Valuation of Financial Services Firms - A Case study on the Valuation of a Swiss Bank with and without the Government Guarantee
One of the key tasks of corporate management is to increase shareholders' equity. It is therefore important to determine this value at regular intervals in order to measure the effectiveness of management. This paper assesses the intrinsic value of a Swiss cantonal bank and its state guarantee.
Frey Kilian & Kopp Ramon, 2020
Bachelor Thesis, Aargauische Kantonalbank
Betreuende Dozierende: Daniel Höchle
Keywords: Company valuation, Valuation of a government guarantee, Dividend Discount Model, P/B-Ratio, P/E-Ratio, Funding Cost Approach, Corporate Finance, Financial Analysis
In the case of the target company, such an assessment was last prepared in June 2018. As the global economy has been hit by COVID-19 in the meantime, an up-to-date assessment is all the more relevant. Furthermore, its legal form and the continuation of its government guarantee is repeatedly discussed. In this context, the target company, who is also the commissioning party, has assigned the authors with the valuation of the shareholder equity and the state guarantee. Additionally, it should also be investigated whether the current compensation of the state guarantee is justified.
First, historical figures of the company and its peers are reviewed together with an analysis of the market environment. Then, a forecast of the target company's balance sheet and income statement is developed. Subsequently, an adjusted Dividend Discount Model for shareholders' equity and the funding cost approach for the government guarantee are applied. Different scenarios, sensitivity analyses and an additional Monte Carlo simulation complement the valuation process. Finally, the values determined are compared with relative valuation methods using the market multiples P/B and P/E-ratios.
The valuation is dated June 30th, 2020. For confidentiality reasons, the exact figures of the valuation cannot be published within this public management summary.
The distribution of the intrinsic equity values is developed based on sensitivity analyses for all three scenarios: management, bull and bear case, and a Monte Carlo simulation. An unweighted average of the median values of these four results represents the author's best estimate of the target bank's intrinsic equity value. This best estimate can be validated using the relative valuation method but is closer to the upper limit. Moreover, this thesis provides insight into the most important variables that drive the intrinsic equity value by applying sensitivity analysis.
An analysis of the state guarantee reveals that its intrinsic value is highly sensitive to the implied tax advantage derived from the bank's legal status. Two different estimations of the intrinsic value represent the cases of normalized and historical taxes. Furthermore, this thesis builds the basis to evaluate whether the guarantee is compensated fairly.
Studiengang: Business Administration International Management (Bachelor)
Fachbereich der Arbeit: Accounting, Banking, Controlling and Finance