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The Valuation of Financial Companies: Tools and Techniques to Measure the Value of Banks, Insurance Companies and Other Financial Institutions

Book Description

This book presents the main valuation approaches that can be used to value financial institutions. By sketching 1) the different business models of banks (both commercial and investment banks) and insurance companies (life, property and casualty and reinsurance); 2) the structure and peculiarities of financial institutions' reporting and financial statements; and 3) the main features of regulatory capital frameworks for banking and insurance (ie Basel III, Solvency II), the book addresses why such elements make the valuation of financial institutions different from the valuation of non-financial companies.

The book then features the valuation models that can be used to determine the value of banks and insurance companies including the Discounted Cash Flow, Dividend Discount Model, and Residual Income Model (with the appropriate estimation techniques for the cost of capital and cash flow in financial industries). The main techniques to perform the relative valuation of financial institutions are then presented: along the traditional multiples (P/E, P/BV, P/TBV, P/NAV), the multiples based on industry-specific value drivers are discussed (for example, P/Pre Provision Profit, P/Deposits, P/Premiums, P/Number of branches). Further valuation tools such as the "Value Maps" or the "Warranted Equity Method" will be explained and discussed. The closing section of the book will briefly focus on the valuation of specific financial companies/vehicles such as closed-end funds, private equity funds, leasing companies, etc.

Table of Contents

  1. Cover
  2. Title Page
  3. Copyright
  4. Preface
  5. Acknowledgments
  6. Chapter 1: Bank Business Models
    1. 1.1 ECONOMICS OF BANKING
    2. 1.2 COMMERCIAL BANKS
    3. 1.3 INVESTMENT BANKS
  7. Chapter 2: Financial Statements Analysis for Banks
    1. 2.1 BALANCE SHEET
    2. 2.2 THE US GAAP FOR BANKS
    3. 2.3 PROFIT & LOSS STATEMENT
    4. 2.4 MAJOR DIFFERENCES BETWEEN IAS/IFRS AND US GAAP
    5. 2.5 EXAMPLE OF IAS/IFRS APPLICATION
  8. Chapter 3: The Regulatory Capital for Banks
    1. 3.1 REGULATORY CAPITAL REQUIREMENTS
    2. 3.2 BASEL II
    3. 3.3 THE REFORM OF BASEL III
    4. 3.4 MANAGING THE REGULATORY CAPITAL
  9. Chapter 4: Assessing and Preparing the Business Plan for a Bank
    1. 4.1 STATUS QUO ANALYSIS
    2. 4.2 INTERNAL CONSISTENCY
    3. 4.3 EXTERNAL CONSISTENCY
    4. 4.4 THE FORECASTING MODEL OF A BANK
  10. Chapter 5: Bank Valuation
    1. 5.1 WHY BANK VALUATION IS DIFFERENT
    2. 5.2 DISCOUNTED RETURNS MODEL
    3. 5.3 RELATIVE VALUATION
    4. 5.4 ASSET/LIABILITY-BASED VALUATION
    5. 5.5 THE SUM OF THE PARTS FRAMEWORK
    6. 5.6 BANK VALUATION IN M&A
    7. 5.7 THE VALUATION OF WELLS BANK
  11. Chapter 6: Insurance Business Models and Financial Statements
    1. 6.1 THE BUSINESS MODEL OF INSURANCE COMPANIES
    2. 6.2 SEGMENTATION BY PRODUCTS
    3. 6.3 DISTRIBUTION CHANNELS
    4. 6.4 INSURANCE BALANCE SHEET UNDER US GAAP
    5. 6.5 INSURANCE CONTRACTS UNDER IAS/IFRS
    6. 6.6 CASE STUDY
  12. Chapter 7: Regulatory Capital for Insurance Companies
    1. 7.1 INSURANCE INDUSTRY REGULATION IN THE US
    2. 7.2 CURRENT US SYSTEM
    3. 7.3 SOLVENCY II – EUROPEAN-BASED REGULATION
    4. 7.4 MAIN DIFFERENCES BETWEEN SOLVENCY II AND US REGULATION
  13. Chapter 8: Assessing the Business Plan for an Insurance Company
    1. 8.1 STATUS QUO ANALYSIS
    2. 8.2 INTERNAL CONSISTENCY
    3. 8.3 EXTERNAL CONSISTENCY
    4. 8.4 THE FORECASTING MODEL
  14. Chapter 9: Insurance Companies Valuation
    1. 9.1 APPRAISAL VALUE
    2. 9.2 RELATIVE VALUATION
    3. 9.3 THE CASE OF “GENERAL INSURANCE”
  15. Chapter 10: The Valuation of Other Financial Companies
    1. 10.1 THE VALUATION OF FINANCE COMPANIES
    2. 10.2 THE VALUATION OF FUNDS
  16. References
  17. Index