Valuing stocks of commercial joint stock banks - The case of Sacombank = Định giá cổ phiếu ngân hàng thương mại qua trường hợp ngân hàng Sacombank

VIETNAM NATIONAL UNIVERSITY, HANOI
SCHOOL OF BUSINESS




DANG QUOC HIEP



VALUING STOCKS OF COMMERCIAL JOINT STOCK BANKS
– THE CASE OF SACOMBANK






MASTER OF BUSINESS ADMINISTRATION THESIS











Hanoi – 2010

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VIETNAM NATIONAL UNIVERSITY, HANOI
SCHOOL OF BUSINESS



DANG QUOC HIEP



VALUING STOCKS OF COMMERCIAL JOINT STOCK BANKS
– THE CASE OF SACOMBANK


Major: Business Administration
Code: 60 34 05


MASTER OF BUSINESS ADMINISTRATION THESIS


Supervisor: Dr. Chu Thanh
Ph.D Candidate Ha Nguyen






Hanoi – 2010

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vi
TABLE OF CONTENTS

ACKNOWLEDGEMENTS i
ABSTRACT ii
TÓM TẮT iv
List of tables viii
List of figures viii
List of abbreviations ix
INTRODUCTION 1
CHAPTER 1: COMMERCIAL JOINT STOCK BANKS: INTRODUCTION TO
VALUATION OF STOCK 5
1.1 The introduction of commercial joint stock banks 5
1.1.1 Commercial bank- an important intermediary financial institution 5
1.1.1.1 The definition of commercial banks 5
1.1.1.2 The financial intermediary role of commercial banks 5
1.1.2 The organization and operation of commercial banks 6
1.1.2.1 Organization and management of commercial banks 6
1.1.2.2 Capital of commercial joint stock banks 8
1.1.2.3 Some basic criteria for evaluating the operation efficiency of
commercial joint stock banks 13
1.2 Legal bases and stock valuation methods 15
1.2.1 Concept of stocks and valuing stocks 15
1.2.1.1 Concept of stocks 15
1.2.1.2 The concept of valuing stocks 16
1.2.2 The legal bases for valuing stocks in Vietnam 16
1.2.2.1 Some regulations of stock valuation 18
1.2.2.2 Regulations of valuation methods 19

1.2.2.3 The regulations of land usage right 23
1.2.2.4 The regulations of specifying the advantage values 24
1.2.3 The stock valuation methods: 25
1.2.3.1 The method of dividend discount model (DDM model) 28
1.2.3.2 The discounted cash flow method (DCF) 36
1.2.3.3 The valuation method based on P/E 39
1.2.3.4 The assessment method based on the value of net assets 41
1.2.3.5 The valuation method based on P/B 42
1.2.3.6 Methods to assess banking stock 43
CHAPTER 2: ANALYSIS OF COMMERCIAL BANK STOCK VALUATION –
THE CASE OF SACOMBANK 45
2.1 The establishment and development of commercial joint stock banks in
Vietnam 45
2.2 General introduction of Sacombank: 46
2.2.1 Sacombank stock: 46
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2.2.2 Some general features of Sacombank: 48
2.2.2.1 Operational cirteria of Sacombank during 2005-2009 49
2.2.3 Asia banking sector overview and forecast: 51
2.3 Valuation analysis on the stock STB 53
2.3.1 Valuing the stock STB with DDM method 53
2.3.2 Valuing the stock STB with the method of P/E coefficient: 56
2.3.3 Valuing STB with the method of net value of assets: 57
2.3.4 Analyzing the P/B coefficient of STB as of year end 2009: 58
2.4 Evaluating the results of valuing the stock STB 59
2.6 Advantages and difficulties in valuing stocks of Vietnamese commercial
joint stock banks 60
2.6.1. Advantages in valuing stocks: 60

2.6.2. Difficulties in valuing stocks 61
2.6.2.1. Difficulties from commercial banks themselves 61
2.6.2.2. Difficulties from the business environment 62
2.6.2.3. The lack of understanding of investors 66
2.7 Major lessons taken out of Sacombank 67
CHAPTER 3: SOLUTIONS & RECOMMENDATIONS TO ENHANCE/
IMPROVE STOCK VALUATION OF COMMERCIAL BANKS IN VIETNAM 71
3.1 Implications for other banks 71
3.2 Recommendations to enhance the quality of banking stock valuation 74
3.2.1 Recommendations to commercial banks: 74
3.2.1.1 Developing business strategies and long term financial plans 74
3.2.1.2 Complying with rules and accounting standards 75
3.2.1.3 Setting up expertise departments for valuing stocks 75
3.2.1.4 Performing the information announcement 75
3.2.2 Recommendations to the government 76
3.2.2.1 Improving the legal framework for valuation and system of
related legal documents 76
3.2.2.2 Methods related to the market information 80
3.2.3 Recommendations to investors 83
CONCLUSION 85
LIST OF REFERENCES 87
Appendix 1: Country Default Spreads and Risk Premiums 90
Appendix 2: Asia banking sector peer comparison 94
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viii
List of tables

Item

Table Description Page

2.1 Operation criteria of Sacombank in the period of 2005-2009 49

2.2 Income Statement of Sacombank throughout the years 49

2.3 Key financial ratios of Sacombank throughout the years 50

2.4 Dividend payout history of Sacombank in recent years 66

2.5 ROE of Sacombank in the period of 2005-2009 66

2.6 Balance sheet of Sacombank in the quarter 4/2009 70



List of figures

Item

Figure Description Page

1.1 The organization of a small bank 6

1.2 The organization of a large bank 7

1.3 Valuation Models 25

1.4 SML – The Security Market Line 32

2.1 The price movement of stock STB from the quotation day to
25/04/2009
47

2.2 Asia Banking Forecast Q2/2010 52

2.3 Sacombank Beta 56





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ix
List of abbreviations

VN-Index Vietnam Index
GDP Gross Domestic Products
WTO World Trade Organization
IPO Initial public offering
P/B Price to book
P/E Price to earning
STB Sacombank
ROA Return on asset
ROE Return on equity
DDM Dividend discount model
DCF Discounted cash flow
FCF Free Cash Flow
FCFE Free Cash Flow to Equity

FCFF Free Cash Flow to Firm
NAV Net Asset Value
EPS Earning per share
SML Security Market Line
WACC Weighted average cost of capital
CAPM Capital Asset Pricing Model
HOSE Hochiminh Stock Exchange
HASTC Hanoi Stock Trading Center
OTC Over the counter

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1

INTRODUCTION

The emergency and objectives of the research
The reform of Vietnam has been taking place totally and deeply in many fields. The
event that Vietnam became the official member of the World Trade Organization
(WTO) put an important mark in the integrating process into the world economy.
Vietnam’s economy has grown fast, in the last five years GDP of Vietnam increased
by nearly 7.5% on average.
In that situation, the process of economic monetarilization will also take place
deeper and larger, demands for financial and banking services of enterprises and
especially of inhabitants will increase dramatically. In recent years, the average
growth rate of banking sector is 22%, 3 times faster than the growth of GDP.
Besides, there is a market share transition among groups of banks, in which the
market shares of commercial banks group will increase substantially.
After 8 years in operation, Vietnam’s securities market has gained certain
remarkable achievements; the highest VN-index reached 1070 points, then fell to

the trough of 235 points. The development of the securities market has made the
stock valuation become necessary.
The stock valuation has helped small investors in Vietnam become more active,
avoid the phenomenon of transacting with the “gregarious” psychology and avoid
bearing risks.
For enterprises who conduct the initial public offering (IPO), the valuation of
referential stocks for the first transaction day of the IPO firms is a necessary and
extremely sensitive work. This valuation may lead to success or failure of this
public offering.
In the banking sector, a number of state-owned banks are preparing for the
equatization and offering securities to the public. In the mean time, there are only
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two joint stock banks listing their stocks in the centered securities market, those are
ACB and Sacombank.
With the objective to contribute to finding a suitable stock valuation methods for
stock valuation of listed commercial banks, and from that some methods for
enhancing stock valuation in the Vietnamese securities market can be
recommended, I have chosen the topic “Valuing stocks of commercial joint stock
banks- the case of Sacombank”.
The objectives of the research are to:
- Present an overview of the commercial bank operations & stock evaluation
methods
- Provide an analysis of the STB stock with various methods
- Recommend improvement plans to enhance the valuation of bank stocks.
Subject and scope
The thesis concentrates on the valuation methods for stocks of commercial joint
stock banks. In which, it will specifically value the stock of Saigon commercial

joint stock bank -Sacombank, one of the two banks which are listing their stocks in
the listed securities market.
Research methodology:
The author adopts both primary and secondary research methods to domestic and
foreign material sources to find out basic theories about stock valuation methods,
meanwhile collecting data through prospectus, financial statement, analysis reports
of Sacombank…Using the systematical, statistical, analytical methods to analyze all
collected data.
Combining studied theories, domestic legal bases with all collected results to give
judgments on the application capability of valuation methods for stocks of the
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banking sector, and to recommend some methods to enhance the stock valuation in
the Vietnamese securities market at the same time.
The structure of the thesis
The thesis is presented in three chapters in which the first chapter will give basic
definitions and most general theories about the researched problem of this thesis.
The second chapter will apply each method presented in the first chapter one after
the other to conduct the valuation of Sacombank’s stocks and give judgments about
the application capability of the stock valuation methods. The third chapter will give
some recommendations about applying some valuation methods to evaluate stocks
of the banking sector, besides, give some recommendations to enhance the quality
of stock valuation in the Vietnamese securities market.

Chapter 1: Commercial joint stock banks: Introduction to Valuation of Stock
The content of this chapter is to concentrate on giving a general overview about the
system of commercial banks, legality of commercial joint stock banks in Vietnam
and basic theories about stock valuation.

Chapter 2: Valuing stock of commercial banks – the case of Sacombank
This chapter concentrates on introducing the establishment, development and
operation of Vietnamese commercial joint stock banks in general and Sacombank in
particular. This chapter also collects preliminarily the price changes of the two
banking stocks which are now being listed and then conduct applying the valuation
methods in the first chapter to value the stock STB. Finally, chapter 2 will evaluate
the application capability of above valuation methods in valuing stocks of banks
and give out some advantages and difficulties in valuing stocks of commercial joint
stock banks currently.
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Chapter 3: Some recommendations and solutions to assessing stocks of
Vietnamese commercial joint stock banks
This chapter concentrates on recommendations and solutions to assessing stocks of
Vietnamese commercial joint stock banks.

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CHAPTER 1: COMMERCIAL JOINT STOCK BANKS: INTRODUCTION TO
VALUATION OF STOCK

1.1 The introduction of commercial joint stock banks
1.1.1 Commercial bank- an important intermediary financial institution
1.1.1.1 The definition of commercial banks
Commercial bank is one of the most important financial organizations of any
economy. In the world, there are many different definitions of commercial banks,
most of which are presented through functions a commercial bank.
According to website www.investorwords.com, a commercial bank is defined as:
“An institution which accepts deposits, makes business loans, and offers related
services. Commercial banks also allow for a variety of deposit accounts, such as
checking, savings, and time deposit.”
Through the above definition we can see that the operations of banks today
definitely have had changes, the scope of offering services of banks is enlarged.
Besides the main operations like credits, savings, payments, banks also target
new fields like real estates, equity investment, insurance…
1.1.1.2 The financial intermediary role of commercial banks
A bank is a financial intermediary organization with the main operation of
tranfering savings to investment, it requires the contact with two types of

individuals and organizations in the economy: (1) individuals and organizations
who temporarily have deficit in spendings, meaning that expenses for consumptions
and investments are in excess of earnings, that is why they are the ones who need to
supplement capital; and (2) individuals and organizations who are surplus in
spendings, meaning that their current earnings are bigger than expenses for goods,
services and hence they have money to save.
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Another contribution of banks is that they are willing to accept risky credits while
issuing less risky stocks to depositors. Indeed, banks take part in doing business on
riskiness. Banks also meet the liquidity demands of many customers.
Another reason for making banks develop and prosper is the ability to assess the
information. The unequal distribution of information and capacity of analysing the
information called the state of “disproportionate information” have lessened the
efficiency of market but created a profitability for banks which have expertise
knowledge and experiences in evaluating financial tools and have abilities to choose
tools with the most attracting factors of riskness and profits.
1.1.2 The organization and operation of commercial banks
1.1.2.1 Organization and management of commercial banks
Figure 1.1: The organization of a small bank

(Source: the material of “Commercial banks: management and operations”)
PhD. Phan Thi Thu Ha-PhD. Nguyen Thi Thu Thao)
Shareholders’ committee
Administration board
Board of directors
Controlling board

Offices

Credits

Accounting

Budgeting



International
payment

Internal
control
Investment and
development

Information
technology

Transaction
department

Branches
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The system organization of large commercial joint stock banks often contains more
departments and rooms than small and medium banks.
Figure 1.2: The organization of a large bank

















(Source: the material of “Commercial banks: management and operations”)
PhD. Phan Thi Thu Ha-PhD. Nguyen Thi Thu Thao)

Shareholders’ meeting


Board of Directors


General director and assistants

Admin

General
control

Personnel
and
training

Foreign
business



Planning
and
market

Domestic
business

Acct
and
finance

Member units
Independent
posting units:
- Jewelry
companies
- Leasing
companies 1 & 2

- Securities
companies



Career posting
units:
-Centers of
trainings jobs
-Informatics
center
- Information
center of
preventing risk


Dependent posting units:

- General business branch
- Specialized business branch
- Transaction headquarter

-

Provincial banking branch

- District banking branch
- Commune banking branch

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Big banks often have a lot of branches, own many companies, operate in various
fields, markets and may have different branches abroad. Large banks are the
wholesale ones having big customers (corporations, economic groups, ). Hence, the
syteorganization of these banks must have a high specialization. In specialized
deparments, there are a lot of experts in consulting, researching market, analysing
finance of companies, sectors and nation; and experts in lending, securities, laws,
human resources, technology,…
1.1.2.2 Capital of commercial joint stock banks
- The foundation of capital of commercial joint stock banks:
Banks do business by mobilizing capital, lending, investing and providing other
services. Mobilizing capital – the activity to create capital source of the banks –
plays an important role and affects the quality of operations of banks. Hereby lists
the different sources of money transferred to banks due to different channels:
Owners’ equities: to begin banking operations (allowed by laws), the owners of

banks must have a specific amount of money. This is the kind of capital banks can
use for long term, forming equipments, houses for banks. The sources and
operations creating this kind of capital are various depending on the ownerships,
financial capacity of bank owners, demands and the development of the market.
Initial capital: formed by the contributions of shareholders through buying shares or
stocks.
Additional capital during operation process: during the operation process, banks
increase owners’ equities with many different methods depending on specific
conditions. Retained earnings: in the situation when net income is bigger than zero,
the bank owners have the trend to increase their equities by transferring a part of
net income into investment capital. The proportion for accumulating depends on the
consideration of bank owners about accumulation and spendings. For long
established banks, with big net income, they have higher capital sources
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accumulated from profits than initial equities. Additional source from issuing
stocks, additional contributions: to expand the operation scale or to improve
equipments, or to meet the demands of increasing owners’ equities declared by the
State Bank… The feature of this capital mobilization type is the infrequency, but it
helps banks have a big amount of equities when necessary.
Funds: banks have a lot of funds. Each fund has its own objective. First is the
Damage standby Fund. This fund is set up annually and accumulated in order to
make up all occurred damages. The capital preserving fund is to make up
depreciation of capital under the effect of inflation. The surplus fund is a
reevaluated part of assets of banks and difference between market price and face
value of stocks when issuing new stocks. Due to regulations of each country, banks
also can have welfare fund, reward fund, directors’ fund,….
Convertible debt: long and medium term debts of commercial banks which are

likely to be changed to shares can be considered a part of equity of banks
(additional source) since this source has some features such as long term usage,
being able to invest into houses, real estates and being likely not to be repaid at
maturity.
Deposit source and operations of mobilizing deposits: deposits of customers are
the most important source of commercial banks. When a bank begins to operate, the
first operation is to open deposit accounts to keep money and perfom payment for
customers, by this way, banks can mobilize money from enterprises, organizations
and inhabitants.
Payment deposits: (transaction deposits or payment deposits): this is money of
enterprises or individuals putting into banks so that banks can keep and perform
payment for them within the allowed balance. All the demands of paying and
spending of enterprises and individuals are conducted by banks.
Termed deposits of enterprises, social organizations: a lot of receipts in cash of
enterprises and social organizations will be paid after a specific period of time.
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Savings deposits of inhabitants: all levels of inhabitants have earnings items which
are not being used temporarily (savings items).
Sources in payment: all the payment activities without using cash can form a source
in payment (cheques during paying process, money as security to open L/C )
Other sources: other debt items like unpaid taxes, unpaid salaries…
- The usage of capital of commercial banks (asset structure of commercial joint
stock banks)
The main activity of commercial joint stock banks is to find capitals (mobilizing
capital) in order to gain profits. The usage of capital is exactly the process of
creating different types of assets of banks, in which lending and investing are the
two important and huge assets.
commercial Joint stock banks are enterprises who do business on money. Because

of this feature, most of assets of banks are financial assets including lending
contracts, hiring-purchasing contracts, securities, deposits… A small part of banks’
assets is fixed assets like houses, equipments… Each asset is formed due to its own
way for its own objective which is to assure the safety and profitability for banks.
Budget: Budget of a commercial banks often contains:
Cash in the safe: it can be domestic currency or foreign currencies (in abroad,
foreign currencies are used in circulation, or accepting foreign deposits). Some
banks also have gold, other precious metals and stones. Cash is used for quick
payments. However, cash does not bring profits and from the side of safety, it is
usually the subject of robbery, fakery. Cash sticks to some generating costs like
preservation, counting, transportation,…
Deposit at banks: it contains deposits at the State Bank, at other banks and credit
organizations. Commercial banks must perfom obligatory reserves. The forms of
obligatory reserves may be different in countries. A lot of State Banks require
commercial banks to maintain obligatory reserves under the form of deposits at the
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Central Banks. Besides, commercial banks keep these deposits for the aim of
convenient payment method. Many payment items among banks are performed
through State banks (Central banks), or through agency banks (payment through
different countries). This deposit can bring profits but very low.
Securities: commercial banks keep securities with the aim of liquidity and
diversifying assets. Banks keep a lot of types of securities which can be classified
by many criteria such as liquidity, issuing subjects, objectives of keeping,…
Government securities (Central or provincial) are issued by the State Treasury
including: short, medium, and long term securities.
Securities of other banks, financial companies: it includes stocks and other
debentures which are issued or accepted to pay by banks or financial companies.
Securities of other companies: banks keep securities because they can bring profits

to them and can be sold to increase budget when necessary. Banks often divide
securities into liquid and less liquid securities. Normally, securities which are safe,
can be easily sold, not reduce in price frequently, have low profitability rate; in
converse, securities which are less liquid (investment securities) having high risks
often have high profitability rate.
Credits: credit is a type of assets accounting for the largest proportion in most of
commercial banks, which reflects the typical operation of banks. This asset is
classified by many different criteria.
Short, medium, long term credits: short term credits – the period of less than 12
months. Medium term credits – the period from 1 to 5 years. Long term credits –
over 5 years. Specifying the credit periods is comparative only because a lot of
credits do not determine in advance exactly the time. Classifying credits due to time
is significant to banks since time is related to the safety and profitability of assests.
The proportion of short term credits at commercial banks is usually higher than
medium and long term credits. Banks mainly finance mobile assets of customers.
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Medium and long term credits often have lower proportions due to higher risk and
more costly and scarce sources of capital. There are a lot of factors affecting this
proportion such as period, stability of capital source, the ability to manage the
liquidity of banks, the ability to forecast and provide for risks in medium and long
term.
Other assets:
Mandated assets: assets are formed according to the mandates of customers. Banks
offer lending mandate services for other banks, Government organizations and non
Government organizations.
Pooled capital (united): banks can take part in contributing capitals with other
organizations (not under the way of keeping securities). For example, pooling
capital into joint venture banks, companies,…

Other assets: houses and equipments of banks serve the business process of banks
and are used for rent. The buildings are the largest fixed assetsof banks. In spite of
accounting for small proportion in the total assets, these assets can affect the
position, productivity of banks. In addition, there are also advancing items to
purchase small devices which are not allocated totally during the term, advancing
items for banks’ staff. Some banks put slice loans into other assets.
Off-balance sheet assets: banks give commitments to customers, which forms a
type of asset that is commitment contract. For example, guarantee contracts,
management mandate contracts (customers mandate assets to banks to manage),
financial contracts. Although they are not used to calculate many important
financial targets related to total assets (total assets - Asset – only on-balance sheet
assets), off-balance sheet assets also affect operation capacity of banks, can create
earnings and cause risks to banks.

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1.1.2.3 Some basic criteria for evaluating the operation efficiency of commercial
joint stock banks
Group of profitability criteria:
ROA = net income after tax /total assets (return on assets – ROA)
ROA is calculated by letting net income be divided by average total assets in a period.
The increasing trend of ROA is generally positive with the condition that banks do not
perform the business policy of accepting a lot of risks.
ROE = net income after tax / shareholder’s equity (return on equity – ROE)
ROE is a measurement of the profitability of banks, often combined with ROA. ROE
of banks is usually calculated by letting net income be divided by average equity in
one period. With the aim to maximize the profits of owners, ROE is a profitability
criterion cared most by bankers.
ROE = net incomet after tax /average equity = (ROA x total assets)/average equity

= (ROA x total sources/average equity) = ROA x (1+Debts)/ average equity.
The above relationship shows that the correlation between main profitability ratio of
ROE and other basic ratios of banks. If other factors do not change, the bigger the
ratio of Debt/Equity is, the higher the profitability of the bank gets.
Interest spread = interest receipts – interest expenses
Interest spread reflects the profitable scale from the basic operations of banks:
mobilizing capitals to lend and invest. The more the difference is, the higher the net
income of banks get. Difference of other receipts and expenses plays a more and
more important role to banks when the difference of receipts and expenses from
interests tends to decrease. The after tax net income is the result criterion reflecting
most the profitability of banks.
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Net income after tax = Interest receipts – Interest expenses + Other receipts –
Other expenses – Income tax
The factors affecting interest receipts - expenses and other receipts - expenses
clearly affect the before tax net income. The tax rate and taxed subjects continue to
affect the after tax net income. It means that income of tax free securities is
substracted from the before tax income to calculate tax, then it is added to calculate
after tax income. The higher the income from securities is, the lower the tax is and
the higher the after tax income becomes. The degree of decreasing tax depends on
the way of calculating the input costs of tax free securities. In general, banks want
to reduce this costs as low as possible. The tax office will calculate the average cost
for the whole cash source. Then, it depends on the degree of encouraging to keep
securities to calculate capital cost for securities due to a ratio of average cost (first it
is 15%, then 25%, and can be reached to 100%). With different ratios, the
profitabilities of tax free securities is different.
Group of risk criteria:
Bad debts/total debt balances.

Outstanding debts/owner’s equities
Budget/short term sources
Sensitive assets/sensitive sources
The above criteria reflect risks (credit risk, liquidity risk, interest risk, exchange rate
risk, ) supplementing the profitability criteria in order to reflect fully the business
results of a bank in a period. If a bank pursues risky investments, the profitability
ratio will be higher. However, if the damage happens (normally after a specific
time), the profitability of that bank will be reduced, even that this bank may get
bankruptcy. Hence, in this stage, high risk can cause damages to the next period
reducing the profitability of the following period. The higher the ratio of
Debts/owners’ equities, the higher the ratio of ROE becomes, but the lower the
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ability to resist damages of banks is. The ratio of Sensitive assets/sensitive sources
reflects interest risk when the interest changes in the negative direction for the
banks. However, when interest changes in positive direction or keeps unchanged,
the income of banks will increase.
1.2 Legal bases and stock valuation methods
1.2.1 Concept of stocks and valuing stocks
1.2.1.1 Concept of stocks
Stock is understood as a proof of comfirming the enterprise ownership of investors
who invest in joint stock companies. According to Securities Law 2006 of Vietnam,
stock is defined as following: “Stock is a kind of securities comfirming the rights
and legal benefits of owners towards a part of joint stock capitals of the issuing
organizations”.
Stock can exist under the form of certificates, book entries, electronic data. When
buying stocks, the investors will become stockholders, the owners of companies.
The degree of that ownership depends on the proportions of stocks the stockholders
keep. Being the owners, the stockholders will together share the results and

damages during the operation process of the companies. In the worst case when the
company must liquidate its assets because of bankruptcy, stockholders only receive
the rest after the company pays all other liabilities (such as tax, bank debts,
bonds,… Stocks are untermed tools. According to the benefits stocks can bring to
stockholders, there are two basic types of stocks which are common and preferred
stocks.
Common stock is the most typical stock. If a company is allowed to issue only one
type of stock, it will issue common stocks. The common stock holders will get the
following rights: right of receiving devidends, right of buying new stocks and right
of voting.
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Preferred stock is divided into three types according to Enterprise Law 2005:
Voting preferred stock, devidend preferred stock and returnable preferred stock.
Within the scope of this thesis, all stock valuation methods will only concentrate on
assessing common stocks of Saigon Thuong Tin commercial joint stock bank.
1.2.1.2 The concept of valuing stocks
All investors who have the intention of keeping stocks in long run want to know
that whether the price people offer is reasonable or not. They want to know the
internal value of stocks. This value is defined as the present value of all receipts that
investors want to gain in the future.
Valuing stocks will help investors give decisions of whether to invest in a type of
stock or not. If after calculating, the real value of stock is higher than the market
price of that stock, meaning that this stock is being sold at the price lower than its
internal value, and it is advised to buy this stock because its price will increase to its
real value. On the contrary, it is better not to invest in stocks that are being sold at
the prices higher than their real values, since in the next time, the prices will
decrease to come back their real values.
1.2.2 The legal bases for valuing stocks in Vietnam

In reality, in Vietnam, there is no legal document directly mentioning valuing
stocks. However, we can base on legal documents on the issues of equitizing state-
owned enterprises (in which enterprise valuation methods are mentioned) to have
legal bases for valuing stocks in Vietnam.
The year of 1992 was the beginning one of the program of equitizing state-owned
enterprises. Since that time, enterprise valuation has been cared much more. From
1992 to present, the Government and Ministry of Finance have issued some legal
documents regulating the transfer of state owned enterprises to the form of joint
stock companies. Each document was issued with the aim to replace the previous
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one and be more suitable to the reality of country’s development. We can divide
these documents due to the following periods:
The first period, from 1996-1998: includes the decree 28/1996/ND-CP issued on
07/05/1996 about transferring some state owned enterprises to joint stock
companies, and the circular 50/1996/TT-BTC of the Ministry of Finance issued on
30/08/1996 instructing to perform the decree 28.
The second period, from 1998-2002: includes the decree 44/1998/ND-CP (replacing
the decree 28) issued on 29/06/1998 about transferring some state owned enterprises
to joint stock companies, and the circular 104/1998/TT-BTC of Ministry of Finance
issued on 14/07/1996 instructing to perform the decree 44.
The third period, from 2002-2004: includes the decree 64/2002/ND-CP (replacing
the decree 44) issued on 19/06/2002 about transferring some state owned enterprises
to joint stock companies, and the circular 79/2003/TT-BTC of Ministry of Finance
issued on 12/09/2003 instructing to perform the decree 64
The fourth period, from 2004 to June of 2007: includes the decree 187/2004/ND-CP
issued on 16/11/2004 about transferring some state owned enterprises to joint stock
companies, the circular 126/2004/TT-BTC of Ministry of Finance issued on
24/12/2004, and then the circular 95/2006/TT-BTC revising and supplementing the

circular 126/2004/TT-BTC instructing to perform the decree 187.
The fifth period, from June of 2007 to present: The decree 109/2007/ND-CP issued
on 26/06/2007 about transferring some state owned enterprises to joint stock
companies, and the circular 146/2007/TT-BTC of Ministry of Finance issued on
06/12/2007 instructing to perform the decree 109.
Due to the real demands during the development process, especially since the
establishment of Ho Chi Minh Stock Exchange (HOSE), the legal documents
regulating enterprise valuation and stock valuation have been more and more
improved so that they can be more suitable to the reality of the economy. We can
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consider the aspect: the regulations of valuation, regulations of valuation methods,
regulations of land using right and regulations of comparative advantages.
1.2.2.1 Some regulations of stock valuation
From 2002 to previous, this was the beginning period of equitization process;
enterprise valuation and stock valuation were performed by the enterprise
management agency through the Committee of valuing enterprises. The members of
this committee included representatives of financial agency, sector management
agency, enterprises’ representatives and financial experts. The inadequate point of
this model is the lack of objectiveness, lack of marketability, and it does not have
staffs that specialize in valuing enterprises and stocks as well.
The period of 2002-2004, the activities of valuing enterprises and stocks received
the contributions of financial intermediaries when the decree 64/2002/ND-CP
allowed to maintain two valuation methods which are through valuation committee
and through intermediary institutions like auditing companies or companies
specializing in valuing.
The decree 187 which was issued in 2004 partly solved the above existing
problems. This decree eliminated the valuation method through the committee in
order to enhance the clearness and professionalism in valuing enterprises and

stocks. This decree regulated: “All enterprises having the total value of accounting
assets up to over 30 billion VND must conduct the valuation through the valuation
agencies like: auditing companies, securities companies, price assessing companies
and domestic and foreign investment banks which have the function of assessing
prices. Enterprises with the value of total assets less than 30 billions VND do not
need to hire the professional organizations to value enterprises. In the case that
enterprises do not hire the valuation organizations, the results must be reported to
the authorized agencies about decisions on values of enterprises.
The decree 109 basically did not change any point about this issue.
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19
1.2.2.2 Regulations of valuation methods
Before 2002, the method used to evaluate the prices of equitized enterprises and
then to specify the value of shares which are presented by stocks was the method of
asset’s value. Because each enterprise had specific features, operated in different
fields, especially there were a lot of limitations in the valuation method of assets’
value, with only this method itself could not bring the exact valuation results. It can
be seen that banking sector does trading on money and provides related services, so
banks are very different from manufacturing enterprises in terms of value of assets,
but in reality, the value of banks is very big and may be much higher than other
manufacturing enterprises.
The decree 64 combined the two methods in valuing enterprises. From that valuing
stocks could be:
- Net asset method: enterprise valuation based on assessing assets which they
are possessing and using.
- Discounted cash flow method: enterprise valuation based on the profitability
of them in the future.
However, the discounted cash flow method just applied limitedly to enterprises
which operated in the fields of trade service had the ratio of after tax profits over

average owner’s equities in 5 consecutive years from the valuation point of time.
The decree 187 not only regulated the two methods similar to the decree 164, but it
also allowed enterprises to apply other valuation methods after negotiating with
Ministry of Finance.
The decree 109 basically did not change any point about this issue. In detail, the two
valuation methods mentioned in the decree 109/2007/ND-CP are:
a. The asset method:
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