Applying logistic model to predict the probability of default for construction enterprises in Vietnam from 2014 to 2016: Khóa luận tốt nghiệp Đại học / Trinh Thanh Dat

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MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OFVIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

TRINH THANH DAT

APPLYING LOGISTIC MODEL TO PREDICT THE

PROBABILITY OF DEFAULT FOR CONSTRUCTION

ENTERPRISES IN VIETNAM FROM 2014 TO 2016

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY - 2018

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

INSTRUCTOR

M.S. TRAN KIM LONG

HO CHI MINH CITY - 2018

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OFVIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

TRINH THANH DAT

APPLYING LOGISTIC MODEL TO PREDICT THE

PROBABILITY OF DEFAULT FOR CONSTRUCTION

ENTERPRISES IN VIETNAM FROM 2014 TO 2016

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THE AUTHOR'S DECLARATION

Full name: Trinh Thanh Dat

Student class: HQ02-GE01, faculty of Banking and Finance, Banking University of Ho

Chi Minh city.

Student code: 030630141126

I declare that this thesis has been composed solely by myself and that it has not been

submitted, in whole or in part, in any previous application for a degree. Except where

states otherwise by reference or acknowledgment, the work presented is entirely my own.

Ho Chi Minh City, May 18, 2018

Author

Trinh Thanh Dat

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THE AUTHOR'S ACKNOWLEDGEMENT

First of all, I would like to thank all lecturers at Banking University of HCMC. Your

enthusiastic and devoted instruction helped me to improve my logical thinking ability and

knowledge.

In addition, I would like to thank Mr. Tran Kim Long who enthusiastically instructed and

encouraged me to complete this graduation thesis.

However, due to limited knowledge and practical experience and limited research time,

the study cannot avoid certain shortcomings. The author wishes to receive the comments

of members in the committee to complete the thesis.

Ho Chi Minh City, May 18, 2018

Author

Trinh Thanh Dat

iii

BANKING UNIVERSITY OF HO CHI MINH CITY VIETNAM

High-Quality Program of Banking and Finance

ABSTRACT

Author DAT, Thanh TRINH

Title Applying logistic model to predict the probability of default for

construction enterprises in Vietnam from 2014 to 2016

Year 2018

Language English

Instructor M.S. LONG, Kim TRAN

In the current overall development of the economy, banking credit plays a very important

role in the economy of every country in the world and is especially important for

countries with underdeveloped financial markets like Vietnam because it is a main source

of funding for businesses. However, recently, excessive credit growth, resulting in

uncontrolled credit quality, has caused some consequences for the banking system such

as: high credit risk, declining profit, liquidity reduced. The paper focuses on building a

model estimating credit risk for construction firms in Vietnam from 2014 to 2016. Based

on the results of the study, the paper provides not only an effective tool to predict the

probability of default of construction companies but also comments and policy

implications for commercial banks to improve the quality of credit and reduce credit risk

in the future.

Key words: Credit risk, Logistic model, Basel II, Probability of default, Construction

companies, Vietnam.

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INDEX

LIST OF ACRONYMS....................................................................................................... 1

LIST OF TABLES AND FIGURES ................................................................................... 2

CHAPTER 1: INTRODUCTION........................................................................................ 3

1.1 Research background ............................................................................................. 3

1.2 Significance of research......................................................................................... 3

1.3 Object and scope of the study ................................................................................ 4

1.4 Research questions................................................................................................. 4

1.5 Research methods .................................................................................................. 4

1.6 Structure of the themes .......................................................................................... 4

SUMMARY OF CHAPTER 1......................................................................................... 5

CHAPTER 2: LITERATURE REVIEW AND THEORETICAL FOUNDATIONS......... 6

2.1 Credit risk (Default risk)........................................................................................ 6

2.1.1 Definition ........................................................................................................ 6

2.1.2 Measuring credit risk....................................................................................... 7

2.2 Probability of default (PD)................................................................................... 10

2.2.1 Definition ...................................................................................................... 10

2.2.2 Measuring PD................................................................................................ 10

2.3 Some previous research on measuring PD .......................................................... 12

2.4 Model evaluation methods................................................................................... 22

2.4.1 Confusion matrix........................................................................................... 22

2.4.2 Accuracy........................................................................................................ 23

2.4.3 Sensitivity...................................................................................................... 23

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2.4.4 Specificity...................................................................................................... 23

2.4.5 Precision ........................................................................................................ 23

2.4.6 F1 score ......................................................................................................... 24

2.5 ROC Curve........................................................................................................... 24

2.5.1 Definition and some overviews..................................................................... 24

2.5.2 ROC‟s construction....................................................................................... 25

SUMMARY OF CHAPTER 2....................................................................................... 26

CHAPTER 3: MODEL ESTABLISHMENT.................................................................... 27

3.1 General concept.................................................................................................... 27

3.2 Building model..................................................................................................... 27

3.2.1 Logistic model and Model selection ............................................................. 27

3.2.2 Collection and cleaning data ......................................................................... 27

3.2.3 Building models ............................................................................................ 32

3.2.4 Apply the models into estimating the PD in 2016 ........................................ 35

3.2.5 Choosing cutoff values.................................................................................. 35

SUMMARY OF CHAPTER 3....................................................................................... 36

CHAPTER 4: VALIDATING MODEL‟S PERFORMANCE AND EVALUATING

RESULTS.......................................................................................................................... 37

4.3 Evaluation indicators ........................................................................................... 42

4.4 ROC Curve (Receiver operating characteristic curve) ........................................ 43

4.5 The area under curve (AUC)................................................................................ 44

SUMMARY OF CHAPTER 4....................................................................................... 45

CHAPTER 5: CONCLUSIONS........................................................................................ 46

5.1 Final result............................................................................................................ 46