Valuing a bank under IFRS and Basel III 2nd Edition by Waymond Grier ISBN 978-1843747697 1843747693
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Product details:
ISBN 10: 1843747693
ISBN 13: 978-1843747697
Author: Waymond Grier
The purpose of this workbook is to provide objective guidance to anyone who may be involved in determining the value of a commercial bank … It is a hands-on tutorial, designed to unravel the complexities of valuation in general and the application of valuation models in particular. The workbook is not intended to make the reader an expert in the field, but to equip the reader with the working tools and applications used by valuation experts for banks and business entities.
Table of contents:
Module 1:
The process of valuing a bank
Introduction
Why banks merge
How mergers add value
What makes a merger unattractive?
Exercise 1.1
Three-stage approach
Market value approach
Equity value approach
Exercise 1.2
Bank risks
Exercise 1.3
Summary
Module 2: IFRS disclosure for banks
Introduction
Applicable IFRS standards
Consolidated statement of income
Exercise 2.1
Consolidated statement of comprehensive income
Consolidated statement of financial position (balance sheet) – assets
Consolidated statement of financial position (balance sheet) – liabilities
Consolidated changes to equity
Consolidated statement of cash flows
Disclosure requirements for banks and similar institutions
Exercise 2.2
Maturities of assets and liabilities
IAS 39/IFRS 9 and hedging asset/liability mismatch
Concentration of assets, liabilities and off-balance-sheet items
Related-party transactions
Other disclosures
Merger accounting for banks
Exercise 2.3
Summary
Module 3:
Book to market value
Introduction
FMV and a bank’s assets and liabilities
Exercise 3.1
Cash and cash equivalents
Financial instruments
Treasury bills and other eligible bills
Trading and repo securities
Derivatives (as assets)
Exercise 3.2
Exercise 3.3
Other placements
Investment securities
Pledged assets
Loans and advances to customers
Customer liability for acceptances
Lease financing
Exercise 3.4
Real estate loans
Exercise 3.5
Reserve for loan losses
Investments in subsidiaries
Intangible assets
Bank premises and equipment
Deferred tax assets
Other assets
Deposits
Derivatives (as liabilities)
Short-term borrowed funds
Other borrowed funds
Current and deferred tax liabilities
Retirement benefit obligations
Equity
Exercise 3.6
Off-balance-sheet items
Exercise 3.7
Case study example of book value to fair market value
Annex: Example of a cash flow hedge (a ‘plain vanilla’ interest rate swap)
Module 4:
Market valuation models
Introduction
Model basis
Due from banks: interest-bearing time deposits
Exercise 4.1
Other money market placements: overnight funds
Exercise 4.2
Treasury bills and other eligible bills
Treasury notes
Coupon versus discount rate
Exercise 4.3
Treasury notes: market valuation between coupon dates
Treasury bonds
Zero-coupon bonds
Discount rate and price
Bond price over time (interest-paying bond)
Securities purchased under agreement to resell (repos)
Loans
Reserve for loan losses
Other assets
Model summary for assets
Exercise 4.4
Exercise 4.5
Model usage for liabilities
Off-balance-sheet items
Summary
Module 5:
Cash flow valuation for banks
Introduction
The equity approach
Exercise 5.1
Estimating free cash flow
Step 1: identifying the relevant components of free cash flow
Step 2: developing an integrated historical perspective
Step 3: forecasting changes in net interest income and developing the forecast assumptions
Step 4: calculating and evaluating the resulting free cash flow forecast
Exercise 5.2
Exercise 5.3
Module 6: GAP value drivers
Introduction
Static GAP analysis
Dynamic GAP analysis
Exercise 6.1
Determinants of rate sensitivity
Factors affecting net interest income (NII)
Changes in the level of interest rates
Changes in the relationship between short-term asset yields and liability costs
Changes in volume
Changes in portfolio composition
Rate sensitivity reports
Strengths and weaknesses: GAP analysis
Managing the GAP
Link between GAP and NIM
Sensitivity and simulation analysis
The duration gap: managing the market value of equity
Exercise 6.2
A duration application for banks
An immunised portfolio
GAP versus duration gap: which model is better?
Macrohedging and the GAP
Hedging and duration gap
Summary
Note: classification of cash and current account (non-interest-bearing) deposits
Exercise 6.3
Module 7:
Equity value application
Introduction
Free cash flow valuation
The capital asset pricing model (CAPM)
The dividend valuation model
Targeted return on equity (ROE)
Exercise 7.1
Case application: valuing the free cash flow to shareholders
Other valuation procedures
EPS dilution constraints
Exercise 7.2
Case application
Non-financial considerations that affect mergers and acquisitions
Summary
Exercise 7.3
Module 8: Enhancing bank value in reformed markets
Introduction
Types of credit derivatives
Credit default swaps
Exercise 8.1
Exercise 8.2
Total return swaps
Exercise 8.3
Credit-linked notes
Exercise 8.4
Summary
Module 9:
Basel III and bank value
Introduction
Definitions of capital
Regulatory capital: Bank for International Settlements
Basel I, Basel II and Basel III
Credit risk
Market risk
Operational risk
Exercise 9.1
Pillars 2 and 3
Internal growth rate of capital (IGRC)
Supplementary traditional capital ratios
Can shareholder value be added under Basel III?
Factors motivating regulatory capital arbitrage
Capital arbitrage in practice
Summary
Module 10: Value in stress testing and early warning signs
Part 1 Stress testing and value
What is a stress test?
Why stress test?
US Fed scenario
CEBS scenario
CEBS results
CEBS comparison with US Fed test
Relevance to bank valuation
Part 2 Stress test: an early warning sign?
Early warning signs of bank failure: deterioration in earnings
Early warning signs of bank failure: too risky lending
Early warning signs of bank failure: over-reliance on brokered deposits
Early warning signs of bank failure: incompetent managers
Detecting bank failure: Texas ratio
Bank failures: background
Review of bank failure models
Detecting bank failure: rating systems
Case study: buying a failed bank
Exercise 10.1
Annex
Appendix
Excess return models
Answers to exercises
Glossary
References
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