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Specifics of Financial Institutions Valuation

Sorin Petre and Ileana Gutu

The Valuation Journal, 2012, vol. 7, issue 1, 78-109

Abstract: In this article the authors' purpose is to highlight the most significant aspects that should be borne in mind while performing a valuation of a financial institution, the focus being on banks and insurance companies. Consequently, the similarities and differences between the two types of institutions are addressed with the goal to better understand their business model. While keeping in mind the general framework prescribed by the International Valuation Standards, consideration should be given to the particular case of income approach, namely dividend discount model, that represents the recommended method for financial institutions valuation. As this approach is based on entity's business plan, main triggers for profitability and capital regulatory requirements should be very well understood by the valuer. The market approach should be regarded from the perspective of those multiples relevant for each type of company - an extensive analysis of advantages and disadvantages for main category of multiples is presented within the relevant sections of the article. Within the present article, consideration is granted to both banks and insurers from the following perspectives: prescribed valuation methodology for financial institutions; specific terminology one should understand when valuing each type of entity; interdependencies between balance sheet and income statement; correlations between explicit projected period's and perpetuity's assumptions. The opinions presented in the article are solely those of the authors and do not represent any official position of PricewaterhouseCoopers.

JEL-codes: G29 G32 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:vaj:journl:v:7:y:2012:i:1:p:78-109