Financial Distress Prediction through Altman Z-Score Model: A Case Study of State Owned Commercial Banks of Bangladesh
Keywords:
Altman Z-score, financial distress, prediction, state owned commercial banksAbstract
Purpose: Banks are the backbone of the economy. The bank collects money temporarily from the public and lends
to other people as per need. Banks should concern about the soundness of their financial health. The purpose of this
study is to predict the financial health of the State Owned Commercial Banks (SOCBs) of Bangladesh using Altman
Z-score Model. Methodology: The Z-score uses working capital to total assets, retained earnings to total assets,
earnings before interest and tax to total assets, shareholders equity to total liabilities to measure the financial health
of the banks. The study is analytical in nature and is carried out based on only secondary data. The published Annual
Reports of the six SOCBs for the period of 2010-2018 collected for secondary data and financially analyzed through
Altman Z-score Model for prediction of financial distress. Findings: The study found that with only one exception,
the financial health of the SOCBs is unsatisfactory. One exception is only Bangladesh Development Bank which fell
into grey zone among the six SOCBs as it secured on an average 1.52 score. However, the remaining others are found
in Distress zone as they secured on an average < 1.10 score. Hence, it is said that the financial health of the Basic
Bank Limited is the worst and BDBL is the best among the six banks. Implications: The implication of the study is
that respective authority of the SOCBs of Bangladesh can use the findings of the study to take necessary actions for
financial distress.
References
Afrin, R. (2017). Analyzing the potential of Altman’s
Z-score for prediction of market performance and
share returns – A case study of the cement industry
in Bangladesh. The AUST Journal of Science and
Technology, 6(1&2), 1-16.
Al-Manaseer, S. R., and Al-Oshaibat, S. D. (2018). Validity
of Altman Z-Score Model to Predict Financial Failure:
Evidence from Jordan. International Journal of
Economics and Finance.10 (8), 181-189.
Al-Rawi, K. (2008). The Use of Altman Equation for
Bankruptcy Prediction in an Industrial Firm (Case
Study). International Business & Economics Research
Journal. 7(7), 115-128.
Altman, E. I. (2000). Predicting Financial Distress of
Companies: Revisiting the Z-Score and ZETA®
Models. Journal of banking & Finance. 1-54. http://
pages.stern.nyu.edu/~ealtman/Zscores.pdf
Apoorva D. V., Curpod, S. P., and Namratha, M. (2019).
Application of Altman Z-Score Model on Selected Indian
Companies to Predict Bankruptcy. International Journal
of Business and Management Invention. 8 (1), 77-82.
Chowdhury, A., and Barua, S. (2009). Rationalities of
Z-Category Shares in Dhaka Stock Exchange: Are
They in Financial Distress Risk? BRAC University
Journal.6 (1), 45-58.
Jahan K. (2018). Determinants of Financial Distress:
Evidence from the State-owned Commercial Banks in
Bangladesh. Journal of Business Studies. 39(1), 51-68.
Khaddafi, M.; Falahuddin, F., Heikal, M., and Nandari, A.
(2017). Analysis Z-score to Predict Bankruptcy
in Banks Listed in Indonesia Stock Exchange.
International Journal of Economics and Financial
Issues. 7(3), 326-330.
Khatun, F. (2018). Banking Sector in Bangladesh: Moving
from Diagnosis to Action. Centre for Policy Dialogue.
-48. https://cpd.org.bd/wp-content/uploads/2018/12/
Banking-Sector-in-Bangladesh-Moving-fromDiagnosis-to-Action.pdf
Mwawughanga, C. W. and Ochiri, G. (2017). Application
of Edward Altman’s Z-Score Model on Measuring
Financial Health of Commercial Banks in Kenya. The
Strategic Journal of Business & Change Management.
(2), 722.
Parvin, A., Rahman, B., and Nitu, A. A. (2016). Prediction
of Financial Health of Banking Industry in Bangladesh
Using Altman’s Z -Score: A Comparison Between
State-Owned Commercial Banks and Private
Commercial Banks, Proceedings of the International
Conference for Bankers and Academics 2016, Dhaka.
Qamruzzaman (2014). Predicting Bankruptcy: Evidence
from Private Commercial Banks in Bangladesh.
International Journal of Financial Economics. 2 (3), 114.
Sajjan, R. (2016). Predicting Bankruptcy of Selected Firms
by Applying Altman’s Z-Score Model. International
Journal of Research–Granthaalayah. 4 (4), 152-158.
Sanjaya, A., Lindrianasari, and Aminah (2015). Bankruptcy
Analysis of Banking Companies in Indonesia Period
-2012. International Journal on Economics and
Social Sciences. 1 (1), 20-24.
Turk, Z. (2017). Financial Failure Estimate in BIST
Companies with Altman (Z-Score) and Springate
(S-Score) Models. Journal of Economics and
Administrative Sciences. 1 (1), 1-14.
Uddin, M. M., and Masud, M. A. K. (2015). Financial Health
Soundness Measurement of Private Commercial Banks
in Bangladesh: An Observation of Selected Banks. The
Journal of Nepalese Business Studies. 9 (1), 20-36.
Will Kenton. (2019, May 27), Investopedia contributors,
Investopedia. Retrieved 12:33, October 27, 2019,
from https://www.investopedia.com/terms/f/financial_
distress.asp
