Valuing Banks & Insurance Companies

This 4-day course covers the key elements of modeling and valuing the activities of a commercial bank, including retail banking, consumer lending and credit cards, commercial banking, investment banking and asset / wealth management operations. Participants will be introduced to the broad regulatory themes and challenges facing the financial services industry and an overview of the banking system the regulatory environment. The course will allow participants to understanding the role of credit rating agencies and how the Basel II compliance requirements effect bank regulation, including minimum capital requirements, the supervisory review process and the market discipline elements of Basel II. The course will allow participants to calculate risk-weighted assets, tier one and tier two capital and to model a bank income statement using the balance sheet as a driver. Participants will build an integrated financial statement forecast model, projecting asset and liability balances, interest rates and spreads for key assets and liabilities, using industry best practices. Real-world case studies and financial filings will be used to extract key information. Participants will learn industry-specific forecast methodologies and apply them in a financial model. The course then looks at the valuation approaches to be taken to enable participants to value financial services companies. Given the very different nature of financial services companies such as banks and insurance companies, traditional valuation techniques cannot necessarily be applied to banks and insurance companies. This course looks at some of the ways of adapting valuation approaches to deal with the specific problems in valuing financial services businesses. How will this course assist you? On completion of four day training course you will: Gain an understanding of the key elements of a bank forecasting model and valuation Understand the valuation approaches for banks and insurance companies Gain an insight into the current regulatory environment for banks and insurance companies including the Basel banking regulations and the insurance solvency regulations Who should attend? Insurance and banking analysts in industry Equity analysts and portfolio managers specialising in financial services companies Investment banking professionals specialising in the financial services sector Course Structure The course firstly covers the banking sector and the difficulties created by a banks fundamental business model, being balance sheet driven rather than driven by cash flow or profitability. The various valuation models used to adapt to a bank business model are discussed and the participants will firstly build a bank valuation based on intrinsic valuation tools such as the dividend discount approach, cash flow to equity and the residual income approach. Various relative valuation approaches are discussed including price to book and tangible price to book ratios. The course then covers the approach to valuing insurance companies firstly looking at insurance company accounting, which is very different from traditional accounting and then dealing with the main forecasting issues that arise from insurance company accounting. The regulatory issues associated with insurance companies, including Solvency II are the discussed in a valuation context and the different challenges associated with valuing general and life assurance companies are covered. Given the evolving nature of the regulatory environment for the financial services industry the course attempts to provide a current status for both the accounting and regulatory issues facing banks and insurance companies and how these are likely to affect the approach to valuation.
Day 1 We begin the course with an introduction to the fundamentals of commercial banking activities and the regulatory environment that the sector faces. The course then looks at the key elements to be forecast and how a bank forecast model is constructed. Commercial banks and the regulatory framework Overview of the banking system The role of the rating agencies Basel II compliance and its effect on bank regulation - Pillar 1: minimum capital requirements - Pillar 2: supervisory review process - Pillar 3: market discipline Bank’s internal rating systems Calculating risk weighted assets Calculating tier 1 and tier 2 capital Case study – Modelling risk weighted assets and tier 1 & 2 capital Building a bank forecast model Sourcing information – historic and forecast data Key elements of a bank model - The balance sheet as a driver - Key elements of the income statement - Determining economic drivers for different types of banks Case study – The bank forecasting model – structure and linking the balance sheet and income statement Further issues to consider in a bank model Debt service and income as an operating or financing expense Regulatory constraints on reinvestment and implications for growth Projecting cash flows Incorporating regulatory constraints into the model Dealing with regulatory capital ratios Calculating minimum capital adequacy Auditing the model and further analysis Balancing the model and checking for accuracy. Error proofing techniques and sensitivity analysis Ratio analysis – the key efficiency, operating and financial ratios for a bank Case study – Participants build error proofing techniques into the case company model and produce efficiency, operating and financial ratios for the company. Day 2 Having constructed a bank forecasting model, participants will use the outputs from the model to build a valuation for the business. The course covers the difficulties created by a banks fundamental business model, being balance sheet driven rather than driven by cash flow or profitability. The various valuation models used to adapt to a bank business model are discussed and the participants will firstly build a bank valuation based on intrinsic valuation tools such as the dividend discount approach, cash flow to equity and the residual income approach. Various relative valuation approaches are discussed including price to book and tangible price to book ratios. Valuing banks Valuation issues – getting to intrinsic value in a bank valuation - Issues with a bank business model - Key accounting issues in the bank sector - The valuation issues surrounding regulatory capital Valuation issues – relative valuation tools used in a bank valuation - The key multiples used - Deriving multiples from fundamentals Valuation approaches for a bank – building a dividend discount model - Determining the number of stages to be used - Calculating the discount rate - Maturity phase and terminal value assumptions Case study: Participants build a dividend discount valuation for the case company. Valuation approaches for a bank – building a residual income model - Determining the number of stages to be used - Calculating the discount rate - Maturity phase and terminal value assumptions Case study: Participants build a residual income valuation for the case company. Valuation approaches for a bank – building a cash flow to equity model - Determining the number of stages to be used - Calculating the discount rate - Maturity phase and terminal value assumptions Case study: Participants build a cash flow to equity valuation for the case company. Day 3 Having constructed a bank valuation the course then covers the approach to valuing insurance companies firstly looking at insurance company accounting, which is very different from traditional accounting and then dealing with the main forecasting issues that arise from insurance company accounting. The regulatory issues associated with insurance companies, including Solvency II are the discussed in a valuation context and the different challenges associated with valuing general and life assurance companies are covered. Valuing insurance companies Insure company accounting and regulatory issues - Premium recognition - Customer acquistion costs - Investment accounting - Provisioning - Capital requirements - Solvency II - Key elements of an insurance company financial statements Forecasting issues - forecasting a general insurance business - The underwriting result - Modelling the income statement and balance sheet - Modelling reserves and investments Case study: Participants model the key inputs to a general insurance business income statement and balance sheet. Valuation issues - valuing a general insurance business - Derived cash flows and a valuation - Cash flow to equity and residual income approaches Case study: Participants model the key inputs to a general insurance business valuation Day 4 Forecasting issues – forecasting a life insurance business - The key elements of a life insurance product - Profit versus cash flow for life assurance companies - Investment returns - Return on shareholders’ equity Case study: Participants model the key inputs to a life insurance forecasting model. Valuation issues – valuing a life insurance business - Value of new business - Return on shareholders’ equity - Embedded value and the value of future growth Case study: Participants model the key inputs to a life insurance valuation model. Capital requirements and solvency issues - The current status of Solvency II - The likely impact on solvency requirements - Reporting requirements – greater transparency on the way - Embedded value accounting Case study: Participants adapt the valuation model for the case company solvency requirements. Course summary and close