Evaluating the Financial Soundness of Banks : An Application of Bankometer on Pakistani Listed Banks

Financial system of a country is an important system in its economy. The sustainability and growth of banking sector is critical for development of the financial sector as well as economic growth. Economic development of a country is reflected through the soundness of its banking system. Therefore in order to sustain and grow, banks have to be financially sound. Many researchers in Pakistan and in other countries have conducted studies on evaluating the financial soundness of banking sector by using different tools and methods. Bankometer is used in this study to evaluate the financial soundness of banks. It is a new and efficient model and computationally less expensive than other models like CAMELs and CLSA-stress test. To confirm its accuracy, it has been applied on each banks listed on Pakistan Stock Exchange over the period 2006-2014. Soundness of each bank has been computed separately which demonstrate which bank is super stable and which is close to insolvency. For comparison purpose, Z-score model is also used for banks listed on Pakistan Stock Exchange. These two models reported the same results, but however some are slightly different. As per the results of both models Bank of Punjab's financial soundness is in grey area and need to be enhanced to reach in the protected zone with a score of soundness (70)