Present by: HOANG HAI NGUYEN
nguyen.hoang@jvn.edu.vn

John Von Neumann Institute - VNUHCM
November - 2013
Nguyen

Vietname...
Table of Content
•
•
•
•
•
•

Motivation
Objectives
Literature review
Model specification
Results & Discussion
Conclusion ...
Motivation
• Valuing financial service firms is
difficult.
• The top of the list of valuation issue [1]
• More banks liste...
Objectives
• Review the current bank industry practice
• Review the literature on the topic of firm
valuation
• Propose a ...
Problem
• Problem 1: Operating business is special.

• Problem 2: most banks operate under a
regulatory framework.

Nguyen...
Bank Specifies in Context of Valuation
• Business structure
• Value-relevant specifics

Nguyen

Vietnamese Bank Valuation
...
Bank Specifies in Context of Valuation (cont.)
Structure of the balance sheet of banks vs. non-banks
NonAssets

banks

Lia...
Bank Specifies in Context of Valuation (cont.)
Structure of the income statement of banks vs. non-banks
NonRevenues
Sales
...
Bank Specifies in Context of Valuation
• Business structure of banks
• Value-relevant specifics of banks
– Specific role o...
Valuation methods and their application for banks
Four approaches [2] [3] [4]

Applications

Asset-based approach

Valuing...
Selection
⁻ The equity approach [1][4]
⁻ Residual Income model
⁻ Need to adjust

Nguyen

Vietnamese Bank Valuation

11
Model specification
Market value observed in
the market

Invested
Capital

Nguyen

Future
value
creation

Market
value

In...
Structure of the Model
• Using equity approach, Residual
Income model,
• Residual Income is defined by
Equation[2]:

RI = ...
Structure of the Model (cont.)
• Calculation of Economic Equity
– Charter equity, reserves, sum of intangible, deferred ta...
Estimation of parameters

RI

Nguyen

Vietnamese Bank Valuation

15
Estimation of Perpetual Growth Rate
10000
1000
100
10
0.1

1
12
23
34
45
56
67
78
89
100
111

1
0.01
0.001

Economic

(7)
...
Estimation of Cost of Equity

RI

Nguyen

Vietnamese Bank Valuation

17
DATASET
•
•
•
•

Selected markets
Financial factors
Market data
Economic factors

Financial
factors

Market
data
Economic
...
Selected Markets
Selected markets
Financial factors
Market data
Economic factors
Characteristics

Australia

Vietnam

Type...
Selected Markets (cont.)
No
.
1

Full Name
Australia and New Zealand
Banking Group

Code

Market cap.
(mil. A$)

Rank

ANZ...
DATASET
Selected markets

Financial factors

– Australia
– Vietnam

– Annual financial reports
– Adjusted
profit, capital,...
The results
Financial
factors

Market data

Economic
factors

Model

Results
Australia’s
Banks

Nguyen

Vietnam’s
Banks

V...
Australia’s Banks (cont.)
ANZ

35
30

CBA

60

y = 0.923x + 0.6065
R² = 0.9418

y = 0.8664x + 2.871
R² = 0.9383

50

25

4...
Vietnam’s Banks
ACB
40

CTG

25
20

30

15
20
10
10

5

0

0
2009

2010
Modelled Price

2011
2012
Traded Price

2009

2010...
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

...
Findings
• Appreciate model for valuing banks is residual
income model.
• Estimating parameters of Residual income model f...
Conclusions and perspective
• Conclusion
– Propose a framework for valuing Vietnamese banks
– This model do allow the anal...
Vietnamese Bank Valuation
Vietnamese Bank Valuation
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  • 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
  • Vietnamese Bank Valuation

    1. 1. Present by: HOANG HAI NGUYEN nguyen.hoang@jvn.edu.vn John Von Neumann Institute - VNUHCM November - 2013 Nguyen Vietnamese Bank Valuation 1
    2. 2. Table of Content • • • • • • Motivation Objectives Literature review Model specification Results & Discussion Conclusion & Perspective Nguyen Vietnamese Bank Valuation 2
    3. 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 Nguyen Vietnamese Bank Valuation 3
    4. 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 Nguyen Vietnamese Bank Valuation 4
    5. 5. Problem • Problem 1: Operating business is special. • Problem 2: most banks operate under a regulatory framework. Nguyen Vietnamese Bank Valuation 5
    6. 6. Bank Specifies in Context of Valuation • Business structure • Value-relevant specifics Nguyen Vietnamese Bank Valuation 6
    7. 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) Nguyen Vietnamese Bank Valuation 7
    8. 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) Nguyen 100% 100% Total expense Vietnamese Bank Valuation 8
    9. 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 Nguyen Vietnamese Bank Valuation 9
    10. 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 Nguyen Vietnamese Bank Valuation Requirements 10
    11. 11. Selection ⁻ The equity approach [1][4] ⁻ Residual Income model ⁻ Need to adjust Nguyen Vietnamese Bank Valuation 11
    12. 12. Model specification Market value observed in the market Invested Capital Nguyen Future value creation Market value Intrinsic value estimated by model Economic Equity Vietnamese Bank Valuation Value of Residual Income 12 Intrinsic value
    13. 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 Nguyen IV: Intrinsic value EE: Economic Equity PV(RI): Present value of Residual Income Vietnamese Bank Valuation 13 Intrinsic value
    14. 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 : Nguyen Vietnamese Bank Valuation 14
    15. 15. Estimation of parameters RI Nguyen Vietnamese Bank Valuation 15
    16. 16. Estimation of Perpetual Growth Rate 10000 1000 100 10 0.1 1 12 23 34 45 56 67 78 89 100 111 1 0.01 0.001 Economic (7) Nguyen Vietnamese Bank Valuation 16 Firm
    17. 17. Estimation of Cost of Equity RI Nguyen Vietnamese Bank Valuation 17
    18. 18. DATASET • • • • Selected markets Financial factors Market data Economic factors Financial factors Market data Economic factors Model Nguyen Vietnamese Bank Valuation 18
    19. 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 Nguyen Vietnamese Bank Valuation 19
    20. 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 Nguyen Vietnamese Bank Valuation 20
    21. 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 Nguyen – GDP growth rate – Risk-free rate – Risk Premium Vietnamese Bank Valuation 21
    22. 22. The results Financial factors Market data Economic factors Model Results Australia’s Banks Nguyen Vietnam’s Banks Vietnamese Bank Valuation 22
    23. 23. Australia’s Banks (cont.) ANZ 35 30 CBA 60 y = 0.923x + 0.6065 R² = 0.9418 y = 0.8664x + 2.871 R² = 0.9383 50 25 40 20 30 15 20 10 5 10 0 0 0 5 10 15 20 25 30 35 NAB 50 10 20 30 40 50 60 WBC 30 y = 1.041x + 0.315 R² = 0.894 40 0 y = 0.900x + 0.771 R² = 0.942 25 20 30 15 20 10 10 5 0 0 0 10 Nguyen 20 30 40 50 0 5 Vietnamese Bank Valuation 10 15 20 25 24 30 35
    24. 24. Vietnam’s Banks ACB 40 CTG 25 20 30 15 20 10 10 5 0 0 2009 2010 Modelled Price 2011 2012 Traded Price 2009 2010 Modelled Price EIB 2011 2012 Traded Price VCB 16 35 14 30 12 25 10 20 8 6 15 4 10 2 5 0 0 2009 2010 Modelled Price Nguyen 2011 Traded Price 2012 2009 Vietnamese Bank Valuation 2010 Modelled Price 2011 2012 Traded Price 25
    25. 25. 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 Nguyen 2011 2012 Capital Year 2009 2010 Residual Income Vietnamese Bank Valuation 2011 Capital 2012 26
    26. 26. 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 ). Nguyen Vietnamese Bank Valuation 27
    27. 27. 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. Nguyen Vietnamese Bank Valuation 28

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