Analysis of Solvency of Banks Using Altman’s Z Score

Abstract

This study delves into the analysis of banks' credit strength using the Altman Z-score model, a proven tool in assessing financial stability and risk. Developed by Edward I. Altman, the Z-score model is widely utilized for predicting bankruptcy and gauging overall financial health. The primary objective of this research is to apply this formula to evaluate the credit worthiness of various banks. Methodologically, the study involves the computation of Altman Z-scores for a diverse range of banks using key financial ratios. These ratios encompass dimensions such as liquidity, profitability, solvency, and efficiency, collectively providing a comprehensive overview of each bank's financial standing. The findings of this analysis can be instrumental for stakeholders, including regulators, investors, and financial institutions. Banks with higher Z-scores are generally considered more creditworthy and financially stable, whereas those with lower scores might indicate potential financial distress. By employing this model, this study enhances understanding of how credit strength can be evaluated across different banks. It underscores the significance of the model's application in capturing nuanced risk levels within the banking sector. The outcomes of this research hold valuable implications for regulatory decision-making and investor strategies. Regulatory authorities can use these insights to tailor appropriate policies for ensuring the stability of the financial system. Investors, on the other hand, can incorporate the Z score findings into their risk assessment and portfolio management decisions.