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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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4

Assessing and Preparing the Business Plan for a Bank

Amedeo Giammattei

Forecasting bank earnings may appear to be something of a lottery with so many uncertain line items.

Stephen Frost, The Bank Analyst's Handbook

The purpose of this chapter is twofold: we will first present a framework to analyze the business plan of a bank from a valuation perspective, and we will then provide guidelines for preparation of the business plan itself. As a matter of fact, the business plan is the fundamental input of the valuation process. Assessing its sustainability and highlighting areas of potential inconsistency might have a critical impact on the final valuation and requires not only strong judgment but also a solid method.

If the business plan already exists and is available to the analyst, there are three broad categories of checks that can be performed:

  • Status quo analysis: establishes whether the current value of some key on- and off-Balance Sheet items requires potential adjustment. Areas that are particularly critical for banks include asset quality, toxic and illiquid assets, goodwill, and capitalization.
  • Internal consistency: assessment of the forecasts included in the business plan to make sure they are internally coherent, that is, there is consistency between historical performance and projected performance, the expected evolution of P&L items and that of Balance Sheet items, asset side and liability side, financial forecasts, and operating forecasts;
  • External consistency

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