Equity valuation using accounting numbers : valuation models in the banking context : empirical performance and analysis of Broker’s reports

This study investigates the performance of the Dividend Discount Model (DDM), the Residual Income Valuation Model (RIVM) and two multiples based valuation methods, Forward Price to Earnings (P/E) and Price to Book (P/B) ratios, when analysing bank equity. Additionally, the role of Other Comprehensive Income (OCI) in the difference between the outputs of the DDM and the RIVM is analysed as a possible cause of this difference. Although the sample is relatively small, OCI is not found to be the driver of the difference between the output of the aforementioned mentioned models. The analysis also concludes that the performance of Dividend Discount Model and the Residual Income Valuation Model is highly sensitive to the inputs used, especially growth rates. The second part of this study investigates the valuation methods used by analysts in bank valuation, compares the findings with what literature proposes and analyses if the period of the most recent financial crisis had any impact on the methods used by analysts. It finds that in their majority, analysts conform to what literature proposes and that there was a noticeable change in valuation models used during the 2006-2011 period. Although many of the reports do not provide clear explanations as to why this happened, the analysis tries to fit in-report information with the theoretical framework