Hello everyone, I am currently trying to get into FIG banking and would like to learn more about valuation practices in the financial services industry. I was wondering if anyone can share with me what are the main differences between valuing corporates and financial instituions? From what I have read so far it seems that the most widely used valuation tools for FIs are P/B and residual income models, as well as DDM and FCFE. I would be very greatful if you can share your experience in using these models as well as any other insights you think are relevant for FI valuation. Also I was wondering if there are any valuation considerations that apply to specific sub-sectors e.g. banks, insurance, or asset management?
Thanks a lot for your help, I really appreciate it!
Look at excess return models where you discount the banks excess returns at the cumulating cost of equity to get intrisinsic equity value for that firm.
thadonmega thanks for the reply. I looked at some excess return models, they seem pretty straightforward. The only thing I wasn't sure about is how to determine the terminal year value in a two-stage growth model. I came across several methods that differed quite a bit. Would you mind sharing the most common method that you have used to calculate terminal value? Thanks!
Terminal value for excess returns is the same for any stable growth model.
TV Excess Returns = [NetIncome - EquityCost}*{1+g}/[ReL - g]
The numerator is just {ROE-ReL}*[BV Equity], the excess return for the final year before stable growth.
Why FIG? I interviewed for FIG at a BB two weeks ago for final rounds and doing FIG valuations never came up. I did work on secondary LBO valuations and provided trading comps for a co-investment. They asked me to walk through the models I used.
Typically, the questions are geared toward your resume. If you've worked in FIG before, the questions will be about that experience. Knowing how to value something is good, but it's looked upon much differently if you had the chance to apply it in a project that delivered a positive result.
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