Valuing financial institutions refers to the valuation of balance sheets and many other aspects of financial institutions. The valuation process of financial institutions plays a significant role in the global financial market.
In terms of the figure of the assets on the balance sheet and net profit on the Profit and Loss (P/L) A/c, if a financial institution shows high value and profitability, it is assumed that the particular financial institution is having a sound financial support. If the situation is otherwise, then it is assumed that the condition of the financial institution is not well.
A large number of corporate valuation firms are operating in the financial market. They provide valuable services to the financial institutions regarding their valuation. According to their opinion, the market valuation of a financial institution is dependent on the following factors:
Corporate strategy and competitive positioning
Business model that is being followed
Performance of operations
Growth of earnings
Management of capital
Market perception
Market disclosure
For valuing different types of financial institutions, the risks that are taken into consideration by the CFOs (Chief Financial Officers) and the CROs (Chief Revenue Officers) are the following:
- Market risk
- Credit risk
- Insurance risk
The valuation process of financial institutions is also known as corporate valuation or financial institution appraisal. For corporate valuation, the different methods that are used include the following:
- Relative metrics: Under this method, equity multiples are used for corporate valuation.
- Discounted Cash Flow Model (DCF Model): FCFE (Free Cash Flow for Equity) and FCFF (Free Cash Flow to the Firm)
- Dividend Discount Model: Dividends Per Share and Earnings Per Share
- Excess Return Model
- Capital Asset Pricing Model (CAPM)
Valuing financial institutions carry a substantial degree of importance in the financial market because of the simple reason that companies having higher asset value and net profit attract greater number of investors. The management of the value of financial institutions enables those institutions to produce greater value for the stockholders with the help of appropriate risk and finance management.