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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 799

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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 2004 Description Min. Max. Mean Min. Max. WC/TA (%) -62,30% 22,75% -25,67% -68,32% 5,4% RE/TA (%) -15,21% 5,69% 1,34% -13,04% 7,3% EBIT/TA (%) 0,34% 5,7% 2,3% -4,4% 4,5% MVE/BVD (%) 6% 15% 10% 5% 15%

2005

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2006

2007

2008

Mean Min. Max. Mean Min. Max. Mean Min. Max. Mean

-27,13% -59,29% 10,48% -27,98% -45,82% 11,92% -20,15% -51,36% 6% -23,2%

1,27% -11,16% 6,5% 1,67% -9,4% 7,3% 1,93% -5,1% 7,4% 2,6%

1,02% -1,42% 3,8% 1,33% 0,13% 3,8% 1,5% -1,8% 3,5% 1,29%

9% 5% 19% 11% 6% 27% 11% 6% 26% 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 Code INPC BBCA BNGA BDMN BEKS BABP BNII BKSW MAYA MEGA BBNI BBNP NISP BNLI BSWD BVIC BMRI BBRI 2004 -3,02 -2,7 0,59 0,38 -3,23 -1,52 -2,73 1,55 -3,79 -3,42 0,6 -0,29 -0,79 -2,93 0,5 -0,29 -2,63 -1,06 2005 -1,41 -2,5 -0,25 1,05 -3,79 -1,2 -2,92 -1,99 0,07 -4,33 -0,55 -1,15 -0,82 -3,06 0,38 -3,8 -2,66 -1,08 Z-Score / Year 2006 -1,97 -1,82 0,85 -0,09 -3,9 -2,79 -2,21 -3,2 -1,09 -2,94 -1,57 -0,84 -1 -2,92 1,09 -1,38 -2,44 -1,1 2007 -2,03 -1,51 0,77 -0,05 -2,91 -1,55 -2,28 -2,57 0,82 -2,41 -1,85 -0,53 -1,15 0,35 0,51 1,03 -2,3 -1,1 2008 -2,31 -1,63 0,65 0,31 -3,02 -2,12 -2,34 -0,17 0,28 -3,03 -2,33 -0,76 -1 -0,01 0,92 -1,69 -2,42 -1,6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

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

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Tabel 4. Independent Sample Test

Levenes Test F Sig .029 .866 T .484 .480 t-test Sig (2-tailed) .630 .635

Stock Price

Equal Variances Assumed Equal Variances Not Assumed

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 JanuariApril, Hal 68- 93.

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