Bank stocks such as LBK are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. Banks, for example, must hold certain levels of tiered capital in order to maintain a safe cash cushion. Emphasizing line items like book values, along with the return and cost of equity, may be suitable for assessing LBK’s value. Below I’ll take you through how to value LBK in a fairly useful and simple way. View our latest analysis for Liberbank
What Model Should You Use?
There are two facets to consider: regulation and type of assets. Financial firms operating in Spain face strict financial regulation. In addition, banks usually do not hold significant portions of physical assets as part of total assets. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
The Calculation
The key belief for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (4.89% – 12.02%) * €0.96 = €-0.07
Excess Return Per Share is used to calculate the terminal value of LBK, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= €-0.07 / (12.02% – 1.74%) = €-0.67
These factors are combined to calculate the true value of LBK's stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= €0.96 + €-0.67 = €0.29
Relative to today's price of €0.46, LBK is currently trading above what it's actually worth. Therefore, there's no benefit to buying LBK today. Pricing is only one aspect when you're looking at whether to buy or sell LBK. Analyzing fundamental factors are equally important when it comes to determining if LBK has a place in your holdings.
Next Steps:
For banks, there are three key aspects you should look at:
- Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like bad loans and customer deposits.
- Future earnings: What does the market think of LBK going forward? Our analyst growth expectation chart helps visualize LBK’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether LBK is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on LBK here.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.