Calculator · Financial-service firms
Bank and insurer equity value
Value the equity of a bank, insurer or other financial-service firm with an excess return model and a dividend discount model on the same inputs, cross-checked against the industry price-to-book ratio.
Why banks are valued on equity
For a bank or an insurer, debt is raw material rather than financing, and reinvestment is hard to measure, so free cash flow to the firm and enterprise value are not meaningful. Damodaran values these firms on equity: the dividends they pay, or their book value plus the present value of the returns they earn above the cost of equity.
With consistent inputs the two models give the same value. Growth in book value comes from the return on equity and the share of income retained; in stable growth the payout must be 1 − g ÷ ROE. A firm worth more than its book value must earn more than its cost of equity, and regulatory capital limits how much it can pay out.
Related: Cost of equity · Multiples · Model notes
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