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THE FINANCIAL PERFORMANCE ANALYSIS USING

ALTMAN Z-SCORE AND ITS EFFECT TO STOCK PRICE
BANKING SECTOR IN INDONESIAN STOCK EXCHANGE.

Rida Prihatni SE. Ak. MSi.1

Adam Zakaria SE. Ak. MSi. 2

1,2
Accounting Lecturer at Accounting Department Faculty of Economics
State University of Jakarta, Indonesia
Mail address: Faculty of Economics, State University of Jakarta
Building R, Jalan. Rawamangun Muka, Jakarta Timur, Indonesia
Ph.: +62 21 4721227 Fax: +62 21 4706285
E-mail address:hatney_yes@yahoo.com
azdelima@yahoo.com, adam@feunj.ac.id

Abstract

The objectives of this research are to explore whether banks have financial difficulties and its
effect to companiess stock price. Data gathered from banking sector during year 2004-2008
listed in Indonesian Stock Exchange. The results show that all banks used in this sample are
categorized in financial difficulties but in fact, those banks are still running the operation
normally. Then, positive and negative Z-Score did not significantly different in stock price
from 5 days before and 5 days after publication date of financial report.

Keywords: Financial Performance, Z-Score, Stock Price.

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1. Background
Stock market and money market has played its role in order to mobilize public fund
to enhance countrys development process and distribute wealth through saving, deposit,
buy and sell transactions. In the long-run, this condition certainly supports people
welfare. To ease stated purpose, Indonesian government launched many deregulation
policies / packages for banking sector.

June 1983 package can absorbed public funds in order support business sector by
setting deposit rate and giving loans without intervered by central bank. Furthermore,
October package was also released regarding easier procedures of new bank opening.
February 1991 package then became control factor since minimum 8 % CAR was
introduced. Subsequently, Banking Act No. 7/1992 then followed by Government Rule
No. 70/1992 have determined organizational procedures and miminum capital owned.
May package 1993 focused on lower minimum CAR allowed, maximum lending limit for
related parties. In April 1997, minimum reserve for every bank was initiated. Due to non
performing loan in property sector, maximum lending limit to related parties is refocused
in July package 1997.

During deregulation progress, factors have caused improper banking practice for
example insider lending, high interest rate, limited access to banking system and loans
given to luxury sectors such as apartment, golf field, business district building etc. In
November 1997, 16 banks were banned to run their business operation/liquidation while
others were forced to merge. Afterthat, few banks were found bancrupty and bailed out by
government then deposit guarantee institution was released in order to heal the
psychological issue resulted from past experience.

In 2004, Indonesian Central Bank issued regulations No 6/9/2004 related to

minimum of 8 % CAR and maximum of 5 % NPL in order to not classify having or not
having difficulty in going concern bank. Furthermore, every bank must have risk
management committee no later than June 30th, 2007 according to Indonesian Central
Bank rule No 8/4/2006. That rule requires banks to have Risk Management Committee,
Audit Committee, and Nomination and Remuneration Committee as an independent
position established by Board of Commissioner to oversee and coordinate any task related
with Board of Director and its subordinate.

Stock Exchange Act No. 8/1995 has also enhanced companies listed di Indonesian
Stock Exhange (formerly Jakarta and Surabaya Stock Exchange), trading volume and
market capitaliziation. Composite index closed at 3,645 poins in November 1, 2010. Bank
Mandiri, BCA, BNI and BRI are the examples of big capitalization companies.

Altman model can predict financial bankruptcy with combined financial ratio to
overcome the financial analysts weakness by applying regression technique and
descriminant analysis. Altman Z-Score can be applied for benefits of testing
characteristics of companys business failure by determining variable which would be
effectively to predict financial difficulty in the future. This model can also be used for
analyzing and evaluating companys financial performance through ratios.

By using multivariate descriminant analysis, combined ratios can predict varies

business sectors as an early warning system bank which is indicated bankruptcy
eventhough this model can not predict exact time bank would suffer bancruptchy (Altman

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, 2000). Other research done resulted that investors adjusted their new solvency position
then stock price reflected (Supardi, 2003). Researh conducted to explore the effect of
fundamental information to stock price at best 100 companies listed in Jakarta Stock
Exchange in 2002 ranked by investor magazine. The result showed that net operating
marging, assets turn over and market value are positively associated to stock price.

2. Research Questions
Based on aforementioned descriptions, we develop research questions as follows:
1) How is companiess financial performance using Altman approach for banking sector
listed in Indonesian Stock Exchange?
2) Is there any difference between companies stock prices which suffer financial
difficulties and not suffer financial difficulties?

3. Technical Terms
Financial distress is a condition which company delisted because of net loss for few
years, negative equity and merge (Luciana, 2004). It also resulted from debt default
(Kahya and Theodossiou, 1999). In the long-run, companys inability to pay liabilities to
third party because of lack of resources have, it would head to bankruptcy.

Few studies have been done to explore benefit of financial ratios to predict
companies financial difficulties as an early warning system. Altman used 66 samples
consists of 33 companies in bankruptchy and another 33 companies not in bancruptchy.
By using Multivariate Discriminant Analysis, Altman discover that profitability, liquidity
and solvency ratios to assess bankruptchy in 95 % accuracy rate a year before companies
bankruptchy. This rate is varies in 72 %, 29 %, and 36 % accuracy rate for 2 years, 4
years and 5 years before bankruptcy, respetively.

Research using 3 syariah banks in Indonesia during period 2005-2007 resulted that
all banks were predicted bankrupt (Endri, 2009 Perbanas Quarterly review??). Another
research regarding bankruptcy prediction were also done (Hadad, 2004; Rahmat 2002.),
According to Indonesian Central Bank Rule No. 6/10/PBI/2004 the criterias used for
Bank Not in Financial Difficulties are capital, asset quality, earning, management,
liquidity, sensitivity to market. While Indonesian Central Bank Circular Letter No
6/23/DPNP concerning level of financial condition ratings consist of very good, good
enough, less good and not good.

Stocks issued by public company as source of funds to finance the operation and
investment purposes. Stock price can be reflected from companys financial conditions, it
is caused by factors such as fundamental of financial conditions, supply and demand,
interest rate, currency exchange, foreign investment in capital market, composite index,
news and rumors.

4. Framework of Study
Since we pursue for 2 objectives regarding the relative score to determine whether
banks are categorized in bankruptcy or not and its effect to stock prices, this research
surely summarized based on previous explanations in introduction and technical terms.

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5. Research Methodology
Samples used from 18 banks listed in Indonesian Stock Exchange, formerly Jakarta
Stock Exchange, during 2004-2008. Moreover, variables measured are financial
performance using Altman approach and stock prices. Audited financial reports as main
sources in gathering data then used for Altman Z-score financial ratios computation.
Selected Banks stock prices for those periods are 5 days before to 5 days after
publication date of financial report.
Altman financial ratios comprise:
1. Ratio Working Capital to Total Assets.
2. Ratio Retained Earnings to Total Assets.
3. Ratio Earning Before Interest and Taxes to Total Assets.
4. Ratio Book Value of Equity to Book Value of Total Debts.

Altmans formula is explained below:

Z-Score = 6.56 WC/TA + 3.26 RE/TA + 6.72 EBIT/TA + 1.05 BVE/BVD
The criteria used to predict financial difficulties are:
1. If Z-Score > 2.60 means that bank is not in financial difficulties.
2. If Z-Score <2.60 means that bank is in financial difficulties.
Formula used for relative stock price is: (Jogiyanto, 2000):
R it = P it P it-1
P it-1
Rit = Realative stock price at certain date.
Pit = Stock price at certain date.
Pit-1 = Stock price at a day before.
Furthermore, average relative stock price for before and after publication date of
financial report counted using this formula:
= Y
n
Y = relative stock price before and after publication date.
= average relative stock price before and after publication date.
n = number of days

The objective of independent t-tes is to compare 2 unconnected groups average in

order to prove whether those have significantly same / different average values.
Independent sample t-test then conducted to determine whether 2 independent samples
have a different average value. Subsequently, that test compares the different between 2
average values and error standard. This results show stock prices difference for banks
categorized in and not in financial difficulties.

6. Discussion
6.1. Descriptive Statistics.
Table 1. Altman Approach Financial Ratios

Year Description WC/TA RE/TA EBIT/TA MVE/BVD

(%) (%) (%) (%)
2004 Min. -62,30% -15,21% 0,34% 6%
Max. 22,75% 5,69% 5,7% 15%
Mean -25,67% 1,34% 2,3% 10%
2005 Min. -68,32% -13,04% -4,4% 5%
Max. 5,4% 7,3% 4,5% 15%

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Mean -27,13% 1,27% 1,02% 9%

2006 Min. -59,29% -11,16% -1,42% 5%
Max. 10,48% 6,5% 3,8% 19%
Mean -27,98% 1,67% 1,33% 11%
2007 Min. -45,82% -9,4% 0,13% 6%
Max. 11,92% 7,3% 3,8% 27%
Mean -20,15% 1,93% 1,5% 11%
2008 Min. -51,36% -5,1% -1,8% 6%
Max. 6% 7,4% 3,5% 26%
Mean -23,2% 2,6% 1,29% 11%

Descriptive statistics are explained as follows:

1. Working Capital to Total Assets Ratio
In this ratio, maximum percentages come from Kesawan Bank in 2004 by 22.75%
means having lower financial difficulties and higher liquidity compare with other
banks.
2. Retained Earnings to Total Assets
In this ratio, maximum percentage is 7.4% in 2008 scored by Bank Central Asia
means that BCA had high profitability by utilizing their assets in this sector.
3. Earnings Before Interest and Tax to Total Assets
Bank Danamon scored highest percentage in 2004 by 5.7% means that this bank
could maximize their productivity using their asset.
. 4. Book value of Equity to Book value of Total Debt Ratio
Mayapada Bank scored highest percentage in 2007 by 27% means that this bank
could guarantee payment of their liabilities from their equities.

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6.2. Z-Score Result

Discriminant analysis of Altman Z-score is summarized at table below:
Table 2. Z-Score
No Bank Z-Score / Year
Code
2004 2005 2006 2007 2008
1 INPC -3,02 -1,41 -1,97 -2,03 -2,31
2 BBCA -2,7 -2,5 -1,82 -1,51 -1,63
3 BNGA 0,59 -0,25 0,85 0,77 0,65
4 BDMN 0,38 1,05 -0,09 -0,05 0,31
5 BEKS -3,23 -3,79 -3,9 -2,91 -3,02
6 BABP -1,52 -1,2 -2,79 -1,55 -2,12
7 BNII -2,73 -2,92 -2,21 -2,28 -2,34
8 BKSW 1,55 -1,99 -3,2 -2,57 -0,17
9 MAYA -3,79 0,07 -1,09 0,82 0,28
10 MEGA -3,42 -4,33 -2,94 -2,41 -3,03
11 BBNI 0,6 -0,55 -1,57 -1,85 -2,33
12 BBNP -0,29 -1,15 -0,84 -0,53 -0,76
13 NISP -0,79 -0,82 -1 -1,15 -1
14 BNLI -2,93 -3,06 -2,92 0,35 -0,01
15 BSWD 0,5 0,38 1,09 0,51 0,92
16 BVIC -0,29 -3,8 -1,38 1,03 -1,69
17 BMRI -2,63 -2,66 -2,44 -2,3 -2,42
18 BBRI -1,06 -1,08 -1,1 -1,1 -1,6

According to table 2, all banks scored less than 2.60 means that have financial
difficulties but we can divide into negative and positive scores. In 5 years of
observation, 10 banks always scored negative: Artha Graha International Bank, BCA
Bank, Eksekutif International Bank, Bumiputera Bank, BII, Mega Bank, Nusantara
Parahiyangan Bank, NISP Bank, BRI, Mandiri Bank while 8 others score fluctuate.
Afterall, this prediction might reflect differently with Indonesian Central Bank policies
for liquidation purpose. Because the government uses the liquidation of bank, rather
than using financial ratio Altman Z-Score model, but using the CAMEL model of
Financial ratios, that already specified by Indonesian Central Bank. The result are
consisten and accordance with research done by Supardi and Mastuti (2003)
Concerning the validity of the uses of Altman Z-Score to asses distress in Banking go
public firms in Indonesian stock exchange. In fact all banks discussed are still running
the operation normally.

6.3. Independent Sample T-Test Result

In this test, positive and negative Z-Score used as independent variable and stock
price as dependent variable.

Table 3. Test of Different Group

Z-Score Criteria N Mean Std. Deviation Std. Error Mean
Negative Stock Price 71 .00081762 .011817426 .001402470
Positive Stock Price 19 .00066368 .011970473 .002746215

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Tabel 4. Independent Sample Test

Levenes Test t-test
F Sig T Sig (2-tailed)
Stock Price Equal Variances Assumed .029 .866 .484 .630
Equal Variances Not Assumed .480 .635

Based on tabel 3 dan tabel 4, F levenes test is 0.029 with probability 0.866. Since
the probality is more than 0.05 so we can conclude that population variance is same.
Thus, in analyzing test of difference t-test must use equal variances assumed. T- Value
at equal variances assumed is 0.484 with probability of significant is 0.630 (2-tailed).
Overall, we conclusion can be drawn is there no significant difference in stock price
between 2 groups with positive and negative Z-Score. Allegedly because the investors
in detecting the share price of bank services industry does not use fundamental analysis
as the analysis, For note that the investors can still use technical abalysis as a tool of
analysis which is reinforced by the result of research from ngaisah & Indriantoro
(2000).

7. Conclusions
From this research, conclusions can be drawn are:
1) Using Altman approach for year 2004-2008, all banks categorized in having financial
difficulties since no one scores more than 2.60.
2) There is no significant difference in stock prices between banks which have positive
and negative Z-score.

8. Suggestions
1) Investors should not only rely on common financial ratios as fundamental factor but
also other factors like news, politics, economics etc.
2) In 2010, there are more than 30 banks listed in financial sector. Further research
might consider to extent observation years and sample used. Comparison among
banks in ASEAN countries can also reflect financial strength. Policies applied in
each central bank may be tested and compared for the purpose of benchmarking.

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9. References
Altman E. I, (2000), Financial Distress of Companies: Revisiting Z-Score and Zeta Models. Updated
from E. Altman, Financial Ratios, Discriminant Analysis, and Corporate Bankruptcy,
Journal of Banking and Finance, 1.

Endri, (2009), Perbanas Quarterly Review, Vol. 2, No 1, Maret.

Jogiyanto, (2000), Teori Portofolio dan Analisis Investasi. Yogyakarta : BPFE

Hadad, M. D., W. Santoso Sarwendi, (2004), Model Kepailitan Bank Umum Di Indonesia, Direktorat
Penelitian dan Pengaturan Perbankan Bank Indonesia.

Kahya E. dan P. Theodossiou, (1999), Predicting Corporate Financial Distress: A Time-Series

CUSUM Methodology, Review of Quantitative Finance and Accounting, 13, 4,
ABI/INFORM Global p. 323.

Luciana S. A, (2004), Analisis Faktor-Faktor Yang Mempengaruhi Kondisi Financial Distress Suatu
Perusahaan Yang Terdaftar di Bursa Efek Jakarta, Jurnal Riset Akuntansi Indonesia (JRAI),
Vol 7. No. 1.

Rahmat T., (2002), Penerapan Z-Score Untuk Memprediksi Kesulitan Keuangan dan Kebangkrutan
Perbankan Indonesia (Studi Kasus Kebijakan Bank Indonesia Tanggal 13 Maret 1999
Terhadap 18 Bank Publik), Jakarta.

Supardi dan Sri Mastuti, (2003). Validitas Penggunaan Z-Score Altman untuk Menilai Kebangkrutan
pada Perusahaan Perbankan Go Public di Bursa Efek Jakarta, KOMPAK No. 7 Januari-
April, Hal 68- 93.

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