Relationship Between Banking Performance and Financial Distress: A Study on Banks of Bangladesh

Abstract

Banking is said to be one of the most successful industries in the economy of Bangladesh. The aim of this study is to check the existence of a relationship between the financial strength (or distress), measured through Altman Z-score, and banking performance, measured using Return of Equity (ROE), of the banks of Bangladesh listed in the Dhaka Stock Exchange (DSE). The paper thoroughly analyzes and describes the data associated with these two variables, and a linear regression has been conducted between these two variables to ascertain the level and direction of their relationship. The trends of Z-score over the five years from 2015 to 2019 (inclusive) have been tested. The analysis discloses that the z-score is a statistically significant predictor of the ROE in the banking industry. Although, the industry shows a low level of Z-score indicating a high level of financial distress among the banks studied, this study implies that an increase in Z-score will result in an increase of ROE.