Prediction of Financial Distress for Commercial Banks in Kuwait

Mohammad Ahmad Al-Saleh and Ahmad Mohammad Al-Kandari

The main objective of this article was to find the most accurate model for financial distress prediction. As it is known, predicting bank financial distress reduces the incurred loss and helps avoiding misallocation of Bank's financial resources. A total of six Kuwaiti commercial banks were financially analyzed using data compiled for nine consecutive years from 2001 to 2009. Data has been collected from the annual financial report represented in the balance sheet and income statement for Kuwaiti Commercial Banks. Logistic regression, which can be used as a part of an “early warning” system with respect to the financial distress of the commercial banks, was then undertaken to form a prediction model for time periods in which the banks were going into financial distress. Results have shown that during the operation of the banks; 41.7% of time periods the banks were expected to go into financial distress, whereas 83.8% of time periods the banks were expected to be in a good financial situation. Out of the eleven ratios that have been included in the study, only three ratios are statistically significant in predicting financial distress of the banks. The 1st ratio is (Investment in Securities to Total Assets), the 2nd ratio is (Loans to Total Assets) and the 3rd ratio is (Loans to Deposits). These ratios are considered to be the best predictors of financial distress for the banks under this study.