This document provides an overview of valuing banks. It begins with an introduction to the banking industry and discusses the business of banking. The key aspects include banks functioning as financial intermediaries, generating income from interest spreads, and being regulated businesses. The document then covers various valuation approaches including income approach by projecting cash flows and a market approach using comparable publicly traded companies and transactions. It emphasizes adjusting valuation multiples based on growth prospects, profitability, market position and risks for the subject bank. Overall, the document provides a framework for analyzing the banking industry, the company, and applying different approaches to determine the value of a bank.
2. Structure
1. Introduction
The Value of a Bank
The Business of Banking
2. Analysis of a Bank
Industry Analysis
Company Analysis
Income Approach
3. Valuation Approaches
Market Approach
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3. The Value of a Bank
General
Financial Intermediary between
depositors and borrowers
Special Information hyposesis
Provision of liquidity and payments
Banking Frachise - Bank’s individual
characteristics which make it a going
concern
Ability to generate a net profit from
deposit-related services
Ability to generate rents on the asset
side as well
Franchise Value
Company specific
Market vs. Investment Value
Market share
Intangible assets
License – access to the
market
Customer relationships
(Core deposit base)
Brands
Assembled workforce
Other (software, scoring
methodologies)
Not a collection of assets
Going concern vs. Liquidation value
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4. The Value of a Bank
Why value banks?
M&A
Determination of conversion ratios
Minority stakes valuation
IPO’s
Restructuring
IFRS
Corporate planning
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5. The Business of Banking
Distinctive characteristics of banks
Financial Structure
Relatively few hard assets
The majority of assets are financial
The majority of liabilities are deposits
No inventory, trade payables, no significant amount of receivables
Cash and marketable securities – operating asset
No clear distinctions between operating and financing activities
Income statement
Income is generated as an interest spread between interest received
and interest paid (“Marginal business’)
Revenue = Net interest income + Net commission income + Net
trading gains
Regulated Business
Importance of Risk Management
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6. The Business of Banking
Bank’s Balance Sheet
ASSETS
Cash and Due from CBRF
Securities
Loans and Advances to Banks
Loans and Advances to Customers
Fixed Assets
Other Assets
LIABILITIES Amounts Due to Banks
Customer Accounts
Securities Issued
Other Liabilities
Equity
Financials
Liquidity
management +
Obligatory reserves
Interest
Earning Assets
Typically is an
insignificant amount
Interest Bearing
Liabilities
Source of business
growth, minimum level
subject to regulation
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7. The Business of Banking
Bank’s Profit and Loss Account
Financials
Earned on loans issued
and fixed income
securities owned
Interest Income
Interest Expense
Paid on deposits and
securities issued
Net Interest Income
Provision for Losses
Net Interest Income after provision for losses
+
Non-interest Income
=
Estimate of how well
loans are repaid
Net Commission Income +
Net trading gains on
securities and currencies
REVENUE OF A BANK
Administrative, Staff and Other Fixed Expenses
Shows the efficiency of a
bank’s operations
Non-recurring Gains/Losses
Pre-Tax Income
Result of non-typical, oneoff transactions
NET INCOME
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8. The Business of Banking
Criteria
Types of Banks
Types of banks
Target market
Retail
Corporate
Investment
Ownership
State and Quasi-state
Private Banks
Independent
Captive
Foreign
Geographic
focus
International
National
Regional
Size
Large
Small
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9. Valuation Procedures
Preparatory Stage
Collection of Data
Management Interviews
Analysis Stage
Economy and Industry Analysis
Understanding the background of the transaction
Calculations Stage
Valuation Approaches
Final Stages
Preparation of the report
Presentation to the client
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10. Analysis of a Bank
Major Analytical Tools
Top down approach
Economy, Industry, Subject
Financial Statements analysis
Ratio analysis
Growth
Profitability
Capitalization
Liquidity
Common-sized financials
Peer comparison
Non-operating assets (real estate, other)
Non-recurring income or expenses
Unusual material transactions
Acquisitions and disposals
Large write offs of loans
Public companies and transaction analysis
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11. Industry
Analysis of a Bank
Historical Background
•General economic recovery
2006
•Growing competition - Entry of new players, incl.
International
•Industry consolidation
•Importance of retail
Financial Crisis
•Many banks experience losses:
•Liabilities in USD – assets in Roubles
•Losses on government bonds and derivaties
1998
• Borrowers default
•Massive industry restructuring
•Growing number of banks
•Mainly corporate short-term lending, foreign exchange and
securities trading
•A lot of captive, non-market players
1991 1992
•First commercial banks are established on the basis of the
branches of state banks
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12. Industry
Analysis of a Bank
Russian Economy experiencing a steady GDP Growth
Banking Industry has been outpacing general economy
Russian Banking Assets and Loans to GDP
50,0%
45,0%
40,0%
35,0%
30,0%
25,0%
20,0%
15,0%
10,0%
5,0%
0,0%
1999
12
2000
2001
2002
2003
Total Banking Assets / GDP
2004
2005
2006
Total Loans / GDP
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13. Industry
Analysis of a Bank
Nevertheless, the penetration of banking services remains
low compared to other countries
Lending to GDP
140%
120%
100%
Average
Developed Europe
80%
60%
40%
20%
Romania
Russia
Turkey
Poland
Ukraine
Lithuania
Slovak Republic
Kazakhstan
Bulgaria
Hungary
Slovenia
Latvia
Czech Republic
13
Estonia
Croatia
0%
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14. Industry
Analysis of a Bank
Fragmented Industry
Large number of banks
– steadily decreasing
Majority are small banks
Concentrated Industry
Significant role of
largest banks – steadily
increasing
Number of operating banks in Russia
1340
Role of the largest banks
75%
70%
65%
1300
60%
55%
1260
50%
45%
1.2005
1220
7.2005
1.2006
7.2006
Share of 30 largest banks in total capital
1180
01.2004
Share of 30 largest banks in total assets
01.2005
01.2006
Share of 30 largest banks in total loans
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15. Industry
Analysis of a Bank
Role of the international players in the
Russian banking sector
180
14%
160
140
12%
120
1998
crisis
10%
Russia upgraded to
investment grade
8%
80
6%
60
4%
40
2%
0%
01.1996
20
0
01.1997
01.1998
01.1999
01.2000
01.2001
Share of non-residents in the total charter capital
15
100
Number of operating banks with foreign participation
Share of non-residents in total charter capital. %
16%
01.2002
01.2003
01.2004
01.2005
01.2006
Number of operating banks with foreign participation
Source: Central Bank of Russia
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16. Industry
Analysis of a Bank
Trends to watch in the banking industry
Historical and expected growth
Penetration
Economic and disposable income
growth
Diversification and new services
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Competitive Environment
Porter Analysis
Industry Consolidation
Share of foreign banks
The role of the State and Staterelated banks
Drive for cost-efficiency
Increase of the role of brands
Regulatory environment
Licensing
Minimum capital and
reserves requirements
Deposit insurance
scheme
Risk supervision –
concentration, capital
adequacy
Financial reporting
requirements
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17. Company-specific
factors
Analysis of a Bank
Company-specific
factors
Economy and
Industry
Business profile (model)
Corporate, retail,
investment
Clients and Markets
Strategy
Risk
Concentration
Liquidity
Valuation
Assumptions
(Income and Market
Approaches)
Capital adequacy /
Overcapitalization
Size
Transparency
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19. Income Approach
Major Questions
Where the Bank will be 3-5 years from now
What are the Company’s Prospects and its Strategy
What is the Company’s current and target market
position
Who are the Potential Investors
Financial Future
Major Projection Drivers
Reporting standards used
Level of uncertainty
Uncertainty of the results
Company-specific risk factors
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20. Projected Cash Flows
Consider expected operating and financial results of a bank
reflected in the Projected Financials
Balance Sheet
Income Statement
Represents “potential dividends” available to shareholders
NOT Extrapolation
Depreciation
CAPEX
Increase in reserves
with CBRF
Additional Capital
Requirements
Net Income
Free Cash Flow
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21. Projected Cash Flows
Typical projection drivers
Balance
Sheet
Drivers
Profit &
Loss
Drivers
Balance Sheet
Structure
Growth
Drivers
Return
Drivers
Growth
Drivers
Total Loans /
Customer and
Bank Accounts
and Securities
Issued
Loan Loss
Provision /
Gross Loans
and Advances
Deposits
(Retail,
Corporate)
growth rate
% Interest
income on
loans
(securities)
Non-interest
income
growth rate
Due to banks /
Customer
Accounts and
Securities
Issued
Trading
securities
growth rate
% Interest
expense on
deposits
(securities)
Equity /
Total
Assets
Other assets
(liabilities)
growth rate
Effective tax
rate
Operating
Expenses
growth rate
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22. Projected Cash Flows
Estimating Projection Drivers
Subject’s historical financials
Industry Analysis
Peer Analysis
Company’s strategy and competitive position
Special Considerations
Financial reporting standards
Fair Value vs. Book Value of Assets and
Liabilities
Non-recurring operations
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23. Projection Drivers – Industry and Peer Analysis
05
03
Deposits Growth
03
115%
03
95%
05
06F
07F
08F
04
07F
08F
03
04
05
06F
07F
08F
04
08F
05
06F
07F
04
05
06F
07F
08F
03
04
04
05
06F
35%
03
04
05
06F
07F
08F
55%
06F
75%
15%
Russian
Banking
Industry
Largest 30
Banks
Sberbank
VTB
Rosbank
Bank of
Moscow
Vozrozhdenie
Source: Company Reports, analyst estimates
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24. Projection Drivers – Industry and Peer Analysis
Loans / Interest bearing liabilities
03
04
05
120%
110%
06F
06F
07F
08F
04
05
03
03
07F
08F
05
06F
07F
08F
03
60%
03
04
05
06F
03
70%
04
05
06F
07F
08F
04
04
05
06F
04
05
06F
03
80%
03
90%
05
06F
07F
08F
100%
04
50%
40%
Russian
Banking
Industry
Largest 30
Banks
Sberbank
VTB
Rosbank
Bank of
Moscow
Vozrozhdenie
Russian
Standard
Source: Company Reports, analyst estimates
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25. Projection Drivers – Industry and Peer Analysis
Equity / Total Assets
03
03
23%
04
21%
05
19%
05
06
06
05
04
06
05
06
03
05
06
03
05
03
04
03
04
06
11%
9%
04
04
05
06
03
04
06
13%
03
15%
04
05
17%
7%
5%
Russian
Banking
Industry
Largest 30
Banks
Sberbank
VTB
Rosbank
Bank of Vozrozhdenie Russian
Moscow
Standard
Source: Company Reports, analyst estimates
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26. Projected Cash Flows
Corporate Banks
Factors to watch for...
Income generation ability
Target vs. Existing Client Base
Market position and competitive advantages
Large non-recurring transactions
Non-interest income generation
Cost-efficiency
Risks
Concentration of clients (industry, individual clients)
Operations with related parties (critical factor for captive
banks)
Non-performing loans (history and expectations)
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27. Projected Cash Flows
Retail Banks
Factors to watch for...
Income generation ability
Business profile
Collateralized lending (autoloans and mortgages)
Uncollateralized lending (consumer finance)
Penetration of services rendered on the target market
Market share: retail network
Brand power: sales and promotion channels
Quality of execution – “commodity” business
Risks
Determined by business profile and quality of risk management
Growing competition
Deteriorating quality of loan portfolio
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Lack of funding for growth
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28. Projected Cash Flows
Retail Banks
Special Consideration: Fast Lending Growth
Increasing bad loans (especially for non-collateralized lending) – makes risk
management extremely important
Lack of cheap and long term funding
Fast growth requires significant equity injections from shareholders
Increasing competition with foreign market players
9 000
3,0%
8 000
Share of
overdue loans
to individuals
grows to 2.7%
2,5%
7 000
RUR bln
6 000
2,0%
5 000
1,5%
4 000
3 000
Share of
Loans to
Individuals
7%
1,0%
2 000
0,5%
1 000
-
0,0%
01.2003
28
Share of Loans to
Individuals 22%
01.2004
Total Loans
01.2005
Total Loans to Individuals
01.2006
Share of Overdue Loans to Individuals
Source: CBRF
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29. Discount Rate Development
re = rf + β × MRP + CSR
CAPM
Risk free rate
Beta
Company specific risk
Size
Uncertainty of projections
Historical Adjusted Betas for Guideline Companies
1,2
1
Average beta
for Guidelines
= 0.975
0,8
0,6
0,4
0,2
0
29
Sberbank
ING Bank
Slaski
BRE Bank
Komercni
banka
OTP Bank
Garanti Bank
Finansbank
AKBank
Unibanco
Banco
Bradesco
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30. Terminal Value
How to determine the terminal value
Gordon stable growth model
Sustainable long-term growth rate
Long-term profitability and capital structure
Applying market-derived ratios
Checking the terminal value for consistency
Stabilization of cash flows
Consistent return on equity and total assets
Sustainable capitalization levels
Potential sale considerations
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31. Market Approach
Two major variations
Guideline Companies Analysis
Guideline Transactions Analysis
Applicability varies with
Availability of guidelines
Size
Business profile
Risk profile
Availability of data
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32. Market Approach
Major Industry Valuation Metrics: PB and PE Multiples
PB (“Price to Book”)
Market Capitalization / Book Value of Shareholders’ Equity
Usually Exceeds 1.0
Growth of PB multiples with time - Recent Trend in the
Emerging Markets
Sberbank's share price
600%
Price to
Book 06F
500%
4.3
Price to
Book 04
400%
1.75
300%
200%
100%
0%
01.2005
32
07.2005
01.2006
07.2006
Source: RTS
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33. Market Approach
PB vs. ROE
Technical
explanation: Actual
Return exceeds
Required Return on
Equity
4,0
3,5
Finansbank
Price to Book 2006
Why PB multiples
for banks are
usually above 1.0?
Sberbank
3,0
Banco Bradesco
2,5
BRE Bank
Komercni Bank
2,0
OTP Bank
AKBank
ING Bank Slaski
Garanti Bank
Unibanco
1,5
1,0
10%
12%
14%
16%
Other factors:
18%
20%
22%
24%
26%
28%
ROE (2005-2007F)
High Expected Growth (Industry and Company)
Fair Values vs. Book Values
Intangible Assets not registered on the balance sheet
Price to Book alone not sufficient – other value indicators (ratios) and
approaches should also be used:
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PE, Price to Total Assets, Price to Gross Operating Profit, Price to Cash Flow
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30%
34. Market Approach
Publicly Traded Guidelines
Lack of actively traded bank stocks in Russia
Average daily trading volume, 000 USD
2005
Sberbank
2006
16,900
75,100
675
486
-
218
Bank of Moscow
70
118
Vozrozhdenie
29
45
Promstroibank
Rosbank
Guidelines from other markets may be used
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35. Market Approach
Public Guidelines
1. Analysis of ratios indicated by guidelines
Price to Shareholders' Funds
Market Capitalisation : Price to Shareholders' Funds
Guideline Companies
Country
4 Yr Avg
2004 to 2007
Previous Year
2005
Sberbank
ING Bank Slaski
BRE Bank
Komercni banka, a.s.
OTP Bank
Garanti Bank
Finansbank
AKBank
Unibanco (Uniao de Bancos
Banco Bradesco S.A.
Russia
Poland
Poland
Czech
Hungary
Turkey
Turkey
Turkey
Brazil
Brazil
3,5
2,2
2,3
2,4
2,6
1,9
3,6
2,1
2,0
3,2
4,2
2,3
2,7
2,7
2,9
2,1
3,9
2,2
2,1
3,7
2,6
0,6
0,2
2,9
0,8
0,3
Average
Std Deviation
Std Deviation / Average
Current Year
2006
Forecast Year
2007
Concluded
Weights
3,1
2,1
2,2
2,2
2,5
1,8
3,5
2,3
1,8
2,8
2,4
2,0
2,0
2,0
2,2
1,6
2,6
1,8
1,6
2,3
15%
11%
7%
11%
7%
8%
10%
8%
15%
10%
2,4
0,6
0,2
2,0
0,3
0,2
100,0%
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36. Market Approach
Public Guidelines
2. Weighing procedure
Price to Shareholders' Funds
4 Yr Avg
2004 to 2007
Sberbank
ING Bank Slaski
BRE Bank
Komercni banka, a.s.
OTP Bank
Garanti Bank
Finansbank
AKBank
Unibanco (Uniao de Bancos Brasileiros SA)
Banco Bradesco S.A.
Sum of Weighted Multiples
Percent of Weight Used
"Comparably" Weighted Multiple
Multiples times Weights
Previous Year
Current Year
2005
2006
Forecast Year
2007
0,5
0,2
0,2
0,2
0,2
0,1
0,4
0,2
0,3
0,3
0,6
0,0
0,2
0,3
0,2
0,2
0,4
0,2
0,3
0,4
0,5
0,2
0,2
0,2
0,2
0,1
0,4
0,2
0,3
0,3
0,4
0,2
0,1
0,2
0,2
0,1
0,3
0,1
0,2
0,2
2,6
100,0%
2,7
89,5%
2,4
100,0%
2,0
100,0%
2,6
3,0
2,4
2,0
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37. Market Approach
Public Guidelines
3. Applying concluded multiples to the Subject
Period
4 Yr Average 2004 to 2007
2005
2006
2007
Concluded
Multiples
2,6
3,0
2,4
2,0
Subject
Company
US$ 000,000
1 000
1 600
2 000
2 200
Indicated
Value
US$ 000,000
2 624
4 816
4 890
4 508
Concluded
Weights
20%
20%
50%
10%
Weighted
Conclusions
US$ 000,000
525
963
2 445
451
Sum of Weighted Streams
Percent of total Weight Used
4 384
100%
Indicated Market Capitalisation
4 384
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38. Market Approach
Public Guidelines
4. Reconciliation of the results
VALUATION SUMMARY
Approach
Detailed in
Table
Concluded
Equity Value
Selected
Value
Weights
(g)
US$ 000,000
Price to Shareholders' Funds
Price to Net Income
Price to Total Assets
Total
Rounded to
1
2
3
4 384
4 039
3 126
Weighted
Conclusions
US$ 000,000
70%
20%
10%
3 069
808
313
0,0%
4 189
4 200
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40. Reconciliation
Banks’s size and
business profile
Income
Approach
Reliability of
information
Relevance of
information
Guideline
Companies
Reconciled
Value
Continuous Process...
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