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2023 | Buch

How to Value a Bank

From Licensing to Resolution

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Über dieses Buch

This book gives an overview of the most common techniques used by analysts and experts to assess and value banks in all phases of a Bank’s life, from licensing to resolution. These include licensing procedures, going concern market valuation techniques, liquidation, and resolution methodologies. The author sheds light on financial institutions’ reporting and financial statements and explains how to interpret the data. Special attention is given to the different valuation approaches for financial institutions ranging from the basic PE and PBV methodologies to the more sophisticated ones such Discount cash flow (DCF), Dividend discount model (DDM), excess return models (EVA), and their variant, the warranted equity value (WEV) method. The authors also illustrate how to build a sum-of-the-parts model (SOTP) and how to treat capital in the process as well as developing a bottom-up approach for the cost of equity. The book provides numerous real-world examples which will hopefully help practitioners build their own MS Excel models. Furthermore, this publication investigates some of the critical aspects of banking M&A and its valuation implications.

This book also takes a deep dive into valuation for Banks in gone concern status, describing the basis for three different types of valuation of Banks in resolution: to inform a decision on whether to put a bank into resolution; to inform the choice of resolution tools and the extent of any bail-in of liabilities; and to determine whether any creditors would have been better off had the bank gone into insolvency. Special attention is given to the valuation of non-performing loans (NPLs) and financial assets focusing on some operational aspects of winding-down a bank’s loan and trading book portfolio.

Inhaltsverzeichnis

Frontmatter
Introduction
Abstract
Bank valuation analysis is very different from corporates, with greater emphasis to balance sheet examination. Complexity emerges also from the public role of banks and the potential impact from their default. This led to an enormous quantity of rules designed to manage the risk arising from this business. Difficulties emerge also from the different approach needed during the life cycles determined by diverse macroeconomic contexts and idiosyncratic events. In this book, we provide practical guidance of banks’ valuation methodologies juxtaposing practical examples to each valuation model to enrich the theoretical discussion and help practitioners build their own spreadsheets.
Alessandro Santoni, Federico Salerno
Main Features of the Banking Business Model
Abstract
Banks are very different from other industries. The business model is mainly based on collecting deposits from customers and granting credits or invest in securities on their own account. This apparently easy business model is, in fact, a complex one. The public role of banks and the potential impact from their default in society has led regulators to introduce a significant quantity of rules designed to mitigate the risks arising from this business. Given their peculiar business model, banks can be particularly challenging to value and require a wholly different approach relative to industrial entities.
Alessandro Santoni, Federico Salerno
Valuing a Bank in Going Concern
Abstract
In common with other financial institutions, banks exhibit some specific features relative to industrial companies. This has led the analyst community to opt for certain valuation methods rather than others, over the years. In this chapter, we investigate the most common methodologies used by analysts in valuing Banks in going concern status. The warranted equity value (WEV) method, an adaptation of the EVA approach, is used to value both the entity as a whole or individual business areas in a sum-of-the-parts. It responds to the need to take a bank’s capital absorption and capital position into account. The DDM is a universal method which suits banks as well as industrials. And so is the free cash flow to equity (FCFE), in a sense an expansion of the DDM in that it adds potential dividends to actual dividends.
Alessandro Santoni, Federico Salerno
Banks M&A: Strategy and Valuation
Abstract
Valuing a Bank in an M&A scenario can be challenging, and several factors and points of views would need to be considered. The starting point of an M&A valuation can be the traditional methodologies used for valuing a Bank in a normal scenario. In this chapter, we investigate some of the critical aspects of a Banking M&A and the valuation implications from two points of view: the shareholders’ point of view and the supervisors’ point of view. From the shareholders’ point of view, the key aspects to be considered are the calculation of the synergies arising from the M&A and the potential earning accretion/dilution. On the other side, Banks M&A are always assessed by supervisors on a case-by-case basis. The main objectives from their point of view will be to ascertain, to the extent possible, the sustainability of the business model of the combined entity. In this sense, the analysis of the potential goodwill impairment represents a key component of the consideration.
Alessandro Santoni, Federico Salerno
Valuation in Resolution
Abstract
In April 2014, following the early 2000 financial crisis, European Authorities published the Bank Recovery and Resolution Directive (BRRD). The Bank Recovery and Resolution Directive was adopted to provide authorities with comprehensive and effective tools to deal with failing banks at national level and provide cooperation arrangements to tackle cross-border banking failures. The overarching objective of the BRRD resolution regime is to make sure a bank can be resolved swiftly with minimal risk to financial stability. Banks’ valuation methodologies, which are used by Supervisors and Resolution Authority to trigger the failure of a bank and the best resolution tool to utilize, constitute the key aspects of the BRRD. In this chapter, we will revise the key principles of these valuation methodologies.
Alessandro Santoni, Federico Salerno
Valuation in Liquidation
Abstract
Liquidation value is the value of the assets that remain if the company goes from a going concern to a gone concern status. In the liquidation process, creditors, lenders, and shareholders based on seniority of their claims will receive the proceeds from the liquidation of the company’s assets. Banking assets included in liquidation value usually include loans, financial assets, tangible assets like real estate, equipment, investment. Liquidation procedures differentiates from resolution measures and presents several valuation methodologies peculiarities.
Alessandro Santoni, Federico Salerno
Loan Valuation
Abstract
During a period of recession or following period of economic financial turbulences, one of the main tasks to proper value a Bank is calculating the possible hidden losses arising from non-performing or illiquid assets. The two most important asset categories on Banks’ balance sheet that will be hit by severe losses during crisis are loans and financial assets. In this chapter, we will concentrate on the methodology used to value loans while in the next chapter we will focus on financial assets.
Alessandro Santoni, Federico Salerno
Financial Assets Valuation
Abstract
Accounting valuation is the process of valuing a company’s assets and liabilities for financial reporting purposes. Several accounting-valuation methods may be used while preparing financial statements to value financial instruments (and non-financial). Accounting International Financial Reporting Standards (IFRS) require market transactions being recorded at fair value. To obtain a prudent value of the assets, regulation requires the fair value to account for additional valuation adjustments (AVA). In this chapter, we analyse prudent valuation methodologies for financial assets.
Alessandro Santoni, Federico Salerno
Solvent Wind-Down
Abstract
In this chapter, we focus on some of the valuation and operational aspects of winding down a bank’s trading book portfolio and the potential hidden exit costs. It provides a deep dive on valuation principles and exit strategies currently considered by industry practitioners when designing a solvent wind-down plan. It also provides the reader with an overview of key underpinning valuation or pricing concepts (i.e. “Fair value”, “realisable value”, and “Solvent Wind Down value”). Ultimately it shows that the cost to wind down a trading portfolio beyond the usual accounting carrying value might be mostly driven by wind-down operating costs (incl. Liquidity and funding costs) and two main pricing components, namely the Capital Valuation Adjustment and Margining Valuation Adjustment.
Alessandro Santoni, Federico Salerno
Backmatter
Metadaten
Titel
How to Value a Bank
verfasst von
Alessandro Santoni
Federico Salerno
Copyright-Jahr
2023
Electronic ISBN
978-3-031-43872-1
Print ISBN
978-3-031-43871-4
DOI
https://doi.org/10.1007/978-3-031-43872-1