Application of financial covenants in credit risk management at commercial banks: A case on construction enterprises in Vietnam, 2018

STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY OF HO CHI MINH CITY

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BACHELOR THESIS

Major: Financial - Banking

APPLICATION OF FINANCIAL COVENANTS

IN CREDIT RISK MANAGEMENT AT COMMERCIAL

BANKS: A CASE ON CONSTRUCTION ENTERPRISES

IN VIETNAM

Student’s name : Nguyễn Hoàng Thủy Tiên

Student’s ID : 030630141644

Guiding teacher : Nguyễn inh Nh

Major ID : 7340201

Ho Chi Minh City, 2018

i

ABSTRACT

The research has focused on the application of financial covenants into the Viet

Nam market with the objects are construction enterprises. The author choose the a

non-parametric model called Decision Tree model to measure the thresholds for

selected indicators from 100 listed construction companies in the period of time from

2014 to 2017. The detailed process has been demonstrated, from preparing data,

selecting variables to building a model and finally obtaining result. The performance

figures of the obtained model are all reasonable, which proves its capability to apply

into covenants. Despite providing numerous beneficial contribution, there are still

some shortcomings, mainly due to the lack of time and information, have been

withdrawn. Recommendations for improvement and further studies have also been

proposed. Based on the results of the study, the paper provides not only the idea about

a new mechanism for credit risk management in Viet Nam market but also the suitable

thresholds to apply it into construction companies.

ii

DECLARATION OF AUTHENTICITY

I hereby confirm that I am the sole author of the written these here enclosed and

I have compiled it in my own words.

With my signature, I confirm that this dissertation is my original work, gathered

and utilized especially to fulfill the purposes and objectives of this study. I have

mentioned all people who were significant facilitators of the work.

I declare that all statements and information contained herein are true, correct

and accurate to the best of my knowledge.

Ho Chi Minh City, December 26

th, 2018

Nguyen Hoang Thuy Tien

iii

ACKNOWLEGEMENTS

Firstly, I would like to express my gratitude towards MSc Nguyen Minh Nhat

for his dedication, patience and support me with useful recommendations and guidance

in the process of this study.

Secondly, I would like to thank all Banking University's lecturers who have

provided me with valuable knowledge as well as experience to help me obtain a solid

academic foundation for the future research, career practice and workflow.

Finally, I would like to thank my friends for the sharing and support throughout

my Bachelor program.

However, due to the limitation of experience and time, the study cannot avoid

some certain drawbacks. All the comments and advice contributed by members in the

committee are gratefully welcomed and appreciated.

Ho Chi Minh City, December 26th 2018

Nguyen Hoang Thuy Tien

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TABLE OF CONTENTS

ABSTRACT __________________________________________________________ i

DECLARATION OF AUTHENTICITY ___________________________________ii

ACKNOWLEGEMENTS ______________________________________________ iii

LIST OF ABBREVIATIONS ___________________________________________ vi

LIST OF TABLES____________________________________________________vii

CHAPTER 1: INTRODUCTION ________________________________________vii

1.1 Motivation ________________________________________________________1

1.2 Research goal _____________________________________________________2

1.3 Research questions _________________________________________________3

1.4 Research subject and range__________________________________________3

1.5 Research method __________________________________________________3

1.6 Research contribution ______________________________________________3

1.7 Research Outline __________________________________________________4

CHAPTER 2: LITERATURE REVIEW ___________________________________5

2.1 Review about Construction Industry in Viet Nam _______________________5

2.2 Credit risk ________________________________________________________5

2.2.1 The importance of credit risk management in commercial banks ____________6

2.2.2 Credit risk management models ______________________________________7

2.3 Loan covenants ___________________________________________________10

2.3.1 Covenant types __________________________________________________12

2.3.2 Basic financial covenant structure____________________________________16

2.3.3 Prior study on the application of financial covenants _____________________22

2.4 Decision Tree Model_______________________________________________27

2.4.1 Introduction _____________________________________________________27

2.4.2 Previous application of Decision tree model____________________________29

CHAPTER 3: RESEARCH METHOD AND DATA_________________________33

3.1 Data Sources _____________________________________________________33

3.2 Data Preparing ___________________________________________________33

3.3 Variables selection ________________________________________________34

CHAPTER 4: EMPIRICAL RESULTS ___________________________________37