Altman Z-Score Flags PSU Banks in Distress Zone

Altman Z-Score Flags PSU Banks — But the Model Has a Blind Spot The Altman Z-Score is flashing red across India's public sector banking space. [Canara Bank](/stock/CANBK), [Bank of Baroda](/stock/BANKBARODA), [Punjab National Bank](/stock/PNB), [Union Bank of India](/stock/UNIONBANK), [Bank of India](/stock/BANKINDIA), UCO Bank, and Central Bank of India are all registering scores below 0.37 — deep inside the threshold that Edward Altman originally associated with corporate bankruptcy risk. The scores are being dragged down almost entirely by debt-to-equity ratios ranging from 10x to nearly 15x, a structural feature of how banks operate rather than a sign of financial deterioration. That distinction matters enormously before drawing any conclusions. The Altman Z-Score was built in 1968 using data from manufacturing companies. It weights retained earnings, working capital, market capitalization, and total debt in ways that make intuitive sense for a steel mill or a textile exporter. For a bank, where deposits are the primary funding source and appear as liabilities on the balance sheet, the model's debt sensitivity becomes a category error. A bank with a 14x debt-to-equity ratio isn't necessarily overleveraged — it may simply be doing its job. Treating that ratio the same way you'd treat it at a capital goods company produces scores that look alarming but carry limited diagnostic value. What the Numbers Actually Show The FairStock Score tells a different story for several of these lenders. NSE: CANBK and NSE: BANKBARODA both carry FairStock Scores above 70, which reflects a broader set of inputs including asset quality trends, return on equity, net interest margins, and capital adequacy. Bank of Baroda reported a net interest margin of approximately 3.27% in FY24, and its gross NPA ratio has declined steadily from above 9% in FY21 to around 3.5% by mid-FY25. These aren't the numbers of a distressed institution. NSE: PNB and NSE: UNIONBANK present a more mixed pi...