Study and Analysis of:

Altman’s Z-Score of 20 Companies

In Banking Sector.

Submitted To: Prof. Zohra Bi

Submitted By: Rohan Kumar Gupta
Roll no: 2021BBAH08AAC035
Course: BBA (Hons.) - Finance
INTRODUCTION

The Altman Z-score, a variation of the traditional Z-score in statistics, is based

on five financial ratios that can be calculated from data found on a company's
annual report. It uses profitability, leverage, and liquidity. solvency, and activity
to predict whether a company has a high probability of becoming insolvent.
NYU Stem Finance Professor Edward Altman developed the Altman Z-score
formula in 1967, and it was published in 1968. Over the years, Altman has
continued to re-evaluate his Z-score. From 1969 until 1975, Altman looked at
86 companies in distress, then 110 from 1976 to 1995, and finally 120 from
1996 to 1999, finding that the Z-score had an accuracy of between
82% and 94%.
In 2012, he released an updated version called the Altman Z-score Plus that one
can use to evaluate public and private companies, manufacturing and non-
manufacturing companies, and U.S. and non-U.S. companies. One can use
Altman Z-score Plus to evaluate corporate credit risk. The Altman Z-score has
become a reliable measure of calculating credit risk.

The 20 Companies involved in the Study are:

 INDUSIND BANK LTD.

 UCO Bank
 RBL BANK LIMITED
 AU SMALL FINANCE BANK LIMITED
 THE CANARA BANK LIMITED
 Indian Overseas Bank
 IDFC FIRST BANK LIMITED
 YES BANK LIMITED
 Punjab National Bank
 BANDHAN BANK LIMITED
 THE FEDERAL BANK LTD
 Axis Bank Limited
 UNION BANK OF INDIA LIMITED
 KOTAK MAHINDRA BANK LIMITED
 THE BANK OF MAHARASHTRA LIMITED
 ICICI BANK LIMITED
 HDFC BANK LIMITED
 BANK OF INDIA LIMITED
 THE BANK OF BARODA LIMITED
 State Bank of India
OBJECTIVE

 To study the Financial Performance of Banking Industry of 20

Companies for FY-2022-2023
 To predict the probability of a company going bankrupt within two years.

METHODOLOGY

 Study has been done by analysing the Financial and Income Statements
of various companies for the Financial Year 2022-2023.
 The Data has been taken from Money Control and Capital line databases
and relevant ratios using tables have been drawn and accordingly
interpretation has been made.

Altman's Z-score Formula

The Altman’s Z-score formula is written as follows:

ζ = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:
 Zeta (ζ) is the Altman’s Z-score
 A is the Working Capital/Total Assets ratio
 B is the Retained Earnings/Total Assets ratio
 C is the Earnings Before Interest and Tax/Total Assets ratio
 D is the Market Value of Equity/Total Liabilities ratio
 E is the Total Sales/Total Assets ratio
The Z-Score for non-manufacturing companies is slightly different:

ζ = 6.56A + 3.26B + 6.72C + 1.05D

In both formulas, a higher Z-Score is generally considered safer, with values

above a certain threshold indicating a lower risk of bankruptcy, while values
below the threshold suggest a higher risk of financial distress.

Edward Altman's Z-Score model has been widely used by investors, analysts,
and lenders as a tool to assess the credit worthiness and financial stability of
companies. It is important to note that while the Altman Z-Score is a useful tool,
it is not certain, and other factors and qualitative considerations should also be
taken into account when evaluating a company's financial health and potential
for bankruptcy. Additionally, the thresholds for what constitutes a safe or risky
Z-Score can vary by industry, so it's important to consider industry-specific
benchmarks.

Interpretation

Investors can use Altman Z-score to evaluate corporate credit risk. For
manufacturing companies a score below 1.8 signals the company is likely
headed for bankruptcy, while companies with scores above 3 are not likely to go
bankrupt. For non-manufacturing companies a score below 1.1 signals the
company is likely headed for bankruptcy, while companies with scores above
2.6 are not likely to go bankrupt. Investors may consider purchasing a stock if
its Altman Z-Score value is closer to 3 or 2.6 (for manufacturing) and selling, or
shorting, a stock if the value is closer to 1.8 or 1.1 (for manufacturing). In more
recent years, Altman has stated a score closer to 0 rather than 1.8 indicates a
company is closer to bankruptcy.
The Five Financial Ratios in Z-Score Explained

1. Working Capital/Total Assets

Working capital is the difference between the current assets of a company and
its current liabilities. The value of a company’s working capital determines its
short-term financial health. A positive working capital means that a company
can meet its short-term financial obligations and still make funds available to
invest and grow.
In contrast, negative working capital means that a company will struggle to
meet its short-term financial obligations because there are inadequate current
assets.

2. Retained Earnings/Total Assets

The retained earnings/total assets ratio shows the amount of retained earnings or
losses in a company. If a company reports a low retained earnings to total assets
ratio, it means that it is financing its expenditure using borrowed funds rather
than funds from its retained earnings. It increases the probability of a company
going bankrupt.
On the other hand, a high retained earnings to total assets ratio shows that a
company uses its retained earnings to fund capital expenditure. It shows that the
company achieved profitability over the years, and it does not need to rely on
borrowings.

3. Earnings Before Interest and Tax/Total Assets

EBIT, a measure of a company’s profitability, refers to the ability of a company
to generate profits solely from its operations. The EBIT/Total Assets ratio
demonstrates a company’s ability to generate enough revenues to stay profitable
and fund ongoing operations and make debt payments.

4. Market Value of Equity/Total Liabilities

The market value, also known as market capitalization, is the value of a
company’s equity. It is obtained by multiplying the number of outstanding
shares by the current price of stocks.
The market value of the equity/total liabilities ratio shows the degree to which a
company’s market value would decline when it declares bankruptcy before the
value of liabilities exceeds the value of assets on the balance sheet. A high
market value of equity to total liabilities ratio can be interpreted to mean high
investor confidence in the company’s financial strength.

5. Sales/Total Assets
The sales to total assets ratio shows how efficiently the management uses assets
to generate revenues. A high sales to total assets ratio is translated to mean that
the management requires a small investment to generate sales, which increases
the overall profitability of the company.
ANALYSIS

Most Bank Companies have an Altman Z-score of below 1.8 as:

1. Banks have high leverage ratios. This means that they hold a lot of debt
relative to their equity. This is necessary in order to finance their lending
activities, but it also makes them more vulnerable to bankruptcy in the
event of a financial crisis.
2. Banks are subject to strict regulatory requirements. These requirements
can be costly to comply with and can limit banks' ability to generate
profits.
3. Banks operate in a competitive environment. This can make it difficult
for them to maintain high margins and profits.

The Altman Z-Score relies on financial ratios like working capital, retained
earnings, EBIT (earnings before interest and taxes), and market value of equity,
which may not be as relevant or meaningful for assessing banks' financial
stability. Banks operate based on their ability to manage and leverage their
balance sheets effectively, which involves different risk factors and financial
metrics.

Name Z-SCORE Zone

THE BANK OF BARODA LIMITED 0.958040438
THE BANK OF MAHARASHTRA < 1.1
LIMITED 0.966701048
State Bank of India 1.107712269
THE CANARA BANK LIMITED 1.145729476
UNION BANK OF INDIA LIMITED 1.187667558
BANK OF INDIA LIMITED 1.232734428
IDFC FIRST BANK LIMITED 1.255265168
Indian Overseas Bank 1.290202885
Punjab National Bank 1.327287822
UCO Bank 1.365539139
RBL BANK LIMITED 1.517013455 >2.6 & <1.1
THE FEDERAL BANK LTD 1.521662815
Axis Bank Limited 1.526550445
ICICI BANK LIMITED 1.562814967
YES BANK LIMITED 1.603493
HDFC BANK LIMITED 1.894105299
AU SMALL FINANCE BANK LIMITED 1.941191566
INDUSIND BANK LTD. 2.00492869
KOTAK MAHINDRA BANK LIMITED 2.073958995
 BANDHAN BANK LIMITED 6.665903875 >2.6

The Bank of Baroda and Bank of Maharashtra have the Z-Score < 1.1 which
signals the company is likely headed for bankruptcy.

Bandhan Bank have the Z-Score >2.6 which means it is not likely to go
bankrupt in Future.

CONCLUSION

Altman Z-Score was primarily designed and optimized for assessing the
financial stability and bankruptcy risk of manufacturing and non-financial
companies, not banks or financial institutions. Banks have a significantly
different business model and financial structure compared to manufacturing and
service-oriented companies. As a result, the traditional Altman Z-Score model
may not be the most appropriate tool for evaluating the financial health of
banks.
For banks, regulatory authorities and market participants typically use a
different set of metrics and stress tests specifically designed for the banking
industry to assess their financial health and risk profiles. These metrics may
include measures of capital adequacy, liquidity, asset quality, and interest rate
risk, among others.

Regulatory bodies, such as the Basel Committee on Banking Supervision, have

established guidelines and capital adequacy ratios like the Basel III framework
to ensure the stability of the global banking system.

As a result of these factors, bank companies tend to have lower Altman Z-scores
than companies in other industries. However, it is important to note that the
Altman Z-score is just one measure of a company's financial health.
Banks are still considered to be relatively safe investments, due to their role in
the financial system and the government guarantees that are often in place.