Bank valuation using the income approach
Posted: Thu Jan 30, 2025 4:19 am
To evaluate a banking institution as a going concern, this approach uses two main methods:
capitalization of income;
discounted cash flows.
Capitalization of income
The first one can be applied only argentina email list if the mandatory condition is met – maintaining profitability at the existing level. Such an assumption can be fairly put forward by large structures (for example, Sberbank of Russia), which have been operating in the market for many years. Sometimes stable growth rates are also observed in small banks, which in this case are quite capable of using the capitalization method in evaluation.
Bank valuation using the income approach
Source: shutterstock.com
But more often than not, especially in the context of economic cataclysms, it is difficult to talk about sustainable development and to assume with a high degree of confidence that it will be possible to maintain the achieved profitability indicators. Therefore, the cost conclusion must be confirmed by the results of assessment using other methods and even approaches. This will be more justified.
Discounting cash flows
The second method allows for the potential uneven change in profitability over time. When applying it, the following aspects should be taken into account.
The banking business is customer-oriented, therefore, to forecast income and expenses, it is possible to use information about the characteristics of the client base and its dynamic changes, taking into account all capital (both equity and borrowed) in the calculations. Using this model in assessing credit institutions allows us to forecast the financial result as such (the difference between income and expenses), which, in turn, leads to a fairly accurate determination of the total financial flow for the organization.
Many experts consider the cash flow model to be the most suitable for conducting a high-quality bank valuation, in order to obtain the market value of the organization's equity. The cash flow is calculated as income from core activities, to which the received funds are added and the used foreign exchange reserves are subtracted.
High risks (as one of the characteristics of the banking sector) require limiting the forecast period to 15-20 years. Of these, detailed calculations are made for the first 5-8 years (which is ensured by analyzing the dynamics of the client base), and simplified ones for subsequent years. Within the framework of this scheme, one can expect a terminal value (in the post-forecast period) of 80-85% of the total price of the credit institution.
capitalization of income;
discounted cash flows.
Capitalization of income
The first one can be applied only argentina email list if the mandatory condition is met – maintaining profitability at the existing level. Such an assumption can be fairly put forward by large structures (for example, Sberbank of Russia), which have been operating in the market for many years. Sometimes stable growth rates are also observed in small banks, which in this case are quite capable of using the capitalization method in evaluation.
Bank valuation using the income approach
Source: shutterstock.com
But more often than not, especially in the context of economic cataclysms, it is difficult to talk about sustainable development and to assume with a high degree of confidence that it will be possible to maintain the achieved profitability indicators. Therefore, the cost conclusion must be confirmed by the results of assessment using other methods and even approaches. This will be more justified.
Discounting cash flows
The second method allows for the potential uneven change in profitability over time. When applying it, the following aspects should be taken into account.
The banking business is customer-oriented, therefore, to forecast income and expenses, it is possible to use information about the characteristics of the client base and its dynamic changes, taking into account all capital (both equity and borrowed) in the calculations. Using this model in assessing credit institutions allows us to forecast the financial result as such (the difference between income and expenses), which, in turn, leads to a fairly accurate determination of the total financial flow for the organization.
Many experts consider the cash flow model to be the most suitable for conducting a high-quality bank valuation, in order to obtain the market value of the organization's equity. The cash flow is calculated as income from core activities, to which the received funds are added and the used foreign exchange reserves are subtracted.
High risks (as one of the characteristics of the banking sector) require limiting the forecast period to 15-20 years. Of these, detailed calculations are made for the first 5-8 years (which is ensured by analyzing the dynamics of the client base), and simplified ones for subsequent years. Within the framework of this scheme, one can expect a terminal value (in the post-forecast period) of 80-85% of the total price of the credit institution.