Vol 13 (2016) - Issue 1

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Altman Z-Score Bankruptcy Analysis in the Greek Banking Sector

Introduction
Altman’s Z-Score is one of the best known, statistically derived predictive models used to forecast a firm’s impending bankruptcy. Altman’s model utilises multiple discriminant analysis (MDA). MDA is used to classify an observation into one of two or more groups that have been established by the analyst prior to the observation, e.g. bankrupt or non-bankrupt.
The Greek Comprehensive Assessment 2015, which was conducted by the ECB and published on 31 October 2015 is of a great interest not only for Greece’s four systemic banks on the behalf of whose data the research published its findings, but also for the Greek banking sector in general, in terms of the preservation of its financial stability. Resulting from the European Stability Mechanism, the Hellenic Republic and the Bank of Greece agreement on 19 August 2015, the ECB assessment is based on a given set of macroeconomic scenarios, and focuses on the overall review of each one of the testing banks’ status evaluation and their capital needs. Particularly, the recapitalisation needs that will secure the liquidity and viability of four Greek core banks are fully addressed under this exercise.
The analysis, which was based on end-June 2015 macroeconomic data, estimated the asset quality review (AQR), as well as the stress test, which contributed to the evaluation of each bank’s solvency, with baseline and adverse scenarios. The total group assets of Greece’s four systemic banks, aggregate EUR 296 billion, comprise 90% of the total assets of the Greek banking sector.
The aim of this paper is to assess the outcome of the Greek Comprehensive Assessment 2015 on the basis of the results of the Altman Z-Score model for likelihood of bankruptcy of the four main systemic banks of the Greek banking system.

A brief account of the Altman model
A method to estimate the solvency and liquidity of the Greek banking sector is undertaken by using the Altman Z-Score model. The Altman Z-Score consists of a quantitative method based on balance sheet data that can predict the probability of bankruptcy one year prior to the event with approximately 90% accuracy. The term bankruptcy is used to describe the financial condition at which the total liabilities exceed the fair value of assets.
It was published in 1968 by Edward Altman, and it combines five weighted business ratios, which were chosen after Altman researched the data of 66 manufacturing firms (half of which were healthy whereas the other half consisted of firms which had filed for bankruptcy) and selected the ones that could detect with greater accuracy the healthy firms from the bankrupt ones. It has also been restructured to fit in different types of companies, such as public companies, private companies and non-manufacturing firms.