Prediction of Financial Distress for Commercial Banks in Kuwait

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.

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