The main question the book addresses is whether it is possible to determine the value of banks in general and Islamic banks in particular using generally available valuation models. But does this still hold in the current uncertain times? Questions that will be addressed include the suitability of price as the right benchmark, what is the impact of market psychology and how accurate are future cash flow estimations. Over the years, large numbers of academics and practitioners have looked into the valuation of companies and the different techniques that can be applied. Discounted cash flow, residual income and economic value added (EVA) are only a few of the techniques that have been researched extensively. Typically, these cover either a specific industry, or a large diverse set of listed companies, but without exception exclude financial institutions. The reasons for this exclusion are simply that the characteristics are different from other industries and the fact that financial institutions, specifically banks, are notoriously difficult to value. But are they really that difficult to value and if so, why? As a result of the global growth of the Islamic banking industry it becomes increasingly important to be able to determine the value of Islamic banks and compare their ability to create value with other banks in the industry. For Islamic banks, the estimation of parameters differs, amongst others due to the different balance sheet structure, and the lack of availability of market data.
Table of contents
Foreword. v
Table of contents. vii
1 Valuation of Firms. 7
1.1 Valuation Components. 7
1.1.1 Growth. 8
1.1.2 Risk. 8
1.1.3 Returns. 9
1.1.4 Capital 12
1.1.5 Cost of Capital 13
1.2 The Models. 15
1.2.1 Discounted Cash Flow.. 15
1.2.2 Economic Profit. 18
1.2.3 Which Model?. 21
2 Why is Bank Valuation so Difficult?. 25
2.1 Bank Valuation Model 26
2.2 The Parameters. 28
2.2.1 Return. 28
2.2.2 Capital 28
2.2.3 Cost of Capital 30
2.2.4 Risk. 34
2.3 The Proof 36
2.3.1 Data. 37
2.3.2 Statistical Method. 41
2.3.3 Sample Details. 42
2.3.4 Test Results. 46
2.4 Valuing Banks – The Conclusion. 48
3 Valuing Islamic Banks. 49
3.1 Islamic Bank Specifics. 50
3.1.1 Sources of Funds. 52
3.1.2 Sources of Income. 54
3.1.3 Structure. 55
3.1.4 Financial Year. 58
3.1.5 Accounting Standards. 58
3.1.6 Financial Data Availability. 59
3.2 The Parameters. 59
3.2.1 Return. 60
3.2.2 Capital 61
3.2.3 Cost of Capital 63
3.2.4 Risk. 64
3.3 The Proof 65
3.3.1 Data. 65
3.3.2 Statistical Method. 71
3.3.3 Sample Details. 72
3.3.4 Test Results. 75
3.4 Valuing Islamic Banks – Myth or Reality. 83
4 Further Observations. 86
Challenges in Uncertain Times. 93
5 The Challenge with Value at Risk. 95
5.1 The Beauty of VaR. 96
5.2 How VaR has Fared. 97
5.3 Is VaR all bad?. 102
6 The Impact of News and Behavioural Finance. 104
6.1 Efficient Market Hypothesis. 104
6.2 Behavioural Finance. 106
6.3 Is the Market Efficient?. 111
7 Can Asset Bubbles be Predicted. 114
7.1 What Recent Data Tells Us. 116
7.1.1 The Data. 117
7.1.2 The Statistics. 118
8 Concluding Remarks. 125
8.1 The Model and Parameters. 125
8.2 Capturing Bank Fundamental Value. 127
Glossary. 133
Bibliography. 136
Index. 145
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