DCF method for Banks

DDM Theoretically you could derive the cashflows of a bank. But there are several problems even if you get to that point.

First of all a bank’s business is driven by the balance sheet and using the debt/deposits to generate returns on the asset side in some form of loans (the bread and butter for all banks in terms of income). Hence its impossible to split non-operational assets from operational assets, which are needed for the unlevered FCF and the EV to EqV bridge.

If you were hypothetically able to get to the levered FCF of the business, you still can’t just DCF every cashflow to the present day. Banks are extremely regulated through Basel, which expects banks always to hold a % of their core equity (CET1) against their risk-weighted assets (RWA). So there is no real concept of free cash flow even if they satisfy all payment obligations as banks need to hold capital on the balance sheet. So you usually distribute dividends above the target CET1 ratio as that is actual cash you can distribute to shareholders.

FYI also seen leverage ratios used instead of CET1 to determine the level of dividends.

This would also apply for insurance carriers as they face similar regulatory frameworks. Very different framework, implication is the same (but this varies more from region to region from my understanding)