The answer to this question drives what we do within Mercer Capital’s Financial Institution group. We decompose this question into two parts:
Banks have robust financial reporting systems, generating extensive reports on every facet of a bank’s operations. These reports – such as regarding financial performance, asset quality, or interest rate risk – form the foundation for assessing factors influencing value. By itself, though, even the best financial reporting cannot tell the entirety of a bank’s “story.” Experienced valuation insight is crucial in determining the story that exists behind the numbers. This story includes the bank’s personnel, markets, culture, opportunities, and approach to the evolving banking industry.
The key to a well reasoned valuation is synthesizing these factors, which inform our view of a bank’s financial trajectory and its underlying risk. For example, asset quality metrics can be connected to credit culture, historical loan growth to market opportunities, and profitability to management’s ability to balance reinvestment and shareholder returns. Identifying the nexus between quantitative and qualitative variables crystallizes insights into the bank’s value.
No shortage of market data exists regarding the values of banks – banks trade in the public markets; banks are sold in the M&A market. Analysts seldom find, though, exactly comparable institutions to your bank. This imprecision can arise for any number of reasons – different markets, divergent risk tolerances, dissimilar revenue compositions, or varying perceptions of the bank’s ability to capitalize on opportunities. Ultimately, growth and risk matter to investors. When assessing market data, the value of your bank turns on assessing its growth opportunities and risk factors, relative to other banks for which market data exists.
In some instances market data alone is inadequate to form a well-rounded analysis of the bank’s value. Since the value of a bank is forward looking, and historical performance only informs the future outlook, another technique embraces expectations regarding how a bank will deploy its existing capital to generate future returns for its shareholders. This approach, which relies upon a projection of the bank’s future financial performance, provides important perspective regarding the effect of management’s strategy on shareholder value.
No two valuations are alike, and assessing value simply by reviewing a Call Report is inadequate. Your bank may be worth book value; it may not. From an investor’s perspective, your bank’s worth is based on its potential for future shareholder returns. This, in turn, requires evaluating qualitative and quantitative factors bearing on the bank’s current performance, growth potential, and risk attributes.
Contact one of our professionals to discuss your needs in confidence.