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11.08.2008New News3
11.08.2008New News2
11.08.2008New News1

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The financial sector of economics is characterized by a number of peculiar features that predetermine particularities of the valuation of a commercial bank's cost. For instance, from the legal point of view, the banks operate under strict regulation and control of the Central Bank of the Russian Federation etc.

 

The bank's cost valuation, like in the case with the business valuation, is determined by the possible income which the owners may obtain from the bank. But there exist some peculiarities which make bank business differ from any other enterprise and which presuppose different approaches to valuation of the bank and to the companies belonging to the non-financial sector of economics. Among those peculiarities we may distinguish the following:

 

  1. Small share of property in the bank's assets. Fixed assets are acquired by the bank to provide its proper operation. These assets are low liquid as bank equipment and transport are specific and have small market.
  2. Specific character of accounting in the credit institutions. It is important for the bank's cost valuation that the balance mostly shows pending and contingently pending transactions, with results appearing in future. For example, the loan issued is the pending transaction, it will be completed only in future after the principal sum and interest return.  
  3. Small share of its own funds in the assets. While in the companies of the non-financial sector it may constitute up to 70%, in the banks the share of its own funds does not reach over 20%. Nevertheless, the real capital substantially influences the bank's cost valuation. It is very important that the principal receivable must not exceed 70%.
  4. Small share of operating income in the capital. Often the bank's cost cannot be defined by means of analysis its flow of funds as it is distorted while tax sheltering, using accounting methods or technical correcting of balance.
  5. Quite substantial cost of intangible assets. The main task for the new owners who have just purchased bank as business is to preserve personnel, management and customers. This predetermines the increased cost of those banks that are oriented to the retail market segment and have won good positions in the sphere. The problem of trust into the bank is always important!
  6. Most bank selling transactions are bank license purchase transactions, i.e. possibility to operate at the market. According to the Central Bank of the Russian Federation, in Russia there are registered 1310 banks (as of 01.11.2007), and most of them have the charter capital less than EUR 5 million (letter of CBR as of July 3, 2007 N 96-T). From the 1st of January 2007 there enter into force the requirements as to the minimum volume of the own funds (capital) for operating banks and non-bank credit institutions which solicit bank status, the minimum volume of the own funds for them amounts EUR 5 million in the equivalent sum in rubles. 

 

For the first six months of the year 2007 average price ratio of transactions constituted 2,4 of the bank's capital. Recently the bank's cost has been influenced by the bank's participation in the deposit insurance system. This enables the bank to attract funds of the natural persons and thus get additional benefits in the struggle for financial resources.

 

Besides the bank's having licenses and insurance system, its cost is also influenced by the presence of certain infrastructure for taking different transactions.

 

First of all, the bank's branch system is valuated.  Besides, the bank's cost substantially grows if the bank has several subdivisions which render related financial services (lease, factoring, trust management, insurance services, pension funds etc).

 

The real dynamics of the bank's market position is also important, as certain trends of the bank's development quite often become permanent and sometimes it is difficult to change them. It may demand some efforts to overcome a negative dynamics, and if the minority interest is purchased, the dynamics directly influences the cash flow forecast.

So, the key issues of the bank's cost valuation are defining the specific bank's risk and its risk and profitability balance and valuation of the quality of the bank's risk management.

 

Our experts have not just participated in the Research and Practice Conferences devoted to the working out the methodological principles for evaluating the cost of the credit institution's own capital, but they also have managed to reveal the peculiarities of this business, which especially impact the valuation process, in practice. 

 

At present we can say for certain that we know how to evaluate the bank sector. Our reports of the bank's cost are always based only on the objective, reliable and up-to-date information.

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