Value Investing Question - Valuation of a Bank - impact of interest rates |
- Question - Valuation of a Bank - impact of interest rates
- The Prosperity Mirage - Paul Singer & David Rubenstein
- $DF Long Special-ish Sits Thesis
| Question - Valuation of a Bank - impact of interest rates Posted: 03 Aug 2019 06:06 PM PDT So, I am in the midst of doing a valuation of some regional banks and insurance companies (general insurance and some title insurance) for a Fund Management class I am taking this summer. I have noticed that a key profitability ratio for banks is the Net Interest Margin. This being the differential between the interest rate banks get charged for a loan (FED & Inter-bank rate) versus what they can charge their customers (on average). I realized that the costs of borrowing (for the bank) is a linear relationship, where as the income generated is an exponential. This exponential relationship being based on the fact that the banks can loan each dollar borrowed multiple times. So the impact the impact of lowering interest rates will be linear on the cost side while exponential on the income side. Assuming that competitive forces impose downward pressure on the upper end of the net interest margin, those who utilize higher Net Interest Margins feeling the worst of the effects due to the exponential relationship. This isn't too big of a deal if the bank is lending each dollar a moderate amount of times. 1-5x isn't too painful, but 10-12x starts to look ugly, and 16x...well it's just funny at that point. As for my question, I am struggling to find this figure (the number of times each dollar is lent by the bank) published anywhere. Does anyone know of how to best calculate this figure manually? [link] [comments]  |
| The Prosperity Mirage - Paul Singer & David Rubenstein Posted: 03 Aug 2019 05:53 AM PDT |
| $DF Long Special-ish Sits Thesis Posted: 03 Aug 2019 12:22 PM PDT |
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