Predicting the Financial Distress in the Banking Industry of Bangladesh: A Case Study on Private Commercial Banks

Abstract

Financial distress is the technical term which is used to assess the insolvency as well as bankruptcy of the financial organizations. Banking sector of Bangladesh play a vital role in the economic development of the country. The main purpose of this study is to assess the financial performance of the banking sector using various ratios. This study also attempts to forecast the bankruptcy or possibility of bankruptcy using Altman (1968) Z-score model. From the various studies it has been found that this model reveals the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years before the event. The accuracy of this models varies depends on the types of the industry analysis. There are 25 conventional and non-conventional commercial banks which have been randomly selected out of 56 banks for this study over the period of 2010 to 2014. There are various financial ratios like activity, profitability, solvency, leverage & market value ratio that have been used to measure the financial performance of the banks. To measure the financial distress various ratios and descriptive statistics have been used. This study reveals that among the selected commercial banks 24% in the safe zone, 20% in the distress zone and 56% in the grey zone. The greater degree of fluctuation occurred in EBIT to total asset ratio. The findings of the study help the managers, depositors, regulatory body & the shareholders to look after their interest in the banking sector of the country.

Keywords: Financial Performance; Financial Distress; Banking Industry; Commercial Banks; Insolvency; Bankruptcy & Z-score

Australian Academy of Accounting and Finance Review, vol 2, issue 1, January 2016, page 44-58