Valuing banks and financial institutions
What are the main differences between valuing banks and regular industrial companies?
Do you mostly use FCFE, FCFF, or DDM and why?
I would greatly appreciate your help in understanding the main implications of valuing banks.
There are many differences, but the main ones include the use & classification of debt. Interest expense/income are normal parts of business operations and should therefore be included in your cash flows.
With all valuations, you want to reflect the core operating cash flows of a business. For banks and financial institutions, this happens to include interest expense/income.
Having said this, you obviously don't want to use FCFF since it excludes debt. Instead, use either the DDM or the FCFE models. The DDM model is easier to use since you will not have to explicitly estimate reinvestment needs in FCFE.
The same thing goes for multiples. Don't use EBITDA multiples since they do not represent relevant measures of cash flows for banks. Instead, focus on FCFE and earnings multiples (P/E, P/Book, etc)
Hope that helps
Thanks. Do you use levered cost of equity or unlevered cost of equity, and if the former, how do I estimate the D/E ratio for a bank? What should be included as debt?
why P/B is is especially suitable for valuing bank (Originally Posted: 01/20/2009)
why P/B is is especially suitable for valuing bank
Don't be silly... P/B is only suitable for sandwiches.
I'll have to admit...JJC's comment was pretty funny.
Why is P/Tangible Book so valuable...
Bank valuation (Originally Posted: 10/31/2017)
Hey all, I'm new here. I just had an exam in valuation and got asked whether I would use an unlevered or levered valuation model for valuing a bank. The concept of levered/unlevered has always been very confusing to me.. I know from my lectures that for valuing a bank you should only value the equity - however, this is the part where I get confused. How I see it, is that when you value just the equity, you think of the company as having no debt and being completely equity-financed, thus unlevered (?). I think the answer might have been levered though. Could someone explain this to me in simple terms?
Thanks!
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