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Bank valuation: with an application to the implicit duration of non-maturing deposits

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The purpose of this tutorial paper is to present a model to value banks. First, three traditional models are summarized briefly. Next, a ‘fundamental’ bank valuation model is introduced. Based on sound economics and finance principles, it allows us to identify the various sources of value and to derive managerial implications such as the measurement of interest rate risk on non-maturing deposits. A first contribution includes the breakdown of the value of equity into two parts: a liquidation value and a franchise value. A second contribution is to call attention to the corporate bond market – instead of the equity market – to find adequate risk premium to value banks. The valuation model concerns on-balance-sheet banking business, such as deposit taking and lending. Off-balance-sheet business, such as advisory services, can be valued with standard corporate finance tools.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2009/2009-64.pdf

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Copyright INSEAD. All rights reserved