Day 1 - Analyzing and Forecasting Banks Performance

The first day covers how banks make money and how their business model is represented in banks’ financial statements. Participants analyze a real set of accounts for a case bank and forecast future performance given a set of assumptions.

Key topics

• How do banks make money?
• Structure of banks’ balance sheet
• Structure of banks’ income statement
• Difference between accrual and fair value accounting
• Structuring a forecasting and valuation model for a bank
• Input historical results
• Forecasting the loan book
• Forecasting the trading book
• Forecasting the funding need and mix of deposit and non-deposit funding
• Forecasting net interest income, net fee income and trading gains
• Forecasting loan loss impairment allowance and impairment charges
• Forecasting operating expenses
• Completing the income statement
• Linking the income statement to the balance sheet
• Reality check of forecasts: key performance ratios for banks

Day 2 - Regulation and Valuation

Regulatory capital is a bank-specific topic which is at the core of understanding banks’ business model and valuation. Participants learn how to quantify regulatory capital available and risk weighted assets. The course concludes with a review of the key valuation methods for banks and participants complete a dividend discount model of the case bank.

Key topics

• Overview of the regulatory framework
• Calculation of regulatory capital available: Core Tier 1, Tier 1, and total capital and role of hybrid securities
• Calculation of risk weighted assets: credit risk, market risk, operational risk
• Minimum capital ratios and target capital ratios to maintain/achieve target credit rating
• Additional risk measures: leverage ratios based on common tangible equity
• Extracting historical and forecasting future capital ratios for case bank
• Calculating capital surplus / shortfall for case bank
• Review of bank valuation methods: trading multiples v fundamental valuation
• Bank trading multiples: P/E, P/BV, P/tangible BV, dividend yield
• The dividend discount model
• Cost of equity for banks
• Forecasting potential dividends over explicit forecast period for case bank
• Approaches to estimation of terminal value
  • Straight perpetuity formula and sensitivity to long term growth rates
  • P/BV and sensitivity to long term growth rates
• Impact of the Basel III on banks valuation