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How to value a bank?

Graham Osborn

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Can people describe the steps they take in bank valuation?  On the one hand cash flows are volatile, on the other hand portfolio may be less mark-to-market than one would like.  Applying any sort of "steady state" assumption based on historical returns seems difficult particularly with the roller-coaster ride of the past 15 years.  Are people just looking for a sufficient discount to book with a sufficiently conservative loan portfolio?  Help!

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Ignore BV.  Book value means nothing.  Citigroup has been trading at less than TBV for how many years how.  Look at their earnings.


The most important thing for banks is their deposit base, and how sticky these deposits are (i.e. retail checking is the stickiest).  That is where all the value comes from.  At the end of the day the core business model for banks is to get cheap funding through deposits and make a spread from loans or buying bonds. 


If you want to calculate future earnings you have to look at the assets/liabilities and interest rate sensitivity (problem here predicting interest rates going forward good luck with that). 


Also banks use a lot of suspect accounting when booking provision for loan losses, mortgage servicing and interest amortization so you have smooth these out over time (i.e. in 2009 Wells fargo "took a bath" on the wachovia's loans - they over "expensed" it and eventually this expense was reversed and came back into income).


Also i think most US banks are fairly valued at point.  If you buy these you really need a very high conviction that rates are going much higher.       



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