SBANK operates in the banking industry, which has characteristics that make it unique compared to other sectors. Understanding these differences is crucial when it comes to putting a value on the bank stock. The tiered capital structure is common for banks to abide by, in order to ensure they maintain a sufficient level of cash for their customers. Examining factors such as book values, with the return and cost of equity, may be useful for estimating SBANK’s value. Today I’ll look at how to value SBANK in a relatively accurate and simple method. Check out our latest analysis for Sbanken
What Model Should You Use?
Two main things that set financial stocks apart from the rest are regulation and asset composition. Financial firms operating in Norway face strict financial regulation. In addition, banks usually do not have large amounts of physical assets on their balance sheet. 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 central assumption for this model 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)
= (14.41% – 8.40%) x NOK62.38 = NOK3.75
We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= NOK3.75 / (8.40% – 1.99%) = NOK58.55
Putting this all together, we get the value of SBANK’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= NOK62.38 + NOK58.55 = NOK120.93
This results in an intrinsic value of NOK120.93. Relative to today’s price of øre84.60, SBANK is , at this time, undervalued. Therefore, there is potential room to profit from mispricing if you bought SBANK at NOK120.93. Pricing is one part of the analysis of your potential investment in SBANK. Fundamental factors are key to determining if SBANK fits with the rest of your portfolio holdings.
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 SBANK going forward? Our analyst growth expectation chart helps visualize SBANK’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether SBANK is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on SBANK here.