Banking industry Archives - Consilue https://consilue.com/en/tag/banking-industry-en/ Consulting professionals Mon, 22 Nov 2021 11:30:56 +0000 en-US hourly 1 https://wordpress.org/?v=6.9.4 https://consilue.com/wp-content/uploads/2019/10/favicon.ico Banking industry Archives - Consilue https://consilue.com/en/tag/banking-industry-en/ 32 32 EBITDA and EBITDA margin https://consilue.com/en/ebitda-and-ebitda-margin/ Mon, 19 Mar 2018 11:49:50 +0000 http://consilue.com/?p=768 The EBITDA is a well-known financial metric. It is considered as the best approximation of operating cash flows and thus consequently a crucial indicator for managers, bankers, appraisers, analysts and other industry practitioners. Read about the meaning and use of the EBITDA.

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]]> The EBITDA is a well-known financial metric. It is considered as the best approximation of operating cash flows and thus consequently a crucial indicator for managers, bankers, appraisers, analysts and other industry practitioners.

In other words, EBITDA gives you an indication of how much earnings before interest, taxes, depreciation and amortization the company makes with all the invested capital. Negative number is a red alarm for a company, meaning that the company is facing fundamental problems with its operations.

Normally practitioners consider normalized EBITDA only (management adjustments, pro-forma adjustments and other adjustments), since one off events may sometimes represent a significant role.

Due to fast and easy use of EBITDA, the metric is dominating the financial world. Its applicability makes it a #No.1 indicator. Furthermore, it is often used in relation with debt, value and performance indicators:

– Leverage: Financial obligation/EBITDA

This metric measures how does the debt relate to the ability of generating the operational profit. It can be argued that a leverage > 4 is not acceptable for banks anymore.

– Interest coverage: EBITDA / Interest expenses

This metric measures the ability of a company to cover its interest out of its operations. It is obvious that a ratio <1 is not sustainable.

– Value multiplier: Enterprise value/EBITDA (EV/EBITDA)

This metric measures how the market values the firm according to its ability to generate operational profits.

– Performance indicator: EBITDA / Total revenues (EBITDA margin)

This metric is a relative indicator and offers a great way to compare the company performance with its competitors.

EBITDA is further developed into EBITDAR and EBITDARM in cases where costs such as rents, restructuring fees and management fees represent a significant amount. These is especially typical for retail industry, REITs, hospitals, etc.

Nowadays more and more financial practitioners are aware of the underlying interpretational problems of EBITDA. The metric that overcomes the disadvantages of EBITDA is the economic value added model (so called EVA model). Even though the model as such is more advance, it relays on subjective assumptions related to the cost of capital calculation.

 

Are you interested in boosting your EBITDA? Check our performance improvement services or contact us directly!

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]]> Bank specifics and value creation https://consilue.com/en/bank-specifics-value-creation/ Mon, 19 Mar 2018 11:32:40 +0000 http://consilue.com/?p=763 In order to understand banks & their specifics, you need to first understand how they generate value, the role that they play and systematic limitations.

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Banks represent a crucial element of the modern economy. Often we read about bank specifics. What exactly is it about? How do banks operate and what kind of risks and regulation are they facing? Do the risks and regulation impact the value creation?

Generally speaking we divide banks into four groups according to the source of the bank’s income:

  • Net interest income is income generated as a difference between funds attracted in the form of customer deposits and debt and funds provided to customers in the form of loans such as mortgages, credit card loans, and corporate loans.
  • Fee and commission income is income charged for services such as transaction advisory, underwriting and placement of securities, managing investment assets, securities brokerage, and many others.
  • Trading income is income generated from trading financial instruments such as equity stocks, bonds, foreign exchange and exotic financial products.
  • Other income is income generated from wide variety of nonbanking activities, including real estate development, minority investments in industrial companies, and distribution of investment, insurance, and pension products and services for third parties.

Ideally, any activity involving financial advisory service should consider businesses and dependent value drivers separately according to the source of income.

Besides value drivers, a very good understanding of the business activities and value creation is required. In contrast to non-banks institutions, most of banks create value on both sides of the balance sheets – on the equity and liabilities side, due to the customer deposits costs that are below the market interest rate, and on the asset side, due to the value added to financial products. By definition, financial obligations carry operational meaning for banks and are not meant only as a source of financing as for non-financial companies.

One should also account for risks related. In last decade the volatility of profitability of the banking industry has increased, causing the impact on market-to-book ratios. Banks deal with interest rate risks, due to the mismatched maturities of loans and deposits. High leverage causes a bank to be highly vulnerable to even small changes in interest rates. Besides that, banks take on significant risks inherent in balance sheet items (such as proprietary trading activities) and also risks related to off-balance sheet positions (such as swaps, forward deals and options on foreign currencies or securities).

Furthermore, the way modern banks operate in the financial markets result in a general dependency on exogenous factors such as the economic cycle or trends in money, capital or real estate markets, showing up through changes in a bank’s credit losses. Financial planning and other financial advisory services thus require a thorough analysis of several parameters and forecasting future trends.

Last but not least, law and regulation is also crucial. Banks are subject to various bank-specific rules. High regulation is necessary due to specific role within the financial system, risks they face and dependency on economic cycles. Regulation is imposed at the state level and occasionally at the international level, as in the case of bank capital requirements. Six types of regulation seek to enhance the net social welfare benefits of financial intermediaries’ services: (1) safety and soundness regulation, (2) monetary policy regulation, (3) credit allocation regulation, (4) consumer protection regulation, (5) investor protection regulation, and (6) entry and chartering regulation. The regulation that significantly influences the value of a bank is capital adequacy.

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