Why Banks Are Different to Value

Banks and insurers require a special approach — debt is raw material, not just funding. FCFF doesn't work; use DDM or FCFE instead.

BanksInsuranceROEP/BVRegulatory Capital

Live Result

1,666.67

ƒ: BV_equity * (ROE - g) / (ke - g)raw: 1666.67

ƒ(x)

Use variable names from the panel above (e.g. FV, r, n) — or type numbers directly: 10000 / (1 + 0.08)^10

BV_equity

Book value of equity

BV_equity = 1000

ROE% as decimal

Return on equity (decimal)

ROE = 0.14

ke% as decimal

Cost of equity

ke = 0.10

g% as decimal

Stable growth rate

g = 0.04

💡 You can also enter values directly in the formula: 10000 / (1 + 0.08)^10

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Learn: Why Banks Are Different to Value

Special Valuation Cases · Educational Guide

The Core Idea

You can't use FCFF for a bank. A bank's "debt" (deposits, borrowings) is its raw material — the deposits are what it uses to generate loans. Separating debt from operations is impossible. Instead, we value banks at the equity level directly.

How It Works

For banks: use DDM, FCFE, or P/BV analysis. The key driver is ROE vs cost of equity (ke). If ROE > ke, the bank creates value and deserves to trade above book value (P/BV > 1). If ROE < ke, it destroys value (P/BV < 1).

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Real-World Example: Bank with BV = $1,000M, ROE = 14%, ke = 10%, g = 4%: P/BV = (14% − 4%) / (10% − 4%) = 10% / 6% = 1.67. Equity value = $1,000M × 1.67 = $1,670M. Trading above book because ROE (14%) > ke (10%).

Why Banks Are Different to Value

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