Learning Objectives:

  • Apply valuation methods for banks.

  • Understand bank-specific valuation challenges.

  • Analyse contemporary issues in bank financial reporting.

8.1 Bank Valuation Methods

Valuing banks is distinct from valuing non-financial firms due to the nature of their assets and liabilities. Key methods include:

  • Discounted Cash Flow (DCF): Valuing a bank based on the present value of its expected future cash flows. The Siena University course covers “cash flow analysis for bank” and “cash flow to equity model” .

  • Excess Return Valuation: A method that values a bank based on the present value of its excess returns over the cost of capital .

  • Multiples Approach: Using price-to-earnings (P/E) and price-to-book (P/B) ratios to value banks .

  • Dividend Discount Model (DDM): Valuing a bank based on the present value of expected future dividends.

8.2 Bank-Specific Valuation Challenges

Valuing banks presents unique challenges:

  • Asset Quality: The quality of the loan portfolio is difficult to assess.

  • Regulatory Capital: Capital requirements affect valuation.

  • Interest Rate Sensitivity: Earnings are sensitive to interest rate changes.

  • Off-Balance Sheet Items: Contingent liabilities and commitments.

8.3 IFRS and US GAAP: Key Differences

The Siena University course extensively compares “IAS/IFRS vs. US GAAP” in bank accounting . Key differences include:

  • Financial Instruments: Classification and measurement of financial instruments.

  • Impairment: Incurred loss (US GAAP) vs. expected loss (IFRS 9) models for impairment .

  • Fair Value Measurement: Different rules for measuring fair value.

8.4 Contemporary Issues

The Siena University course covers contemporary issues such as:

  • IFRS 9 Implementation: The new accounting standard for financial instruments .

  • ESG Factors: Environmental, Social, and Governance factors and their implications for banks .

  • NPL Securitisation: Analysis and valuation models for non-performing loan securitisation .

  • Pillar 3 Disclosure: Information in footnote disclosures and Pillar 3 disclosure 

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