Valuing a Financial Institution

Part One

Introduction

• Valuation techniques – price versus value

• Pricing techniques – market focus

• Risk and the pricing of risk

• Differences between financial institution and corporate valuation techniques

• Income volatility for banks, insurance companies, asset managers, other FI’s

• Return on equity and Price/BV

• The relevance of the cost of capital

• Limitations of accounting-based data

• Problems associated with using traditional DCF techniques for valuing FI’s

Advanced Discounted Cash Flow Techniques for FI‘s

• Loan portfolio default rates and provisioning policy

• Concentration and position risks

• Discounted cash flow value of the loan portfolio

• Discounted cash flow value of on-balance sheet instruments

• Market risk of derivative positions and impact on value

• Choice of Discount Rate

• Cost of Strategic Equity Capital

• Problems with the use of betas

• Impact of risk and uncertainty

• Practical application of DCF techniques to FI’s

• Approaches to the market premium – use of implied premium

• Terminal valuation, perpetuity, and appropriate adjustments

• Subjecting the valuation to sensitivity

• Case study example of valuing financial services firms and institutions

Evaluating the FI Revenue Base: Strategic Risk

• Diversity of revenue base

• Margin spread and the effects of yield curve movements

• Transfer pricing impact

• Shareholder value-added measurement

• Strategic value management

• Case study example of adding value through strategic value management

Part Two

Dividend Valuation

• Comparison to DCF (Discounted cash flow)

• Practical problems in application

• When to adopt it as the principal valuation technique

• Dividend Yield Valuation Method Basis

• The Dividend Growth Model Formula

• Multi-period dividend discount models

• Dividend Policy and its impact on valuation

• Case study: Valuation of financial companies using a dividend valuation approach

Asset-Based Valuations

• Balance Sheet Approach, NAV (net assets value) and RoNAV (Return on net assets value)

• Realisable Value and Replacement Cost

• Applications in Practice

• Composite Basis of Valuation

• Case studies using the RoNAV approach

Pricing Techniques - Comparatives

• Determining appropriate comparative businesses

• Adjustments to be applied in the application of comparative data

• Price/book value of equity and link to return on equity

• Price/cash flow and other cash multiples

• Total enterprise value

• P/E (price-to-earnings) ratios and their use – relative P/E ratio, PEG (price/earnings-to-growth)

• Enterprise value to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) & EBIT (Earnings Before Interest and Taxes)

• The banking valuation portfolio and customer coverage are explored in this bank valuation course

• Qualitative assessment of management's ability to deliver results

• The efficiency of operations and cost/income ratios

• Market sector growth possibilities

• Effect of bank reorganisations and asset redeployment on the overall value

• Case studies using comparatives to value FI’s

Problematic Issues in Valuation

• Investment in banking groups with differential risk profiles

• Embedded value of future income streams

• Valuing goodwill

• The sum of its parts: company valuation techniques for FI groups

• Differences between bank valuation, fund management, leasing companies and asset management company valuation

Valuation of financial institutions concludes with a summary of key issues and comments.

Training Objectives

Redcliffe's course comprehensively covers the valuation of financial institutions and banks.

The programme will include short lecture sessions and case study examples.

Delegates will use Excel-based models for valuation exercises. This will enable delegates to understand the implications of decision-making for bank performance analysis, giving them a better appreciation of bank performance ratios and analyses that impact valuation.

Training Course Summary

Our financial institution valuation training is divided into short sessions to maintain attention span during the training. We will use the Slido (a polling app) and Mural (a virtual whiteboard app) applications during the training to encourage interaction and discussion. Important when using online training methodologies.

Bank valuation course material is provided before the session for delegates to download; they are needed during the sessions.

Delegates will be divided into small groups for practical exercises on valuation fundamentals, and the breakout function in Zoom is particularly useful in this regard, which allows the use of group work in a similar manner to what would be used during a normal face-to-face training session. This ensures both a practical and rigorous delivery of the programme material.