Valuing Banks: A New Corporate Finance Approach by Federico Beltrame, Daniele Previtali

By Federico Beltrame, Daniele Previtali

This e-book goals to beat the constraints the diversities in bank-specifics impose by way of offering a bank-specific valuation theoretical framework and a brand new asset-side version. The publication comprises additionally a optimistic comparability of fairness and asset facet tools. The authors current a singular framework entitled, the “Asset Mark-down Model”. this system contains an Adjusted current price version, which permits practitioners to spot the most worth production resources of a selected financial institution: from asset-based money circulate and the mark-down on deposits, to tax merits on bearing liabilities. throughout the implementation of this framework, the authors provide a extra exact and extra particular method of valuing banks.

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06 2011 2010 2013 2012 Debt Total Asset Ratio Equity Total Asset Ratio Fig. 3 Commercial banks’ financial structure. The sample is composed of 141 European listed banks. The reported values are the means of the respective balance sheets data. Source: Authors’ elaboration. 2 Valuation in Banking: Issues and Models 13 According to the literature, the most important issue in bank valuation is really represented by the definition of debt. Debt can be considered as the raw material of banks, since their principal activity is to transform it into other financial assets, taking on the maturity transformation risk.

G. g. loan loss provisions, capital adequacy or time and market trends) that may drive the multiple. Generally, there is a substantial risk that many other explanatory variables are omitted from regressions. Thus, there is a high degree of risk of mispricing the target bank or, depending on the aim of valuation, having incorrect information about investments; • Control for outliers. They should be rigorously treated as they may strongly affect the estimation of coefficients. Following the value maps approach, from an academic literature perspective, Calomiris and Nissim (2007) have developed a bank-specific valuation model which is based on the cross-sectional variation of price to book value.

When expected credit losses are higher than total provisions, banks deduct the difference (50 % from Tier 1 capital and 50 % from Tier 2 capital). 6 % of credit RWA. 2 2 Valuation in Banking: Issues and Models 15 • Income smoothing: that is the practice which is intended to stabilize net profits over time. This goal can be explained by the fact that managers are inclined to: –– keep bank profitability around a determined range of values in order to maintain a constant mean (Collins et al. 1995); –– achieve a mean benchmark (Kanagaretnam et al.

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