Application of z score model in the credit rating of 100 enterprises listed on HOSE

OVERVIEW OF THE RESEARCH PROJECTBeginning from the limited risks in the method of scoring credit ratings ofcommercial banks today, the author has learned about a credit rating scoring mo

ACADEMY OF POLICY AND DEVELOPMENT INTERNATIONAL

SCHOOL OF ECONOMICS AND FINANCE

GRADUATION THESIS

Topic: “Application of Z-Score model in the credit rating of

100 enterprises listed on HOSE”

Supervisor: M.Sc Dang Thuy Nhung Student: Luu To Uyen

Student ID: 5083402217

Ha Noi, June 2021

This report would never have been possible without the consistent supportand assistance of the people whom I approached during the various stages ofwriting this report To complete the full report, I would like to send my first andmost sincere thanks to Mrs Dang Thuy Nhung Lecturer, Academy of Policy andDevelopment, for her valuable advice, encouragement, direction, and assistance.Writing this report would have been impossible without her guidance

Next, I would like to thank the Academic of Policy and Development and allthe lectures at the Academy for teaching me the most necessary knowledge andcreating the best learning environment

Due to my limited knowledge, the thesis cannot avoid mistakes I hope toreceive the teacher's comment and give me suggestions and ideas for me tocomplete the thesis better

StudentLuu To Uyen

TABLE OF CONTENTS

ACKNOWLEDGEMENT 2

LIST OF TABLES 1

LIST OF FIGURES 2

OVERVIEW OF THE RESEARCH PROJECT 3

1.1 Origin of study 3

1.2 Objective of study 4

1.2.1 Goal of study 4

1.2.2 Mission of study 4

1.3 Scope of study 5

1.4 Research Methods 5

1.5 Structure of study 5

CHAPTER 1: LITERATURE REVIEW AND EMPIRICAL REVIEW OF CREDIT RATING AND Z-SCORE MODEL 6

1.1 Overview of credit rating 6

1.1.1 Definition of credit rating 6

1.1.2 Characteristics of credit rating 8

1.1.3 Object of credit rating 9

1.1.4 Role of credit rating 10

1.1.5 Rule of credit rating 13

1.1.6 Credit rating process 15

1.1.7 Methodology of credit rating 18

1.2 Overview of Z-score model 29

1.2.1 Introduction of model 29

1.2.2 Content of the model 30

1.2.3 Evaluate the model Z-score 36

1.3 Empirical review on credit ratings and Z-score model 38

1.3.1 Empirical review on research of credit ratings 38

1.3.2 Empirical review on research of Z-score model 41

1.3.3 Research gap and research innovation 44

CHAPTER 2: Z-SCORE INDICATOR APPLICATION IN CORPORATE CREDIT RATING LISTED ON HOSE 45

2.1 Data and research methods 45

2.1.1 Data 45

2.1.2 Research methods 45

2.2 Research results 50

2.2.1 Research result 1: Overall assessment of credit ratings of 100 enterprises 50

2.2.2 Research result 2: Credit rating assessment of 100 enterprises by industry 56

2.2.3 Research result 3: Evaluation of credit ratings of 100 companies by the time of listing shares on HOSE 69

CHAPTER 3: CONCLUSION AND SOME RECOMMENDATIONS 72

3.1 Some recommendations for investors 72

3.2 Some recommendations to improve the role and innovate the credit rating method in Vietnam today 73

3.3 Conclusion 74

REFERENCE 76

APPENDIX 79

LIST OF TABLES

Table 1.1: Evaluate non-financial indicators 21

Table 1.2: The difference between 3 models 36

Table 2.1: Data description 45

Table 2.2: Number of companies studied 46

Table 2.3: Classification of enterprises by industry of manufacturing enterprises 47

Table 2.4: Non-manufacturing firms 48

Table 2.5: Statistics of manufacturing and real estate enterprises 56

Table 2.6: Statistics of wholesalers and retailers of consumer goods 59

Table 2.7: Statistics of Technology and services 62

Table 2.8: Food business credit score results 66

LIST OF FIGURES

Figure 1.1: Credit rating scoring criteria 14

Figure 1.2: Financial criteria 15

Figure 1.3: Credit rating process 16

Figure 1.4: Horizontal link model 28

Figure 2.1: Scoring credit ratings of 100 businesses in 2020 50

Figure 2.2: Number of businesses in credit rating by industry 56

Figure 2.3: Z-score distribution of firms in the construction and real estate industries 58

Figure 2.4: Z-score distribution of enterprises in the Wholesales industry and details 60

Figure 2.5: Z-score distribution of enterprises in the technology and Service 62 Figure 2.6: Credit scoring results for raw material mining and manufacturing enterprises 64

Figure 2.7: A summary of the number of companies listed on the HOSE from 2000 to 2020 69

OVERVIEW OF THE RESEARCH PROJECT

Beginning from the limited risks in the method of scoring credit ratings ofcommercial banks today, the author has learned about a credit rating scoring modelbeing used in the world Altman Z - score model (referred to as Z - score model) isone of many models invented in the world and has been used in practice in manycountries The Z-score model used to assess the bankruptcy risk of enterprises wasdeveloped in 1968 by American professor Edward I Altman, Leonard N SternSchool of Business, New York University Although the Z-score model was found

in the US, most countries can still use it with high confidence, including Vietnam

In Vietnam, credit rating still has many limitations and inadequacies in thecredit rating process of enterprises Credit rating methods and models that are in linewith international standards have not been universally implemented At commercialbanks, the customer credit scoring method is still heavily formal, not reflecting theactual situation that businesses are facing In addition, commercial banks mainly rely

on internal credit ratings based on the requirements of the State Bank Therefore, thecredit rating system of banks is often misleading, still does not accurately reflect therisks of enterprises, is lengthy, and especially the status of some businesses that are

about to go bankrupt is still rated safe Credit risk is the action that borrowers arenot able to repay the bank's debt when due date, this directly affects thedevelopment process of the bank and can also determine the survival of the bank at

or bankrupt of the Bank Therefore, if in the process of credit rating the bank stillhas a rating based on form, the credit risk will lead the bank to make regularprovisioning capital and limit the cash flow used with other business purposes ofthe bank Therefore, commercial banks need to pay more attention and improvemore models and methods of credit rating to minimize credit risks from borrowersand provide capital provisions in case of bankruptcy borrowers

Through the process of learning about the model, the author found that thecurrent credit rating model at commercial banks is not suitable for the actual economicand financial situation of enterprises listed on the exchange securities, but the Z-scoremodel is being used by many countries, especially developed countries This provesthat the Z-score model is a very beneficial method in the credit rating process of

banks From the above reasons, the author chooses the topic: "Application of Z-Score

model in the credit rating of 100 enterprises listed on HOSE".

1.2 Objective of study

1.2.1 Goal of study

The project is implemented to propose the application of the Z-Score model

in credit rating of 100 enterprises listed on HOSE stock exchange

1.2.2 Mission of study

- Clarifying the theoretical and practical basis of corporate credit rating

- Collect data on the financial situation of 100 1enterprises listed on the HOSE

- Application of Z-Score model in the credit rating of 100 enterprises listed on theHOSE

1.3 Scope of study

- Scope of research space: study 100 enterprises listed on the HOSE stock exchange

- Time range: 2020 - 2021

• List of 100 companies listed on the HOSE as of May 20, 2021

• Financial figures: financial statements of 100 enterprises in the fourth quarter of 2020

• Share price closed at 20:41 on May 19, 2021

1.4 Research Methods

The thesis uses the document research method in research, the authorsearches for documents from books, dissertations and scientific research works Inaddition, there is the guidance of the lecturer

The author uses the method of collecting, processing and analyzing data asthe main research method of the thesis The research data was downloaded by theauthor from Cafef.vn and Vietstock.com.vn, mainly financial statements andbusiness results of 100 enterprises The author processes the data by usingstatistical methods with the help of Excel to calculate the results In addition, whenanalyzing data, the author uses multidimensional statistical methods, samplingmethods and logic to analyze results obtained from calculation and data processing

1.5 Structure of study

- Chapter 1: Literature review and empirical review of credit rating and Z-Score model

- Chapter 2: Z-score indicator application in corporate credit rating listed on hose

- Chapter 3: Conclusion and some recommendations

CHAPTER 1: LITERATURE REVIEW AND EMPIRICAL

REVIEW OF CREDIT RATING AND Z-SCORE MODEL

1.1 Overview of credit rating

1.1.1 Definition of credit rating

World of conception: Before the 19th century, businesses were close to eachother, knew each other's financial ability, so it was easy to extend credit to partners.However, when the gap increases, this becomes difficult, investors are afraid toextend credit because they are worried about the risk of their counterparty notbeing able to repay the debt That created the first basis for the birth of the creditrating industry

The Mercantile Agency, the ancestor of today's credit rating agencies, wasestablished after the financial crisis of 1837 This organization ranks merchants'ability to repay loans and then publishes them

According to John Moody's research in 1909, credit ratings are opinions aboutcredit quality and debt solvency for creditors based on research results expressedthrough the notation system Aaa to C The new word “credit rating” was first issued

by financial analyst John Moody in his “Railway Securities Handbook” when heresearched, analyzed, and published ratings The first credit for 1500 bonds of 250companies under a system of symbols consisting of 3 letters A, B, and C ranked from

AAA to C respectively These ratings do not have a profound effect on the marketfor in 1936, a new law was passed: Banning banks from investing in speculativebonds, or bonds with low credit ratings, to avoid the risk of default that could lead

to financial loss The act was quickly enforced by companies and financialinstitutions As a result, relying on credit ratings has become the standard

According to research in 1860 by Standard & Poor's group - a credit ratingagency in the US Credit ratings are opinions about the risk, solvency of financial

obligations fully and on time of an issuer such as a business, government, orpeople's committee In addition, credit rating also refers to the credit quality of anindividual debt such as a corporate or local government bond and the relativeprobability that the issue may default.

According to a study by Nomura Research Institute - Japan's prestigiousGeneral Research Institute, credit rating is the current assessment of a company'savailability and ability to pay principal or interest on debt securities issued duringthe life of the security

For Fitch Corporation(1924) - one of the three prestigious credit institutions

in the US in the world , credit ratings are assessments of an object's ability to meetfinancial commitments such as interest rates, shares, and interest rates, incentives,principal repayments, insurance claims, or partnership obligations Credit ratingsrelated to securities and issuer obligations may include recovery expectations.Credit ratings are used by investors as an indication of their ability to repay themoney they have invested in

Vietnam's conception: The word "Credit rating" is translated into manydifferent meanings In this study, the authors use the term "'credit rating'"

In terms of definition, each financial institution defines credit rating differently, butthe core content includes an evaluation of the credit quality or repayment ability ofthe issuer or debt instrument

Issuers include Enterprises, special purpose companies, governments, localauthorities, non-profit organizations, sovereign states

Credit-rated debt instruments include Government bonds, corporate bonds,certificates of deposit (CDs), local government bonds, preferred shares, mortgage-backed securities, Collateralized Debt Obligations

The ranking is made based on the analysis of qualitative and quantitative factorsrelated to the borrower's business activities, borrowing history, and debt repayment.

Thus, in this research topic: “Credit rating is understood as an assessment ofcredit quality, showing the willingness to pay financial obligations (principal andinterest) of an entity business customers in a complete and timely manner, through

a predefined symbolic classification system for the lifetime of the rating object.”

1.1.2 Characteristics of credit rating

- Credit ratings are assessments of credit risk, conducted based on information collected from subjects rated credit, and information sources considered reliable

- Credit ratings do not constitute financing, investment advice, a recommendation

to buy or sell an object or hold bonds or debt instruments Credit ratings onlyperform an independent function that is to assess the level of credit risk orcreditworthiness of a rating object

- Credit ratings are not an indication of a security's liquidity or a measure of its market value

- Credit rating does not guarantee absolute credit quality and future credit risk

- Credit rating results only approach all factors related to financial risks.Commercial banks do not use credit rating results to show the value of borrowers,but credit ratings used is only a criterion for the decision-making process and isvalid for a certain period

1.1.3 Object of credit rating

There are many ways to classify the subject of credit rating, depending ondifferent bases, one can classify as follows: personal credit rating, corporate creditrating, national credit rating assessment, the credit rating of investment instruments(corporate bonds, government bonds, and other bonds, bank promissory notes,preferred stocks, common shares…) (Nguyen Trong Hoa 2010)

- Personal credit rating: applied to individual customers who have a creditrelationship with the bank An individual's credit rating is made based on the loanand repayment history, the amount and type of collateral assets that the individualowns, the late payments, or past due debts (get information from CIC), andthorough customer diligence)

- Corporate credit rating: corporate credit rating is based on the financial and financial criteria of the enterprise for evaluation (financial statements of thatenterprise, CIC, Appraisal)

non Country Credit Rating: assesses the creditworthiness of a country so that theinvestment environment can be compared between countries The credit rating ofcountries is based on common development indicators such as the industrydevelopment index, capital adequacy index, country's economic growth rate, andpolitical stability

- Credit rating of investment instruments such as corporate bonds, government bondsand other types of bonds, bank promissory notes, preferred shares, common stocks

Credit ratings of instruments are performed is based on several criteria such as liquidity, term, interest rate, par value, risks that may be encountered

- In Vietnam, currently, only focusing on ranking enterprises participating in creditactivities such as commercial banks and listed companies National ratings andinvestment tools have not been implemented yet, but only for major rating agencies

such as Moody's, Standard & Poor's, or Fitch Personal credit ratings are due tothe collection and search of information These subjects are quite complicated tocontrol, so individual credit ratings are not popular in Vietnam.

1.1.4 Role of credit rating

Credit rating is becoming more and more important in the financial sector,which is said to be an important stage for making credit decisions, as well as ininvestment Credit rating is considered as a "passport" for the process of brandinternationalization of enterprises in particular and integration in general In theprocess of doing business, banks, financial institutions, enterprises, and investorshave different purposes in credit rating (Nguyen Trong Hoa, 2010)

Therefore, these groups of subjects have different opinions on credit ratings:

Risk is an inseparable factor in the process of commercial bankingoperations in the market Lending risk is doubled because the risk is not only due toits subjective reasons but also bears the risks caused by customers To maintain theability to repay customers' deposits and preserve capital, commercial banks mustensure the recovery of their lent capital So, the purpose of a bank's credit rating is:

- Limiting and making credit-granting decisions to minimize credit risks, banks applymeasures such as an effective appraisal of business plans, monitoring of operations,

and financial situation of customers From there, determine the credit limit, term, interest rate, loan security measures.

- Monitoring and evaluating customers, when credits are outstanding, customer ratings allow the bank to forecast credit quality and take timely countermeasures

- Support for debit classification and risk provisioning: the customer credit ratingresults of the internal credit rating system will serve as a basis for calculating riskprovision

- Developing customer policy: the bank's customer policy will be applied to eachcustomer group based on credit rating results Customer policies include Creditpolicy, Interest rate policy, Collateral policy, Fee policy

- From the perspective of managing the entire portfolio, credit ratings also serve thefollowing purposes: Developing a marketing strategy towards less risky customers

Or estimate the loaned capital that will be difficult to recover to make provision forcredit risks and calculate the risk value

1.1.4.2 For companies

- Businesses use credit ratings to know the actual state of their business, futuregrowth prospects, and possible risks On that basis, make plans to adjust businessoperation strategies to improve efficiency and competitiveness

- In case an enterprise issues shares to the public for the first time or is equitized,the results of the credit rating are the basis for building the value of the enterpriseand the value of each issued share At the same time, credit rating is the basis thatallows businesses to compare their competitive position with other businesses

1.1.4.3 For investors and stocks market

In today's global market economy, the existence and development of themarket is an objective necessity Along with the existence and development of thestock market, information on credit ratings of securities as well as issuers plays anincreasingly important role

- Credit ratings help to provide investors with necessary information about thestatus of issuers to choose from when investing in appropriate security whilefacilitating capital mobilization in the stock market contracts are made easier andmore convenient

- Make an important contribution to reducing the cost of capital for the issuer When

an issuer is reputable, the credit rating will help to raise capital through a reputableissuer, the credit rating will make the mobilization of capital through the issuance ofsecurities convenient and easy and at the same time reduce the cost of raising capital

- Credit ratings motivate issuers to increase accountability to investors The creditrating is closely related to the issuer's reputation, which motivates the issuer tobetter fulfil its commitments to investors in ensuring payment of interest and loancapital Credit Rating is a portfolio management tool In the portfolio, there aremany different types of securities, based on the change of credit rating, investorstrade the securities in the portfolio to gain profits and limit risks

1.1.4.4 For government

- Credit rating information will help state management agencies assess the objectsunder their management, and have an information basis for comparison by industryand business field From there, offer the most appropriate solution to promote thedevelopment and operation of enterprises in the economic sector in particular and

in the whole economy in general, to ensure a healthy economic environment

- Besides, credit rating information will help the government to determine thepolitical and business efficiency of state-owned enterprises On that basis, thegovernment can decide to equitize, merge or dissolve the enterprise.

- For state-owned banks, through information from corporate credit ratings, thebank can know the level of risk by industry, economic region, and type of businessfrom which to have monetary and credit policies properly, inspect and supervisecredit institutions and provide necessary information for commercial banks inmaking credit decisions with businesses

- Thanks to that, despite the difference in purpose, the common goal of credit rating

is to forecast and assess the prospects and potential risks of an enterprise, financial decisions

1.1.5 Rule of credit rating

Credit rating is made based on the main principles including credit analysisbased on customers' sense and willingness to pay debts in history, assessment ofrepayment ability through analysis of the financial capacity of customers Fromthere, a comprehensive and unified risk assessment is based on the notation systemfrom Aaa to C (Doan Thanh Thien Thu, 2013)

In the credit rating analysis, it is also necessary to pay attention to thequalitative analysis to complement the shortcomings of the quantitative analysis.The analytical criteria may change by environmental factors Normally, thecommonly used credit rating scoring criteria include (i) Type of business, (ii)Financial criteria, and (iii) Time of listing on the stock exchange

Credit scoring criteria

Type of

Time of listing

on the stock exchange

Figure 1.1: Credit rating scoring criteria

(Source: edited by author)

Based on the criteria, the enterprise will evaluate and analyze the productionand business situation of the enterprise, thereby predicting the ability to repay theloan and interest, as well as the purpose and efficiency of the business the use ofcapital of the enterprise

Type of business and one of the bases for credit rating and rating Based oneconomic sectors and scale, enterprises can be classified into enterprises in thefollowing industries: agriculture, forestry, and fishery; trade and services,production, and construction…

- Income

Figure 1.2: Financial criteria

Source: edited by author

1.1.6 Credit rating process

Based on the reference basis (Tran Thi Hoa 2016) and accumulatedexperience from the rating processes commonly used in the world, it is realized thatwhen conducting credit rating, the following steps should be taken:

15

Step 1: Collect data

Guarantee claimSources of informationcollection

Step 2: Analyze the information

Step 3: Choose credit rating method

Step 4: publish credit rating

results

Step 5: Adjust ratings

Figure 1.3: Credit rating process

Source: edited by author

❖ Data collection: This is an important step because it directly affects the

results Lack of or inaccurate data leads to unreliable or even misleading creditrating results

- Data must ensure:

o Quantity: Large enough not to lose the generality of the study;Comprehensive information needed for quantitative and qualitative analysis

o Quality: Collected data must ensure the accuracy and objectivity of the rating

object's activities; factors that directly or indirectly affect the release of research ratings

o Continuity: Time-series informational data including the past, present, and future forecasts Spatial and cross-sectional data can be considered

- Information source:

o External sources: Economic data of each industry and field provided bydomestic and foreign organizations and associations Reports and statistics fromministries and departments; information from books, newspapers,

internet…

o Internal sources: Financial statements, annual reports of enterprises Issuanceannouncements, issuance memos for each specific security Other information isprovided by stock exchanges and enterprises

❖ Credit analysis and rating: After collecting all the necessary data, experts

will base on the system of criteria and theoretical models to calculate, score,analyze and evaluate the situation the current performance of the business, and theexpected ability to develop and repay debts in the future

- In the credit rating criteria system, depending on each specific enterprise, expertswill select some of the most important criteria, which have a significant impact onthe issuer's ability to fulfill financial obligations and assign weights to eachindicator For unimportant indicators, it will be used to consider adding ratingsbetween businesses in the same industry, add a "+", "-" sign or keep the same rating

in similar ratings equivalent in terms of targets

❖ Publication of credit rating results: After the credit rating is completed, the

rating results will be given to the requesting parties or announced to the market(depending on the subject) The results only reflect the evaluation for a certain timebecause the actual operation situation of the enterprise is constantly fluctuatingaccording to objective and subjective factors Therefore, the credit rating needs toalways update and supplement data to ensure the accuracy of the results given at alltimes

❖ Rating adjustment: Based on the information collected after publishing the

issuer rating results, the credit rating company will make adjustments to theassigned rating for the issuer to ensure guarantee accuracy at all times

1.1.7 Methodology of credit rating

Based on the purpose and object of credit rating, it can be divided into thefollowing methods:

1.1.7.1 professional method

The professional method used by many people in this research is the Thesis

of Nguyen Trong Hoa (2010), Tran Thi Hoa (2016), Doan Thanh Thien Thu(2013), Ngo The Chi, and Nguyen Trong Mechanical (2005)…

The expert method is a method of collecting, processing, and synthesizingexperience by good experts From there, giving an objective scientific answerabout the current situation as well as forecasting the future development of ascientific field, namely the field of credit rating Thereby, find out the nature of therelationship between the risk of bankruptcy of the enterprise and the factorsaffecting it

The process of applying the expert method can be divided into three majorstages: (i) Selection of experts, (ii) Consultation of experts, and (iii) Collection andprocessing of predictive assessments

The expert method is based on summarizing experience and the ability toreflect the future naturally of good experts and statistically processing the answersscientifically The task of the method is to make objective predictions about thecurrent situation and future development of a scientific field based on thesystematic treatment of forecasted price estimates by experts.

In credit rating, this method is based on the accumulated experience of experts,through which it is possible to find out the nature of the relationship between the risk

of bankruptcy and the factors affecting it Experience gained from:

- subjective observations and real-life experiences

- conjecture about the correlation of business and risk of bankruptcy

- economic knowledge related to bankruptcy risk

Many models use expert methods and are usually grouped under the heading

of the diagnostic model class and are divided into:

❖ Classic assessment questionnaire

❖ Qualitative system

❖ Expert system

In credit ratings, these models often use the relationship between repaymentand lending of the subject to be assessed, to make assessments about thebankruptcy risk of businesses and borrowers in the future future The quality ofthe diagnostic models depends on how accurate the subjective experience of thecredit professionals is Furthermore, not only the factors associated withbankruptcy risk were determined empirically, but their correlation and weighting

in the overall assessment were also evaluated based on subjective experience Theclassical assessment questionnaire, the qualitative system has been commonly usedand the main content is summarized as follows:

❖ Classic Evaluation Questionnaire

This is the method many people conduct for scoring and based on the scalethat has been assigned to rank businesses, to proceed with the following steps:

- Step 1: Determine the content and criteria to be evaluated

- Step 2: Determine the score chart for each criterion

- Step 3: determine the type system and the corresponding score of each type

- Step 4: Based on the scorecard and classification system formed in step 1,

analyze the data and information about the business

- Step 5: Summarize the score and grade the business credit

- Step 6: Make comments on the strengths and weaknesses of the enterprise, and make necessary recommendations and suggestions by the assessment objectives

The classic assessment questionnaire is designed based on the experience ofcredit professionals Ranked subjects answer well-defined questions that includefactors associated with bankruptcy risk and are assigned fixed scores Furthermore,the factors and the corresponding scores are not statistically tested, but they reflectthe subjective assessment of credit experts

When conducting these assessments, businesses or individuals will answerquestions asked by credit officers or representatives of banks or credit ratingagencies The scores of each answer are aggregated and ranked according to thetotal score achieved The results of the rating will reflect the willingness of bothbusinesses and individuals to repay debt and points to consider The followingtable shows an assumption from the classic assessment questionnaire:

Table 1.1: evaluate non-financial indicators

In the table, the experts have developed a definition system for the abovefactors These factors are correlated with the bankruptcy risk of the business Each

factor is assigned a fixed score The number of points assigned depends on the degree

of correlation with the risk of bankruptcy The table shows that enterprises withoutdated technology have a higher level of risk than enterprises with medium andmodern technology Outdated businesses are assigned a lower score The sameconsideration applies to other factors

Comment

The decisive success factor in a classical ranking questionnaire is the use offactors affecting the bankruptcy risk of a business or a subject being rated, to whichthe user can ask questions Answers are clear and easy to understand That helps toincrease the recognition as well as the objectivity of the model

According to the experience of experts, the answers showing a high bankruptcyrisk should be associated with a higher score than the answers with a lowbankruptcy risk This ensures consistency and the first condition for recognitionamong users and external interested parties

In the qualitative system, informational attributes that are strongly correlatedwith the risk of bankruptcy are also determined based on the experience of thecredit professionals However, it is different from the classic ranking questionnaire.The qualitative system does not assign a specific score with a certain value to theevaluated factors Instead, individual information attributes are individuallyevaluated by a rating agency representative or credit officer and using a predefinedmodel This is done with the help of a predefined pattern This is done with the help

of a system that classifies or ranks the values of each attribute These individual

scales or categories are assigned respective weights based on the evaluator'ssubjective experience.

To ensure that all users have the same interpretation of their assessment, aqualitative system should be accompanied by a response guide In practice, theseprocedures are used by credit institutions, especially in the group's customer servicedepartment However, in recent years, qualitative systems have been superseded bystatistical models due to the availability of data and the continued development ofstatistical methods

- This method has the first advantage of taking advantage of experience and depth knowledge from leading experts At the same time, because the evaluationresults are gathered from many people, the reliability level is quite high

in The second advantage of the expert method is that the results are gathered frommany experts so all aspects are considered; creating a high level of confidence.Thus, one-sidedness can be avoided

✓ Disadvantages of expert method

- This method has the disadvantage that the cost can be very high when the number ofparticipants is large and the number of rounds of opinion collection is many times

- Subjectivity in the assessment cannot be eliminated

- Evaluators may fall into traps created by metrics

✓ Scope of application of the expert method

The expert method is often applied to collect forecasts and evaluations of experts inthe field such as:

- Assess the market potential and competitive strategy of the business

- Evaluate and rank enterprises in terms of management organization and human resource management situation

- Evaluate and rank businesses from a financial point of view

- Forecasting changes in the business environment

- Forecast and evaluate the prospects and trends of the economy of industries such

as economic growth rates, inflation, and exchange rate fluctuations, the outlook of

an economic sector

- forecasting and evaluation of the industry's technology development prospects and cycles,

- assessment of the location and area of operation of the business

- Assess and forecast the market potential of the enterprise's product

1.1.7.1 Statistical methods

Statistical methods have existed since at least the 5th century BC

Some scholars date the origins of statistics to 1663, with the publication ofthe Natural and Political Observation Bills by John Graunt The first application ofstatistics revolved around the policy needs of countries based on demographic andeconomic data, thus forming the study of the origins of statistics The scope ofstatistical subjects expanded in the early 19th century to include data collection andanalysis, but not in-depth Today, statistics are more widely used in government,business, natural and social sciences Especially today, statistical methods are alsoused in credit rating, making it possible to approach many statistical models whilediagnosing credit rating models

There have been many studies using statistical methods in research related to creditratings such as Nguyen Trong Hoa (2010), Nguyen Van Cong (2002), Lai TienDinh (1998), Vu Thieu, and Nguyen Quang Dong and Nguyen Khac Minh (2001)

… The statistical method is one of the accurate research methods It helps todiscover the laws of objective reality, from a visible thing The statistical method is

a process that includes statistical investigation, generalization of information also

known as statistical synthesis, analysis, and forecasting This is the process ofmathematical modeling of problems to be analyzed according to researchobjectives In this way, we can widely apply multidimensional statistical analysismethods, control theory, etc.

Depending on the statistical method used in the credit rating, we canapproach the following statistical models:

- Discriminant analysis model

of enterprises are high, lower than the average bankruptcy risk of businesses at risk

of bankruptcy compared with those without bankruptcy risk The informationabout credit ratings of enterprises at risk of bankruptcy is shown through the set ofempirical data, these hypotheses can be rejected or accepted appropriately

When statistical models are used, the selection and weighting of factorsaffecting the bankruptcy risk of enterprises are conducted objectively From theavailable information about the credit rating of the business In this process, theselection and determination of weights are carried out precisely by the appropriatemethod Therefore, businesses that are at risk of bankruptcy and those with highcredit ratings that are not at risk of bankruptcy are considered secure businesseswill be classified in the empirical data set most optimally

❖ Difference analysis model

The Difference analysis model is built based on the DA method The objective

of the DA method in a credit rating is to distinguish between businesses at risk ofbankruptcy and businesses that are not at risk of bankruptcy most objectively andaccurately By using the discriminant function, where the variables are financialindicators The main goal is to find a system of linear combinations of variablesthat distinguishes groups well, the individuals in each group are closest to eachother and the groups are best distinguished

The objective of the model is to use the factors that affect a firm (the

independent variable) to determine how likely it is that these firms will be at risk ofbankruptcy (the dependent variable) That is, the logit and probit models canestimate the default probability that a firm is at risk of bankruptcy directly from thesample Incorporate credit rating, Logit, and Probit models are often used torepresent this relationship

- The outstanding advantages of the method are low cost, quick implementation, easy application, and results-based entirely on a quantitative basis

- Subjectivity of credit experts is eliminated when rating credit

✓ Disadvantages of statistical methods

- In the case of unreliable data sources or lack of data sources, it is difficult to calculate and implement the method

- Hypotheses given are not theoretical or empirical, leading to unreliable results If the assumptions are not satisfied, the ranking results may not be reliable

✓ Scope of application of statistical methods

Statistical methods are applied in the field of evaluating and rankingenterprises on financial and non-financial aspects

1.1.7.3 Combination method

The combination method is the method commonly used in most of the studiesrelated to credit rating such as Nguyen Trong Hoa (2010), Doan Thanh Thien Thu(2013), Tran Thi Hoa (2016), Lam Minh Chan (2007), Nguyen Minh Kieu (2007)The analysis of the advantages, disadvantages, and scope of application of corporate

credit rating methods shows that there is no universal method that each method can

be applied appropriately for certain content of credit rating Therefore, to take

advantage of the advantages and limit the disadvantages of each method, one canapply the combined method

content

The combined method is a combination that is the application of manymethods in the evaluation process, and for each content to be evaluated, onlyevaluation methods suitable for that criterion are applied

This combined method presents many advantages as they complement eachother For example, statistical and theoretical models have the advantage of being intheir goal and performing a higher classification than diagnostic models However,statistical and theoretical models are only possible with a limited number of defaultfactors Excluding expert knowledge as in the diagnostic model, important informationabout a firm's default is lost in individual cases Furthermore, not all statistical modelsare capable of performing the process with qualitative data directly, or they require alarge amount of data to find a function that fits the model use To obtain a full picture

of the firm's creditworthiness in such cases, it would be appropriate to evaluate thequalitative data using a diagnostic model However,

diagnostic modelLing requires a larger number of experts in the rating process than

in the case of automated credit assessments when statistical and theoretical modelsare used, i.e using both two models will increase user acceptability

For example, options pricing and statistical models exhibit specific strengths

in evaluating quantitative data, but most of these models are not viable forprocesses with qualitative data no further support An option pricing or statisticalmodel is used to analyze annual financial statements or to assess the financialposition of a business Qualitative data were evaluated using an appropriatediagnostic model combining the outputs of these two models creates acomprehensive credit rating model, also known as a cross-linking model

credit rating

Figure 1.4: Horizontal link model

Source: Nguyen Trong Hoa, 2010

Depending on the purpose of the ratings, the data one can make differentcombinations suitable for the actual conditions

✓ Advantages of the combined method

The outstanding advantage of the combined method is that it is possible to takeadvantage of the strengths of each assessment method within the appropriate range

At the same time, it is possible to limit the weaknesses of each method To improvethe accuracy of the results, the evaluator can apply a variety of methods andcompare the results to arrive at an official result

Evaluation in all aspects

1.2 Overview of Z-score model

1.2.1 Introduction of model

Altman Z-score (or Z-score model) was developed in 1968 by Americanprofessor Edward I Altman, Leonard N Stern School of Business, New YorkUniversity, based on fairly public research Over several different companies in the

US Although this Z-score was found in the United States, it can still be used withhigh confidence in most countries

- This model is successful in predicting financial distress in any company The Z-scoremodel stands out by being able to help measure the financial health of a businessorganization using a variety of balance sheets and business reporting values

- In the years since the model was introduced, the Z-score has improved to becomeone of the most reliable bankruptcy predictors, and more analysts today use thismethod than any other method because of its wide applicability Altman evaluatedthe models by examining 86 troubled firms from 1969 to 1975 and then 110bankruptcies between 1976 and 1995 and then 120 bankruptcies since then 1996 to

1999 The Z-score model had an accuracy level of 82% to 94% higher than thatachieved by any existing method

Altman (2000) studies the factors affecting the probability of default of smalland medium enterprises in the US market The research results show that fiveindependent variables are the financial indicators that have the best predictabilityfor the probability of default of enterprises This model is increasingly beingextended not only to manufacturing enterprises but also to non-manufacturingenterprises The criteria used in the formula are easily obtained from the financialstatements of the enterprise and information publicly disclosed.

1.2.2 Content of the model

The Z-score model studies the factors affecting credit risk of small andmedium enterprises in the US market Research results of Professor Altman (1968)have opened 3 versions of the Z-score model suitable for some business lines ofenterprises Specifically, with version 1 researched by the author in 1968, it issuitable for the corporate credit rating of listed manufacturing enterprises Version

2 of the Z model is the Z’ model suitable for private enterprises, and version 3 isthe Z” model suitable for non-manufacturing enterprises In addition, with eachversion, there are differences in the given parameters and financial indicators Inparticular, after many versions studied by Altman, in 1995 Altman and colleaguesHarzell and Peck conducted a study on 700 companies to produce an adjusted Z'index (also known as the EMS model) ) The difference of the model with othermodels is that it has a high similarity with the credit rating of Standard & Poor.This has created an opportunity to link the Z-score Model with the professionalrating organization in the world

1.2.2.1 Traditional Z-score model, applicable to listed manufacturing enterprises

Starting from a credit risk forecasting model, the Z-score model is considered

to be a relatively accurate forecast of companies that will go bankrupt within 2years through considering the value of the value Z-score

Z-score model:

Z = 1.2X1 + 1.4X2 +3.3X3 +0.64X4 + 0.999X5

With this model, the variables X1 to X5 do not need to be calculated as a percentage

- If Z> 2.99: The enterprise is in a safe zone, there is no danger of bankruptcy

- If 1.8 < Z < 2.99: Enterprise is in the warning zone, may be at risk of bankruptcy

- If Z < 1.8: The enterprise is located in a dangerous area, the risk of bankruptcy is high

- 5 financial indicators denoted from X1, X2, X3, X4, X5 include:

 X1: Working Capitals/ Total Assets

 X2: Retained Earnings/Total Assets.

 X3: EBIT/ Total Assets.

 X4: Market Value of Total Equity / Book values of total Liabilities.

 X5: Sales/Total Assets.

X1: Working Capitals/ Total Assets

Commonly found in business problem studies This is a measure of acompany's net current assets relative to its total capitalization Working Capital isdefined as the difference between current assets and current liability Here,liquidity and size characteristics are considered Typically, a company operating at

a loss will shrink its current assets relative to total assets Of the three liquidityratios assessed, this one proved to be the most valuable The other two test liquidityratios are current ratio and quick ratio are less useful and tend to depend on thepersonal goals of some companies that failed

X2: Retained Earnings/Total Assets

Retained earnings is an account that reports the total amount of reinvestedearnings and/or losses of a business over its life This account is also considered asthe surplus earned from the operation of the business However, it should be noted

that Retained Earnings depend on the movement through restructuring anddividend declaration, while this is not the subject of this study Conceivably, theintended change would be brought about through reorganization, or dividendpolicy, or appropriate adjustments in the accounting accounts.

An interesting new aspect of the X2 index is its ability to measurecumulative profits over time, where the age of a business is implicitly consideredthrough this metric For example, young companies often show low RetainedEarnings/Total Assets because it hasn't had time to accumulate profits Therefore, itcan be argued that young firms will be “discriminated” to some extent in thisanalysis, and the likelihood of these firms being classified as bankrupt is usuallyhigher than that of younger firms long-standing business But, this is exactly thesituation in reality Startups and young businesses are prone to bankruptcy in theearly years of operation In 1993, about 50% of businesses went bankrupt within 1

to 5 years of operation (Bradstreet, 1994)

In addition, the Retained Earnings/Total Assets index also measures thefinancial leverage of a business Firms with higher RE than TA can reinvest assets

by retaining profits and not using much debt (I Altman, 2000)

X3: EBIT/ Total Assets

This ratio is a measure of the real productivity of a business's assets,independent of any tax or leverage policy factors The ultimate survival of abusiness is based on its ability to generate money from its assets, so this metric isextremely relevant in research related to corporate failure Furthermore, insolvency

in the event of bankruptcy occurs when total liabilities are greater than the actualvalue of the firm's assets, which is likely to be a better indicator than otherprofitability ratios, including cash flow

X4: Market Value of Total Equity / Book values of total Liabilities.

Equity is measured by the market value of all shares, preferred shares, andcommon stock; while debt includes both short-term debt and long-term debt Thisindex measures the extent to which a business's assets (measured at the marketvalue of equity and debt) can decline in value before liabilities exceed assets andthe business becomes insolvent This index adds a market value dimension thatmost other bankruptcy studies don't cover

X5: Sales/Total Assets.

The efficiency of using the entire asset is a standard financial ratio thatillustrates how much 1 dollar of assets involved in the production and businessprocess will generate how much revenue This is one of the capacity managementmeasures in handling competitive conditions This last metric is quite important as

it is the ratio that makes the least sense on a particular business basis Based onunivariate statistical significance testing, it wouldn't have appeared at all However,because of its unique relationship with other variables in the model, this indexcontributes the second most to the overall analytic power from the sample

1.2.2.2 Z-score model applied to private enterprises

After the study, the Z-score model was applied to listed joint-stock companies.Atman again received many questions "how to apply the Z-score model to privatecompanies, not listed on the stock exchange?" The biggest obstacle when applying theoriginal Z-score model to private companies in the financial index X4 because X4requires data on stock values The original Z-score model was suitable for publiccompanies, and an inappropriate adjustment would have no scientific merit

The result of the adjusted Z-score model with the new variable X4 is:

Z’-score model:

Z’= 0.717X1 + 0.84 X2 + 3.107 X3 + 0.420X4 + 0.998 X5

With Z indices in the following range:

Z' < 1.23: the business is said to be in the danger zone and has a very high

probability of bankruptcy

1.23 < Z' < 2.9: the enterprise is in the warning zone and has a moderate probability

of bankruptcy

Z' > 2.90: the enterprise is in the safe zone, the probability of bankruptcy is negligible

- 5 adjusted financial indices with symbols from X1, X2, X3, X4, X5 including:

 X1: Working Capitals/Total Assets

 X2: Retained Earnings/Total Assets

 X3: Profit before interest and tax on total assets (EBIT/ Total Assets).

 X4: Book value of Equity / Total debt

The production process of a manufacturing enterprise includes production,distribution, discussion, and consumption The production process is a combination ofthree labour factors, labor objects, and labour materials to create products

(Source: Extracted from the list of Vietnamese references no 9)

The difference between a manufacturing enterprise and a non-manufacturing enterprise is

- Manufacturing enterprises have tangible and reservable inputs

- There are stable inputs with censorship standards while non-manufacturing enterprises are uneven and stable

- The manufacturing company can easily and simply evaluate the value

- Manufacturing enterprises have indirect consumer relations, trading and service enterprises have direct relationships with consumers

Non-manufacturing enterprises include commercial and service enterprises

- Non-manufacturing enterprises including commercial and service enterprises.These enterprises are classified as non-manufacturing because commercial and serviceenterprises do not have a production process These are businesses operating in theform of providing services to consumers such as distributing goods and trading goods,providing utility services The biggest difference with manufacturing enterprises isthat commercial and service enterprises do not directly produce goods

(Source: Extracted from the list of Vietnamese references no 9)

The next modification of the Z-score model is to analyze the characteristicsand accuracy of a model without the X5 variable (sales/total assets) Altman doesthis to minimize potential industry effects that can occur when a high industry-sensitive variable such as asset turnover is included The revenue/total assets ratiovaries greatly by industry This index is larger in service trading companies than inmanufacturing companies because they require less capital As a result, non-manufacturing firms have a larger revenue/total asset ratio In addition, Altmanalso uses this model to assess the financial health of businesses outside the UnitedStates The Z'' model adjusted by Altman has only 4 financial indicators including:

 X1: Working Capitals/Total Assets

 X2: Retained Earnings/Total Assets

 X3: Profit before interest and tax / total assets (EBIT/ Total Assets).

 X4: Book value of Equity / total liabilities