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Hi All,

I have an interview with a FIG team at an emerging market PE group. The final round is a case study and entails valuing a financial institution (anything from microlender to insurance). I have combed for valuing private banks, and there is surprisingly little information (plenty for public companies, less for private), and so have turned here!

My question is this: within my allotted 90 mins of prep time, which valuation methods would you recommend?

1) A DDM seems to be the bread and butter of analysing a financial institution. However, a) it is very time consuming, and b) without dividends (which is expected for a Private EM bank), it will be complex and prone to error. Should I ignore the DDM?

2) If yes to the above, what valuation should I use instead? Naturally, multiple analysis will be used (P/E, P/B), but what should compliment this analysis? Asset Based, Excess Return etc?

Note that for this I am under time pressure and so time efficiency is important. Would greatly appreciate any help

Thanks all!

Comments (2)

 
Dec 30, 2018 - 5:55pm
  1. If you need to build even a simple model with forecasts in order to complete the case study then a DDM is not complicated. All you need is Attributable Earnings (i.e. Net Income after the cost of hybrid debt like AT1) and an estimate of the capital requirement for the business (e.g. for a bank this is the minimum CET1 ratio required by the regulator plus a buffer). You could very simply say that if the capital level for the company is below the requirement then there is no dividend and if it is above the requirement then you pay out all the excess in dividends. A terminal growth rate and Cost of Equity are the only other inputs you need for your DDM. If you are not familiar with FIG companies then the above is probably too complicated and you should avoid it.
  2. P/E and P/(T)BV are the multiples that you should use. Ideally you would have forward estimates (from your model) to apply these multiples to. If you have comps then use those (note that you should use a P/(T)BV vs. Ro(T)E regression rather than an average P/(T)BV multiple. Put the Ro(T)E of your business through the regression to derive the appropriate multiple).

You can also use the Gordon Growth formula to derive a P/(T)BV multiple for the business. If you use the version of the GGM: P/BV = (RoE - g)/(CoE - g) and make an assumption on Cost of Equity and growth then you have a multiple (without the need for comps).

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