What's a Bank Worth?
This book provides a theoretical model for bank valuation and highlights the challenges in times of economic uncertainty. It consists of two parts: the first part outlines a theoretical model for bank valuation and the second part looks into associated subjects, such as behavioral aspects, responses to crisis, and the prohibition of interest. The book starts with a brief review of the theoretical framework surrounding the valuation of companies and which model appears to be most suitable for firm valuation. It then guides the reader through the application of the residual income model to value a financial institution. Subsequently, it outlines a number of practical challenges faced when applying the model. The question that then arises is how banks differ and what is the impact of these exact differences on the valuation model. Is it possible to use the same model to value a bank? What's a Bank Worth? is based on the author's earlier work Valuing Banks in Uncertain Times. There are, however, a number of differences. The most substantial change is that this book does not have a specific section for Islamic financial institutions. Instead, it has a number of additional sections dealing with asset bubbles, financial regulations, risk management, and interest. The data used predates the global financial crisis of 2007/2008. Although current events do not by definition invalidate the results, they do raise a number of related questions, such as how the model presented might hold up throughout an economic cycle and whether or not the asset bubble and subsequent bust could have been predicted. The remainder of the book explores different types of valuation models and how the selected "residual income model" can be applied to the valuation of banks, as well as to Islamic banks. It also focuses on challenges which are not necessarily only applicable to banks, and it considers issues such as the impact of the media on share prices, valuation in uncertain times, and market sentiment.
Publication Date: 4/1/2012