BANK VALUATION METHODS

Before the global crisis, the topic of bank valuation had been

discussed relatively few in the academic world and mainly in the real-life,

some bank valuation techniques were offered to be used by analysts &

professionals. After the crisis, the importance of banks have been noticed

and since then academic studies in bank valuation techniques also

increased.

Valuation attained its place and importance in Western literature in

the 1960s and it is sloganised that the main objective of the corporation is

to maximise the value rather than maximise the profit. It is started to

emphasize on the importance of valuation in Turkey since the 1990s in

both academic and practical studies (Küçükkaplan, 2008: 1). In the past,

in US finance books the main objective of the firm was mentioned as

profit maximisation but later it is lost its significance since profit

maximisation is subjective. For example, as mentioned in Ercan and

Üreten (2000), in the article of Robert Antony in Harvard Business

Review in December 1960 with the name of “The Trouble with Profit

Maximisation” it is mentioned that profit does not have a meaning in

solitary sense and it is not clear whether the profit to be maximised is

short term, long term, profitability ratio or profit amount. In today’s

world, the objective of a corporation is defined as maximising the value in

shareholder perspective (Küçükkaplan, 2008: 4).

According to Damodaran (2009) analyst having the purpose of

valuing a bank faces three main difficulties. Firstly, the character of

banks’ facilities create obstacles to specify re-investment (net capital

expenditure and working capital) and debt and this makes it tough to

estimate cash flows (banks’ debts are more close to staple rather than a

capital source). Secondly, banks are usually under intemperate regulations

and this may cause notable outcome on value. Thirdly, accounting

principles governing banks are quite dissimilar from the accounting

principles applied in other non-financial corporations and assets of the

banks are mostly marked to the market-place. Assets of banks are usually

financial instruments such as securitised obligations, bonds and they

usually have dynamic marketplace. Accounting standards are built up by

considering the fact & tendency that banks usually achieve a profit for

long intervals and usually have heavy losses for short intervals.

The intention of valuing an investment instrument is determining

its price. Market price does not always reflect the true value of an asset.

Investors need to find the true value which has to be. Different techniques

are employed in the valuation process. In the literature, these techniques

are used easily for manufacturing and commercial firms but they are quite

difficult to employ for financial corporations (banks, insurance, leasing,

factoring companies etc.). These difficulties arise from the different

structure of financial corporations’ financial statements and the excessive

sensitivity of these corporations to macro-economic decisions. It is quite

tough to value a bank for both theoretical and practical sense. For some

techniques, it is quite difficult to reach the required data needed for

valuation (Küçükkaplan, 2008: 1). Common conceptions like income

from operations and working capital happen to specify and account. As a

result of this, there is a need to value a bank from a quite different

perspective which has advantages and disadvantages (Dime Trader, 2012).

Valuing banks by internal bodies mostly focus on stockholders’ objective-

creating value, improving cash and profitability. However valuing banks

by external bodies is various-sided and mostly focuses on risk

(Strumickas & Valanclene, 2006: 22).

Banks are to a great extent controlled by regulations every place

in the world, although the size of the control changes from state to state.

Generally, this regularization happens in three kinds. Firstly, bank

corporations are expected to achieve some capital proportions which are

asked by the regulators and which are calculated according to their book

values of equities and their performance in order not to stretch beyond

their capacities and risk the position of the shareholders or depositors.

Secondly, banks are commonly restrained in terms of where they can

venture their reserves. For example, at the beginning of 2000s, the Glass

Steagall Act which is enacted in the USA, restrained banks operating in

commercial facilities from seizing effective equity-related places in non-

financial corporations and involving in investment banking facilities.

Thirdly, the entrance of new banks in the sector and merging requests

between the corporations are usually checked & controlled by the

regulatory bodies. All these issues affect valuation calculations because

suppositions related to growing are concatenated to suppositions

surrounding re-investment. In terms of banks, those suppositions must be

scrutinized to assure that they meet regulation restrictions. These issues

may also affect the framework where the risk of the bank is quantified. If

regulation related constraints are varying or they are expected to vary, this

then might increase the risk (uncertainty) for the future facilities and

affect the bank’s value. Simply, we must be conscious of the governing

regulatory forms in the valuation process (Damodaran, 2009: 5).

Beltrame and Previtali (2016) mention that usually bank regulators

impact several features of banks’ facilities both from asset and liability

perspective. They acknowledge that the Basel framework which imposes

some capital restraints is one of the most crucial components that impact

bank value. It is mentioned that the concentration is on bank capital due to

the undermentioned reasons:

•The character of bank facility that conducts with payments,

investments, credits and savings needs a stable type of safeguard

from market failure.

•Lofty level of capital shields claim holder from failure (default)

and they promote to strengthen bank sector’s resiliency to likely

systematic financial crisis.

•Bank capital possesses an unlike function in comparison with the

other non-financial corporations. In the banking sector, capital

hinges on the aggregate of asset and its risk.

These likely capital stipulations which are imposed by Basel are

peculiarly important in bank valuation process since capital additions and

their inner form may create an explicit restraint on growth chances. A

capital shortage diminishes the bank’s potential to extend assets or even to

handle their interior mixture by considering the inherent risk. This kind of

rigidness in asset and capital supervision may impact the bank’s capability

to achieve earning and to give out a dividend. Hence, it is believed that

when the bank is valued, in addition to asset growth and earning, also

bank’s plan to encounter the required increase in the capital should be

assessed (Beltrame & Previtali, 2016: 9-10).

Cash flows generated by banks are usually quite volatile and are

connected to macro-economic conditions. For this reason, it is quite

difficult to forecast cash flows of banks and it is easier to make a fault.

For most of the corporations, their balance sheets are heavily influenced

by presumptions made by the managers and past events. For instance, the

judgment made between FIFO (First in first out) and LIFO (Last in first

out) stock valuations may affect the results of a corporation with a high

level of stock and in high inflation environment. As a result of this, for

non-banks, equity of stockholders is quite gratuitous evaluation and it is

quite tough to contrast across corporations with divergent business tactics

& strategies, grand and ages. Fortunately, in most cases, this is not an

issue for banks. Banks utilise accountancy of mark to market and this

enables us to see almost assets and liabilities at a valuation which are at a

fair level determined by the market rather than historical cost. By this

way, unrealized gains and losses are in actuality recognised. The

stockholders’ equity on the balance sheet of the bank becomes to a greater

extent of net deviation between the existing marketplace of assets and

liabilities (Dime Trader, 2012).

Another notable point which should be considered is the loan loss

provision (LLP). Banks make loan loss provisions to confront a possible

twisting in the quality of their credit portfolio and this can be noted as one

of the primary accrual expenses. Usually, loan loss provisions are

discretional and they should be normalised when the analyst calculates the

expected earning of the bank. The main targets of provision can be listed

as below (Beltrame & Previtali, 2016: 14-15):

•Taxes: Executives can modify provision with the purpose to

report a targeted net profit (when more provision is made, yearly

tax expense is lowered).

•Capital adequacy: Executives may utilise provision to achieve

the capital requirement.

•Income smoothing: When there is an intention to stabilise net

profit over time-period, this pursuit is made.

•Signalling: Substantial loan loss provisions are thought to be a

signal to the market that profitability will increase in the future

rather than a credit loss.

When we examine capital expenditures in banks, it is noticed that

since mostly the bank’s investment is not a tangible asset, banks have a

low grade of amortization. Bank’s investment in a brand name, I&T

technology, process and procedure improvement and human capital are

usually accounted as operational cost (rather than fixed investment).

Some academicians defend that to estimate capitalisation, the primary

difficulty faced by an external analyser is to distinguish distinct elements

of investment from operational cost. Therefore, adjustments made in

capital expenditure in nonfinancial corporations are not suitable for banks

due to the unlikeness in fixed investment concept (Beltrame and Previtali

2016, 16).

To obtain efficiency and reliability in capital markets one of the

crucial issues is to value the firm correctly. At first, determining the value

of the firm correctly is needed in the initial public offering and at the time

when the decision to buy the stock is made. The degree of reflecting the

true price in the market is very important for investors. On the other hand,

it is crucial to determine the value of the corporation that is in the

privatisation process in a true way (Küçükkaplan, 2008: 1).

Assets can be marked to market but despite this, the analyst

should carefully and independently assess the value. Otherwise, there are

two reasons for failure in precise value estimation. Firstly; believing that

the market will form accurately can be misleading, it can make mistakes

and these mistakes will then pass to the book value. For example, after the

crisis in 2008, it was understood that markets overvalued the assets.

Secondly, assets are usually valued by the market by the use of models

utilised by appraisers and this evidently causes the lag in noticing the

change in the value and sometimes causes to overvalue (Damodaran,

2009: 12).

EXCESS RETURN MODEL

Because of the reason that banks’ equities’ book values are to a

greater extent true and cash flows of banks are quite volatile and to a

lesser extent precise for measuring the managers’ performance due to

larger effect of macro-economic factors rather than micro-economic

factors) compared to other types of firms, some of the analysts who are

interested in the value of banks, depend on stockholders’ equities. This

technique is known as ‘Excess Return Model’ and reaches to equities’

values by summing the existing equities capitals and present economic

values of expected excess returns to equities (Dime Trader, 2012). Also

discounted cash flow measures do not provide any info about the value

created. Therefore to examine if banks accomplish higher return than the

cost of capital, this model; the excess return model is quite practical and is

a different approach to value measurement. This model is also known as

residual income model or abnormal earnings model in the literature. This

approach originates from the study of Marshall in 1890 and at that date,

he mentioned that value concept is measured by the excess profit after we

deduct a capital charge. By the help of this model, we measure the value

of the bank on the capability of the bank to accomplish a flow of return

higher than the return which will be achieved by the invested capital with

the same risk level (i.e. opportunity cost). When this model is examined

from an academic perspective, it is noticed that the model’s measures

abide by Feltham and Ohlson model. The bank’s value stringently hinges

upon whether the return is more than the capital cost (i.e. excess return).

If this stipulation is not accomplished in the forecast term, then bank

value is simply net asset value. The model can be calculated as below

(Beltrame & Previtali, 2016: 23-25):

Residual Income (ROEre)*EquityCapitalt1 Residual

Income  Net Income( *re EquityCapitalt1)

EquityValue  EquityBookValue

t nt1 (1RIrt )  TV

t(1

ere )n

RIt1

TV 

(re  g)

In other words, in the excess return technique, cash flows are

separated into normal return cash flows and excess return cash flows.

When the bank earns a risk-adjusted required return, this is recognized

as cash flow of normal return but when the bank creates cash flow above

or below this figure, and then it is called an excess return. This excess

return may be positive or negative. Excess return technique originates

from the concept of capital budgeting and NPV (net present value). As

long as bank achieves positive NPV, the regarding investment improves

the value (the prior estimated profitability of the investment does not

matter). This means that if the excess return is achieved then cash flow

growth and earnings matter value (equity return>cost of equity).

Therefore this technique values the bank as a function of estimated

excess returns (Damodaran, 2006: 37).

DISCOUNTED CASH FLOW MODELS

As it is usually applied, the discounted cash flow (DCF)

approaching is built on the theory that we estimate the asset’s price by

discounting back the expected cash flows in a period. In bank valuations,

mainly two discounted cash flow models are utilised: Dividend Discount

Model (with excess capital adjustment) and Cash Flow to Equity Model

(CFE). When these models are examined, it is seen that they give the

same results when banks pay out all distributable earning. This happens

when the pay-out ratio is equal to 100% (Beltrame & Previtali, 2016: 19-

22).

 CashFlowt

Value (1re)t

t 0

Estimation of profit evolvement for banks can be accomplished

by regression analysis or by analysing the plan in terms of finance from

data prepared from profit & loss account and balance sheet. The

regression analysis technique is suitable in developed countries where

there exists long term stability. Secondly, this technique is more

appropriate for banks rather than nonfinancial corporations since banks

usually operate under strict regulations and there is not chief

unsteadiness. However, if it is available to the bank’s financial plan is

the best and most accurate way to estimate future performance (dividend

etc.). An analyst should be able to examine the critical features of a

bank’s profits and future projections. It should be usually reasonable if

estimations are performed for the next 5 years. Loans and other earning

assets which are main profit creators and income from fees should be

very carefully assessed in the analysis (Horvatova, 2010: 57).

Nevertheless, calculating a value from cash flows can be

problematic. In terms of cash flow, there is not a well-defined value

creation procedure, since, for example, the dividend represents a synthetic

amplitude of cash. By some academicians, it is advocated that equity side

perspective can be imperfect technique since this technique does not

permit to analyse cash formed by the use of asset and liability (Beltrame

& Previtali, 2016: 1).

According to Damodaran (2009) two main figures that affect bank

value are the ‘cost of equity’, which is the function related to the risk that

originates from the banks’ investment, and ‘the return on equity’, that is

settled by banks’ business choosings and regulatory stipulations.

For a bank, in comparison with other nonfinancial corporation

there exists a substantial difference in terms of the portion of own and

foreign fund sources. Due to the characteristics of bank, it usually has a

high gearing ratio. Cost of capital stands for the investors’ expected rate

of return considering the investment risk grade. Expected rate of return

should be higher than the bank interest rates (bank deposit) since any kind

of business facility represents a higher risk than risk-free investment.

Riskfree rate(rf) may be calculated from government bond interest rates or

these government bonds’ yield to maturity. Cost of capital is higher than

the riskfree rate considering the tax shield. Some techniques for

estimating the cost of equity can be listed as below (Horvatova, 2010: 53-

54):

•Gordon Growth Model

•Capital Assets Pricing Model (CAPM)

•APT (Arbitrage Pricing Theory) Model

•The foreign funds’ cost

•Average profitability

CASH FLOW TO EQUITY MODEL

Aggelopoulos (2017) argues that when a bank’s cash flow model

is tried to be built outside the bank, Cash Flow to Equity technique rather

than the Discounted Cash Flow technique should be utilised. Because the

financing and operating judgement can not be segregated in banks

(interest expense and income (financing judgements’ elements) are crucial

factors of operating income) (Aggelopoulos, 2017: 2). In this technique,

rather than free cash flows provided to debt and equity holders are used,

only cash flows expected to be provided to equity holders are utilised.

Since the expected cash flows are only for equity holders, when the

present value of these cash flows is calculated, the equity cost of the bank

should be used. The sum of discounted values of equity cash flows

estimates the value of a bank’s equity. When equity value is divided by

the stock number, the price of each bank stock is estimated. Stock price in

the market can be compared to the required value of the stock estimated

by the model and buy-sell decisions are given by examining the difference

(Bozacı, 2012: 34-38).

CashFlow EBIT *(1T)

(Capital Expenditure AmortisationExpense)

NetWorkingCapital

EBIT  EarningsBeforeInterestandTax

DIVIDEND DISCOUNT MODEL

Damodaran(2009) mentions that some analysts believe that

the estimation of value by cash flows for banks is not applicable and

only depend on the sole discernible cash flows: dividend. This can be

thought to be sensible, these analysts inherently assume that the

dividend which is paid by banks is reasonable and sustainable.

Nevertheless, this assumption is not always correct. It is known that

some banks are paying dividend too much and afterwards they issue

new shares to recompense and some pay too little and utilise the

remaining amount to improve their capital proportion(ratio). When the

valuation is performed depending on paid out dividends by

considering the scenarios mentioned, in the former case we will

overvalue the value of the bank and in the latter case, we will

undervalue the value of the bank. The use of present dividends can be

problematic; for example, the bank can have high growth potential

and pay a very little dividend for a very long time compared to the

mature banks. This time we can again undervalue the bank. If the

bank pays no dividend, we can even conclude that the value of the

bank is zero!

Horvatora (2010) believes that in utilising cash flow to

estimate value from the perspective of bank shareholders below issues

should be taken into consideration:

•For banks, statement of cash flows is not appropriate for

deciding owners’ sources because dividend related to the bank

shareholders can be reimbursed only from real net income

after tax and not from the cash flow activity.

•Banks’ and nonfinancial corporations’ profits are not evenly

come-at-able because there is not a problem in terms of cash

available to bank shareholders due to the character of most of

the assets&liabilities, whereas in nonfinancial corporations

substantial deviations exist between profits and cash flows

(some businesses may create profit but not enough cash

flow).

•The primary income generators for banks are service fees and

the balance between interest income and expense. i) Gordon

Growth Model

As mentioned by Damodaran(2002), the Gordon Growth Model is

utilised usually to value corporations which have steady growth and

which have dividend growth rate preserved in an infinite time. Because of

the reason that it is assumed in the model that the corporation’s growth

rate in dividends is anticipated to continue eternally, in literature the title

‘steady growth rate’ is extensively argued and queried. One of the

viewpoints of the Gordon Growth Model and the model’s steady growth is

that other functioning rates (for example ‘earnings’) have the identical

yearly growing rate as a dividend. For this reason, in the case that

corporation’s earning is developing quicker than its ‘dividend payout

ratio’ in the longterm, than the corporation’s ‘payout ratio’ is going to

tardily come close to zero and this isn’t a characteristic of a corporation

which has a stable growing structure. Moreover, a corporation which is in

‘steady state’ can not possess a growing rate which surpasses the growth

rate of the sector & economy where the corporation functions. It is

pellucid that ‘growing rate’ has an important function in this model and if

we utilise inappropriate rate, this will result as improper valuations. It can

be seen in the regarding the formulation of the model that when the

corporation’s ‘growth rate’ approaches the ‘cost of equity’, the value will

become infinite and when the ‘growth rate’ passes the ‘cost of equity’

then the value will become negative (Charumathi & Suraj, 2014: 39).

Regarding the payout ratios issue; the ‘expected dividend per

share’ may be calculated by finding the product of EPS (Earning per

Share) and ‘Expected Payout Ratio’. There are two gains when we derive

dividends from ‘expected earnings’. Firstly this enables the analyst to

concentrate on ‘expected growth rate in earnings’, that is more credible

and obtainable than ‘growth in dividends’. Secondly, ‘payout ratio may

vary in due course and this shows that investment possibilities and growth

are changing. We can calculate the bank’s ‘payout ratio’ dividing the

dividend by the earning (same calculation with the corporations in other

sectors). When the dividend performances of banks are examined it is

noticed that banks usually pay more dividends in comparison with the

other corporations in the market. The ‘dividend yield’ and ‘dividend

payout ratio’ for banks are mostly higher than the results of the

corporations in different sectors. This happens firstly because banks

facilitate in much more ripe field in comparison with the corporations in

other fields such as software and telecommunication. Secondly, even the

differences in the expected ‘growing rate’ are controlled, banks usually

pay more in dividends compared to non-financial corporations for two

causes: banks customarily have fewer invesments in the ‘capital

expenditures’ than nonfinancial corporations (so more dividend from

more net income can be paid and as a dividend) and when the historical

performances are analysed it is seen that banks are stable and high

performance in dividend payment (so they earned the reputation of being

reliable dividend payers) and they appealed investors who prefer dividend

and by this way, it has become more arduous to modify their dividend

payment scheme (Charumathi & Suraj, 2014: 40).

The formulation is as below:

Value  ke  g

ke  Costof Equity

g GrowthRateof Dividend

ii) Two-Stage Dividend Discount Model

This model allows us to use two different growth rates for two

different periods. Firstly, a growth rate is decided for the suitable first

period (this rate does not need to be constant). Secondly, a constant

growth rate is used for the second period which is assumed to continue

eternally. In most cases, it is expected that the growth rate is higher than

the constant growth rate. However, this is not a necessity. This model can

also be applied to the banks which have low growth rates initially

however which are expected to grow fast afterwards. (Bozacı, 2012: 41-

42). The formulations are as below:

Value tn1 (1Dkt e)t  (1Vkne)n

Dn1

n 

(ke  gn )

Dt expected dividend in yeart

ke costof equity

Vn  valuein yearn g 

growthrateatthebeginning gn

unchanging growthrate

iii) H Model

H Model is another quantitative method which can be used in the

dividend discount model. This technique is quite alike as the two-stage

dividend discount model. The difference is that growth rate is attempted

to be smoothed out over time and it does not suddenly change from high

to a low value. In this model, it is assumed that the growth rate falls

linearly towards the final growth rate. For most of the corporations,

dividends fall or rise gradually rather than suddenly changing. This model

was created for the corporations whose growth rates change over time

(“What is the HModel?”,t.y.)

The formulations are as below:

Value  D0(1 gn )  D0 * H *(ga  gn )

ke  gn ke  gn

Dt  e xpected dividendin yeart

ke  c ostof equity

H  the durationof thedecline incompany s growth'

ga  growthrateatthebeginning gn unchanging

growthrateafter H years2

iv) Three-Stage Dividend Discount Model

This model is created by combining the two-stage dividend

discount model with the H model. This is the most flexible dividend

discount model. In this model, it is assumed that the corporation will

grow at a constant high rate, afterwards, it will decline gradually and

finally, it will remain at a lower constant rate and continue eternally in

this constant growth rate (Bozacı, 2012: 44-45).

Value tn11 E0 *(1(1gkea))t a  t n n12 1

(1Dkt e)  E(kne2 *gnn)(1*(1kge)nn)

Dt  expected dividend in

yeart Et  earningin yeart ke 

costof equity

 a dividend payoutratioinhighgrowthrate period  n

dividend payoutratioinunchanging growthrate period ga 

growthrate forn period1 gn  unchanging growthrate

expected growthrate

 1

equity profitability

Below primary propositions can be made when discounted cash

flow models are considered as a whole (Beltrame & Previtali, 2016:

2223):

•Dividend discount model is easier to be performed in practical

life since free cash flows to equity can not be calculated for banks

unless we make some strong suppositions. Moreover, a bank

usually does not pay out all of its yearly earning and it tries to

smooth stockholder’s cash flow in time. Dividends can be

regarded as the best substitute for the free cash flows available to

stockholders.

•From the viewpoint of an external analyser, it can be quite tough

to estimate the dividends in the long-term since dividends are the

outcome of banks’ dispersion policies. It can be advocated that

historical performance can be a useful benchmark, however,

valuation is made for the future. When it is tough to estimate the

future (for example in case of crisis) dividend discount model can

be untrustworthy. In such occasions, it would be convenient to

perform probabilistic sensitivity review or asset-side technique of

valuation.

RELATIVE MARKET VALUATION MODEL

Relative market valuation model takes its roots from the

presumption that financial markets are efficient and have liquidity. When

the financial markets are efficient, then alike assets that have the same

risk and return properties should be traded with close prices to each other.

Value and market multiples are usually used to value the firm by

assuming the above presumption and the bank’s value is estimated in the

context of banks’ which have close properties. To able to apply the above

methods, we have to have similar banks that are close to each other in

terms of growth, efficiency, profitability, diversification, size and

commercial plan. But it is a quite tough task to find similar banks. For this

reason, the criteria are loosened to achieve a tradeoff between the number

of the banks in the list and the closeness of the banks in terms of

properties and a counterbalance between data quality and precision is

tried to be accomplished. Since there is a risk to misprice the bank and a

risk to be inaccurate, this technique is advised to be used only as a control

method (ie not the chief method) (Beltrame & Previtali, 2016: 31).

Damodaran (2006) mentions that corporate value multiples such

as Value to EBIT or Value to EBITDA can not be simply used for the

valuation of banks, because we can not simply estimate operating income

and value for banks. Therefore it is advised that equity multiplies should

be utilised in the valuation process. Mostly, in practice, price to sales

ratio, price to book value ratio and price-earnings ratio are used. It is

believed that from these ratios, price-earnings ratio and price to book

value ratio should be preferred since sales are not easy to be measured for

banks and it is more difficult to use price to sales ratio.

i) Price Earnings Ratio:

Price-earnings ratio is among the most favourite valuation

techniques for analysts who are interested in the values of firms. It is quite

useful since the price-earnings ratio seizes stock’s growth rate and risk.

Therefore we can evaluate the bank’s value by utilising the price-earnings

ratio of corresponding banks that have the same growth and risk. This

technique is particularly handy when we can not observe the value of a

bank. The functioning of this technique relies on the way we choose

comparable banks. Alford (1992) inspects many explications of

comparable corporations (for example sector membership, return on

equity, size) (Cheng & McNamara, 2000: 349-350).

Price per share Earnings per share

Price Earnings Ratio



Value Price arning atio Bank snet profit e r * '

ii)Price to Book Value Ratio:

If we keep other factors same, higher price to book ratio will

occur when return on equity, earnings growth rate or payout ratio

increases or equity cost decreases. Among these four ratios, return on

equity has the greatest impact on the price to book value ratio, therefore

this ratio can be identified as the associate variable for the price to book

value ratio. It can be said that the association of return on equity and price

to book value ratio is stronger for the banks in comparison with the firms

in other industries & sectors. The reason for this is the fact that equity’s

book value is closer to the equity’s market value. Additionally, accounting

facilities affect the return on equity less for banks (Damodaran, 2009: 30).

Price per share

Price to Book Ratio



Bookvalueof theequity per share

Value  PricetoBook Ratio Bank sEquity*

ASSET MARK-DOWN MODEL

Beltrame & Previtali (2016) proposed a new model which is

based on bank-specific theoretical valuation perspective and a novel asset

side model. It is an adjusted PV(Present Value) model and it aims to

calculate chief value creator originators which are identified as mark-

down on deposit, tax benefit on bearing liability (deposit and non-deposit

debt) and free cash flow from assets (FCFA). Unlike industrial companies,

bank deposit creates value. To estimate value created by banks, model

formulates an association between WACC and cost of assets and suggests

a restatement of the Modigliani Miller proposition utilising bank-specific

adjustments.

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