Valuing Banks: Case Study of Sparebank 1 SR-Bank

Abstract

The purpose of this thesis is to identify the value of Sparebank 1 SR-Bank (SRBANK) as of 31.12.2017. Furthermore, the thesis identifies why bank valuation is problematic and which approaches the literature recommends for bank valuation. Moreover, the thesis analysis how the applied valuation models incorporates the problematics with bank valuation. In the first part of the thesis, a literature review of how the structure of banks complicates the valuation process and which valuation approaches academic literature consider most suitable for banks is presented. Four main aspects that complicates bank valuation have been identified. Firstly, banks are highly regulated. Secondly, banks perform maturity transformation. Thirdly, banks create value through risk transformation. Lastly, banks have integrated financing, operating and investment activities. Moreover, the literature review indicated that a variation of the free cash flow to equity (FCFE) model is the most appropriate model to use for bank valuation. In the second part of the thesis, the valuation of SR-BANK is conducted. The valuation starts with a strategic analysis and a financial statements analysis. Further, two valuation models are applied to SR-BANK. First, the FCFE model which identifies the value of SR-BANK`s equity to be NOK 26.894 million (NOK 105 per share). Second, the Treasury model which identifies the liquidation value of SR-BANK to be NOK 22.453 million (NOK 88 per share). The last part of the thesis analysis how the FCFE model and the Treasury model applied to SR-BANK incorporates the problematics with bank valuation identified in the first part of the thesis. The FCFE model incorporates the problems arising from regulations, maturity transformation and risk transformation. However, integrated activities lead to difficulties defining working capital and capital expenditures. Thus, cash flow estimation remains problematic. The Treasury model incorporates all four aspects that complicates bank valuation. However, this is mainly solved by separating the value centres and by calculating a liquidation value