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Integrated Bank Analysis and Valuation: A Practical Guide to the ROIC Methodology PDF

191 Pages·2014·1.16 MB·English
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Integrated Bank Analysis and Valuation Global Financial Markets series Global Financial Markets is a series of practical guides to the latest financial market tools, tech- niques and strategies. Written for practitioners across a range of disciplines it provides comprehen- sive but practical coverage of key topics in finance covering strategy, markets, financial products, tools and techniques and their implementation. This series will appeal to a broad readership, from new entrants to experienced practitioners across the financial services industry, including areas such as institutional investment; financial derivatives; investment strategy; private bank- ing; risk management; corporate finance and M&A, financial accounting and g overnance, and many more. Titles include: Daniel Capocci THE COMPLETE GUIDE TO HEDGE FUNDS AND HEDGE FUND STRATEGIES Sandy Chen INTEGRATED BANK ANALYSIS AND VALUATION A Practical Guide to the ROIC Methodology Frances Cowell RISK-BASED INVESTMENT MANAGEMENT IN PRACTICE (2nd Edition) Jawwad Farid MODELS AT WORK A Practitioner’s Guide to Risk Management Guy Fraser-Sampson INTELLIGENT INVESTING A Guide to the Practical and Behavioural Aspects of Investment Strategy Michael Hünseler CREDIT PORTFOLIO MANAGEMENT A Practitioner’s Guide to the Active Management of Credit Risks Ross K. McGill US WITHHOLDING TAX Practical Implications of QI and FATCA David Murphy OTC DERIVATIVES, BILATERAL TRADING AND CENTRAL CLEARING An Introduction to Regulatory Policy, Trading Impact and Systemic Risk Gianluca Oricchio PRIVATE COMPANY VALUATION How Credit Risk Reshaped Equity Markets and Corporate Finance Valuation Tools Andrew Sutherland and Jason Court THE FRONT OFFICE MANUAL The Definitive Guide to Trading, Structuring and Sales Michael C. S. Wong and Wilson F. C. Chan (editors) INVESTING IN ASIAN OFFSHORE CURRENCY MARKETS The Shift from Dollars to Renminbi Global Financial Markets series Series Standing Order ISBN: 978–1–137–32734–5 You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England Integrated Bank Analysis and Valuation A Practical Guide to the ROIC Methodology Sandy Chen Cenkos Securities plc, UK © Sandy Chen 2014 Softcover reprint of the hardcover 1st edition 2014 978-1-137-30745-3 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-45554-6 ISBN 978-1-137-30746-0 (eBook) DOI 10.1057/9781137307460 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. The views expressed in this publication are solely the opinions of the author. Nothing in this book is a recommendation to buy, sell or hold any security or financial instrument. The author and the publisher cannot be held responsible for any loss incurred as a result of specific investment decisions made by the reader. Contents List of Figures v ii List of Tables v iii Preface xi Acknowledgements xiii Glossary of Terms x iv Introduction: Fundamentals of Bank Analysis and Valuation 1 1 O ther Approaches to Bank Analysis and Valuation 5 Operating performance ratios 5 Regulatory ratios 9 Example of analysis and valuation in practice: HSBC 19 2 R OIC for Banks Methodology 25 Distinguishing between operating performance and capital leverage 2 5 The fundamental link between analysis and valuation: value creation 26 Some guiding principles 2 7 ROIC analysis: a step-by-step guide 2 8 Calculating Invested Capital 3 0 Calculating Return on Invested Capital (ROIC) 4 0 ROIC valuation: calculating value-added margin 6 1 Aggregative value creation/destruction 6 3 Forecasting with ROIC 6 8 Making forecasts in practice 6 9 Integrating forecasts with valuation 7 2 3 Case Studies 7 6 1. Bank of China 7 9 2. Barclays 8 9 3. Citigroup 1 05 4. Credit Suisse 1 14 5. Deutsche Bank 1 24 v vi Contents 6. JP Morgan Chase 1 33 7. Lloyds Banking Group 1 43 8. RBS 1 53 9. Standard Chartered 1 63 Index 173 List of Figures 2.1 HSBC net interest income v. non-interest income per RWA 5 5 2.2 K ey value levers, HSBC 58 2.3 R OIC v. ROE, HSBC 59 3.1 B ank of China: net interest income v. non-interest income per RWA 85 3.2 Bank of China: key value levers 8 6 3.3 B arclays: net interest income v. non-interest income per RWA 9 7 3.4 B arclays: key value levers 9 8 3.5 Citi: net interest income v. non-interest income per RWA 111 3.6 C iti: key value levers 1 11 3.7 Credit Suisse: net interest income v. non-interest income per RWA 120 3.8 C redit Suisse: key value levers 1 21 3.9 Deutsche Bank: net interest income v. non-interest income per RWA 130 3.10 D eutsche Bank: key value levers 130 3.11 JP Morgan chase: net interest income v. non-interest income per RWA 1 40 3.12 JP Morgan chase: key value levers 140 3.13 Lloyds: net interest income v. non-interest income per RWA 149 3.14 L loyds: key value levers 1 49 3.15 R BS: net interest income v. non-interest income per RWA 159 3.16 R BS: key value levers 1 60 3.17 S tandard Chartered: net interest income v. non-interest income per RWA 1 69 3.18 S tandard Chartered: key value levers 169 vii List of Tables 1.1 HSBC: standardised income statement and balance sheet items 20 1.2 HSBC: value levers 2 2 1.3 HSBC: credit quality 22 1.4 HSBC: capital ratios 2 3 1.5 H SBC: standard valuation ratios 23 2.1 S tandard financials template 29 2.2 Building Invested Capital: shareholders’ equity 3 1 2.3 Building Invested Capital: goodwill and other intangibles 32 2.4 Building Invested Capital: cumulative unrealised fair value adjustments 3 2 2.5 Building Invested Capital: loan–loss provisions 3 3 2.6 Building Invested Capital: pensions 34 2.7 B uilding Invested Capital: minority interests (equity) 3 4 2.8 Building Invested Capital: revaluation gains 3 5 2.9 Building Invested Capital: adjusted equity 3 6 2.10 B uilding Invested Capital: subordinated debt 37 2.11 B uilding Invested Capital: minority interests (non-equity) 3 7 2.12 Building Invested Capital: preference shares 3 8 2.13 Building Invested Capital: total 3 9 2.14 Invested Capital: analysis 40 2.15 R OIC: HSBC examples 2011 & 2012 4 2 2.16 B uilding ROIC: net profit 4 3 2.17 Building ROIC: goodwill/intangibles 4 4 2.18 B uilding ROIC: exceptional items 44 2.19 B uilding ROIC: unrealised fair value gains 4 5 2.20 B uilding ROIC: preference share dividends 46 2.21 B uilding ROIC: interest paid on subordinated debt 46 2.22 B uilding ROIC: minority interests 47 2.23 B uilding ROIC: provisioning/impairment charge 48 2.24 B uilding ROIC: Adjusted Operating Profit and Operating ROIC 4 9 2.25 Building ROIC: Adjusted Net Profit and Net ROIC 50 2.26 Building ROIC: through-the-cycle (TTC) ROIC 5 1 2.27 ROIC analysis: ROIC decomposition, HSBC 5 2 2.28 ROIC analysis: Return on Risk-Weighted Assets (RORWA) analysis, HSBC 54 2.29 ROIC analysis: value levers, HSBC 56 viii List of Tables ix 2.30 R OIC analysis: credit quality analysis, HSBC 5 7 2.31 R OIC valuation: value creation, HSBC 62 2.32 R OIC valuation: value-added margin forecasted, HSBC 64 2.33 ROIC valuation: Invested Capital forecasted, HSBC 64 2.34 ROIC valuation: value creation/destruction forecasted, HSBC 65 2.35 ROIC valuation: present value of value created forecasted, HSBC 6 5 2.36 ROIC valuation: fundamental ROIC valuation, HSBC 66 2.37 ROIC valuation: value levers actuals and forecasts, HSBC 7 0 2.38 ROIC valuation: standard valuation ratios, HSBC 7 2 2.39 R OIC valuation: fundamental ROIC valuation, HSBC 73 3.1 Bank of China: standardised financials 80 3.2 B ank of China: ROIC decomposition 81 3.3 B ank of China: RORWA analysis 83 3.4 Bank of China: value levers 84 3.5 B ank of China: asset quality 85 3.6 Bank of China: standard forecast and valuation ratios 8 7 3.7 B ank of China: fundamental ROIC valuation 8 8 3.8 Barclays: standardised financials 9 0 3.9 B arclays: ROIC decomposition 92 3.10 Barclays: RORWA analysis 9 4 3.11 B arclays: value levers analysis 9 5 3.12 B arclays: asset quality 9 6 3.13 B arclays: Invested Capital 9 9 3.14 Barclays: ROIC 1 00 3.15 Barclays: standard forecast and valuation ratios 1 02 3.16 Barclays: through-the-cycle (TTC) ROIC 103 3.17 Barclays: fundamental ROIC valuation 1 04 3.18 Citi: standardised financials 1 06 3.19 C iti: ROIC decomposition 1 07 3.20 Citi: RORWA analysis 108 3.21 Citi: value levers 1 09 3.22 C iti: credit quality 110 3.23 Citi: standard forecast and valuation ratios 112 3.24 C iti: fundamental ROIC valuation 113 3.25 C redit Suisse: standardised financials 115 3.26 Credit Suisse: ROIC decomposition 116 3.27 C redit Suisse: RORWA analysis 118 3.28 Credit Suisse: value levers 119 3.29 Credit Suisse: credit quality 1 20 3.30 Credit Suisse: standard forecast and valuation ratios 1 22 3.31 Credit Suisse: fundamental ROIC valuation 1 23

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