Bank Analysis and Valuation

How does Basle 2 impact commercial bank valuation? Participants will incorporate key regulatory and accounting issues into bank analysis, moving from how a bank works to calculating maximum dividends payable annually.

Course Outline

• How a bank makes money
• How to interpret a bank's balance sheet and income statement
• Understanding the key ratios used to analyze banks
• Understanding dis-intermediation
• Overview of the banking industry
• Understanding a commercial bank’s financial statements in International Accounting Standards

Bank Regulation - The Regulatory Regime Banks Face

• How to calculate risk weighted assets
• How to calculate tier one and tier two capital
• Understand how the credit rating agencies become the de-facto regulators
• How Basle 2 will change bank regulation
• Three pillars
• Internal rating systems

Modeling a Commercial Bank

• Building an asset and liability management model
• Forecasting interest rates and spreads for key assets and liabilities
• Building a risk weighted assets model
• Preparing an income statement and balance sheet for the bank
• Balancing the model and checking for accuracy
• Understanding how regulations impose a growth constraint on commercial banks
• Checking the model and preparing a ratio sheet

 Valuing a Commercial Bank

• Understanding the different ways to value a commercial bank
• Discounted dividend flow
• Comparable valuation
• Price to book values and return on equity regression analysis
• Understanding the impact of double leverage in the holding company

Building a Dividend Discount Model from the Commercial Bank Forecast

• Changing the model driver to be an assumed regulatory capital ratio
• Calculating the minimum capital adequacy
• Calculating the maximum dividends payable each year
• Calculating the bank’s cost of equity
• Discounting the dividends to calculate today’s equity value
• Adjustments required to valuing a bank owned by a parent company
• Taking into account "double leverage"