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Appendices 235

List of Appendices

Appendix 1: Overview of forecast horizons used in bank valuation 237

Appendix 2: Forecast horizon for banks using a residual income approach 238

Appendix 3: Methods for forecasting future bank performance 239

Appendix 4: Overview of growth rates assumed in literature 240

Appendix 5: Overview of industry betas for banks by country 241

Appendix 6: Overview of exemplary banking betas from public sources 242

Appendix 7: Overview of industry betas by bank type and region 243

Appendix 8: Allocation of interest income using a matched-opportunity rate 244

Appendix 9: Overview of key adjustments to valuation models 245

Appendix 10: Sample characteristics by year 246

Appendix 11: Distribution of sample banks by country 247

Appendix 12: Distribution by bank type per region 248

Appendix 13: Sample coverage of DS banking indices by year 249

Appendix 14: Overview of risk-free rate by country 250

Appendix 15: Estimation of market risk premium 251

Appendix 16: Overview of yearly regional industry betas 252

Appendix 17: Dispersion of the prediction errors by region and bank type 253

Appendix 18: Summary statistics for regression models 254

Appendix 19: F-test for joint insignificance of coefficient estimates 255

Appendix 20: Specification tests for fixed effects model 256

Appendix 21: Comparison of beta methodologies - European banks 257

236 Appendices

: Sensitivity of IV to isolated accounting adjustments 258

: Average value creation by phase 259

: Descriptive statistics of characteristics by subsample 260

: Distribution of Universal Banks by country 261

: Overview of tax rates by country 262

: Overview of risk-free rates by country 263

: Estimation of market risk premium 264

: Overview of yearly banking betas by country 265

: Overview of cost of equity by country 266

: Development of RIOE by sample 267

: Summary results for the pooled regression - Total sample 268

: Summary results for the between effects model - Total sample 269

: Summary results for the fixed effects model - Total sample 270

: Summary results for the random effects model - Total sample 271

; Specification tests of regression models 272

: Test for significance of fixed effects 273

: Hausman test for effect endogeneity 273

: LM test for serial correlation 274

: Modified Wald test for groupwise heteroscedasticity 274

: Summary results for the fixed effects model by sample 275

: Summary results for the between effects model by sample 276

: Regression results for alternative branch structure parameters 277

Append]

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1x29

1x30:

x31:

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x38;

x39:

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x42:

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Appendices 237

Appendix 1: Overview of forecast horizons used in bank valuation

Years

3 years

3 to 6 years

4 years

3 to 10 years

5 years

5 to 7 years

5 to 10 years

10 years

Source

Horter(1998Xp. 156

Matten (2000), p. 277

Bomer and Lowis (1997), p. 100

Kirsten(1995),p.674

Vettiger(1996),p. 131

Zessin(1982),p. 64

Adolfetal.(1989b),p.488

Behm(1994),p.60

MSDW(2001),p.24

Damodaran (2004), p. 29

Becker (1999), p. 63

Kummel(1995),p. 55

Merkle(2001),p.226

Wilde (1982), p. 467

Faust (2002), p. 75

Kunowski (2002), p. 70

Mercer (1992), p. 259

Rezaee(2001),p. 187

Strutz(1993),p. 86

Wariboko(1994),p.94

H6hmann(1998),p.92

Source: Own graphic

238 Appendices

Appendix 2: Forecast horizon for banks using a residual income approach

Residual income

Explicit forecast period, e.g., use of detai­led bank budgets

Expected trends ( 4 - 7 years) • Revenue growth • Cost behavior • Equity requirements

n n_n

Intrinsic^ Economic^ value of ^ equity ^ bank today

Value of resi­dual income from first 3 years

© Value of residual income from year 4 to 10

^ Continuing value ^ (value of business

beyond year 10)

Source: Own graphic

Appendices 239

Appendix 3: Methods for forecasting future bank performance

Forecasting methods

Qualitative forecasting methods

e.g., • Delphi interviews • Scenario techniques

• Arithmetic or • Absolute vs. • Linear models • Linear or moving averages relative growth • Exponential muhiple

• Financial ana- models regression lysis models

• One-stage or two-stage process

' Budgeted financial statements

Source: Own graphic following Hohmann (1998), p. 94

240 Appendices

Appendix 4: Overview of growth rates assumed in literature

Growth assumption

g - 0

g = inflation rate

g as value driver

Source

Becker (1999), p. 120

Faust (2002), p. 80

Geltinger (2003), p. 65 and p. 196

Merkle(2001),p. 230

Strutz(1993),p. 95

Vettiger(1996),p. 126

Adolfetal.(1989a), p. 548

Kummel(1995), p. 42

Behm(1994), p. 60

Bomer and Lowis (1997), p. 122

Source: Own graphic

Appendices 241

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244 Appendices

Appendix 8: Allocation of interest income using a matched-opportunity rate

Consolidated balance sheet

120 933

1.053

Lending operations

933

933

Deposit operations

Cash reserves 120 Loans to treasury 880

1,000

Treasury

Loans to lending 880

880

Income statement

Liabilities and

Deposits Equity

Debt to treasur\ Equity

Deposits

Debt to deposit

Interest income (12% x 933)

Interest expense (5% x 1,000)

Net interest income

equity

1,000 53

053

880 53

933

1,000

1.000

880

880

111.96

-5000

61.96

Calculation of income using a matched-opportunity rate (MOR)

Spread on loans

(12% x 933 - 9% x 880 - 0% x 53) or (12%-9%) X 933 + 9% x 53)

r+\ Spread on deposits

( 7 % X 880 + 0% X 120-5% x 1,000)

or (7%-5%) X 1,000 - 7% x 120)

( V ) Mismatch profits

( 9 % X 880-7% x 880)

0 Net interest income

17.60

61.96

Assumptions

Yield on 3-year loans 12%

MOR on 3-year loans 9%

Rates on I-year deposits 5 %

M O R on I-year deposits 7%

Source: Own exemplary calculation

Appendices 245

Appendix 9: Overview of key adjustments to valuation models

Model used Adjustments

•j3 (U

Author and year

o g

Adolfetal. (1989a) Becker, D.( 1999)

Bodmer(2001) Borner and Lowis (1997) Copeland et al. (2000) Damodaran (2004) Faust (2001) Geltinger (2003) H6hmann(1998) Horter(1998) Kirsten (2000) Koch (2002) Kummel(1995) Kunowski (2002) Matten (2000) Mercer (2002) Merkle(2001) MSDW(2001) Rezaee(2001) Strutz(1993) Uyemuraetal. (1997) Vettiger(1996) Zessin(1982)

X

X

X

X

X

(X)

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

(X)

X

X

X

X

X

X

X

(X)

X

X

yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes

(yes) yes yes yes yes yes yes yes

n/a indirect indirect indirect indirect indirect indirect indirect indirect indirect indirect indirect indirect direct

indirect indirect

n/a indirect

n/a indirect indirect indirect direct

n/a

yes yes no yes yes yes yes n/a yes yes yes yes yes yes yes yes n/a yes n/a yes yes n/a yes n/a

3-10 5 - 7

3-10 casewise*

3 - 6 N/a***

5 5-10

n/a 10 3

casewise* n/a

5 - 7 5-10

3 5-10 3-10

5 5-10 5-10

n/a 3 - 6

4

g = inflation g = o

g = value driver casewise*

g = value driver casewise*

n/a g = 0 g = o

casewise* casewise* casewise*

n/a g = inflation

n/a n/a n/a

g = 0 g<0 n/a

g = o n/a

g = o n/a

OR** CAPM

CAPM/Other CAPM APT

CAPM CAPM CAPM CAPM CAPM CAPM

CFV/OR** CAPM/APT

CAPM CAPM CAPM CAPM CAPM CAPM CAPM

CAPM/APT CAPM

CAPM/APT OR**

* Parameter to be defined casewise based of the specifics of the individual bank

** Opportunity rate

*** General forecasting horizon of 5 - 10 years, bank-specific length of forecast horizon not defined

Source: Own table

246 Appendices

Appendix 10: Sample characteristics by year

Mean, Total sample, USD bn. N = 290 per year

Market value 5.6 5.9

4.3

3.2

1.9 2.2 2.3

1.4 1.7 1.7

6.3 5.7

1989 90 91 92 93 94 95 96 97 98 99 00 01 2002

Book equity 0.8 1.0 1.1 1.2 1.3 1.5 1.7 1.7 1.8 2.2 2.4 2.8 3.0 3.3

Total assets 16.6 20.0 22.6 23.2 25.1 28.9 32.9 34.8 36.9 46.2 49.1 55.8 57.7 63.6

ROE (percent) 12.0 10.9 11.1 9.9 11.3 11.1 12.1 11.7 11.9 5.5 6.5 11.3 10.5 8.8

Source: Own calculation

Appendices 247

Appendix 11: Distribution of sample banks by country

(2002)

Country

Canada

United States

North America - Subtotal

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Netherlands

Portugal

Spain

Sweden

Switzerland

United Kingdom

Europe - Subtotal

Hong Kong

Japan

Malaysia

Singapore

South Korea

Thailand

Asia - Subtotal

Grand Total

Number of banks

8

127

135

3

1

7

1

5

6

3

2

12

3

2

10

2

7

10

74

1

69

3

1

2

5

81

290

Market value (USD bn)

82.4

970.3

1,052.7

1

10

14.2

0.1

27.3

45.6

6.8

22.4

57.7

1.1

7.3

82.1

14.3

33.3

130.5

453.5

0.2

111.1

10.3

9.3

5.1

3.9

139.9

1,646.1

Share (percent)

7.8

92.2

100.0

0.2

2.2

3.1

0.0

6.0

10.0

1.5

4.9

12.7

0.2

1.6

18.1

3.1

7.3

28.8

100.0 0.0 0.1

79.5

7.3

6.7

3.6

2.8

100.0

Source: Own calculation

248 Appendices

Appendix 12: Distribution by bank type per region

2002, percent

Number of banks 135 290

Mortgage FinanceA^

Consumer F inance^ln^^f l

Investment Banks^

Banks 89

2^ -^100%

81 77 83

North Europe America

Asia Total Sample

Source: Own calculation

Appendices 249

Appendix 13: Sample coverage of DS banking indices by year

Average share of market value, percent

90

80

70

60

50

40

30

20

10

^

—.^_ -

^

\

-

1989 90 91 92 93 94 95 96

,_^^____^ / North America

^____-- Europe

- , _^ " Total Sample

Asia

Year

97 98 99 2000 01 2002

Source: DS, own calculation

250 Appendices

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^ i i - 1

^ 1

Appendices 253

Appendix 17: Dispersion of the prediction errors by region and bank type

Total sample excluding Asia, 1989 - 1998

1 ]

0]

3rd Quartile-

1st Quartile-

— Maximum*

— Median

— Minimum*

— p - [ ^ Banks

llllllll Investment Banks

\iMM Consumer Finance

I B Mortgage Finance

North America

1,350

Europe

740

Source: Own calculation

254 Appendices

O

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Appendices 255

o 5^ o o

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256 Appendices

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Appendices 257

Appendix 21: Comparison of beta methodologies - European banks

Beta estimates, Europe

1.20

1.15

1.10

1.05

1.00

0.95

0.90

0.85

0 80

r

-

-

^^V.r^^ ' X/ 1989 90 91 92 93 94 95 96 97 98

/ Beta - Ex TMT

/ 1

1 1 • Beta - Normalized TMT /

/ . ' / '

1'/ ^^"""^ Standard beta

7

, , , , ,, 99 00 01 2002

Source: DS, own calculation

258 Appendices

Appendix 22: Sensitivity of IV to isolated accounting adjustments

(1989 - 1998, percent)

Statistic North America Europe Asia

Sensitivity of IV to adjustments for effective average taxes

N

Mean

Median

Standard Deviation

Interquartile Range

1,350

0.90

0.97

2.14

0.15

740

1.00

1.02

1.43

0.28

810

0.99

0.93

2.56

0.17

Sensitivity of IV to adjustments for deferred taxes

N

Mean

Median

Standard Deviation

Interquartile Range

1,350

0.90

1.00

0.26

0.02

740

1.00

1.00

0.09

0.01

810

0.99

1.00

1.41

0.00

Sensitivity of IV to adjustments for unrecorded goodwill

N

Mean

Median

Standard Deviation

Interquartile Range

1,350

1.03

1.00

0.21

0.00

740

N/a

N/a

N/a

N/a

810

N/a

N/a

N/a

N/a

Source: Own calculation

Appendices 259

Appendix 23: Average value creation by phase

1989-1998, percent

1 Value creation in Phase 2

Value creation in Phase 1

44

56

40

60

42

58

43

57

North Europe Asia Total America Sample

Source: Own calculation

260 Appendices

Appendix 24: Descriptive statistics of characteristics by subsample

(1998 -2003)

Statistic Equity'

(EUR mn) Assets

(EUR mn) ROE

(percent) Customers

(mn)

Universal Banks (N=120)

Mean

Median

Standard Deviation

Interquartile Range

4.205

3,014

3,365

3,651

92,087

63,933

81,919

62,409

15.8

14.5

13.1

13.4

5.2

4.0

4.2

4.3

Savings Banks (N=636)

Mean

Median

Standard Deviation

Interquartile Range

192

147

131

109

4,441

3,309

3,104

2,560

6.8

6.5

4.8

5.3

0.3

0.2

0.2

0.2

Source: Own calculation

Appendices 261

Appendix 25: Distribution of Universal Banks by country

(1998-2003)

Country

Belgium

France

Germany

Italy

Netherlands

Portugal

Spain

Sweden

Switzerland

UK

USA

Total

Number of banks

2

1

5

6

2

3

5

3

3

2

1

33

Equity (EUR bn)

22.5

12.6

61.0

101.7

45.6

36.2

54.8

69.2

73.3

9.8

52.5

539.1

Share (percent)

4

2

11

19

8

7

10

13

14

2

10

100

Source: Own calculation

262 Appendices

> O (N X

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Appendices 263

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264 Appendices

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Appendices 265

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266 Appendices

3

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Appendices 267

Appendix 31: Development of RIOE by sample

percent

Universal Banks

Savings Banks

-15 i -20

Median N

Median

N

3rdQuartile-

1 St Quartile -

1998

0.47

12

1.89

106

99

2.74

15

4.69

106

2000

6.70

24

-2.36

106

01

6.71

25

-4.20

106

02

4.72

26

-5.51

106

- Maximum*

- Median

- Minimum*

H Universal Banks I I Savings Banks

2003

7.35

18

-2.01

106

Year

* Outliers and extremes are excluded

Source: Own calculation

268 Appendices

a.

o

I

B B

C/5

a, <

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Appendices 269

B C/5

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270 Appendices

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Appendices 271

^ ^

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272 Appendices

Appendix 36: Specification tests of regression models

(Ho: coefficients are jointly

Regression model

insignificant => m

Distribution

odel is misspecified)

Test statistic p value*

Pooled regression

RIOE

income/Equity

Cost/Equity

LLP/Equity(l)

LLP/Equity (2)

F(6. 741)

F(6. 741)

F(6, 741)

F(6. 741)

F(5, 742)

96.05

24.38

48.20

688.91

1.04

0.00

0.00

0.00

0.00

0.39

Fixed Effects

RIOE

Cost/Equity

LLP/Equity (1)

LLP/Equity (2)

F(6, 607)

F(6. 607)

F(6. 607)

F(6, 607)

F(5, 608)

239.59

28.52

14.18

1,309.35

20.97

0.00

0.00

0.00

0.00

0.00

Between Effects

RIOE

Income/Equity

Cost/Equity

LLP/Equity (1)

LLP/Equity (2)

F(6, 128)

F(6, 128)

F(6, 128)

F(6, 128)

Ff5. 129)

11.00

10.19

13.30

55.08

1.58

0.00

0.00

0.00

0.00

0.17

Random Effects

RIOE

Income/Equity

Cost/Equity

LLP/Equity (1)

LLP/Equity (2)

t(6)

t(6)

t(6)

t(6)

t(5)

1,089.46

22.41

58.25

7,750.66

15.43

0.00

0.00

0.00

0.00

0.01

* According to the corresponding distribution with degrees of freedom as stated in parentheses; bold/? value suggests rejecting Ho.

Source: Stata, own calculation

Appendices 273

Appendix 37: Test for significance of fixed effects

(Ho: parameter homogeneity => fixed effects model is misspecified)

Regression model

RIOE

Income/Equity

Cost/Equity

LLP/Equity(l)

LLP/Equity (2)

F-statistic

10.57

23.62

29.70

11.66

4.15

* According to the F distribution with Num. bold/7 value suggests rejecting Ho.

Degrees of freedom

Num.

134

134

134

134

134

Denum.

607

607

607

607

608

and Denum. degrees of freedom;

p value*

0.00

0.00

0.00

0.00

0.00

Source: Stata, own calculation

Appendix 38: Hausman test for effect endogeneity

(Ho: regressors not correlated with c => random effects)

RIOE

Income/Equity

Cost/Equity

LLP/Equity (1)

LLP/Equity (2)

X^-statistic

176.96

634.77

236.19

43.49

87.79

* According to the -f- distribution with df degrees suggests rejecting Ho

df

6

6

6

6

5

of freedom; bold/?

p value*

0.00

0.00

0.00

0.00

0.00

value

Source: Stata, own calculations

274 Appendices

Appendix 39: LM test for serial correlation

(Ho is either that rho=0 if residuals are ARl or that lanida=0 if residuals are MAI)

Regression model Test statistic Distributed as p value*

(Ho: residual are A R l )

RIOE

Income/Equity

Cost/Equity

LLP/Equity(l)

LLP/Equity (2)

2.08

6.32

25.22

16.20

1.44

N(0,1)

N(OJ)

N(0,1)

N(0,1)

NfOJJ

0.15

0.01

0.00

0.00

0.23

(Ho: residual are MAI)

RIOE

Income/Equity

Cost/Equity

LLP/Equity (1)

LLP/Equity (2)

1.44

2.51

5.02

4.03

1.20

xV) xV) xV) xV) xV)

0.07

0.01

0.00

0.00

0.11

* According to the corresponding distribution with Num. and Denum. degrees of freedom; bold/? value suggests rejecting Ho.

Source: Stata, own calculation

Appendix 40: Modified Wald test for groupwise heteroscedasticity

(Ho: groupwise heteroskedasticity across panels)

Regression model Test statistic Df p value*

RIOE

Income/Equity

Cost/Equity

LLP/Equity (1)

LLP/Equity (2)

13,523.39

19,759.60

1.20E+32

95,184.77

120,000.00

135

135

135

135

135

0.00

0.00

0.00

0.00

0.00

* According to the y^ distribution with Df degrees of freedom; bold/? value suggests rejecting Ho.

Source: Stata, own calculation

Appendices 275

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