Introduction
Financial stability is defined as the stability which is not effected by the shocks of the economics and the institute remains to functional in a way it does. The institution is very much sufficient of doing its basic functions that may include risk management and intermediation of funds. The term financial stability was first defined at the end of 90s and its importance was not identified any time before 2007 when the financial stability techniques were used to tackle the economic crisis. (financial-stability, n.d.)
The financial stability is an instrument used by a country to know its financial health or the financial health of a sector. These sectors help one to understand a country’ public opinion as well. The financial stability in case of banking is called as Banking stability. Therefore banking stability can be simply defined as the state of a bank in which it doesn’t get effected by the external factors. (financial-stability, n.d.)
The bank which has attained the financial stability is the one people are interested to invest in. It is important to know that the stability is just a temporary phase. There are several factors on which the banking stability depend. These factors are called indicators. The banking sectors at level one looks like just another sector, but when we dig deeper one will notice that the banking sector is vulnerable and unique industry. (financial-stability, n.d.)
The indicators are basically of two types i.e. Governance indicators and bank specific indicators. The bank specific indicators can be defined as the factors which are internal factors of the bank. They include:
There are several other factors but in this paper we will only focus on first three factors. In this paper we have selected the first three factors as these factors have negative or low correlation between each other. (Goetz, 2016)
The Governance indicators are the ones which are external factors which effect the stability of the bank, they are controlled by the government. They include the following factors:
There are various other factors as well, but we noticed that there haven’t been more consideration on the last three factors. Hence we have performed our research and draw conclusion based on the these three factors.
It is important to determine the stability of a bank in order to know about investment opportunities in that bank and to know if that bank is performing well. It is significant as it mirrors a sound money related framework, which thusly is significant as it fortifies trust in the framework and forestalls wonders, for example, a sudden spike in demand for banks, which can destabilize an economy.
The two major objectives of this study are as follows:
We have selected the GCC country for our research, we will only consider the values of the factors based on the data obtained about these countries. We will draw results and provide conclusions only on the basis of these countries. (Goetz, 2016)
Literature review
An article by the faculty of Universitatea Alexandru Ioan Cuza and a faculty from Bucharest Academy of Economic Studies in their research paper have discussed various factors by which the stability of CreditCoop is determined. The research has focused on analyzing the stability of a bank based on their various subsidiaries in different regions. (Kawamoto*)
The major focus was on determining the determinants which are most important for the subsidiary's stability, then they have determined which subsidiary is most stable/unstable and profitable/unprofitable regions. (Kawamoto*)
A student of oxford university in an article has discussed about the material hypothetical system for examining the transmission component of fiscal approach and furthermore the suitable institutional structure for the Central Bank to send its large scale monetary strategies. There is no such accord on the suitable hypothetical system for the investigation of money related strength. (Goodhart, 2007)
In reality some would guarantee that there is no appropriate hypothetical system for this capacity in being by any stretch of the imagination. In absence of appropriate system the researchers have used approaches which have been used in the past. (Goodhart, 2007)
An article from Goethe University, shows the relation between competition in the market and the stability of the banks. The article focuses on how various factors lowers the barriers of entry of various banks in the market, this in turn increases the number of banks in the market. Due to increase in the number of banks in a open market, there is an increase in competition. Which leads to increase in stability of the banks. (Goetz, 2016)
The researchers also found that increase in competition also leads to reduction of the non-performing loans which leads to increases the profitability of bank. Due to increase in the revenue of the banks their stability also increases. (Goetz, 2016)
The authors in Annual Workshop of the Asian Research Network submitted a paper on the relation between the risk taking of banks and the financial stability of the banks. The authors targeted the banks based in Japan providing low interest loans to the small and medium sized enterprises of the Japan. The researchers found that the banks which were offering loans at the low rate of interest had low financial stability in comparison to the banks which had high rate of interest. (Kawamoto*)
An article by Michael adusei from the university of science and technology in his paper has discussed about the relation between the size of the bank, risk in funding and the stability of the bank. The author found that the risk of finances positively affect the stability of the bank, The size of the bank and its stability also has positive relationship. (Kawamoto*)
There are various significant repercussions for the present discussion on whether to oblige bank size to protect the budgetary framework from future emergency. The positive connection between financing danger and bank dependability likewise has significant ramifications for the present discussion on subsidizing of retail banks. (journals, n.d.)
A scientist from the university of Waikato in his research has discussed about the use of Z-factor in determining the stability of a few companies. Researchers of considered 20 companies which were shut due to economic loss. The researchers understood that using Z factor one can determine the stability of a company and revive it in time. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
A similar research was conducted by the scientist of Kuwait. The researcher observed various companies listed in the Kuwait stock exchange and noted that the companies can predict their bankruptcy far before when they are actually bankrupt by using the concepts of bankruptcy. Hence this way they the Z-score can be used. (journals, n.d.)
The investigation powers on utilizing multivariate model of examination for the instance of twelve huge accounts which were alluded to National Company Law Tribunal for indebtedness procedures. Corporate disappointments influence all partners. It's likewise a reality that organizations are rarely protected from insolvency.
Data and methodology
The bank stability has been determined by focusing on the six factors which have been mentioned earlier. The data is collected only for the banks which belong to the GCC countries. There are several banks of which the data has been collected. The data is collected both bank wise and year wise. (Kawamoto*)
The data will be used to determine the Z-score of each and every entity. As mentioned earlier the Z-score has been proven efficient in determining the financial stability of a company or an organization. Hence we have based on several other researches have decided Z-score to consider as the methodology to determine the stability. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
The Z-score was first used by the Edward Altman in his research hence it is commonly known as the Altman’s Z-score. The Altman’s Z-score can be defined as the credit-strength of the a company which has been listed publicly. The test mostly focuses on the chances of a company getting bankrupt in near future. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
The Z-score can be defined as the times the standard deviation an entity is deviated to the mean of the data. For instance a Z-score of one can be defined as the entity is one times standard deviation deviated to the mean of the data. Similarly, a Z-score of two can be defined as the entity is two times standard deviation deviated to the mean of the data.
Z scores are often useful when we plan to compare various data points from different sets of data. It is often used by various investors and researchers understand a company’s potential to succeed in the current market trend. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
The Altman’s Z-score focuses on finding various business ratios and then summing them according to their weights. The values of the final Z-score can be determined by the following formulae:
Z-Score = 1.4B+0.6D +1.2A+3.3C+1.0E
Where
In order to calculate A, We will have to calculate the total working capital of the company and then divide it with the total assets of that company. This way A is determined.
In order to calculate B, We will have to the total earning of the company and then divide the calculated value with the company’s total assets. This way one can determine B.
In order to calculate C, we will have to determine the total earning of the company before deduction of the interests paid for the loan and tax then divide the calculated values with the total assets of the company.
In order to calculate D, we will have to actual value of the company’s equity according to the value offered for the same in the market and then divide the value to the total liabilities of the company.
In order to calculate E, we will have to calculate the total sales of the company and then divide it to the total assets of that company.
Understanding the values
The Z-score can be divided in to three categories:
Speculators can utilize Altman Z-scores to decide if they should purchase or sell a stock on the off chance that they're worried about the organization's hidden money related quality. Financial specialists may consider buying a stock if its Altman Z-Score esteem is more like 3 and selling or shorting a stock if the worth is nearer to 1.8. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
Result and analysis
The data has been analyzed and sorted in two types. Firstly, we will analyze the data of three banks in one particular year. Then we will analyze several years for one particular banks.
Let us first consider the First Abu Dhabi Bank
Table 1 First Abu Dhabi Bank
Bank Name |
Year |
Z-score |
Liquid assets / Deposits & short-term funding |
Loan loss provisions |
net income |
control of corruption |
rule of law |
voice and accountability |
First Abu Dhabi Bank |
2019 |
10.97 |
50.535 |
380557.65 |
3428896.62 |
|||
First Abu Dhabi Bank |
2018 |
11.45 |
53.339 |
491068.47 |
3285606.22 |
1.15 |
0.81 |
-1.11 |
First Abu Dhabi Bank |
2017 |
12.44 |
51.86 |
562156.56 |
2496189.21 |
1.13 |
0.8 |
-1.1 |
First Abu Dhabi Bank |
2016 |
9.2 |
54.658 |
306918.98 |
1442080.85 |
1.17 |
0.85 |
-1.05 |
First Abu Dhabi Bank |
2015 |
8.91 |
49.543 |
237972.22 |
1424592.76 |
1.07 |
0.64 |
-1.11 |
First Abu Dhabi Bank |
2014 |
8.65 |
48.291 |
227428.45 |
1519092.98 |
1.2 |
0.65 |
-1.06 |
First Abu Dhabi Bank |
2013 |
9.06 |
44.624 |
316194.95 |
1288801.89 |
1.28 |
0.62 |
-1.02 |
First Abu Dhabi Bank |
2012 |
8.82 |
48.018 |
325149.62 |
1179640.01 |
1.16 |
0.54 |
-1 |
First Abu Dhabi Bank |
2011 |
11.96 |
36.446 |
359441.52 |
3949266.93 |
1.08 |
0.5 |
-0.9 |
We have calculated the z-score and six factors of the considerations which we have decided earlier. Let us discuss each factors one by one:
Table 2 Emirates NBD Bank PJSC
Bank Name |
Year |
Z-score |
Liquid assets / Deposits & short-term funding |
Loan loss provisions |
net income |
control of corruption |
rule of law |
voice and accountability |
Emirates NBD Bank PJSC |
2019 |
41.46973678 |
24.123 |
1306722.925 |
2734247.21 |
|||
Emirates NBD Bank PJSC |
2018 |
44.7221709 |
26.613 |
472399.4497 |
2272510.796 |
1.15 |
0.81 |
-1.11 |
Emirates NBD Bank PJSC |
2017 |
43.77922093 |
30.895 |
593952.3413 |
1971181.188 |
1.13 |
0.8 |
-1.1 |
Emirates NBD Bank PJSC |
2016 |
42.0891201 |
29.625 |
677038.5214 |
1939759.813 |
1.17 |
0.85 |
-1.05 |
Emirates NBD Bank PJSC |
2015 |
42.50316284 |
26.697 |
905518.0285 |
1399327.417 |
1.07 |
0.64 |
-1.11 |
Emirates NBD Bank PJSC |
2014 |
42.60265663 |
24.365 |
1287821.359 |
886689.1655 |
1.2 |
0.65 |
-1.06 |
Emirates NBD Bank PJSC |
2013 |
40.01566205 |
21.676 |
1223404.75 |
695444.2393 |
1.28 |
0.62 |
-1.02 |
Emirates NBD Bank PJSC |
2012 |
41.41127832 |
20.689 |
1058221.635 |
1304965.811 |
1.16 |
0.54 |
-1 |
Emirates NBD Bank PJSC |
2011 |
43.26002782 |
20.212 |
1293732.047 |
1317863.565 |
1.08 |
0.5 |
-0.9 |
Results:
Table 3 Abu Dhabi Commercial Bank
Bank Name |
Years |
Z-Score |
Liquid assets / Deposits & short-term funding |
Loan loss provisions |
net income |
control of corruption |
rule of law |
voice and accountability |
Abu Dhabi Commercial Bank |
2019 |
56.86079587 |
38.464 |
630319.3933 |
1164767.311 |
|||
Abu Dhabi Commercial Bank |
2018 |
50.73505261 |
41.394 |
350091.4866 |
1131944.983 |
1.15 |
0.81 |
-1.11 |
Abu Dhabi Commercial Bank |
2017 |
54.16708208 |
39.003 |
454829.9468 |
1341611.692 |
1.13 |
0.8 |
-1.1 |
Abu Dhabi Commercial Bank |
2016 |
51.38194023 |
36.791 |
422686.4482 |
1144011.967 |
1.17 |
0.85 |
-1.05 |
Abu Dhabi Commercial Bank |
2015 |
54.4382407 |
35.626 |
136223.2795 |
985607.6123 |
1.07 |
0.64 |
-1.11 |
Abu Dhabi Commercial Bank |
2014 |
55.02817677 |
29.023 |
220884.6808 |
765237.5673 |
1.2 |
0.65 |
-1.06 |
Abu Dhabi Commercial Bank |
2013 |
56.53662604 |
26.634 |
371996.1834 |
581658.8085 |
1.28 |
0.62 |
-1.02 |
Abu Dhabi Commercial Bank |
2012 |
56.87822374 |
29.968 |
460478.6874 |
562346.6235 |
1.16 |
0.54 |
-1 |
Abu Dhabi Commercial Bank |
2011 |
50.52359203 |
29.428 |
567014.2886 |
568966.6371 |
1.08 |
0.5 |
-0.9 |
Results:
Table 4 Financial analysis of 2017
Bank Name |
Years |
Z-Score |
Liquid assets / Deposits & short-term funding |
Loan loss provisions |
net income |
control of corruption |
rule of law |
voice and accountability |
First Abu Dhabi Bank |
2017 |
12.44939646 |
51.86 |
562156.5623 |
2496189.214 |
1.13 |
0.8 |
-1.1 |
Emirates NBD Bank PJSC |
2017 |
43.77922093 |
30.895 |
593952.3413 |
1971181.188 |
1.13 |
0.8 |
-1.1 |
Abu Dhabi Commercial Bank |
2017 |
54.16708208 |
39.003 |
454829.9468 |
1341611.692 |
1.13 |
0.8 |
-1.1 |
Mashreqbank PSC |
2017 |
16.73467851 |
35.77 |
395208.164 |
676996.5881 |
1.13 |
0.8 |
-1.1 |
HSBC Bank Middle East Limited |
2017 |
20.19403694 |
58.914 |
141228 |
852243 |
1.13 |
0.8 |
-1.1 |
Commercial Bank of Dubai P.S.C. |
2017 |
15.22042864 |
26.948 |
187071.4749 |
233860.3103 |
1.13 |
0.8 |
-1.1 |
National Bank of Ras Al-Khaimah (P.S.C.) (The)-RAKBANK |
2017 |
14.75969894 |
31.733 |
422862.6225 |
1.13 |
0.8 |
-1.1 |
|
National Bank of Fujairah PJSC |
2017 |
26.97315219 |
31.122 |
120263.5792 |
72118.17475 |
1.13 |
0.8 |
-1.1 |
Bank of Sharjah |
2017 |
19.09824766 |
34.295 |
57397.6848 |
56188.69911 |
1.13 |
0.8 |
-1.1 |
Commercial Bank International P.S.C. |
2017 |
3.89051096 |
14.93 |
-24827.22911 |
89455.41076 |
1.13 |
0.8 |
-1.1 |
National Bank of Umm Al-Qaiwain PSC |
2017 |
20.5364352 |
35.045 |
5721.170795 |
33232.94718 |
1.13 |
0.8 |
-1.1 |
Dubai Financial Market |
2017 |
250.2658019 |
7749.21706 |
1.13 |
0.8 |
-1.1 |
Z-score: most of the banks have a good Z-score which is far greater than 3 so they are financially stable. The bank Commercial Bank International P.S.C. has Z-score very close to zero hence it can get bankrupt if not taken proper care.
Liquid resources/Deposits and transient financing: The proportion of fluid advantages for the stores and momentary subsidizing is above 30. This implies the banks have its benefits in excess of multiple times the stores and financing, which implies the bank is genuinely steady.
Loan loss provision: The bank has a high proportion of advance hardship course of action that suggests the bank won't be bankrupt as a result of bank frauds. The banks HSBC Bank Middle East Limited, Commercial Bank of Dubai P.S.C. , National Bank of Fujairah PJSC and Commercial Bank International P.S.C. Have relatively lower loan loss provision hence much likely to not tackle when hit by a bank fraud.
Net income: The banks Mashreqbank PSC, HSBC Bank Middle East Limited, Commercial Bank of Dubai P.S.C., National Bank of Fujairah PJSC, Bank of Sharjah, Commercial Bank International P.S.C., National Bank of Umm Al-Qaiwain PSC, Dubai Financial MarketThe bank has low income hence they are have high risk of having loss. Rest banks has tolerably significant compensation which indisputably shows that the bank has the high consistent quality.
Control of contamination : The most of the bank is higher than 1. Which shows the incredible control over the degradation.
Rule of law: All the banks have rule of law more than 0.5 in this manner the standard of law are extremely demanding.
All banks have Voice and obligation regards are in negative consequently having useful result. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
Table 5 Financial analysis of 2018
First Abu Dhabi Bank |
2018 |
11.45957428 |
53.339 |
491068.476 |
3285606.223 |
1.15 |
0.81 |
-1.11 |
Emirates NBD Bank PJSC |
2018 |
44.7221709 |
26.613 |
472399.4497 |
2272510.796 |
1.15 |
0.81 |
-1.11 |
Abu Dhabi Commercial Bank |
2018 |
50.73505261 |
41.394 |
350091.4866 |
1131944.983 |
1.15 |
0.81 |
-1.11 |
Mashreqbank PSC |
2018 |
14.71003966 |
39.871 |
332543.4949 |
662939.4065 |
1.15 |
0.81 |
-1.11 |
HSBC Bank Middle East Limited |
2018 |
21.176498 |
53.164 |
143268 |
838413 |
1.15 |
0.81 |
-1.11 |
Commercial Bank of Dubai P.S.C. |
2018 |
14.88405587 |
23.137 |
185865.4845 |
275081.0041 |
1.15 |
0.81 |
-1.11 |
National Bank of Ras Al-Khaimah (P.S.C.) (The)-RAKBANK |
2018 |
14.7978704 |
23.579 |
382203.1267 |
381973.8551 |
1.15 |
0.81 |
-1.11 |
National Bank of Fujairah PJSC |
2018 |
25.31625453 |
28.496 |
115264.5323 |
35317.08602 |
1.15 |
0.81 |
-1.11 |
Bank of Sharjah |
2018 |
19.8229497 |
28.112 |
68559.5635 |
119636.2137 |
1.15 |
0.81 |
-1.11 |
Commercial Bank International P.S.C. |
2018 |
3.515470259 |
25.652 |
-28866.16711 |
100225.7306 |
1.15 |
0.81 |
-1.11 |
National Bank of Umm Al-Qaiwain PSC |
2018 |
22.04399328 |
45.834 |
28027.50136 |
88417.69804 |
1.15 |
0.81 |
-1.11 |
Abu Dhabi Islamic Bank - Public Joint Stock Co. |
2018 |
138.7487639 |
25.281 |
168848.7386 |
148543.2249 |
1.15 |
0.81 |
-1.11 |
Emirates Islamic Bank PJSC |
2018 |
38.69311643 |
44.632 |
105137.0988 |
28793.73689 |
1.15 |
0.81 |
-1.11 |
Sharjah Islamic Bank |
2018 |
44.7956166 |
36.544 |
12518.44777 |
29148.26377 |
1.15 |
0.81 |
-1.11 |
Ajman Bank |
2018 |
73.6147949 |
26.257 |
31714.09083 |
19222.32788 |
1.15 |
0.81 |
-1.11 |
Z-score: the majority of the banks have a decent Z-score which is far more prominent than 3 so they are monetarily steady. The bank Commercial Bank International P.S.C. has Z-score extremely near zero henceforth it can get bankrupt if not taken appropriate consideration.
Fluid assets/Deposits and transient financing: The extent of liquid favorable circumstances for the stores and transitory sponsoring is over 30. This infers the banks have its advantages in abundance of various occasions the stores and financing, which suggests the bank is really consistent.
Credit misfortune arrangement: The bank has a high extent of advance hardship game-plan that recommends the bank won't be bankrupt because of bank fakes. The banks HSBC Bank Middle East Limited, Commercial Bank of Dubai P.S.C. , National Bank of Fujairah PJSC and Commercial Bank International P.S.C. Have generally lower advance misfortune arrangement thus much prone to not handle when hit by a bank extortion.
Overall gain: The banks Mashreqbank PSC, HSBC Bank Middle East Limited, Commercial Bank of Dubai P.S.C., National Bank of Fujairah PJSC, Bank of Sharjah, Commercial Bank International P.S.C., National Bank of Umm Al-Qaiwain PSC, Dubai Financial MarketThe bank has low pay henceforth they are have high danger of having misfortune. Rest banks has passably critical pay which undeniably shows that the bank has the high predictable quality.
Control of tainting : the vast majority of the bank is higher than 1. Which shows the mind boggling command over the debasement.
Rule of law: All the banks have rule of law more than 0.5 right now standard of law are amazingly requesting.
All banks have Voice and commitment respects are in negative subsequently having helpful outcome. (Edward_Altman_Z_Score_for_Financial_Analysis, n.d.)
Summary and conclusion
Financial stability is characterized as the dependability which isn't affected by the stuns of the financial matters and the foundation stays to useful in a manner it does. The organization is particularly adequate of doing its essential capacities that may incorporate hazard the executives and intermediation of assets. The term budgetary steadiness was first characterized toward the finish of 90s and its significance was not recognized whenever before 2007 when the monetary soundness systems were utilized to handle the financial emergency. (financial-stability, n.d.)
The table 1, table 2 and table 3 discusses about the financial condition of the three banks, we have discussed about the effects of various factors on the stability of the bank. We see that most of the years the bank has good Z-score. The banks also have good values of all other factors. (Goetz, 2016)
The table 4 and table 5, discusses about the financial conditions of various banks year wise. Apart from The banks Mashreqbank PSC, HSBC Bank Middle East Limited, Commercial Bank of Dubai P.S.C., National Bank of Fujairah PJSC, Bank of Sharjah, Commercial Bank International P.S.C., National Bank of Umm Al-Qaiwain PSC, Dubai Financial Market which were mentioned in the results we come to know the most of the other banks are doing financially well. (Kawamoto*)
altman. (n.d.). Retrieved from investopedia: https://www.investopedia.com/terms/a/altman.asp
defining-financial-stability. (n.d.). Retrieved from mnb: https://www.mnb.hu/en/financial-stability/defining-financial-stability
Edward_Altman_Z_Score_for_Financial_Analysis. (n.d.). Retrieved from academia: http://www.academia.edu/Documents/in/Edward_Altman_Z_Score_for_Financial_Analysis
financial-stability. (n.d.). Retrieved from worldbank: https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/financial-stability
Goetz, M. (2016). Competition and bank stability. CFS Working Paper Series, No. 559, Goethe University, Center for Financial Studies (CFS), Frankfurt a. M., .
Goodhart, C. &. (2007). Analysis of Financial Stability. Financial Markets Group, FMG Special Papers.
journals. (n.d.). Retrieved from worldwidejournals: https://www.worldwidejournals.com/indian-journal-of-applied-research-(IJAR)/article/prediction-of-financial-distress-using-altman-z-score-a-study-of-select-fmcg-companies/NzM3Nw==/?is=1
Kawamoto*, T. (n.d.). Bank Risk Taking and Financial Stability: Evidence from Japan's Loan Market. Annual Workshop of the Asian Research Network .
Samkin, Grant & Low, Mary & Adams, Tracy. (2012). The Use of Z-Scores to Predict Finance Company Collapses: A Research Note. New Zealand Journal of Applied Business Research. 10. 69-82.
AlAli, Musaed. (2018). The Application of Altman's Z-Score Model in Determining the Financial Soundness of Healthcare Companies Listed in Kuwait Stock Exchange. 3
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