Factors That Affect the Valuation of Commercial Banks
- Many factors that affect the valuation of commercial banksbank image by Pefkos from Fotolia.com
Commercial banks are financial institutions that provide banking services to individuals and businesses, such as checking accounts, savings accounts and loans. Unlike investment banks, commercial banks are not active in capital markets; some banks, however, combine the functions of both of these institutions. There are a number of factors that investors and other interested parties can use to determine the value, or total worth, of a commercial bank.
- One of the surest indicators of a commercial bank's value is its recent financial performance. While a bank's assets and liabilities may speak to its past performance, the earnings statements and profitability of recent years speaks to its present performance and can greatly impact how much investors perceive the bank to be worth.
- Although recent financial performance is tremendously important, investors also like to consider the history of the bank. This can include both past financial performance--for example, a bank that has only recently turned a profit will likely be less valuable than a blue-chip company--and the history of leadership. If a bank has performed well under a certain management team, but the management team has recently departed, the investor may devalue the company because of the shift.
- One quick and dirty measure of a bank's worth is its market capitalization, equal to the number of outstanding shares of stock times the price of each share. Due to the manifold distortions that can affect the price of a share, the market cap is less an objective measure of a company's worth than the free market's best guess at its value. Theoretically, a market cap represents how much money an investor would need to attain if he wanted to purchase the bank immediately.
- Another factor in the valuation of a commercial bank is the amount of assets versus debt that a bank has on the books. If a bank has large assets--or, in the case of commercial banks, has a number of outstanding loans that it can be confident of seeing repaid--and little debt, then the bank will likely be valued far higher than a similarly sized institution with significant debt.
- Independent of the actual health of the institution, the valuation of a commercial bank can be affected by the state of the economy and of trends impacting the financial sector as a whole. For example, during the subprime mortgage crisis of 2008, as many banks failed or lost tremendous value due to poor investment decisions, the value of many banks that had invested wisely fell, too, on general fears about the health of the commercial banking sector and on the expectation of less business due to a worsening economy.