Application of Equity Cash Flow and Residual Income Approaches in Valuing Commercial Banks: A Case Study of Commercial Banks Operate in Palestine
Date
2018-09-09
Authors
Khazem, Majdal Nasser Ahmad
Journal Title
Journal ISSN
Volume Title
Publisher
جامعة النجاح الوطنية
Abstract
The main idea of this study is examining the value of commercial banks operate in Palestine; excluding Islamic banks. The study presents guidelines to value banks and provides a framework for banks’ valuation based on two generally acceptable valuation models: model of discounted residual income (RI) and the model of discounted equity cash flows (ECF) applied for banks in Palestine. Both models are used to calculate the equity value of banks in Palestine and provide an equivalent results and they are highly recommended. Commercial Banking sector that are operating in Palestine has been chosen for conducting this research, excluding Islamic banks due to the analogy purposes of the sample, in which thirteen (13) commercial banks remain as research sample as in 2016. All the necessary data are collected from each bank’s annual audited financial statements and Palestinian Monetary Authority PMA annual Reports. This data is collected from 2008 to 2016 and future data is forecasted for the next five years.
High correlation between both models is a consequence of the T-Test analysis for the difference between values of banks using the recommended models. This result is similar to previous studies such as (Halsey, 2001) which discussed that the discounted residual income model is equivalent to the discounted equity cash flow model. The significant 2 tailed is less than 0.05, this insures that there is no difference between values of banks using the two models. All factors in both models affect the bank’s value except the depreciation in ECF model. The main two factors that affect value in ECF model are net income and net increase in loans. For the RI model, NI and RI are the main two factors that affect value. Due to estimation issues, the equity banks values for both models were equivalent not the exact.
Description
Keywords
Banks Valuation, Bank value, equity cash flows, residual income approach.