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

191 Pages·2014·1.16 MB·English

by  Sandy Chen (auth.)

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
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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
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First published 2014 by
PALGRAVE MACMILLAN
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ISBN 978-1-349-45554-6 ISBN 978-1-137-30746-0 (eBook)
DOI 10.1057/9781137307460
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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