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Valuing Financial Institutions

Valuing Financial Institutions. Valuing Financial Institutions. Why is valuing financial institutions different? How are financial institution valued?. Why valuing financial institution is different. Complexity: Must rely on rough estimates from management’s accounting decisions

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Valuing Financial Institutions

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  1. Valuing Financial Institutions

  2. Valuing Financial Institutions • Why is valuing financial institutions different? • How are financial institution valued?

  3. Why valuing financial institution is different Complexity: • Must rely on rough estimates from management’s accounting decisions • Their choice of leverage is the core of how they generate earnings • Generally highly leveraged • Therefore, extremely sensitive to small changes in key drivers

  4. How are financial institutions valued? • Non-Financial Institutions • Discounted Cash Flow (DCF) • Financial Institutions • Equity Cash Flow • In a simplified world ECF equals Discounting Dividends • ECF = NI – Increase in Equity + Other Comprehensive Income

  5. TRV Discounted Equity Cash Flows

  6. How are financial institution valued?

  7. How are financial institution valued? Conclusion • DCF is not a good valuation method for Financial Institutions • Financial Institution make money on fee and spreads • Debt valuated differently • It is hard to know how much risk a bank current has • Equity Cash Flows can be very different every year • Need to trust management

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