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1

Special characteristics to consider when doing a financial Due Diligence for a bank?

Hi,

after I finished my B.A. Finance & Management recently I decided to change my profession and now I'm looking for a vanacy in the field of TAS. Now, I received a vey short-term invitation for a recruiting day on monday.

I'm working for a bank at the moment but I have nearly no druck with the relevant topics.

They told me on the phone, that i have to prepare two cases in the morning which I have to present in the afternoon. The main topics will be financial due diligence for a bank (adjusting of the balance sheet and especially the profit) and secondly, the calculation of the banks value.

1. What are the special characteristics which i have to consider for the financial DD?

2. Is it the correct way, to calculate the value by using the DCF based of the profit?

Hi,

after I finished my B.A. Finance & Management recently I decided to change my profession and now I'm looking for a vanacy in the field of TAS. Now, I received a vey short-term invitation for a recruiting day on monday.

I'm working for a bank at the moment but I have nearly no druck with the relevant topics.

They told me on the phone, that i have to prepare two cases in the morning which I have to present in the afternoon. The main topics will be financial due diligence for a bank (adjusting of the balance sheet and especially the profit) and secondly, the calculation of the banks value.

1. What are the special characteristics which i have to consider for the financial DD?

2. Is it the correct way, to calculate the value by using the DCF based of the profit?

1 answer

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Hi, to answer your questions separately:

1. In principle, a bank's financial due diligence is not different from any other company's. Obviously the KPIs and metrics are different (e.g.EBITDA margin is meaningless, and instead you'd be looking at ratios related to efficiency, loans and deposits, income margin, etc.). In terms of adjustments, a common one relates to NPL ratios: it might be the case that those are understated and not enough money is set aside; if that's the case, you'll need to book the adjustment into the income statement (profit down) and decrease the book value of the loans accordingly on the balance sheet. Just an idea though, the actual adjustments you need to make will depend on the specific case!

I would say that the Legal DD becomes particularly relevant when assessing a bank - due to all the legal/compliance requirements and the potential liabilities that may arise. Also, in case of local banks, the commercial DD should place more emphasis into the state of the local economy are they are oftern intertwined.

2. DCF is not a good method when it comes to banks. Rather, you should use DDM (Dividend Discount Model), and you can then triangulate the resulting value with trading/transaction multiples.

Good luck!

Nico

Hi, to answer your questions separately:

1. In principle, a bank's financial due diligence is not different from any other company's. Obviously the KPIs and metrics are different (e.g.EBITDA margin is meaningless, and instead you'd be looking at ratios related to efficiency, loans and deposits, income margin, etc.). In terms of adjustments, a common one relates to NPL ratios: it might be the case that those are understated and not enough money is set aside; if that's the case, you'll need to book the adjustment into the income statement (profit down) and decrease the book value of the loans accordingly on the balance sheet. Just an idea though, the actual adjustments you need to make will depend on the specific case!

I would say that the Legal DD becomes particularly relevant when assessing a bank - due to all the legal/compliance requirements and the potential liabilities that may arise. Also, in case of local banks, the commercial DD should place more emphasis into the state of the local economy are they are oftern intertwined.

2. DCF is not a good method when it comes to banks. Rather, you should use DDM (Dividend Discount Model), and you can then triangulate the resulting value with trading/transaction multiples.

Good luck!

Nico

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