 Why is valuing financial institutions different?  How are financial institution valued?

Complexity:  Must rely on rough estimates from management’s accounting decisions  Their choice of leverage is the core of how they generate earnings  Generally highly leveraged Therefore, extremely sensitive to small changes in key drivers

 Non-Financial Institutions  Discounted Cash Flow (DCF)  Financial Institutions  Equity Cash Flow In a simplified world ECF equals Discounting Dividends  ECF = NI – Increase in Equity + Other Comprehensive Income

Conclusion  DCF is not a good valuation method for Financial Institutions  Financial Institution make money on fee and spreads  Debt valuated differently  It is hard to know how much risk a bank current has  Equity Cash Flows can be very different every year  Need to trust management