INDUSTRIAL AND COMMERCIAL BANK OF VIETNAM

ANNUAL REPORT 2004

A PROFILE OF INCOMBANK

- Industrial and Commercial Bank of Vietnam (Incombank) was established in 1988, on its separation from the State Bank of Vietnam . Incombank is one of the four largest commercial banks in Viet Nam and is ranked as one of the 23 special state-owned corporations.  

- Possesses an extensive network of 2 Transaction Centers (in Hanoi and Ho Chi Minh City), 131 branches, 150 sub-transaction offices, 420 savings bureaus, a Training Center (in Hanoi) and an Information Technology Center (in Hanoi).    

- Subsidiaries include a Leasing Company, a Securities Limited Company and an Asset Management Company.

- Co-founder and major shareholder of several joint ventures, namely Indovina Bank, Vietnam International Leasing Company, Incombank Asia Insurance Company (IAI) and Vietnam Banknet.

- Manages correspondent banking relationships with 735 banks worldwide and sends authenticated SWIFT messages to 11,915 banks and their branches globally.

- Provides a wide range of banking and financial products and services including deposits and savings, local and international payments, loans, guarantees and counter-guarantees, trade finance, remittance, issuance and payment service of domestic and international cards, travelers’ cheque, foreign exchange, securities trading, insurance and financial leasing, etc.

-Full member of the Asian Bankers Association (ABA), Vietnam Bankers Association (VBA), Society for Worldwide Inter-bank Financial Telecommunication (known as SWIFT), VISA International Service Association, Master Card International, the Vietnam Chamber of Commerce and Industry and APEC Financial Institutions dealing with Small and Medium-Sized Enterprises

FINANCIAL HIGHLIGHTS

	2004	2003
Total Assets (VND million.)	90,734,644	80,887,100
Total Outstanding Loans (VND million)	64,159,522	51,778,523
Total Equity (VND million)	4,908,773	4,154,083
Total Mobilized Funds (VND million.)	81,596,865	71,146,192
Net Profit (VND million.)	206,869	205,186
Return/ Average Total Assets (%)	0.24	0.28
Return/ Average Equity (%)	4.57	5.60
Equity/Risk-weighted Assets (%)	6.30	6.08

A MESSAGE FROM CHAIRMAN OF THE BOARD OF DIRECTORS

Ladies and gentlemen,

In 2004, the Vietnamese government had a number of policies on promoting the privatization process of state-owned enterprises (including state-owned corporations and commercial banks) and actively strived for Vietnam to become an official member of the World Trade Organization (WTO) by the end of 2005. Vietnamese banking system has made efforts to push up restructuring programs (by making the financial status healthy, strengthening management capacity, improving the competition ability of banks…) to ensure its readiness for international integration.

Given the mentioned circumstances, in 2004, Incombank made efforts and achieved encouraging outcomes. Loans and investments increased by 17% compared to 2003, particularly total outstanding loans rose by 23.9%; the ratio of medium and long-term loans was limited to 40% of the total loans; mobilized funds increased by 14.7% as compared to 31 st December 2003 and properly satisfied funding demands from the economy and liquidity; net profit surpassed goverment set targets by 12%; total risk provision was 26.8% over the targeted level. Many qualitative targets were achieved or exceeded: NPL ratio was controlled at 1.96% of the total outstanding loans (compared to the target of 3%), the proportion of non-secured loans was 36.5% (compared to the target of 38%), the proportion of loans to non state owned sector was 52%.

In 2004, thanks to ongoing strong supports from the Vietnamese government, ministries, and government agencies and the State Bank of Vietnam, Incombank resolved 94% of the total bad debts accrued before the year 2000. With this achievement, Incombank was injected with VND 400 billion as equity capital to raise its statutory capital to VND 3,300 billion; thus its Capital Adequacy Ratio (CAR ratio) has improved to 5.4%. Especially in 2004, Incombank successfully completed the Phase I and has been implementing Phase II of the Banking Modernization and Payment System Project to its branches. During the year, Incombank continued expanding banking services and facilities such as the issuance and payment of international credit cards namely VISA and MASTER cards, adding up various features and services to ATM cards.

Together with these achievements, Incombank’s activities revealed several difficulties and weaknesses which needed attention and resolution, i.e. credit quality was not high, overdue loans still arose, some loans had to be rescheduled, funds mobilization activities were insufficient, inactive and inflexible while competition in the funding market was getting fiercer, internal audit system performance did not come up to its assigned tasks: early warning system was not established but still focused on consequences’ investigation and settlement; the organizational structure was not renovated. There still remained problems related to staff quality which could not meet modernization requirements resulting in a lack of qualified and experienced staff in key sectors.

As forecasted, in 2005 and for the years immediately following, local and international economic environments are expected to creat e more changes and challenges. Especially, from 2005, Vietnam has to implement a host of international commitments on opening its market for banking and financial services. Under these circumstances, Incombank really needs to make definite and continuous efforts for its sustainable and effective development.

Our targets for the financial year 2005 include 12% growth in fund mobilization; a 16% increase in lending, of which medium and long term lending not account for more than 40%, overdue and non performing loans to be kept below 4% (under new regulations); while maintaining net profit and risk provision at a higher level than in 2004; continuing to improve the proportion of income from fees and expanding Incombank’s modern banking products and services effectively.

Although the above-mentioned 2005’s targets are not much higher than those of 2004, they are nevertheless great challenges since the market competition is getting much fiercer. In order to benefit from achievements in the past and to fulfill 2005’s targets and long-term strategic goals towards 2010 successfully, it’s necessary for the whole Bank to focus on those key issues including (i) establishing and accomplishing Incombank’s business strategies up to year 2010; (ii) preparing effective solutions for ensuring sufficient funding at any time and for any possible situation in order to fully and timely satisfy capital demands of the economy and payment activities; (iii) continuing to improve credit quality and ensuring the soundness of credit activities; maintaining major criteria in conformity with planned targets: reasonable proportion of short, medium and long-term loans, loans to non-state-owned and small and medium enterprises as well as secured loans; (iv) completely resolving bad debts in 2005; (v) pushing the Banking Modernization and Payment System project; (vi) implementing new model of internal auditing system.

With the efforts of every individual and division in the whole Bank, support from government bodies and co-operations of our partners, we believe that Incombank will successfully achieve targets and tasks set for the year 2005 as well as in the coming years.

May I, on this occasion, on behalf of the Board of Directors, the Board of Management and the whole staff of Incombank, extend our sincere gratitude towards the Governments, the State Bank of Vietnam, ministries, central and local bodies and authorities for their helpful and effective support and guidance. I also extend special thanks to our domestic and overseas clients and partners for their trust and cooperation with us all over the years.

We wish to retain the privilege of receiving your further support and cooperation in the years to come.

Dr. Nguyen Van Binh
Chairman of the Board of Directors.

AN OVERVIEW OF VIETNAM’S ECONOMY IN 2004

Macro evaluation of aggregate demand

In 2004, Vietnam’s economy maintained its GDP growth rate at 7.69%, including a 10.2% growth in industry and construction, 7.47% in services and 3.5% in agriculture, forestry and aquaculture, which helped to increase the income per capita from USD490 in 2003 to USD553 in 2004. GDP per capita in Purchasing Power Parity (PPP) reached USD 2,580, increasing 12.2% compared to 2003. Unemployment rate has been continuously decreased all over the years, including the same rate in urban areas dropping from 6.4% in 2000 to 5.6% in 2004.

Total investment capital in 2004 was VND 258,700 billion, 18% higher than in 2003, in which investment capital for development from the state and non state sectors increased by VND154,000 billion and VND11,375, accounting for 60% and 20% respectively. The foreign investment also increased by 14%, from VND38,650 billion in 2003 to VND44,200 billion in 2004. In 2004, together with more than USD2 billion supplemented to operative projects, Vietnam attracted USD2.08 billion more as newly registered FDI capital in 679 licensed investment projects. New FDI projects concentrated mainly in Southern provinces and cities which made up 70,5% of the number of projects and 64,2% of total investment amount.

Table 1: Major investors and FDI geographical structure in 2004 (million USD)
Major Investors	FDI capital	FDI Receiving Area	FDI Capital
1. Singapore	7,522.9	1. Ho Chi Minh City	11,753.0
2. Taiwan	5,743.0	2. Hanoi	8,041.7
3. Korea	4,448.9	3. Dong Nai	5,728.5
4. Japan	4,254.5	4. Ba Ria – Vung Tau	3,502.5
5. Virginia archipelago	3,598.4	5. Binh Duong	3,159.2
6. Hong Kong ( China )	2,831.5	6. Hai Phong	1,762.0
7. France	2,422.4	7. Quang Ngai	1,345.8
		8. Quang Ninh	1,080.6
7 biggest investors with registered capital amounting to more than USD 2 billion /each.		8 major investment areas with registered capital amounting to more than USD 1 billion/ each.
Source: General Statistics Office of Vietnam , Vietnamese and World Economy 2003-2004 ( Vietnam Economic Times),

Budget revenues and expenditures in 2004 were evaluated to be effective and within expectation. Total budget revenues in 2004 exceeded the set plan by 14.5%. Total budget expenditures in 2004 exceeded the set plan by 12%, in which expenditures for investment and development, for pensions and social welfares, and for graduation also exceeded the set plan 13,6%; 3,4% and 2,5% respectively. The budget deficit in 2004 was kept under 5% within the level permitted by the National Assembly.

Exportation was the brightest part in the whole Vietnamese economic picture in 2004. 2004’s export turnover increased sharply from USD20.2 billion in 2003 to USD26 billion. Exports increased in both sectors: reaching USD11.74 bio, increasing by 17.2% in state sector; the foreign investment sector had the most significant growth in export with 40% higher compared to 2003, accounting for 54.9% of the total export turnover in 2004. Most of the major export commodities of Vietnam enjoyed a boom in their turnover, notably crude oil with an increase of USD 1,184 million, equivalent to 48.3%. In 2004, Vietnam oil and gas sector produced and exploited about 19 million tons of oil and more than 6 billion cubic meters of natural gas, reaching sales of over USD6 billion. Therefore, in comparison with importation of processing petrol and oil valued USD3.571 billion, Vietnam had positive net exportation of rock-tar (USD 2,095 billion).

The biggest market of Vietnam exports was Asia, which accounted for nearly half of the total export value. In 2004, export to China reached the highest growth rate at 66% compared to 2003, followed by increases in UAE countries (42%), ASEAN region (26%), Korea (23%), Japan (18.6%).

Financial market and monetary policies in 2004

Vietnam’s money market in 2004 was heavily influenced by fluctuations of global foreign exchange market and psychological factors of depositors. In the first half of 2004, USD has aggressively depreciated against EUR and JPY. On the other hand, the left second half witnessed 5 hikes in the FED funds rate which made Vietnamese commercial banks meet a lot of difficulties in their fund mobilization. Total lending to the economy increased by 26.9% compared to 2003 while total mobilized funds rose by 22.7%. In the process of inflation restraint and money market stabilization, the State Bank of Vietnam managed to keep a sustainable basic interest rate at 0.75 per month throughout the year. Competition between commercial banks was getting tougher.

In 2004, the security market was more active with a VND 12,500 billion increase in the quoted security value, rising by 93% compared to 2003 (according to reports provided by the State Security Commission). Traded securities were mainly government bonds. By the year end, there were 26 quoted companies trading their shares on the Vietnamese Stock Market, 24 of which were equitized state owned companies and mainly held by the Government.

Outlook for 2005 – 2007

ADB announced a relatively positive evaluation for the medium term prospects for of the Vietnamese economy. For the next three years (2005 - 2007), thanks to advantageous oil price fluctuations and the world economic recovery, it is estimated that the GDP growth rate will constantly increase around 7.5% - 8.5%. Budget deficit will be kept at 5%. Vietnam is focusing all efforts at completing bilateral negotiations to join WTO by the end of 2005. If this target is achieved, a lot of opportunities for economic development and social improvements will be brought about. However, Vietnam has a long way to go and a lot of things to do in the economic reform process, especially for state-owned enterprises and state owned commercial banks in response to the demands of the regional and international economic integration.

A REVIEW OF INCOMBANK'S PERFORMANCE IN 2004

On the itinerary of the Incombank Restructuring Project approved by the Government, in 2004 with efforts of the whole system, Incombank achieved encouraging results. The bad debts accruing before 2000 was resolved almost totally resulting in the NPL ratio was brought down to less than 3%, lending and investment structure was improved. The Banking Modernization and Payment System Project financed by the WB has been implemented throughout the whole network. The organizational structure has been gradually modernized in compliance with new technology application.

Funds raising

After the deflation period, in 2004 the Vietnamese price index abruptly climbed up to 9.5% in coincidence with a sharp increase in gold price, which inevitably resulted in the increase in bank interest rate. In such circumstance of the year, Incombank strictly followed market fluctuations to make flexible interest rate policies, ensuring its depositors’ benefits. Promotion and customer services were also applied widely and actively to attract more funds. The development of new products and services such as card services or payment continued to be a key investment of Incombank, aiming at two targets: increasing fee income and promoting funding sources.

As of 31 st December 2004, total fund mobilization was VND 81,597 billion, increasing by 14.7% compared to 2003. VND funds kept a higher growth rate than foreign currency funds although the relation between VND and USD interest rates started changing. In 2005, Incombank plans many new solutions in fund raising to maintain a stable growth.

Loans and investments

As of 31 st December 2004, Incombank’s outstanding loans reached VND 64,160 billion, increasing 23.9% compared to the beginning of the year. The objectives of credit business in this period were to restructure the loan portfolio, improve the credit quality, diversify risks, improve risk management, strengthen internal controlling and auditing activities, make early risk warnings to prepare timely resolutions and ensure safety and effectiveness.

Under the guidance from the Government that the process on restructuring and equitization of state-owned enterprises should be accelerated, commercial banking system should evaluate properly credit risks in lending to state owned enterprises. Incombank has focused on analyzing, evaluating actual business results, financial and management capabilities of state owned enterprises to apply suitable credit policy to each customer and each sector. Therefore, the proportion of loans extended to state owned enterprises decreased from 55.5% in 2003 to 48% in 2004.

Lending was directed to small and medium enterprises, production households, active and potential economic sectors. Overseas funded credit programs extended to small and medium enterprises, such as (Japanese) JIBIC program were actively utilized to take full advantage of funding sources with low risk and to learn experience in credit appraisal and control from advanced countries through requirements and conditions of such programs.

In terms of investments, as of 31 st December, 2004, Incombank’s total investments in valuable papers issued by the Government and in the inter-bank market were VND21,187 billion, accounting for 20% of the total assets, which is considered as a type of investment with high efficiency, safety and making contributions to the implementation of Governmental financial policies. Being a major state-owned commercial bank, Incombank played an important role in the banking system to link and support the interbank liquidity.

Incombank also reserved appropriate resources for investment in corporate bonds issued by big corporations. Though the proportion of such investments was limited due to low market liquidity, in the near future, Incombank will continue to expand this type of business to diversify its investment structure and to contribute to the liquidity of Vietnamese capital market. At the same time, Incombank also placed its foreign currency deposits at satisfactory interest rates with close correspondent banks, all of which have high credit ratings.

Developing banking services:

Domestic Payment: The amount and volume of payment transactions through domestic payment system increased steadily. The newly established VND electronic payment system has met demands for expanding internal and external payment network in term of automatic settlement and time requirements. A number of bilateral payment services arrangements were made with major partners such as State Treasury, Bank for Investment and Development of Vietnam, Citibank and Viet Nam Bank for Agriculture and Rural Development. As a result of its advantages, the payment system was given the “Vietnamese Golden Star” award and Certificates of Merits for excellent achievements in product and trademark development in the international economic integration.

Trade Finance and International Payments: In 2004, the international payment volume was higher than in 2003 with import and export payment of totaling USD2.25 billion and USD1.7 billion, increasing 24% and 38% respectively. The number of L/C issued increased by 32%. Transaction volume through nostro accounts at correspondent banks reached USD6.8 billion, up 10% compared to 2003. Professional skills in this business were increasingly improved. Every year since 2000, Incombank has been yearly awarded prizes by major foreign banks such as Bank of New York, JP Morgan Chase, Citibank, Wachovia Bank for high ratio of automatic straight-through payments by SWIFT.

Foreign Exchange: The year 2004 witnessed the relative stabilization of the local foreign exchange market and an increase in export turnover. Incombank’s foreign exchange business fully satisfied its customers’ demands and actively supported other businesses such as trade finance and import-export payments. However, Incombank should attract more export customers in order to balance the demands for selling to customers (which was up by 33%). This issue should be performed in conformity with the Bank’s comprehensive marketing policy and customers services to attract exporters.

Credit cards and ATM: In 2004, Incombank continued to invest and develop its cards business. 2004 was the year that the Bank started to issue international credit cards such as VISA and MASTER cards. As a result, the number of cards issued was double the number as compared to 2003, raising the total number of cards issued by Incombank to 60,000. With enhanced card features, Incombank gradually established its reputation in the Vietnamese card market. Incombank’s 142 ATM system located in branches, transaction offices, or densely populated areas, office centers and universities, ensured that out network met customers’ requirements for easy access.

Overseas remittance: In 2004, Incombank’s overseas remittance volume increased by 46.3% as compared to 2003, considered as a good measure to attract foreign currency funds and to increase service fees. In 2005, Incombank expanded relationship on remittance services with new partners such as correspondent banks and remittance companies in the U.S, Germany, Korea, Taiwan, Russia, to boost global remittance to Vietnam. With the advantages of wide network throughout the country including branches, transaction offices, sales points thus ensuring a speedy payment system with high service quality and competitive fees, Incombank is commited to the further development of this service.

Travellers’ cheques: Presently, the number of branches selected to be settlement agencies for travellers’ checques is 50. Total number of cheques exchanged in 2004 was 1,394 with volumes increasing by 18% as compared to 2003.

International Banking

The year 2004 marked a further effort in Incombank’s commitments to regional and international financial market integration. Incombank’s strategic targets were to reduce the proportion of interest income while increasing non-interest income, strive to become a modern and efficient bank. To realize these targets, Incombank’s international banking played a very important role. Todate, it has established correspondent banking relationships with 735 banks all over the world, and been able to transfer authenticated SWIFT messages to 11,915 banks and their global branches to facilitate trade finance, payments and remittances, foreign exchange, overseas deposits investments, credit cards, travelers’ cheques, etc.

Asian – European Economic Cooperation Meeting (ASEM) through the World Bank (WB) extended Incombank a non-refundable grant for international auditing of two fiscal years 2003 and 2004 under International Auditing Standards (IAS) and Vietnamese Auditing Standards (VAS). With this grant, Ernst & Young performed the auditing and gave valuable and practical recommendations and proposals for the improvement of Incombank’s competitive position, enhanced approach to international banking standards and gradual regional and international integration.

Joint Venture Business

INDOVINA bank is the first joint venture bank in Vietnam, established in 1990 by Incombank and PT BANK SUMMA – INDONESIA, with an initial chartered capital of USD10 million. In 2000, upon the approval from the Governor of the State Bank of Vietnam, the joint venture bank changed its overseas partner to Cathay United Bank. After three capital injections, INDOVINA Bank’s chartered capital reached USD25 million, with equal capital contributions from each partner. It is considered as an efficient joint venture bank with successful business development and profitability. This was especially so after the change to a Taiwanese partner, with profits increasing year by year with whilst maintaining strong financial criteria. The year 2004 witnessed increases of 10.3% in its total assets and 56% in profits compared to 2003.

Vietnam International Leasing Company (VILC) is a financial leasing joint venture company, established in 1997 in Vietnam with a chartered capital of USD5 million contributed by KDB Capital Corporation (Korea), Incombank, Natexis Banque Populaires (France), Aozora (Japan) and International Finance Corporation (USA). At the end of 2004, International Finance Corporation withdrew and transferred its capital (USD 850,000) to the other four partners. At the moment, Incombank’s contribution to VILC accounted for 22.35% of the chartered capital. Since October 1999, the Company has continuously made profits and been on the way of its stabilization and development with expanding operation scale and secure financial achievements. VILC has firmly reinforced its position in the Vietnamese financial leasing sector, played the role as an important capital channel to small and medium enterprises, thus contributing to the Vietnamese economic development.

Incombank Asia Insurance Company (IAI) is a joint venture product between Incombank and Asia Insurance Company (Singapore), established under a business license issued by the Ministry of Finance on 12 th December, 2002 with a chartered capital of USD6 million. Its main business is exploiting and providing all kinds of non-life insurance. The Company commenced business in February 2003 with Head Office in Ha Noi and a branch in Ho Chi Minh City. After one year in operation, the Company not only experienced no losses but made a profit. In 2004, the Company’s profit increased 6.1 times compared to 2003. With the motto: developing the company steadily under good management on the basis of good relationship with partners and cooperation with other insurance companies in the market, IAI will bring viable positive results effects to the Vietnamese economy as well as to Incombank.

Technology Development and Bank Modernization

In 2004, Incombank successfully completed Phase I of the Banking Modernization and Payment System Project (called INCAS – Incombank Advanced System) at the Head Office and 4 major branches in Hanoi. Incombank’s resources were concentrated to take over INCAS from its partner – SILVERLAKE SYSTEM SDN BHD ( Malaysia). INCAS Server was successfully upgraded to facilitate the INCAS implementation and expansion. The Phase II is being implemented to expand INCAS to all branches of the Bank.

In the same year, Incombank also extended banking services and utilities such as ATM, VISA, MASTER Cards, etc. It continued to utilize resources and brainpower to speed up the pace of the Banking Modernization and Payment System Project and promote telephone banking, internet banking, issuance and settlement of cash cards, Visa/Master cards so as to bring new services to customers.

Incombank intensified bilateral payments with Vietnam Bank for Agriculture and Rural Development, Bank for Investment and Development of Vietnam, Vietnam State Treasury, Citibank. This is seen as an important step in the process of enhancing its reputation and position as one of the biggest clearing banks in the interbank payment system for financial institutions and security organizations in Vietnam.

New banking products, i.e. certificates of deposit, non-bearer bonds, foreign currency denominated bonds, etc. are continuously being considered and developed to contribute to fund mobilization. Saving Management Information System (SAMIS) was completed in conformity with new regulations of the State Bank of Vietnam.

Plans and strategies for data storage were prepared in compliance with latest storage technologies. The latest and most effective anti-virus measures were researched and implemented in all departments in Head Office as well as in branches. Safe data storage and transmission in the whole system were ensured to process and provide updated information for the Board of Management.

The intranet system has been considered and applied to Incombank’s whole network. The implementation will be centralized at Head Office and Information Technology Centre in 2005’s second quarter and then expanded to branches.

The possibility to transform the current applications to WEB interface has been studied to ensure the adaptability with future new technologies. Data Leased Lines (LL) (about 100 lines) between branches and Head Office, among transaction offices and saving offices have been implemented to build the communication infrastructure for expanding INCAS and banking services to transaction and saving offices.

Also in 2004, Incombank upgraded its leased lines connecting branches in Hanoi and Ho Chi Minh City to the IT Centre from 64 Kbps to 128Kbps, upgraded and completed several lines including Hanoi - Ho Chi Minh City from 256 Kbps to 512 Kbps, Ha Noi – Da Nang from 64Kbps to 128Kbps, Ha Noi – Hai Phong from 64Kbps to 128Kbps. It also completed the standby 512 Kbps North - South backbone, installed the standby 256 Kbps Ha Noi – Da Nang backbone.

In 2004, Incombank’s product “E. Payment System” was selected and awarded “Vietnamese Golden Star” prize by Vietnam Young Entrepreneurs Association.

In 2005, Incombank will strive for the completion of INCAS and implementation in the whole branch network. Major investments will be made in technology and banking technology modernization to facilitate launching many new banking products and utilities. At the same time, Incombank will increase its capacity for supplying financial and banking services to the economy, strengthen its competitive ability in the application of new user friendly technologies to attract customers, thereby helping to diversify its income structure and to reduce credit risk as well as to improve its market position domestically and internationally.

Objectives and Plan for 2005

With the objective of completing successfully Incombank’s Restructuring Plan approved by the Government, entering a new phase of strengthening and developing as a major and modern Vietnamese bank, having a stable, sound and profitable business operation, possessing advanced technology, diversifying business, expanding and developing strongly retail banking services with high competition ability in Vietnam, the Board of Management has set a business plan for 2005 as follows: total fund mobilization increases by 12%, total lending to the economy increases by 16%, ratio of non-secured loans, NPLs is reduced to less than 4% of the total outstanding loans, medium and long term loans account for 40% in maximum, NPLs are resolved and recovered, provisioning and net profit increase at the same time.

A 4-YEAR PROGRESS REVIEW OF INCOMBANK RESTRUCTURING PLAN

Incombank Restructuring Plan which was approved by the Government and implemented from 2001, to-date has accomplished objectives set for the period 2001-2005.

1. The majority of bad debts occurring before 2000 was basically solved, bringing down the bad debt ratio from 28% in 2000 to 3% in 2004. One of the most effective measures of work-out during the last 4 years is the selling of secured assets by the Incombank Asset Management Company to recover the loans. Another measure of recovery is by utilizing provisioning resources of the Bank. For bad debts without debtors and secured assets, support was received from the Government.

2. In line with the itinerary of the Restructuring Plan, the Government had injected VND 2,200 billion of equity capital, which increased Incombank chartered capital to VND 3,3000 billion at year end 2004.

3. Completed Phase I of the Banking Modernization and Payment System Project (INCAS), resulting in the application was utilized in more than 40% branch network, all banking operations are processed on line.

4. Organization structure has step by step been adjusted in conformity with modern banking technology application, approaching the model of an advanced bank in the region and in the world. Another development in the efforts to strengthen credit business quality is the change of organizational structure of credit departments at Head Office and branch level. Credit departments were restructured towards customer orientation including Corporate Banking Dept., SME Credit Dept., Consumer Banking Dept., Credit Management Dept., Risk and NPLs Management Dept. At the same time, an independent Internal Audit Committee was set up from Head Office to branches, which at branch level reports directly to the General Director instead of reporting to branch managers as before.

5. Training is conducted on regular basis throughout the network to improve staff knowledge and skills, emphasis is made on performance quality, knowledge in modern banking services and products, improving early warning capacity and risk prevention in banking operation. At year end 2004, Incombank Credit Manual was formally issued. This is the handbook for Incombank’s credit operation, which includes all credit principles, processes and procedures stipulated for the purpose of approaching international standards while remaining in conformity with the actual economic environment in Vietnam.

6. Incombank continued to reinforce and to expand its existing extensive network, with concentration in cities and towns, industrial zones, processing zones, densely-populated areas. 4 transaction offices were upgraded to sub-branches, 3 sub-branches were upgraded to full branches, 3 new sub-branches and 3 new full branches were opened resulting in the total branch network consists of 131 branches, 2 main transaction centers, 150 transaction offices and 420 saving offices.

7. The EUR1.3 million Grant given by the French Development Agency (AFD) under the “Restructuring Program for Vietnamese Banking Sector” in coordination with the State Bank of Vietnam, in which the recipient is Incombank and contractor is PWC International Consulting in Vietnam in partnership with Enterplan Consulting Co. (England) and ING Bank (the Netherlands). On the basis of the Grant, the State Bank of Vietnam signed a “Consulting Technical Assistance Contract for the Restructuring Plan of Incombank” with 2 year tenor starting from December 2003 to October 2005, focusing on 8 modules:

• Performance Assessment and Operation Plan Building
• Organization Structure and Corporate Governance
• Market Research and Marketing
• Risk Management
• Treasury
• NPLs Management
• Internal Audit
• IT and MIS Management

The Restructuring Technical Assistance Project is definitely significant to Incombank, which helps the Bank to achieve more efficient and healthy operation, to become a universal and modern bank, and step by step to integrate regionally and internationally.

BASIC OF FINANCIAL STATEMENTS PREPARATION

The Financial Statements have been prepared in accordance with regulations on accounting applicable to Credit Institutions issued by the State Bank of Vietnam. The Financial Statements of Incombank Securities Company is prepared in accordance with regulations on accounting applicable to Securities Companies issued by the Ministry of Finance.

The Financial Statements are presented on a consolidated basis and include the Head Office, the Transaction Offices I and II, all branches, the Leasing Company, the Asset Management Company, the Securities Company and other units such as the Training Center and the IT Center.

The financial year is from 01 st January 2004 to 31 st December 2004.

The unit of account is VND million.

1. Principles and methods of currency conversion: Assets and liabilities denominated in foreign currencies as of balance sheet date are translated into VND at the exchange rate listed by Incombank on 31 st December 2004 (15,739 VND against USD). Transactions in foreign currencies during the year are calculated in original currency and translated into VND at the exchange rate in effect on the dates of the transactions. Exchange gains and losses arising from foreign currency transactions during the year are credited or charged to profit and loss accounts.

2. Income and expense accounts: In accordance with the State Bank of Vietnam’s Regulations, since 2001 the bank has applied the accrual basis in income and expense accounts.

3. Loans: reflects the principal of the outstanding loans as of 31 st December 2004, participations in loans, discounts and mortgaging valuable value papers, loans against lease contracts and loans against guarantees.

4. Capital contributions to joint ventures and shares purchases are accounted in original currencies and converted into VND.

5. Fixed assets are calculated at original price less accrued depreciation. The depreciation rate is calculated pursuant to regulations of the Ministry of Finance.

6. Undistributed profits are calculated as retained earnings not to be distributed to the bank’s funds after deducting income tax, capital tax and advances temporarily allocated to the bank’s funds.

BALANCE SHEET As of 31 st December, 2004 Unit: VND million
	2004	2003
Assets	90,734,644	80,887,100
Cash and cash equivalents	1,250,758	1,044,160
Deposits with State Bank of Vietnam	5,260,666	5,317,107
Deposits with financial institutions	7,999,392	9,213,473
Net loans	64,159,522	51,778,532
Securities investments	8,155,053	10,024.497
Capital contribution and shares	261,576	218,248
Fixed assets	1,002,172	755,876
Receivables	2,517,120	2,375,468
Others	128,385	159,739
Liabilities and Equity	90,734,644	80,887,100
Liabilities	85,825,871	76,733,017
Deposits from customers	64,701,713	56,491,099
Deposits from financial institutions	12,642,276	11,104,441
Bonds and acceptances	4,252,876	3,550,652
Borrowings from State Bank of Vietnam and financial institutions	1,105,411	2,596,716
Payables	2,855,105	2,763,276
Others	268,490	226,833
Equity	4,908,773	4,154,083
Statutory capital	3,327,888	2,908,000
Funds and other capital	1,374,016	1,040,897
Retained profit	206,869	205,186

INCOME STATEMENT Unit: VND million
	2004	2003
Interest Income	6,678,272	5,739,293
From lending	5,624,776	4,798,791
From deposit	368,556	367,745
From securities	644,376	491,203
Others	40,564	81,554
Expense on interest	3,965,833	3,838,689
On deposit, acceptances, valuable papers & bonds	3,295,941	3,491,926
On borrowings	666,719	342,373
Other expenses	3,173	4,390
Net interest income	2,712,439	1,900,604
Non-interest Income	311,547	340,173
Income from fees	178,627	164,717
Income from FX, jewelry, gold and precious stones	55,235	91,365
Others	77,685	84,091
Gross income	3,023,986	2,240,777
Operational expenses	1,361,927	1,085,678
Payroll	482,827	439,414
Administrative expenses	375,755	258,367
Expense on fixed assets
Depreciation of fixed assets	141,687	111,167
Others fixed assets costs	115,250	73,700
Expense on FX, jewelry, gold and precious stones	29,420	11,478
Others	216,988	191,552
Income before loan loss provision	1,662,059	1,155,099
Loan loss provision	1,409,035	931,913
Income before tax	253,024	223,186
Taxes	46,155	18,000
Net income	206,869	205,186

NOTES TO FINANCIAL STATEMENTS

Unit: VND million

1	Deposits with financial institutions	10,535,552	9,213,473
	Deposits with foreign financial institutions	7,999,392	2,961,110
	Deposits with local financial institutions	2,536,160	6,252,363
2	Net loans	64,159,522	51,778,532
	Short-term	35,056,483	23,769,910
	Medium and long-term	27,583,736	24,406,977
	Syndicated loans and loans to financial institutions	47,653	2,151,096
	Loans by foreign grants and investment agents’ funds	676,094	707,828
	Discounts and mortgaging valuable papers	272,939	129,838
	Financial leasing	480,214	300,797
	Guaranteed loans	42,403	312,086
(i)	Classified by currencies	64,159,522	51,778,532
	VND	55,266,756	43,013,192
	Foreign currencies	8,892,766	8,765,340
(ii)	Classified by industries	64,159,522	51,778,533
	Industry	21,270,873	18,667,792
	Commerce and Services	13,876,228	10,492,728
	Construction and Transportation	15,952,670	9,650,157
	Agriculture and others	13,059,751	12,967,856
(iii)	Classified by economic sectors	64,159,522	51,778,533
	State-owned sector	26,918,227	23,818,125
	Non-state-owned sector	37,241,295	27,960,408
(iv)	Non-performing loans	483,804	1,727,268
	Frozen loans	106,300	276,776
	Loans under recovery and litigation	377,504	1,450,492
(v)	Movements in loan loss reserves
	Balance at beginning of 2004	108,021	227,731
	Loan loss provision charge for 2004	1,409,035	931,913
	Write-offs	(1,073,000)	(1,051,623)
	Balance at end of 2004	444,056	108,021
3	Securities Investments	8,155,053	10,024,497
	Government bonds and notes	8,155,053	10,024,497
	Credit institutions’ securities	0	0
4	Capital contribution and shares	261,576	218,248
	In credit institutions	261,576	218,248
	In economic organizations
5	Fixed assets	1,002,172	755,876
	Tangible	867,351	664,527
	Intangible	119,825	65,623
	Leased assets	14,996	25,726
6	Receivables	2,517,120	2,375,468
	From State Budgets	59,716	12,415
	Advances and allowances for operation	446,078	365,787
	Temporary capital injection to subsidiaries	147,865	202,954
	Expense in pending	26,039	27,153
	Accrual interest receivable	673,409	547,392
	Other advances and receivables	1,164,013	1,219,767
7	Deposits from customers
(i)	Classified by customers	64,701,713	56,491,099
	Enterprises and businesses	34,300,598	30,486,692
	Individuals	30,401,115	26,004,407
(ii)	Classified by maturities	64,701,712	56,491,099
	Demand deposits	26,368,117	23,215,081
	Time deposits	38,333,595	33,276,018
(iii)	Classified by currencies	64,701,713	56,491,099
	VND	50,667,127	43,425,028
	Foreign currencies	14,034,586	13,066,071
8	Deposits from financial institutions	7,999,392	11,104,441
	Financial institutions	7,373,909	10,670,808
	State Treasury	625,483	433,633
9	Borrowings from State Bank of Vietnam and Credit Institutions	1,105,411	2,596,716
	State Bank	318,992	1,936,638
	Credit institutions	786,419	660,078
10	Payables	2,855,105	2,763,276
	Capital constructions and fixed assets	101,752	89,343
	Taxes and payables to the State Budget	4,586	5,341
	Pending expenses	385,555	414,154
	Internal payables	93,900	96,155
	Deposit take-ups in VND and foreign currencies	825,405	814,097
	Accrual interest payable	855,105	763,276
	FX deals payable	130,705	226,775
	Others	458,097	354,135
11	Other capital and funds	1,374,016	1,040,897
	Capital constructions	284,671	283,339
	Other capital	66,471	66,472
	Fund for development investment	282,426	279,450
	Reserves for Statutory capital add-on	28,229	27,958
	Financial provisions	665,811	329,866
	Others	46,408	53,812

INTERPRETATION ON FINANCIAL REPORTS

Assets

Incombank’s total assets increased by 13% compared to 2003, reaching VND90,734 billion by 31 st December 2004, equivalent to USD5.76 billion. Loans, deposits with banks and investments in securities were the three largest components of total assets, accounting for 70.7%, 14,6% and 9% respectively. Cash and equivalents made up 1.38%, receivables 2,77% and other assets 2.23% of the total assets.

As mentioned above, loans account for the largest single share of total assets. Loans outstanding at VND64,159 billion, represented a 23.9% increase as compared to last year. The growth rate of loans was lower than the one of assets. Allocation of loans and financings showed a marked shift away from SOEs to companies in the private sector and the retail sector, which rose from 54% in 2003 to 59% in 2004. This was responsive lending by Incombank in acknowledgement to actual developments in the economy and to market demands driven by the surge in the growth rate of the private sector and the ongoing SOEs privatization process.

Medium and long term loan proportion decreased from 47% in 2003 to 43% in 2004 in line with the business target set by the Board of Directors to reduce medium and long term loans to 40%. In relation to the total credit growth rate, lending to the industrial and agricultural sectors rose steadily while lending to trading and service sectors and construction sector rose at a lower rate or even declined. The situation was totally in contrary to the picture in 2003.

Overdue loans to total outstanding loans were brought down to 0,75% from 3.3% in 2003. VND1,073 billion was written off from risk provision source, hence strengthening the balance sheet by year-end. Our successful efforts in chasing for repayments and credit growth in 2004 led to a reduction in NPLs. In 2004, up to VND1,409 billion of earnings were used to reduce NPLs. A work-out plan including provision for loan loss was approved to resolve all accumulated NPLs incurred before 2000, mainly related to the Epco-Minh Phung legal case, by the end of 2006.

Equity and Liquidity

Our equity of VND4,908 billion as of 31 December, 2004, increased by VND754 billion over the year. Capital adequacy ratio was improved to 6.3% compared to 6,08% of 2003, mainly the result of another capital injection of VND400 billion in the form of Government long-term notes. Increase of total profit and the reduction of higher risk assets against low risk assets also contributed to efforts to maintain asset quality and the integrity of the Bank’s operation. Under the ongoing Bank Restructuring Program, the State Bank of Vietnam committed to inject further capital into the Bank’s equity, which will rise up to VND5 trillion in the next few years.

Even though Incombank successfully diversified its fund raising sources to include individual savings, deposits from other banks and financial institutions, borrowings from the State Bank of Vietnam, like most other commercial banks, the Bank’s major funding source are deposits. Given Vietnam’s high economic growth rates, Incombank applied a flexible rate policy along with diversification of saving products to meet various customers’ needs and thus enjoyed a 14,84% increase of deposits. Total fund raising from individual savings and issuance of bank acceptances and CDs was VND68,954 billion, accounting for 76% of total assets. Lending per deposit remained high at 99%, indicating the main source of financing came from deposits. Higher VND rates together with higher USD rates attracted depositors resulting in a 7.4% increase in USD deposits compared to 2003.

Liquid assets to total assets remained at 25% compared to the 2003 ratio of 31%. Outstanding loans to total liabilities ratio stabilized around 78%, unchanged from the previous two years. This liquidity ratio could be considered acceptable, within the actual scenario of the economy and the Bank itself.

Receivables and payables balances increased sharply in 2004 mainly due to the increase of year-end accrual interest receivable, interest payable and other foreign currencies investment activities.

Income and Expenses

Income before provisioning in 2004 reached VND1,662,059 million, increasing by 43.89% compared to the previous year, in which provisioning allocated was VND1,409,035 million, increasing by 51.2% as compared to 2003. Net income attained VND206,869 billion in 2004, a modest increase of 0,82% almost the same level of VND205,186 billion in 2003.

A further analysis of total income showed that interest income accounted for 89.6%, while income earned from fees and other activities made up 10.4% of the total. Interest earnings increased by 16.3% in 2004, attributed mainly to the rise in interest from lending which accounted for 84.2 of total interest income. Earnings from investment securities were also substantially up in 2004, namely 31,1%.

In total interest expenses paid over 2004, those on deposits and term notes and valuable papers represented up to 83.1% of the total, reducing 5.6% compared to 2003 due to the decrease of deposits accepted during the year. Fee income increased by 8.4% compared to 2003, accounting for 57.3% of non-interest income, mainly from payment services.

The key performance measure of operational expenses to total income stayed at 19.4% in 2004, in which payroll accounted for 35.4% of total operational expenses, increasing by 9,8% compared to 2003.