Question

I am currently evaluating banks, as a part of my task at work. To be more specific, it's chinese bank. The question here are, should we use DDM model, as many did use that, and which part of the balance sheet should we valuate first? Should it be in terms of capitalization, and then proceed to deposit/loan growth? there is the off-bs sheet items, in which i have no idea how to include into the model...

Answer 1

Yes, you should use the DDM model, which is one of equity DCF valuation models.So you have to value the equity and it's a market value but not book value.You'd better to start with dividend payout ratio and DPS growth rate.What off-balance sheet items do you mean?

Answer 2

off-bs as in the derivatives and things like that. is there a way we add them in? or somehow evaluate them like the UBPR. since this is a chinese bank, hence its stringent regulations when it comes to derivatives, would it be fine to disregard them?

Answer 3

It comes from IFRS,not from chinese regulations.In IFRS such dervivatives are classified as Securities held for Mercant purposes.Usually they are used for hedging their open positions.But may be they use these derivatives for making speculations, in such cases the income from speculation is intrdused by interest income and simultaneously is included in financial model of DDM valuation.