Model to Value a Bank (Commercial / S&L)
Hello Everyone!
Can anyone please share (or point me to a resource) a working model to value a bank?
Thank you in advance. Your help is much appreciated.
Umm... you're not going to find an industry standard working model to value anything really.
Your best bet is to hit up the following resources for models:
http://www.macabacus.com/ http://pages.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm http://www.exinfm.com/free_spreadsheets.html Understand how they work
Next, understand how banks are valued: http://seekingalpha.com/article/53557-valuation-of-financial-institutio… http://www.bvappraisersconference.org/userfiles/files/Website_Conferenc…
Then use what you learned about valuing financial institutions and combine it with what you learned about general modeling and valuation and you've got your finished product.
FIG scares me
Thanks a lot, Marcus!
yeah, thanks for the good info halberstram.
Valuing a bank, market cap only? (Originally Posted: 07/09/2011)
I looked at some models from the previous projects at this place I'm working now. For banks, they used those equity multiples and came up with the market cap. That's about it. Don't you need to add back net debt and etc? Just curious. Please shed some lights.
As far as I know, dividend discount models are used most often to value banks. Calculating the amount of debt and debt ratios for financial institutions is a nightmare.
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Oh, even the bank that I'm valuing now has borrowed $ from a consortium to turnaround itself. I still don't need to do anything with debt if I were using equity multiples for valuation?
How would you value a private bank? I cam across this problem a few weeks ago... (I'm an intern so don't shit on me)
Struggling valuing a bank (Originally Posted: 06/29/2011)
No one at this firm is able to help me, and I'm struggling with valuing this bank. I know that I'm supposed to use equity multiple for bank valuation. I already have a list of comparable banks and their P/E and P/B, as well as the average and mean of those ratios. But now having all these information, what am I supposed to do?
apply the multiples to the target companies balance sheet
can you please explain a little more? What do you mean by "to target companies balance sheet?" Am I supposed to multiply these multiples with some numbers on the balance sheet?
Sorry, but I'm a noob.
So for P/B take the multiple you came up with and multiply it by the book value of the company you are trying to value. then divide by s/o
Multiples analysis is a form of relative valuation that can help you arrive at a rough estimate or range of EV based on industry average multiples. You'd want to compile a 'universe' of comparable companies CapIQ has a quick and easy function that can compile a quick list. The better matching in terms of business and financial profile the universe is, the more accurate/relevant the multiples analyis will be. From this you can apply a multiples to arrive at a valuation i.e. average industry multiple is 10x EV/EBITDA you apply this multiple to the EBITDA for your 'target' or the bank you're trying to value and you arrive at an average EV based on last reported EBITDA.
Need help on valuing a bank for class (Originally Posted: 04/21/2012)
Hi WSO, First time poster here: I need to find a target for a bank to acquire for one of my finance classes. I've already found the target bank, but need help on the valuation.
I know that a DCF cannot be used for a bank. I also know that the value of equity can be calculated using a Dividend Discount Model.
My question is - How do I come up with some sort of enterprise value for the bank using what I have?
For non-financial services firms, I'd just use a DCF or the EV/EBITDA multiple - but I'm confused in this case. I have equity value - where should I go from here? Or, should I just do something else instead of the DDM?
Thanks a lot in advance guys - I'll try to give out as many SBs as I can!
The difference between banks and non-financial services firms is that banks effectively buy/sell money. Given that context, interest income/expense is considered an operating expense (as compared to non-financial services firms where interest expense is a non-operating expense but rather, considered a financing cost).
As you already mentioned, using a DDM, you get your equity value and you stop there. (Equity value is post-interest). Also, for multiples, P/E and P/BV are commonly used multiples for banks. EV/EBITDA, or anything EBITDA wouldn't be very suitable because it doesn't account for interest income/expense.
However, if you want to calculate Enterprise Value, you can just calculate it as per normal: EV = Equity value + Debt + minority interest + Preferred Shares - Total Cash & Cash Equivalents
you can use a DCF - just that it is much much harder given the difficulty to differentiate between assets/liabilities and interest income/expense, and how to classify it. For beginners, just use a DDM model projected based on ROE and Dividend payout ratio, and use the WACE rather than WACC. Back it up with a P/BV and P/E multiple.
this may help: http://people.stern.nyu.edu/adamodar/pdfiles/papers/finfirm.pdf
Are you guys honestly recommending DDM? It has to be the most wacked out, retarded valuation method I have ever come across. Out of all the discounted valuation concepts this has to be the least rational.
I think conceptually, its a valid recommendation...
Given that the OP's assignment is probably for a 'basic' finance/valuation class, I'm sure that whoever is marking the assignment will be looking out for a DDM, as a form of valuation based on expected future cash flows (arguably one of the fundamental concepts in finance).
Would probably be a better approach to then criticise the weaknesses of the DDM model, some of which have been pointed out by West Coast Rainmaker, and supplement the valuation using more appropriate ratios, again explaining the 'pros' and 'cons' of each valuation methodology.
residual income may be handy? i mean it really depends on your assumption anyway.
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