Bank stocks such as ING 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. For instance, banks must hold a certain level of cash reserves on the books as a safety precaution. Focusing on data points such as book values, along with the return and cost of equity, can be practical for evaluating ING’s valuation. Today we’ll take a look at how to value ING in a reasonably effective and easy approach.
What Model Should You Use?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. The regulatory environment in Poland is fairly rigorous. Moreover, banks generally don’t hold large portions of tangible assets on their balance sheet. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.
Deriving ING’s True Value
The key assumption for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. 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)
= (0.13% – 8.7%) x PLN110.36 = PLN4.76
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)
= PLN4.76 / (8.7% – 3.3%) = PLN89.1
These factors are combined to calculate the true value of ING’s stock:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= PLN110.36 + PLN89.1 = PLN199.47
This results in an intrinsic value of PLN199.47. Compared to the current share price of zł167, ING is fairly priced by the market. Therefore, there’s a bit of a downside if you were to buy ING today. Valuation is only one part of your investment analysis for whether to buy or sell ING. Analyzing fundamental factors are equally important when it comes to determining if ING has a place in your 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 ING going forward? Our analyst growth expectation chart helps visualize ING’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether ING is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on ING here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.