Hello,

Im a finance student looking for help for a project.

Were supposed to value certain banks shares to see if they would make a good investment opportunity.

Does anyone have any tips on doing this?

For example, what ratios are useful when looking at banks??

Well, if you're a finance student you should be able to do this to some degree. Get studying more and stop looking for short-cuts.

Good Evening MisterMe,

Valuing banks is pretty cumbersome, you are entirely right. The reason - challenge in estimating precise levels of debt as well as reinvestments ratios. The general Discounted Cashflow Valuation Model cannot easily be applied to valuing a bank.

Instead, value your bank by applying a Dividend Model. This is done as follows (I assume you know discounting; if not, feel free to ask):

1. Calculate Expected Growth Rate = ROE x Retention Ratio.
2. Calculate Cost of Equity.
3. Map out in a column 5 years' worth of: Expected Growth Rate, Earnings per Share, Payout Ratio, Dividends per Share, Cost of Equity and Present Value of Dividends.
4. Calculate Terminal Price per Share = Expected Earnings per Share (year 5) x Payout (year 5) / (Cost of Equity - Long Term Growth rate). Discount to Present Value.
5. Calculate bank value by adding up present value of 5 years' expected dividends and terminal price per share.

That is it! If you manage better than everyone else in class let me know:)

Regards,
OP