Financial Distress Prediction through Altman Z-Score Model: A Case Study of State Owned Commercial Banks of Bangladesh

Abstract

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.