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An application of KMV-Model to forecast the credit risk of corporate customers and bank’s expected losses

The research aims to apply KMV-Merton model to calculate and forecast default probability (DP) among corporate customers of Vietcombank. Analyzing data from financial statements of 6,398 corporate customers in the years 2008–2012/2013, the research shows that the DP of the whole customer portfolio is 2.6%, equaling a loss of VND6,319 billion, or 3.8% of outstanding loans to the portfolio. | Nguyen Thi Canh & Pham Chi Khoa. Journal of Economic Development 22(1), 62 – 81 62 An Application of KMV Model to Forecast the Credit Risk of Corporate Customers and Bank’s Expected Losses NGUYEN THI CANH University of Economics and Law – Vietnam National University HCMC - canhnt@uel.edu.vn PHAM CHI KHOA University of Economics and Law – Vietnam National University HCMC - khoapc@uel.edu.vn ARTICLE INFO ABSTRACT Article history: The research aims to apply KMV-Merton model to calculate and forecast default probability (DP) among corporate customers of Vietcombank. Analyzing data from financial statements of 6,398 corporate customers in the years 2008–2012/2013, the research shows that the DP of the whole customer portfolio is 2.6%, equaling a loss of VND6,319 billion, or 3.8% of outstanding loans to the portfolio. The results also show that small-sized companies have smaller DP as compared to larger ones. Regarding industries, the lowest DP is found in road and waterway transport business, and the highest is in electricity (including production, transmission and distribution), production of other kinds of power, and seafood processing business. Industries with high DP and outstanding loans may cause the greatest damage to banks. The research concludes that large-sized companies and seafood processing enterprises cause the greatest losses to banks. Received: Aug. 30 2014 Received in revised form Oct. 29 2014 Accepted: Dec. 30 2014 Keywords: KMV model, default point, distance to default, default probability, extent of loss, corporate customers. Nguyen Thi Canh & Pham Chi Khoa. Journal of Economic Development 22(1), 62 – 81 63 1. Introduction The world economy has been struck by numerous crises, which result in the rising toll of bankcruptcies, crumbling banking systems, and economic slowdown. Since 2008 Vietnam has endured a particularly tough time when multiple small- and medium-sized enterprises went bankruptcy and an increase in bad debt that causes great