This book presents the main valuation approaches that can be used to value financial institutions. By sketching 1) the different business models of banks (both commercial and investment banks) and insurance companies (life, property and casualty and reinsurance); 2) the structure and peculiarities of financial institutions' reporting and financial statements; and 3) the main features of regulatory capital frameworks for banking and insurance (ie Basel III, Solvency II), the book addresses why such elements make the valuation of financial institutions different from the valuation of non-financial companies.The book then features the valuation models that can be used to determine the value of banks and insurance companies including the Discounted Cash Flow, Dividend Discount Model, and Residual Income Model (with the appropriate estimation techniques for the cost of capital and cash flow in financial industries). The main techniques to perform the relative valuation of financial institutions are then presented: along the traditional multiples (P/E, P/BV, P/TBV, P/NAV), the multiples based on industry-specific value drivers are discussed (for example, P/Pre Provision Profit, P/Deposits, P/Premiums, P/Number of branches). Further valuation tools such as the "Value Maps" or the "Warranted Equity Method" will be explained and discussed. The closing section of the book will briefly focus on the valuation of specific financial companies/vehicles such as closed-end funds, private equity funds, leasing companies, etc.

Preface viiAcknowledgments ix1 Bank Business Models 11.1 Economics of banking 11.2 Commercial banks 31.2.1 Structure of the industry in the US 31.2.2 Overview of the US regulation 51.2.3 Commercial banks' balance sheets 61.3 Investment banks 71.3.1 Structure of the US banking industry 91.3.2 Typical balance sheet for an investment bank 101.3.3 The banking industry outside the US 122 Financial Statements Analysis for Banks 152.1 Balance sheet 152.1.1 Assets 162.1.2 Investment property 172.1.3 Intangibles 182.1.4 Research and development 202.1.5 Goodwill 202.1.6 Securities 212.1.7 Equity stakes 252.1.8 Loans and receivables 272.1.9 Impairment test 302.1.10 Financial liabilities 322.1.11 Hedging 352.1.12 De-recognition of financial assets and liabilities 372.2 The US GAAP for banks 442.2.1 Reversal of impairment 492.2.2 Transfer among different categories 492.3 Profit & loss statement 492.4 Major differences between IAS/IFRS and US GAAP 512.5 Example of IAS/IFRS application 543 The Regulatory Capital for Banks 613.1 Regulatory capital requirements 613.1.1 Definition of capital according to basel I and II 623.1.2 The risk-weighted assets 643.2 Basel II 683.2.1 Does Basel II work? 703.3 The reform of Basel III 733.3.1 New definition of capital 733.3.2 Change in RWA computation 753.3.3 New coefficients 753.3.4 Leverage ratio 773.3.5 Liquidity ratios 783.4 Managing the regulatory capital 784 Assessing and Preparing the Business Plan for a Bank 814.1 Status quo analysis 824.1.1 Asset quality 824.1.2 Toxic and illiquid assets 834.1.3 Goodwill 844.1.4 Capitalization 844.2 Internal consistency 854.2.1 Historical versus projected performance 864.2.2 ROE framework 864.2.3 P&L and balance sheet drivers 874.2.4 P&L versus balance sheet 884.2.5 Asset side versus liability side 894.2.6 Financial versus operating forecasts 924.3 External consistency 924.3.1 Macroeconomic outlook 934.3.2 Competitive dynamics 944.3.3 Business plan versus market consensus 964.4 The forecasting model of a bank 964.4.1 Balance sheet 974.4.2 P&L 994.4.3 Checking forecasts 1015 Bank Valuation 1055.1 Why bank valuation is different 1055.2 Discounted returns model 1085.2.1 The cost of capital for financial institutions 1085.2.2 The dividend discount model 1115.2.3 The cash flow to equity model 1185.2.4 The excess return model 1205.3 Relative valuation 1235.3.1 Market multiples 1265.3.2 Deal multiples 1295.3.3 Multiples from fundamentals 1315.3.4 Value maps and other regressions 1345.4 Asset/liability-based valuation 1375.5 The sum of the parts framework 1435.6 Bank valuation in M&A 1445.7 The valuation of Wells Bank 1486 Insurance Business Models and Financial Statements 1596.1 The business model of insurance companies 1596.2 Segmentation by products 1606.2.1 Life and health 1606.2.2 Property and casualty 1616.2.3 Reinsurance 1616.3 Distribution channels 1626.4 Insurance balance sheet under US GAAP 1626.4.1 Reserves and separate accounts 1626.4.2 Deferred policy acquisition costs 1676.5 Insurance contracts under IAS/IFRS 1676.5.1 Recognition of insurance contracts 1686.5.2 Adequacy of insurance liabilities 1696.5.3 Unbundling 1706.5.4 Reinsurance 1716.5.5 Discretionary participation features 1716.6 Case study 1727 Regulatory Capital for Insurance Companies 1777.1 Insurance industry regulation in the US 1777.2 Current US system 1787.2.1 Risk-based capital 1787.3 Solvency II - European-based regulation 1817.3.1 Valuation of assets and liabilities 1827.3.2 Best estimate and risk margin 1847.3.3 Own funds 1847.3.4 SCR and MCR 1877.4 Main differences between solvency II and US regulation 1908 Assessing the Business Plan for an Insurance Company 1938.1 Status quo analysis 1938.1.1 Asset valuation 1948.1.2 Reserve adequacy 1948.1.3 Solvency 1958.2 Internal consistency 1958.2.1 Historical versus projected performance 1968.2.2 P&L versus balance sheet 1978.2.3 Asset side versus liability side 1988.2.4 Financial versus operating forecasts 1998.3 External consistency 2008.3.1 Macroeconomic outlook 2018.3.2 Competitive dynamics 2028.3.3 Business plan versus market consensus 2038.4 The forecasting model 2048.4.1 Non-life business 2048.4.2 Life 2068.4.3 Checking forecasts 2089 Insurance Companies Valuation 2099.1 Appraisal value 2099.1.1 The value-in-force 2109.1.2 The ANAV 2129.1.3 The business goodwill 2139.2 Relative valuation 2159.3 The case of "general insurance" 2169.3.1 Step 1 2179.3.2 Step 2 21710 The Valuation of Other Financial Companies 22710.1 The valuation of finance companies 22710.2 The valuation of funds 229References 233Index 235