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Financial Services Firms: Governance, Regulations, Valuations, Mergers, and Acquisitions, 3rd Edition by Zabihollah Rezaee

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Chapter Nineteen

Real-World Bank Valuation Complications

Not all bank valuations will involve normal conditions and clean banks that have healthy prospects for reasonable returns in the future. There are numerous instances where special circumstances require adjustments to the standard valuation approaches. This chapter addresses emerging issues facing financial services firms and describes the application of the various valuation approaches under nine real-world complicating circumstances:

1. A bank that has experienced losses in recent years because of low spreads, high overhead expenses, or excessive loan losses

2. A bank with inadequate capital levels

3. A bank that faces very uncertain loan loss exposure on a significant portion of its portfolio

4. A bank whose equity base consists of both preferred and common stock, but only the value of the common stock is needed

5. A bank that is highly leveraged

6. A branch of a bank that is to be purchased

7. Bank assurance

8. Initial public offering (IPO)

9. Islamic banking systems

Each of these situations requires slight modifications to the valuation approaches used in Chapter 16.

Banks Experiencing Recent Losses

Banks and banking organizations in the United States traditionally have reported many consecutive years of record earnings, showing financial health and strength in rebounding from the financial difficulties of the late 1980s and early 1990s. In 1991, the Federal Deposit Insurance Corporation Improvement Act introduced ...

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