Valuing Banks in Uncertain Times
Over the years, large numbers of academics and practitioners have looked into the valuation of companies and the different techniques that can be applied. Discounted cash flow, residual income, and economic value added are only a few of the techniques that have been researched extensively. Typically, these valuations cover either a specific industry, or a large diverse set of listed companies, but, without exception, exclude financial institutions. The reasons for this exclusion are simply that their characteristics are different from other industries and the fact that financial institutions, specifically banks, are notoriously difficult to value. But are they really that difficult to value and if so, why? As a result of the global growth of the Islamic banking industry, it becomes increasingly important to be able to determine the value of Islamic banks and compare their ability to create value with other banks in the industry. For Islamic banks, the estimation of parameters differs, amongst other reasons, due to the different balance sheet structure and the lack of availability of market data. The main question this book addresses is whether it is possible to determine the value of banks in general and Islamic banks in particular using generally available valuation models. But does this still hold in the current uncertain times? Questions that are addressed include the suitability of price as the right benchmark, the impact of market psychology, and the accuracy of future cash flow estimations.
Publication Date: 10/31/2009