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Bank stocks such as HBAN 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. 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. Looking at elements like book values, along with the return and cost of equity, can be useful for assessing HBAN’s value. Today I’ll determine how to value HBAN in a fairly useful and easy method.
What Model Should You Use?
There are two facets to consider: regulation and type of assets. The regulatory environment in United States is fairly rigorous. Furthermore, banks tend to not have 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.
Calculating HBAN’s Value
The key 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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.14% – 12%) x $10.42 = $0.22
Excess Return Per Share is used to calculate the terminal value of HBAN, 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)
= $0.22 / (12% – 2.7%) = $2.44
Combining these components gives us HBAN’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $10.42 + $2.44 = $12.86
This results in an intrinsic value of $12.86. Relative to today’s price of US$13.96, HBAN is , at this time, priced in-line with its intrinsic value. This means HBAN isn’t an attractive buy right now. Pricing is only one aspect when you’re looking at whether to buy or sell HBAN. Analyzing fundamental factors are equally important when it comes to determining if HBAN 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 HBAN going forward? Our analyst growth expectation chart helps visualize HBAN’s growth potential over the upcoming years.
- Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether HBAN is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on HBAN 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.