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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Valuation of bank shares

Let us take the example of e-Bank.

We know that the equity invested by shareholders in e-Bank is equal to $100 million (see the balance sheet in Stage 1). Imagine that the stock market expects e-Bank to generate a steady annual profit after tax of $10.8 million, paid every year as a dividend.

The return on equity (ROE = profit/equity = 10.8/100) of e-Bank is 10.8%.

To simplify the example and avoid unnecessary maths, imagine that the bank is closed after three years, and that investors, your sister included, recover their initial equity investment of $100 million. The timing of the dividends accruing to investors is as follows:

 Year 1Year 2Year 3
Cash flow (dividends) to investors+10.8+10.8+10.8 + 100

Two cases will be ...

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