Determinants of Financial Performance and Default Prediction: An Empirical Study on Select Commercial Banks in Ethiopia

International Journal of Economics and Management Studies

© 2019 by SSRG - IJEMS Journal

Volume 6 Issue 5

Year of Publication : 2019

Authors : A.Maruthi Varaprasad, Derese Getachew , Tigist Abebe

10.14445/23939125/IJEMS-V6I5P110

How to Cite?

A.Maruthi Varaprasad, Derese Getachew , Tigist Abebe, "Determinants of Financial Performance and Default Prediction: An Empirical Study on Select Commercial Banks in Ethiopia," SSRG International Journal of Economics and Management Studies, vol. 6,  no. 5, pp. 59-64, 2019. Crossref, https://doi.org/10.14445/23939125/IJEMS-V6I5P110

Abstract:

The current trend of Ethiopian banking industry is showing progressive performance and almost all banks are reporting positive accounting profit. However, profit reported by banks is not a guarantee for survival and to fulfil their obligations. The main purpose of this research is to identify factor determine the financial performance and to predict default probability of selected commercial banks in Ethiopia. A total of 8 commercial banks including one public sector bank were selected based on their operational existence for more than 10 years. The study adopted quantitative research approach. By using panel data, bank’s financial statements for the period 2005-2016 were considered for the study. Regression analysis conducted by using E-views 9 software. The findings of the study revealed that capital adequacy, earning ability, operating cost and exchange rate has significantly affecting financial performance of commercial banks measured by return on asset and return on equity. Further, the financial health conditions of the selected commercial banks analysed using Altman Z score model (ZETA Analysis) to predict financial distress. The finding of the study shows that the financial health of the selected commercial banks proved good and improving from time to time, even though fluctuations were noticed in some banks. Based on the study result it is recommended that banks need to adapt efficient managerial skills and practices to have sustainable development and an edge over its competitors. In addition, the study recommends that costumers and investors can rely on private commercial banks as an alternative similar to government commercial banks.

Keywords:

Financial performance, Return on Assets, Return on Equity, default prediction, Altman Z-score

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