The document proposes a framework for valuing Vietnamese banks using the residual income model. It reviews relevant literature, specifies the model, estimates required parameters using data from Australian and Vietnamese banks, and presents results. The model allows estimating the current and future value of banks based on internal factors like capital and profit as well as external economic factors. While preliminary results show potential, more data is needed to better validate modeled versus actual market prices. The framework provides a starting point for further analyzing value drivers and maximizing shareholder value.
3. Motivation
• Valuing financial service firms is
difficult.
• The top of the list of valuation issue [1]
• More banks listed on stock exchanges
(VN – 18%) [*].
• Need the framework for valuing bank.
[*]: Own calculation at 01/11/2013
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Vietnamese Bank Valuation
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4. Objectives
• Review the current bank industry practice
• Review the literature on the topic of firm
valuation
• Propose a framework for valuing bank
• Discuss practical implication
• Indicate areas for further research in the
future
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Vietnamese Bank Valuation
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5. Problem
• Problem 1: Operating business is special.
• Problem 2: most banks operate under a
regulatory framework.
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Vietnamese Bank Valuation
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6. Bank Specifies in Context of Valuation
• Business structure
• Value-relevant specifics
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Vietnamese Bank Valuation
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7. Bank Specifies in Context of Valuation (cont.)
Structure of the balance sheet of banks vs. non-banks
NonAssets
banks
Liability & shareholders'
Non-
equity
hanks
Banks
Banks
Property, plant and
equipment
25%
1% Equity capital and reserves
18%
8%
Investments
13%
2% Provisions
20%
1%
Inventories
23%
n/a Liabilities
62%
91%
Receivables
33%
12%
n/a
74%
Trade payables
Liabilities to financial
from customers
15%
49%
institutions
20%
29%
from credit institutions
n/a
25%
Liabilities to non-banks
n/a
38%
Other receivables
18%
0%
Securitized loans
n/a
23%
Investment securities
3%
19%
Other liabilities
30%
5%
Cash and cash equivalents
4%
1%
Other assets
0%
2%
100%
100%
Total assets
100%
100% Total assets
Source: (Gross,2006)
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Vietnamese Bank Valuation
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8. Bank Specifies in Context of Valuation (cont.)
Structure of the income statement of banks vs. non-banks
NonRevenues
Sales
Non-
Banks Banks
Expenses
Banks
Banks
93%
n/a
Supplies expense
61%
n/a
Change in inventories
1%
n/a
Staff expense
16%
10%
Interest income
1%
83%
Other administrative expenses
n/a
7%
Income from provisions
n/a
7%
Depreciation
4%
7%
n/a
4%
4%
1%
n/a
5%
Interest expense
2%
71%
Tax charges
3%
1%
14%
4%
100%
100%
Income from securities &
investments
Net income from financing
- on fixed assets & intangible
Provisions on receivable &
business
n/a
1%
Other income
5%
5%
securities
Other expenses
Total income
Source: (Gross,2006)
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100%
100%
Total expense
Vietnamese Bank Valuation
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9. Bank Specifies in Context of Valuation
• Business structure of banks
• Value-relevant specifics of banks
– Specific role of financing and risk-taking
– Bank-specific laws and regulations
– Specifics of the operating business
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Vietnamese Bank Valuation
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10. Valuation methods and their application for banks
Four approaches [2] [3] [4]
Applications
Asset-based approach
Valuing individual financial
investments
Market-oriented approach
Valuing bank
- Information is easily
accessible
- Comparable assets is not
limited
Cash flow-oriented
approach
Valuing bank
- The cash flows of a bank
are easily estimated
Residual Income-oriented
approach
Valuing bank
- The return on invested
capital
- The cost of capital
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Vietnamese Bank Valuation
Requirements
10
11. Selection
⁻ The equity approach [1][4]
⁻ Residual Income model
⁻ Need to adjust
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Vietnamese Bank Valuation
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12. Model specification
Market value observed in
the market
Invested
Capital
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Future
value
creation
Market
value
Intrinsic value estimated
by model
Economic
Equity
Vietnamese Bank Valuation
Value of
Residual
Income
12
Intrinsic
value
13. Structure of the Model
• Using equity approach, Residual
Income model,
• Residual Income is defined by
Equation[2]:
RI = Op. Earnings - k x EE (1)
• Intrinsic value of bank[2]
Economic
Equity
Value of
Residual
Income
IV = EE + PV(RI) (2)
RI: Residual Income
Op. Earning: Operating Earning
k: cost of equity
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IV: Intrinsic value
EE: Economic Equity
PV(RI): Present value of Residual Income
Vietnamese Bank Valuation
13
Intrinsic
value
14. Structure of the Model (cont.)
• Calculation of Economic Equity
– Charter equity, reserves, sum of intangible, deferred taxes
Economic Equity = Charter equity + Sum of intangible
+ reserves + deferred taxes
• Calculation of Residual Income
t
t+1
t+2
…
t+m
– RI increases at a certain perpetual growth rate g
– PV(RI) can be expressed as :
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Vietnamese Bank Valuation
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19. Selected Markets
Selected markets
Financial factors
Market data
Economic factors
Characteristics
Australia
Vietnam
Type of market
Developed
Frontier
Size
Large
Small
Volatility
Low
High
Policy
Low risk
High risk
Information
Transparent
Lack of information
Own table
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Vietnamese Bank Valuation
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20. Selected Markets (cont.)
No
.
1
Full Name
Australia and New Zealand
Banking Group
Code
Market cap.
(mil. A$)
Rank
ANZ
59,030
3
2
Commonwealth Bank
CAB
84,540
1
3
National Australia Bank
NAB
52,730
4
4
Westpac Banking Corporation
WBC
64,560
2
1
Full Name
Asia Commercial Joint Stock
Bank
Market cap.
First Day of
(bil. VND)
No.
Trading
ACB
15,002.71
11/21/2006
CTG
64,669.66
07/16/2009
EIB
18,162.26
10/27/2009
SACOMBANK
STB
19,308.45
12/07/2006
VIETCOMBANK
VCB
64,887.68
30/06/2009
Transaction Name
ACB
Code
Vietnam Joint Stock
2
Commercial Bank for
Industry and Trade
VIETINBANK
Vietnam Export Import
3
Commercial Joint Stock Bank
(Vietnam Eximbank)
4
Sai Gon Thuong Tin
Commercial Joint Stock Bank
EXIMBANK
Joint Stock Commercial Bank
5
For Foreign Trade of
Vietnam
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Vietnamese Bank Valuation
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21. DATASET
Selected markets
Financial factors
– Australia
– Vietnam
– Annual financial reports
– Adjusted
profit, capital, and
number of shares
Economic factors
Market data
– Close price.
– Market Index:
• Australia market:
ASX200
• Vietnam market:
Banking Index
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– GDP growth rate
– Risk-free rate
– Risk Premium
Vietnamese Bank Valuation
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26. Vietnam’s Banks (cont.)
ACB
Bank's value
(mil. VND)
30,000
CTG
Bank's value
(mil. VND)
70,000
25,000
60,000
20,000
50,000
15,000
40,000
30,000
10,000
20,000
5,000
10,000
Year
(5,000)
2009
2010
Residual Income
2011
Capital
2012
2009
2010
Residual Income
EIB
Bank's value
(mil. VND)
25,000
Year
-
2011
Capital
2012
VCB
Bank's value
(mil. VND)
70,000
60,000
20,000
50,000
15,000
40,000
10,000
30,000
20,000
5,000
10,000
(5,000)
Year
2009
2010
Residual Income
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2011
2012
Capital
Year
2009
2010
Residual Income
Vietnamese Bank Valuation
2011
Capital
2012
26
27. Findings
• Appreciate model for valuing banks is residual
income model.
• Estimating parameters of Residual income model for
Vietnam market.
• Bank value is effected by external factors (rf, ) and
internal factors (Capital, Profit ).
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Vietnamese Bank Valuation
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28. Conclusions and perspective
• Conclusion
– Propose a framework for valuing Vietnamese banks
– This model do allow the analyst to the current and
future value of bank.
– Need more data to see relationship modeled price
and market price.
• Perspective
– Find out how to decompose these bank value into
contributing factors
– Maximize shareholder value.
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Vietnamese Bank Valuation
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Notas do Editor
Link [6]:http://www.bloomberg.com/news/2013-08-19/vietnam-sends-plan-for-relaxing-foreign-ownership-limits-to-dung.htmlservices and product: equities and derivatives, and provides listing, trading, risk management, clearing, settlement, and market data services for domestic and global customers.MarketCap$1.4 trillion (January 2013)[2]
90% of the securities’s price movement is explained by the index’s movement