Corporate evaluation in the German banking sector

190 Pages·2007·1.801 MB·German

by  Svend Reuse

Svend Reuse
Corporate Evaluation in the German Banking Sector
WIRTSCHAFTSWISSENSCHAFT
Svend Reuse
Corporate Evaluation
in the German
Banking Sector
With a foreword by Prof. Dr. Eric Frère
and Prof. Dr. Burghard Hermeier
Deutscher Universitäts-Verlag
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1. Auflage März 2007
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Foreword V
Foreword
Corporate Evaluation in the German Banking sector is becoming more and more important. In
times of hostile takeovers, missing success in the retail market and an unpleasant cost income
ratio, especially small cooperative banks and savings banks are facing a changed situation
they have never expected. The changing speed has increased dramatically in the German
banking sector. While selling of a savings bank was not possible even 5 years ago, this hard
frontier is broken up now. Banks have to manage this changed situation – in order to prevent
to be taken over or to increase the own value and the own independency accordingly. In both
cases, the quantification of the own value is an essential aspect.
The presented Master Dissertation of Svend Reuse solves theoretical and practical problems
according to this topic. It combines actual value oriented management tools with the classical
methods of corporate evaluation and the results of the actual status quo in the German bank-
ing sector. The essentials can be summed up as follows:
First, the theoretical status quo of corporate evaluation in the German banking sector was de-
fined. The result is that only the earnings value method, equity approach and multiplier
method are useful for banks. All entity models must be rejected, as they do not consider the
fact that a bank generates value with the liability side. Discussing several bank-individual
evaluation models led to open questions. The discounting rate, the implementation of value
corrections and the value of treasury are subject to discussion. Further, it was clearly investi-
gated, why maturity transformation does not generate value, why the CAPM can only be used
in some models and in which models the value corrections for lost loans have to be deducted.
The theory-based demands on a new model are simplicity and the usage of secure cash flows
in order to use other discounting rates than the CAPM.
An additional interesting aspect in this work is the connection to actual banking practice.
Svend Reuse presents a representative empirical study. In total, 51 out of 750 banks took part
in the study. The responses nearly always show a high quality. The main results can be sum-
marized as follows: Shareholder value is not implemented in practice by many banks. Peri-
odic variables are favoured to manage a bank. Intangible values as human resources or the
own brand are not considered in the whole sector. The author developed a scoring model
which proved this assumption to be correct. The second part of the survey analyzed the prac-
tical status quo of corporate evaluation. Almost 50% of the banks analyze their own value in
order to do value based management. Nevertheless, the interlink between the bank’s value
and the related controlling numbers/tools is missing. Banks judge their value, but an inte-
grated management process cannot be found. A practice-based impulse for a new model is
VI Foreword
that some existing controlling methods, especially those derived from the risk covering mass
processes should be used.
The model developed by Svend Reuse took all these aspects into consideration. By an inte-
grated usage of the market interest rate method and the usage of secure cash flows, the CAPM
approach could be avoided. The model sets the value of treasury as zero and quantifies a more
realistic bank value accordingly. Even though the single parts of the model are not new, the
integration of them led to new, interpretable aspects. Really new for the German banking sec-
tor is that the model is verified in practice. A number of 19 of the 51 banks of the survey
wanted a detailed corporate evaluation based upon the data of the survey. On average, the
treasury approach leads to lower results than the equity and earnings value method, even
though a risk-free rate is used. The further empirical analysis was able to generate internal
based multiples to evaluate the value of classical banks in a very simple manner.
To the opinion of Svend Reuse it has to be criticized that banks do not interlink the evaluation
of the own value with a value-oriented management process. In the last section of his work,
he offers a solution to this problem. Further he recommends the integration of intangible as-
sets. The value of the brand, customer satisfaction and the employees will be responsible for
the bank’s value in the future.
The presented Master Dissertation combines existing literature in a new way and extends it in
some parts. Considering the aspect that Svend Reuse has written this dissertation beneath his
work in a few months, the results are very impressing. Some aspects can be used directly in
practice to manage a bank in a rather present value oriented way. We hope that this disserta-
tion will become well-known in Germany.
With his work, Svend Reuse has proved that attaining an excellent academic level is not ex-
clusively possible under the conditions of a full-time degree programme. Nevertheless, part-
time-concepts as the FOM’s MBA programme make high demands on the participants. Con-
sistent discipline and the ability to self-motivation are the key skills to cope with the chal-
lenges of graduating alongside a career –attributes characterizing people with long-term suc-
cess.
Prof. Dr. Eric Frère
Head of International Studies
Prof. Dr. Burghard Hermeier
Dean of FOM
University of Applied Sciences
Preface VII
Preface
Very early during the MBA course of studies, I found the topic of the Master Dissertation.
One the one hand, nearly all my scientific work and publications handled with bank control-
ling and similar topics. On the other hand, the methods of corporate evaluation fascinated me.
So I connected both aspects into the presented dissertation in order to develop some real new
aspects. Combining the theoretical aspects with the practical status quo led to interesting re-
sults for the German banking sector.
Such a project can only be successful with the help and support of many persons closely con-
nected with me. They all helped me – with good advice or psychological support in times of
trouble. I want to give special thanks to some persons and organisations.
My first thanks go to my employer, Sparkasse Mülheim an der Ruhr. Sponsoring and support-
ing me during the MBA course of studies in a time of huge work helped me to complete the
MBA and to write this book.
Certainly, my thanks go to the banks that answered the query. Only with investing time and
manpower into answering the questions, the presented status quo became possible.
Further, I want to say thanks to Herbert Peters, Marc Quattelbaum and Jochen Rulhoff for
finding the mistakes in the English formulations. Reading 200 pages of complex English un-
der time pressure is not very easy, I know.
Next, I want to thank Birgit Rieforth. She has always been a good discussion partner, even at
night if necessary. She was often the only one who understood my complex problems and
helped me with good advice. Further, she checked the formalia – sometimes a very boring job
as well.
Surely, my special thanks go to Prof. Dr. Eric Frère. Since the first semester, his courses in-
spired me to choose this Master dissertation topic and to specialize myself on the banking
sector. He guided me to the good results in this dissertation during a time of pressure in the
job and in the MBA. Further, it was him again who gave me the possibility to publish my
work as a book. It is an honour for me that he wrote a foreword together with Prof. Dr. Bur-
gard Hermeier for this book.
Further, the personal contacts have to be mentioned. I want to say thanks to my friends, espe-
cially Andreas Horn, as I had nearly no time for them during the time of writing the Master
dissertation. Thank you for understanding me during this time.
VIII Preface
Certainly, I want to thank my parents, Helke and Rüdiger Reuse. Thank you for supporting
me in everything I did and helping me in times of trouble. Without your aid at the right time,
some of my success would not have been possible.
Finally, my thanks go to my girl friend Anita. We got closer in a time I had a lot of stress.
Thank you for having patience with me, thank you for packing 750 letters into the envelopes
during the whole night and thank you for standing behind me in these hard times.
Even though the presented work is written in English, I hope that some German banks be-
come aware of the results. I would feel pleased, if these banks get some additional value-
added because of the presented content.
Svend Reuse
Table of Contents IX
Table of Contents
Table of Contents.....................................................................................................................IX
List of Figures.......................................................................................................................XIII
List of Tables..........................................................................................................................XV
List of Equations..................................................................................................................XVII
List of Abbreviations.............................................................................................................XIX
1 Introduction..........................................................................................................................1
1.1 Problem Definition.........................................................................................................1
1.2 Reasoning and Motivation..............................................................................................3
1.3 Research Methods...........................................................................................................3
2 Theoretical Status Quo of Corporate Evaluation..............................................................5
2.1 Motivations for a Corporate Evaluation.........................................................................5
2.1.1 Reasons for a Corporate Evaluation.....................................................................5
2.1.2 The Difference between Price and Value.............................................................6
2.1.3 Functions of Corporate Evaluation.......................................................................7
2.2 Methods of General Corporate Evaluation.....................................................................9
2.2.1 Separate Evaluation Methods.............................................................................12
2.2.1.1 Reproduction Value Method.................................................................12
2.2.1.2 Liquidation Value Method....................................................................12
2.2.2 Global Evaluation Methods................................................................................13
2.2.2.1 Earnings Value Method.........................................................................18
2.2.2.2 Discounted Cash Flow Methods...........................................................20
2.2.2.2.1 Equity Approach...................................................................22
2.2.2.2.2 Entity Approach – WACC....................................................24
2.2.2.2.3 Entity Approach – APV........................................................26
2.2.2.2.4 Real Options Approach.........................................................28
2.2.3 Mixture Methods................................................................................................31
2.2.4 Simplified Approaches.......................................................................................33
2.2.4.1 Real Prices of the Same Company........................................................34
2.2.4.2 Real Prices of a Comparable Company.................................................34
2.2.4.3 Fictitious Prices of the Same Company................................................34
2.2.4.4 Fictitious Prices of the Peer Group – Multiplier Approach..................35
2.3 Bank Individual Approaches........................................................................................37
2.3.1 Reasons for a Bank Individual Approach...........................................................37
2.3.1.1 Generating Value with the Liability Side..............................................37
X Table of Contents
2.3.1.2 Maturity Transformation.......................................................................38
2.3.1.3 Structure of the Balance Sheet..............................................................39
2.3.1.4 Risk Transformation..............................................................................39
2.3.2 Structuring the Status Quo in Current Literature...............................................40
2.3.3 Debatable Problems in Current Literature..........................................................45
2.3.3.1 The Value of Treasury...........................................................................45
2.3.3.2 The Value of Trading............................................................................50
2.3.3.3 Quantifying the Cash Flow for an Equity Approach.............................50
2.3.3.4 Discounting Factor – Equity Yield........................................................51
2.3.4 Theoretical Impulses for a New Evaluation Model............................................51
3 Practical Status Quo: An Empirical Study in the German Banking Sector.................53
3.1 Modeling the Survey.....................................................................................................53
3.1.1 Central Idea of the Survey..................................................................................53
3.1.2 Theoretical Aspects for Modeling a Survey.......................................................53
3.1.3 Structure of the Questionnaire............................................................................55
3.1.4 Defining the Target Group.................................................................................56
3.2 Quantification of the Answers......................................................................................57
3.2.1 Return Ratio and Representativeness.................................................................57
3.2.2 Date of Return....................................................................................................59
3.3 Analyzing the Results...................................................................................................60
3.3.1 Section 1: General Data according to the Bank.................................................60
3.3.2 Section 2: Bank Controlling and Value Based Management.............................64
3.3.3 Section 3: Question according to Corporate Evaluation....................................71
3.3.4 Section 4: Individual Corporate Evaluation.......................................................79
3.3.5 Section 5: Final Amendments............................................................................80
3.4 Extended Analysis........................................................................................................81
3.4.1 Comparison with Existing Surveys....................................................................81
3.4.2 Scoring Model for the Quality of Value Based Management............................83
3.5 Conclusions from the Survey........................................................................................85
3.5.1 Summing up the Main Results of the Questionnaire..........................................85
3.5.2 Practical Impulses for a New Evaluation Model................................................86
4 Development of a New Corporate Evaluation Approach for Banks.............................87
4.1 The Main Idea of the Presented Approach...................................................................87
4.2 Definition of the Model................................................................................................88
4.2.1 Yield Book.........................................................................................................90
4.2.1.1 Definition of Cash Flow........................................................................90
4.2.1.2 Definition of Discounting Rate.............................................................94