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The Valuation of Financial Companies: Tools and Techniques to Measure the Value of Banks, Insurance Companies and Other Financial Institutions by Mario Massari, Gianfranco Gianfrate, Laura Zanetti

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1

Bank Business Models

From an economic point of view, banks carry out the crucial role of intermediating between individuals and/or organizations (corporations, financial institutions, national and local governments, and non-profit entities) with financial surpluses and those suffering from (temporary) money deficits. Such a definition is quite general and falls short of fully representing the complexity and articulation of an industry that is essential for economic development and national growth. When the banking system does not work properly the costs for the economy may be severe as the last financial crisis has made painfully clear. To sketch the main features of the banking business, we will segment the industry into a few categories in order to identify the different business models' economics, profitability drivers, and, eventually, valuation metrics. Nevertheless, it's worth underlining that, as Paul Volcker,1 former Federal Reserve Chairman used to say, fiduciary responsibility is at the very core of every banking organization, regardless of the specific activities carried out.

1.1 ECONOMICS OF BANKING

Bank valuation can build only on a sound understanding of what banking business involves, what the different business models are over time, and now coexist in most countries. For valuation purposes, we will identify the main revenue-generating activities that a bank may carry and outline the business models behind such activities. While some banks are “mono-business” ...

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