International Journal of Financial Economics

Vol. 2, No. 3, 2014, 114-121

Predicting Bankruptcy: Evidence from Private Commercial Banks in

Bangladesh

Md. Qamruzzaman1

Abstract
This study aims to analyze financial position of some selected private commercial Banks in Bangladesh as
well as comparison over the period from 2008 to 2012. Out of 30 listed private commercial banks in Dhaka
Stock Exchange, for study purpose, samples of 20 banks are selected randomly which is representative of
banking industry. Quantitative information applies regarding assessment with widely accepted bankruptcy
prediction “S-score” and “Z-score” model. This study found that both Bankometer S-score and Altman Z-
score show similarities about financial position in year 2008, 2009 and 2010 but exceptions prevail in year
20011 and 2012. Apart from that According to Bankometer: S-score model shows as a whole banking
industry belonging in such a position having very healthy financial status whereas Altman Z-score model
shows likely bankruptcy status, such discrepancy produce option for further study on.
Key Words: Financial Performance, Financial soundness, Altman Z-score, Bankometer: S-score
JEL Classifications: G2, G21

1. Introduction
Over the past two decades, rapid advances in globalization and financial integration, technological
progress, and demographic changes have created significant new challenges and opportunities for national
economies. In such a fast-evolving global competitive environment, financial services especially banking
sector plays a vital role in helping the economy and society respond effectively to generate the liquidity,
flexibility and dynamism that are required to meet the challenges and take full advantage of any
opportunities. In mobilization of funds from surplus units to deficits units private commercial banks play
crucial role in this regard by channelizing funds into different investment area on behalf of clients. According
to the Rangarajan (1997) an enduring and efficient banking sector provides a base for effective stabilization
policies and investment prospects to achieve genuine earnings for developing economy. Therefore, efficiency
of banking sector received a high priority for policy makers as development of the real sector depend on this
sector. Financial evaluations have been among the oldest and the most important approaches used for
evaluating the performance of companies which are mainly based on financial statements. Financial analyses
provide valuable information regarding procedures, correlations, qualities, dividends, and finally corporate
strengths and Weaknesses and the quality of their financial positions

2. Review of Literature
Assessing bankruptcy on the basis of financial ratios is the primary methodology started by Altman
(1968) by showing higher percentage of success. In the initial stage, Z-score model was developed for
manufacturing organization with predicting bankruptcy accuracy rate about 80%. In the later period, Z-score
model comes up with addition development for assessing bankruptcy of banking industry and show
tremendous accuracy of 70% prediction.

1
Lecturer: School of Business Studies (SBS) Southeast University

© 2014 Research Academy of Social Sciences

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Over the period, Altman Z-score model used by number of researcher to assess bankruptcy in different
countries irrespective to industries and model come up with higher accuracy. In 2002, under IMF initiative
new model was developed called Bankometer S-score which is also based no financial ratios especially
CAMEL rating variables of focusing banking sector. In the recent year, especially financial crisis of 2009 in
the world, it is being observes a number of industry become bankruptcy and further study conduct by
different researchers in different countries with both Z-score and Bankometer.
Arulvel and balaputhiran (2013) do study for assessing financial performance of private and state owned
banks by covering period 2006-2012 with application of different statistical tool like Data Environmental
Analysis and CAMELS as well as Bankometer. The study found that state owned banks are performing well
than other commercial banks as per Bankometer indicator.
Anita,Ubud & syafie (2013) conduct study in order to assessing financial performance of P.T Bank
Papua in the light of Cael, Z-score and Bankometer. This study covers the period from 2003 to 2011. The
result shows that both CAEL and Bankometer show same assessment regarding financial position but
exception happened according to Z-score model by putting Papua banking industry in to gray zone. Research
suggests Z-score model is not suitable for using evaluation of banking industry having some limitations.
However, application of Z-score model is recommending as early indication of bankruptcy in assessing
financial performance.
Ivica, Maja &Bruno (2011) conduct the study of assessing companies’ bankruptcy considering
statistical tools focusing Croatia’s commercial banks. The research was conducted on the sample of 78
Bankruptcy Company and 78 healthy companies and statistical model of DA and LR used. DA model shows
accuracy of predicating bankruptcy 79% and LR model is more robust in compare to earlier model.
Amir Hossain (2010) conducts research on understanding financial performance applying Bankometer
Z-score model. The study cover the period from 1999-2002 for gauging the solvency of each bank in
Pakistan and study has found that banks were under stress previously are also categorized as insolvent using
Bankometer technique while sounds banks found solvent under this new procedure.
Jasmine (2010) study on “modeling financial stability: the case of banking sector in Macedonia”. This
study focuses on stability of banking system and formulate financial stability index of the banking sector
more applicable to comparison to previous one. This index shows that the banking system has been
continuously stable as a result of previous conservative approach.
Statement of the problem
Mobilization of funds from surplus units to deficits units requires intermediaries between these two
groups. Financial institutions especially, Banks act as bridge maker and it is essential to preform accordingly
so that customers expectation may not downfall. Now-a-days, a question is buzzing surrounding whether
Private commercial Banks performing with financial stability?.
Objectives of the Study
The study is designed to achieve the following objectives:
1. To developed industry standard for comparison
2. To evaluate the financial accuracy of the private commercial banks in Bangladesh.
3. To compare industry with selected private commercial banks on the basis of their financial position.

3. Methodology of the Study

Sample of 20 private commercial Banks are selected out of 30 listed in Dhaka Stock Exchange. This
study concentrates five years period from 2008 to 2012 considering publically published financial report as
data source. Particularly this research entirely depended on secondary data sources which is financial
statements

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Reliability and Validity of the Data

For the analysis purpose, data has been collected from audited financial statement of selected banks.
The question of reliability satisfy to some extend i.e., all information is publically available and anyone can
use, scope for manipulation is limited.
Tools to Data Analysis
Altman Z-score
The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman. The Z-
score uses multiple corporate income and balance sheet values to measure the financial health of a company.
Where,
T1 = (Current Assets − Current Liabilities) / Total Assets
T2 = Retained Earnings / Total Assets
T3 = Earnings before Interest and Taxes / Total Assets
T4 = Market Value of Equity / Total Liabilities
Z-Score bankruptcy model: Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4
Zones of discriminations:
Z-score Financial position
Institutions are belonging high risky area meaning that
Less than or equal 1.23
about to experience bankruptcy.
Known as grey area indicating those institutions having
Score between 1.23 to 2.90 possibility to become bankruptcy if necessary actions may
not undertake.
Score more than or equal 2.90 Institutions are performing with greater financial stability.

Bankometer model: S-score

Bankometer ratios are derived from both the CAMELS and CLSA stress test parameters with some
modifications. The changes in the selected ratios are made only to synthesize the measurement of banks
soundness. Following IMF (2000) recommendations, we used the procedure of Bankometer to measure the
state and private sector bank in Sri Lanka. This procedure has the quality of minimum number of parameters
with maximum accurate results.

Parameter
1. Capital Adequacy Ratio 40 %=< CAR>=08%
2. Capital to Assets Ratio >=04%
3. Equity to total Assets >= 02%
4. NPLs to Loans =<15%
5. Cost to Income ratio =<40%
6. Loans to Assets =< 65%

S = 1.5* CA+1.2* EA +3.5 * CAR+0.6*NPL+0.3*CI+04*LA

CAR stands for capital adequacy ratio
CA stands for capital assets ratio
EA stands for equity to assets
NPL stands for non performing loans to loans
CI stands for cost to income
LA stands for loans to assets

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With criteria:
a) For the value of S < 50 means that the company is experiencing financial difficulties and high risk.
b) For the value of 50 < S < 70 then the company is considered to be in the gray area (gray area).
c) For S greater than 70, provide an assessment that the company is in a very healthy state.
Research Question
This study conduct to get answer of the following:
Whether banking industry of Bangladesh is performing with strong financial soundness?
Research Variables
Independent Variables under study are:
Input and output variables including financial ratios (CAR, CA, CI,NPL, EA, Working capital / Total
assets , Total retained earnings / Total assets , net profit margin, Market value company / Total liabilities)
The dependent variable was determined as companies’ Financial Soundness.
Research Population and Sampling Procedure
The population under study consisted of 30 listed Commercial Banks in Dhaka Stock Exchange and the
sample of 20 listed Banks the study was selected in the population under study

4. Data Analysis and Findings

Altman Z-score Model2
Predicting bankruptcy, Altman Z-score model act as pioneer with greater accuracy. This model is
widely known as Multivariate Discrimination analysis (MDA) focusing
Table 01
Calculation of Z-score of private commercial Bank (2008-2012)
Industry Standard
2012 2011 2010 2009 2008 Average CV
Average Deviation
PRIME BANK 1.04 1.14 1.57 1.15 0.74 1.13 2.88 0.30 0.10
DBBL 0.77 0.87 1.17 0.94 1.31 1.01 2.88 0.22 0.08
AL-BANK 0.61 0.82 1.53 1.05 1.15 1.03 2.88 0.35 0.12
BRAC 1.43 1.91 3.07 2.52 14.91 4.77 2.88 5.71 1.98
CITY BANK 1.19 1.32 1.48 0.76 0.66 1.08 2.88 0.36 0.12
SIBL 0.62 0.71 1.21 0.87 0.94 0.87 2.88 0.23 0.08
NCC 0.90 1.14 1.51 1.26 0.97 1.15 2.88 0.24 0.08
UCB 0.76 0.96 1.14 1.11 0.97 0.99 2.88 0.15 0.05
STANDARD 0.88 1.05 1.24 1.03 1.14 1.07 2.88 0.13 0.05
ONE BANK 1.25 1.51 1.87 1.27 1.09 1.40 2.88 0.30 0.10
TRUST BANK 10.75 13.49 33.77 17.26 21.03 19.26 2.88 8.99 3.12
IBBL 7.36 8.85 18.83 21.41 17.96 14.88 2.88 6.34 2.20
PREMIER
1.04 1.28 2.00 1.63 1.57 1.51 2.88 0.37 0.13
BANK

2
Z-Score model was originally formed for manufacturing firm so that many times it was considered to be not applicable
for non-manufacturing firms. In 2002, Altman revised the old Z-Score model and produce a new model to accommodate
companies whose fixed assets are not productive assets of the formula Z = 6.56 X1 + 3.26 X2 + 6.72 X3 + 1.05 X4 .
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 M. Qamruzzaman

IFIC 1.34 1.47 2.04 1.45 1.56 1.57 2.88 0.27 0.10
SOUTHEAST 0.96 1.10 1.33 0.93 0.88 1.04 2.88 0.18 0.06
EBL 1.10 1.32 1.96 1.42 1.19 1.40 2.88 0.34 0.12
EXIM 1.12 1.19 1.67 1.11 1.74 1.37 2.88 0.31 0.11
AB BANK 1.03 1.08 1.51 1.03 0.77 1.08 2.88 0.27 0.09
BANK ASIA 0.83 0.95 0.80 0.96 0.92 0.89 2.88 0.07 0.02
JAMUNA 0.76 0.02 0.02 0.02 0.02 0.16 2.88 0.33 0.12
AVERAGE 1.79 2.11 3.99 2.96 3.58
Grey Grey Safety Safety Safety
Zone Zone Zone Zone Zone
Source: author calculation using SPSS-20

From (Table 01) it is manifest that industry average Altman Z score is 2.88 which represent overall
financial soundness of banking industry is fall into “Grey Zone” is likely to have financial stability about to
be reached “Safety Zone”. Altman Z score shows range from 1.97 in 2012 to 3.99 in 2008 indicating industry
is tends to become more financially unsound as year progress.
In year 2008, 209 and 2010 show Altman Z score having 3.58, 2.96 and 3.99 fall into the “Safety Zone”
means indicating financial soundness with stability of banking industry as whole. But as year progress
industry is losing financial soundness according to Altman Z score moving from “Safety Zone” to “Grey
Zone” which is vulnerable towards bankruptcy.

10%
BANKRUPTY
30%
60% Grey Zone
Safety Zone

Figure 1
Financial Soundness of Banking Industry
According to Altman Z (Figure – 1) score about 60% of financial institutions belong to “Bankruptcy
Zone” and only 10% of entire financial institutions belong to “Safety Zone” as well as remaining institutions
belong to “Grey Zone” which is also vulnerable toward financial soundness.
Bankometer Model Assessment
Table 02 shows S values from 2008 to 2012 of private commercial bank in Bangladesh and which are
strongly above the limit of at least 70 from 2008 to 2012, therefore it can be interpreted that private
commercial Banks and banking industry as a whole during period is always in the category of healthy and
does not experiencing financial distress although world wide financial crisis prevailed.
Table 02
Bankometer: S-Score of private commercial banks(2008-2012)
2012 2011 2010 2009 2008 Average
PRIME BANK 109 111 118 109 68 103
DBBL 91 92 89 82 68 85
AL-BANK 98 101 104 87 74 93
BRAC 88 95 98 104 73 92

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CITY BANK 140 143 126 98 60 113

SIBL 99 100 108 107 73 97
NCC 118 123 120 108 81 110
UCB 108 110 86 86 69 92
STANDARD 112 117 113 114 79 107
ONE BANK 112 111 101 96 73 99
TRUST BANK 103 102 105 99 71 96
IBBL 101 95 95 96 78 93
PREMIER BANK 116 116 110 116 79 107
IFIC 95 99 101 95 72 92
SOUTHEAST 120 130 129 112 74 113
EBL 125 126 136 126 73 117
EXIM 124 131 120 105 69 110
AB BANK 109 111 109 104 67 100
BANK ASIA 111 118 92 97 75 98
JAMUNA 109 108 109 105 66 99
AVERAGE 109 112 108 102 72
Source: author’s calculation using SPSS-20

From 2008 to 2012 (Table 02) as a whole banking industry exhibits slightly healthy position having S-
score grater than 70.and financial soundness and stability increase over the research period S-score range
from72 to 112 indicating super soundness in case of financial stability.
In 2008, about 50% of sample private commercial banks belongs to range of S-score 50<S<70
indicating gray area of financial stability parameter but as a whole banking industry healthy position. NCC
bank shows highest S-score having 81 compare to lowest score shows by city bank having 60.
From 2009 to 2012, all selected sample private commercial banks show healthy financial position with
overall banking industry development in the area of financial soundness.
It is shown from the above (Table-02) significant numbers of banks show healthy financial status but
Bankometer S-scores are decreasing from period 2010 to 2012 apart from that decreasing trend still banking
industry as a whole performing exceedingly well with healthy status.

120%
100% 112% 109%
102% 108%
80%
60%
72%
40%
20%
0%
2007 2008 2009 2010 2011 2012 2013
Figure 2
Industry Bankometer: S-score (2008-2012)

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 M. Qamruzzaman

It is evident from the above (Figure 01) that from year 2008 to 2011 \S-score is decreasing range from
72 to 112 and after that decreasing trend move. Although it is decreasing but still show healthy financial
position as a whole

5. Concluding Remarks
Overall financial soundness of banking industry is declining from “Safety Zone” to “Grey Zone” (Table
-01) clearly manifest changes of financial soundness of banking industry from 2008 to 2012. Furthermore it
is also obvious that in year 2012, about 60% financial institutions are performing in the industry having very
high rate of Bankruptcy means inability to pay debt obligation to customers when it is required, such large
portion of financial institutions occupying “Bankruptcy Zone” immensely affected the entire banking
industry’s financial soundness. Only having 10% financial institutions are performing with financial
soundness according to Altman Z –score (Figure-1).
Assessment with Bankometer S-score shows industry’s financial healthy position and maintain over the
period, even though financial institutions also shows financial stability from 2009 to 2012. Although in 2008,
there are few institutions those are in the Gray Zone3 but no one belongs to likely risky in financial stability.
Table 03
Comparison between Z-score and S-sore
year Z-score S-score
2008 3.58 SAFETY ZONE 72% very healthy
2009 2.96 SAFETY ZONE 102% very healthy
2010 3.99 SAFETY ZONE 108% very healthy
2011 2.11 GREY ZONE 112% very healthy
2012 1.79 GREY ZONE 109% very healthy

Assessment with two well established model of financial soundness. It’s evident from above (Table-03)
that both assessments show similarities about financial soundness in year 2008, 2009 and 2010 but
exceptions for year 20011 and 2012. According to Bankometer: S-score model assessment as a whole
banking industry shows very health financial status whereas Altman Z-score model shows likely bankruptcy
status.

6. Limitations and Scope of this Further Study

Both models for predicting bankruptcy situation do well with some limitations. In the initial state
Altman Z-score developed for different industries and satisfies about 65% accuracy as well as S-score model
is developed with initiative of IMA for Indonesia private banks with special purpose. Over the period
different county use both models and get expected outcome. The fact may reduce validity in applicability of
our country due to limited use with different nature of banking business. It has ample opportunity to work on
that with modifications because nonelected institutions may not suitable for Altman Z-score assessment.

3
For the value of 50 < S < 70 then the company is considered to be in the gray area (gray area).
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