2 Quality of credit appraisal of commercial banks 21 Chapter ACTUAL SITUATION OF CREDIT APPRAISAL FOR PROJECTS IN THE FIELD OF PETROLEUM IN VIETINBANK 24 2.1 Some general information about Vietnam Joint stock commercial bank for Industry and Trade – Hanoi branch 24 2.2 The status of the evaluation quality of the investment project of the petroleum sector in Vietinbank and Hanoi branch 27 Chapter ACTUAL SITUATION OF CREDIT APPRAISAL FOR PROJECTS IN THE FIELD OF PETROLEUM IN VIETINBANK AND HANOI BRANCH WITH SPECIFIC EXAMPLE 32 3.1 Project brief 32 3.2 Oil reserves and potentials 34 3.3 Assessment of equity transfer process 34 3.4 Transfer method 35 3.5 Capital transfer methods of PVEP 38 3.6 Project progress 38 Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 3.7 Market and the product consumption methods 39 3.8 Total investment and capital investment appraisal of the project 39 3.9 Project’s financial efficiency assessment 41 3.10 Project’s risks assessment and mitigation 42 3.11 Tentative benefits of Vietinbank Hanoi Branch in case the loan is approved 45 Chapter EVALUATION QUALITY OF CREDIT APPRAISAL FOR PROJECTS IN THE FIELD OF PETROLEUM AND OFFER SOLUTION TO IMPROVE THE QUALITY AS WELL AS LIMITATIONS OF THE EVALUATION OF THE RISKS 46 4.1 Results in credit appraisals in the field of Petroleum 46 4.2 Drawbacks in credit appraisals 46 4.3 Impacting factors 49 4.4 Considering solutions 51 III CONCLUSION 55 IV REFERENCES 56 V ANNEX 57 Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 I INTRODUCTION Vietnam is, in many ways, a developing country Its economy in general and banking sector in particular, are growing fast In such a developing economy as Vietnam’s, financial activities are facing lots of difficulties caused by both objective and subjective factors In countries with developed financial activities, banks’ turnover comes from diverse sources In Vietnam, however, this comes mainly from credit activities Credit project appraisal process is, therefore, extremely important to banks It is considered a decisive element in identifying banking system’s risks Previously, loans granted to giant state corporations (eg to Petrolimex) were always regarded as safe and risk-free ones However, in recent years a lot of those corporations have confronted numerous difficulties caused by economic recession, resulting in huge losses for banks Plenty of state giants have expanded their business into areas in which they have no experience, leading to losses As a result, the government must assist them This makes it more difficult for the banking system to business, especially in appraising credit projects Well-appraised projects are those that help banks not only be able to duly and adequately collect the money they have lent but also to sift and classify projects so as to minimize the wastage of public funds, contributing to socio-economic stability and sustainable growth but also to the implementation of government macroeconomic policies, including those on optimizing national economy’s structure, creating jobs for labors, improving people’s life quality, enhancing national economic relations, expanding international economy, and speeding up industrialization and modernization process The current heavier investment in inefficient projects in general field, especially of large petroleum groups, is a threat to economic growth and commercial banks This is the reason why appraising investment projects in this field should be strictly carried out in order to guarantee the efficiency of both banks and their customers Appraising an investment project, under the investor’s provisions, means to assess the investor’s ability, technology, market and financial status, of which financial assessment is the most vital factor in lending decisions Credit appraisal for projects in Vietnam Joint stock commercial bank for Industry and Trade (VietinBank), especially Hanoi Branch’s, has always received attention in recent years so as to meet Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 the demand for huge capital of investment projects in various economic sectors, including gas and petro one The above mentioned arguments made the author choose the topic on “Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade Hanoi branch” for this thesis In the structure of returns of Commercial banks in Vietnam, return from credit plays the most important role Thus, commercial banks in Vietnam, Vietinbank included, always put credit evaluation top so we can be sure that we make the best investments in effective and low-risk projects It is reported that, almost 30% of Vietnam GDP is made by Petroleum That’s the reason why Vietinbank has been concentrated on creating credit for this field In the credit process, credit analysis is the most important step It determines the quality of credit entities A qualified credit product usually minimizes the default risk and the risk of bad debt expense Yet, a highly conservative credit analysis will eventually prevent the flow of lending Thus, the balance between quality and flexibility in credit analysis has a great impact on the business Big institutions as PVN are always one of the potential clients with the tremendous sponsors from the government However, these institutions recently have ineffectively used their capitals (such as misuse of investment, ineffective capital management) It leads to high records of bad debt expenses Some had enormous consequences to the economy as a whole, and particularly the banking system, such as Vinashin, Vinalines Thus, credit analysis is becoming more and more important, and difficult My research purpose is clarifing the theory of credit appraisal on investment and financial projects; Applying and bringing up the actual market problems on credit appraisal for appraisal activities Besides, I research one credit situation of Vietinbank HN Branch for customers in the field of Petroleum and find the way to improve the quality as well as limitations of the evaluation of the risks based on the facts The Research Subjects is a project in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch One of Vietinbank’s specific lending projects in petroleum field is: the loan for acquiring 50% equity of Block No 67 Oil Mine in Peru My Methodologies are applying these theories of investment and management risk, these statistical methods, comparison of data, synthesis Systemizing diagrams based on real data in the field of Petroleum, particularly based on the banking data and reports to assess the appraisal process Besides, analyzing critical points for specific projects due to personal experiences of expertise Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 II DEVELOPMENT CHAPTER I: THE BASICS OF CREDIT APPRAISAL FOR COMMERCIAL BANK 1.1 GENERAL CONCEPTS ABOUT INVESTMENT PROJECTS AND CREDIT APPRAISAL OF COMMERCIAL BANK 1.1.1 Concepts about investment project a Concept Investment activities are conducted multistage with diversified economic characteristics, normally in the form of one or more investment projects Some projects have a huge capital requirement, on a certain time, in a long-time framework, and complex project management and operation As a result, a seriously active preparation process should be conducted, and investment should be viewed as separated projects to be achievement-oriented Investment projects could be considered in various manners: Investment projects, in form of documents, are a method to present operating activities and costs in a detailed and systematical way to achieve certain desired results and future goals For businesses in general, investment projects combine related activities, which are planned to achieve defined objectives in a given time-frame using certain resources On the management perspective, investment projects are a management tool, monitoring the use of capital, materials and labor to create the financial as well as economic - social results in a long-time framework On the planning perspective, Investment projects are a useful tool to plan in detailed a business that can lead to economic-social developments and be the prerequisite for future investment decisions and funding activities For commercial banks, an investment project is a funded project on the basis of credit appraisal of commercial bank In other words, it is the amount of money that commercial banks loan Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 to businesses or investors on the agreed terms to implement a particular investment project of the investor b Investment project requirement An investment project that is compelling and attractive to participants must ensure the following basic requirements: - The project must be scientifically sound This is the most important element of investment projects It ensures the success of the project development and implementation It is shown on the following criteria: o Data and information transparency accuracy of the project must be guaranteed That is the data and information must come from originated sources o Project elements should not be considered separately but in an interrelationship as a whole Therefore, the project planning process must be implemented logically and coherently o Measurements calculation must be simple and accurate - Projects must fulfill the due diligence process It must be licensed by the competent authorities before implementation - The project must be realistic, meaning that it has the ability to deploy its applications in practice - The project must be considered under the consensus of benefit among related parties to ensure its consistency - The last criterion is predictability Projects must be based on estimations of production, costs, prices, revenues, profit, etc Thus, the aggregate amount is estimated In practice, there is never a situation where the estimates are exactly correct In some cases, outcomes are much different from project estimations c Project classification Investment projects are classified according to many different criteria depending on management objectives, organization, investment plans - Based on the operating characteristics, investment projects are classified into: o Investment projects in manufacturing, services that are easily to payback o Infrastructure, social and cultural investment projects o Regional economic development investment projects - Based on the collaterals of the loan, investment projects are classified into two sub categories: o Investment projects without collaterals: projects that not require the use of assets as collateral but based fully on financial situation, management capacity, faith on the customer relationship and the effectiveness of the project itself o Investment projects with collaterals: projects that require assets, mortgage or the use of third party guarantee as collaterals for the loan Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 - Based on the project’s time frame, investment projects are classified into: o Short-term projects: projects that have a borrowing period shorter than 12 months, and the use of the loan are mainly to maintain current assets or short-term liquidity need of the customer o Medium, long-term projects: projects that have a borrowing period longer than 12 months These projects use the loan to obtain noncurrent assets such as plant, properties, equipment replacement, infrastructure, etc - Based on the Government decree 112/2006/ND-CP on management of investment projects on construction, investment projects are classified into sub categories: national-level projects that are passed by the National Assembly on the policy, and three other A-, B-, C-level investment projects to effectively governance and actively manage the project implementation process Besides, there are various classification methods depending on the project nature and importance d Characteristics of commercial bank’s project lending Project lending satisfies the medium, long term financial need of customers to enhance productivity through expansion investment, replacement investment, etc The costs of these kinds of investment include plans, properties, installment, machines, equipment; or the incremental of current assets to serve the project Project lending satisfies the total financial requirement for a project (current and noncurrent assets investment for the project), creates a financial leverage, ease the shortage of long-term fund Project lending assures the customer ownership over their assets over the lending period compared to financial lease Lending process is based on the financial effectiveness of the project measured by the project’s net present value (NPV) and the project’s internal rate of return (IRR) Project lending process is implemented according to the current stage of the project Project lending must be considered under the aggregate relation of the project elements to ensure the total timeline of the project, guarantee the payback period Project lending contents include the value of equipment, goods, machines, and other costs for customers to implement a business project and expanding their projects, taking out the interest cost of the banking loan in the period when projects are under construction and noncurrent assets are not ready for the medium-and-long-term noncurrent-asset projects that the interest are based on the value of that noncurrent asset e Process of commercial bank’s project lending Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 The project lending process of commercial banks is often implemented in three stages: project appraisal, lending period, and collection period Project appraisal: Investors create a project, considering all the project’s funding resources to make the best funding decision Investors who have the funding need send their documents to commercial banks, including legal documents, documents of financial situation of the investor, project documents, and other related documents After receiving all the necessary documents from customers, the commercial bank will implement the project appraisal process, including the necessity of the investment, project goals, technical issues, economic-social issues, and financial issues to consider the feasibility of the project After the appraisal process, the commercial bank will reconsider the investment project based on its own measurements to make the final decision If the project is not feasible, the commercial bank will document its customer; clearly define its reason for rejection Other than that, the commercial bank will accept the customer’s document and begin the lending contract Lending implementation: After the success of the project appraisal, the commercial bank will announce the loan and create credit contracts, and other related contracts After completing legal procedures of the lending process, the commercial bank must ensure that the loan is ready according to the project’s stages agreed in the contract In this process, the commercial bank must monitor the project implementation to timely recognize and solve any problems Loan repayment: After the loan is delivered in full and the grace period, the commercial bank will announce its repayment schedule to its customer In the agreed period according to the loan contract, the commercial bank will collect its principals, interests, and any agreed fee when they due According to the bank’s announcement, the investor will repay the principals, interests, and fee Parties must discuss and timely find a solution if there is any difference from the agreed contract Among the three stages above, the project appraisal, especially the project financial appraisal is the most important stage that will be the core of the investment process 1.1.2 Concepts about credit appraisal a Concepts 10 Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 The provisions of the agreement will require Seller to ensure that there will be no disputes and claims related to the Project at the time of project valuation CAPITAL ARRANGEMENT The ability to balance investment capital from the equity of PVN: Foreign investment capital PVEP in the Project (in which, 50% is price and 30% is development cost) is in overall capital balance of PVN and was approved by Members’ Council in PVEP’s investment plan according to Decision No 3220/QD-DKVN dated on April 16, 2010 on the PVEP’s 2011-2015 plan Ability to attain liabilities: The Project generates sufficient revenue The cash flow ensures the ability Annual debt service coverage ratios exceed (from 1.2 to 2.4) • PVEP’s current financial status is good, showed as: o Debt over equity is 23% o Debt over total asset is 15% PVEP’s safety ratio is very high according to financial and credit institutions The potential risk of wrong capital structure is low When the project come to profitable stage, with the developed investment environment and banking system in Peru, commercial lending is possible Construction partners are experienced petroleum investors with strong financial status, and PVEP currently has good relationships with many domestic and foreign financial institutions MARKET According to the Contract, after tax obligations are fulfilled, the exploited oil shall be sold in domestic/international market at market price and totally under Investor’s decision The probability of adverse market movements is low as the market includes a massive number of households The ability to control risk is high as long-term oil trading contracts are signed EARTH QUAKE AND NATURAL DISASTERS Lot 67 is located in the Marañon basin, to the east of the Andes It is not in the area of high risk of earth quake in Peru The natural conditions are relatively mild So the possibility of earth quake and dis asteris very low In the worst scenarioof an earth quake in Lot 67, the risk can be mitigatedin an optimal way through buying insurance, designing the construction to withstand the impact of natural dis aster up to a certain degree, etc By anintegrated approach to identify and assesspotential risks and ability to mitigate risk, it can be seen that identified risk has very low probability and can be easily controlled It is shown in (i) average probability of all factors is low (11%) and (ii) average risk mitigation is high (78%) The probability of simultaneous occurrence of uncontrollable risks is very low (4.8%) 3.11 Tentative benefits of Vietinbank Hanoi Branch in case the loan is approved - Interest and various service fees: Guarantee, L/C opening, bank transfer, etc - The company committed to transfer a part of revenue from the project as soon as the project is completed 45 Credit appraisal for projects in the field of Petroleum in Vietnam Joint stock commercial bank for Industry and Trade - Hanoi branch 2013 Personal opinions from the perspective of individual in Customer Department of Hanoi Branch directly in charge of the project a About customer profile, customer capability: the profile is sufficient according to law and the bank’s regulations (document checklist, within annex) b About production and trading activities of the customer: appropriate in accordance with the managers and capabilities of the customer c Credit scoring and rating: 58.43 points – Rating: BB (Details are in annex) d Project’s feasibility: The customer has project management experiences, thus, is capable of implementing the project e About compliance with Vietibank’s regulations: Requested credit limit exceeds the authority of Branch; loan term exceeds the authority of Branch; Equity capital ratio