Stephanie Gross Banks and Shareholder Value

Transcription

1 Stephanie Gross Banks and Shareholder Value

2 GABLER EDITION WISSENSCHAFT

3 Stephanie Gross Banks and Shareholder Value An Overview of Bank Valuation and Empirical Evidence on Shareholder Value for Banks With a foreword by Prof. Dr. Andreas Hackethal Deutscher Universitats-Verlag

4 Bibliografische Information Der Deutschen Nationalbibliothek Die Deutsche Nationalbibliothek verzeichnetdiese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet iiber < abrufbar. Dissertation Universitat Frankfurt am Main, Auflage Dezember2006 Alle Rechte vorbehalten Deutscher Universitats-Verlag I GWV Fachverlage GmbH, Wiesbaden 2006 Lektorat: Ute Wrasmann / Nicole Schweitzer Der Deutsche Universitats-Verlag ist ein Unternehmen von Springer Science+Business Media. Das Werk einschlieglich aller seiner Telle ist urheberrechtlich geschiitzt. Jede Verwertung auserhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlags unzulassig und strafbar. Das gilt insbesondere fiir Vervielfaltigungen, Ubersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten waren und daher von jedermann benutzt werden durften. Umschlaggestaltung: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Druck und Buchbinder: Rosch-Buch, ScheBlitz Gedrucktauf saurefreiem und chlorfrei gebleichtem Papier Printed in Germany ISBN

5 To my parents and Kim

6 Foreword VII Foreword When CEO Joseph Ackermann set Deutsche Bank the target for 2005 of achieving at least 25% return on equity before tax, he was sending out a clear signal: Management in the German banking sector was finally realizing that it had to focus more on shareholder interests. Parallel to the discontinuation of German state guarantees, Gewahrtragerhaftung and Anstaltslast, in 2005, there was a change in owner's requirements on members of the largest German banking group - the Landesbanks and savings banks. Some municipalities have been increasing pressure on their institutions to create greaterfinancialvalue, which will then allow higher payouts. The increasing importance of shareholder value orientation in the banking sector poses at least three interesting sets of questions: How should one measure economic value creation (for shareholders) in banking? Does the banking sector possess any special features that have to be taken into consideration when measuring this? To what extent do banks' market values truly reflect expected shareholder value creation? Which factors are responsible for systematic deviations of a bank's intrinsic value from its market value? What are the key financial and operational levers that bank managers should focus on in order to increase shareholder value? This dissertation by Ms. Gross focuses on precisely these three sets of questions. It provides a very good summary of the status of the relevant literature and uses high quality data and appropriate methodology to achieve groundbreaking results that are relevant both in terms of scientific value and in terms of practical application. Prof. Dr. Andreas Hackethal HCI Endowed Chair of Financial Services Sales and Distribution European Business School, Oestrich-Winkel

7 Preface IX Preface This dissertation was written during my time as a doctoral student at the Faculty of Economics and Business Administration of the Johann Wolfgang Goethe University in Frankfurt am Main. Several people and institutions kindly supported me throughout the dissertation process and I would like to express my sincere thanks for this support. I owe special thanks to my academic supervisor, Prof. Dr. Andreas Hackethal, who continually facilitated my research project and academic development. His constructive advice combined with his accessibility at any time and his openess for discussion were a great help in writing this dissertation. I would also like to thank my second advisor, Prof. Dr. Mark Wahrenburg, for his valuable and helpful suggestions. In addition, I would like to express my gratitude to the colleagues and friends who supported me in discussing the content and methodology as well as proofreading the dissertation. In particular, I would like to thank my sister for her relentless advice. Most of all, I would like to express my deepest gratitude to my parents and Kim. This dissertation is dedicated to them. Stephanie Gross

8 Summary of Contents XI Summary of Contents Table of Contents List of Figures List of Tables Lists of Abbreviations List of Symbols XIII XIX XXI XXIII XXV I. Introduction 1 II. How to measure the shareholder value of banks? 9 II. 1 Motivation and key research questions Overview ofbank valuation literature Bank specifics in the context of valuation Valuation methods and their applicability to banks Measuring the shareholder value of banks Conclusions and outlook 98 III. Empirical relevance of shareholder value for banks 101 III. 1 Motivation and key research questions Overview of existing research Data and methodology Accuracy and explanatory value of residual income value estimates Determinants of the prediction error Sensitivity analyses Conclusions 173 IV. Value drivers of retail banks 175 IV. 1 Motivation and key research questions 175 IV.2 Derivation of value driver model for banks 177 IV.3 Data and methodology 182 IV.4 Empirical results 202 IV.5 Conclusions 220 References 223 Appendices 235

9 Table of Contents XIII Table of Contents List of Figures List of Tables List of Abbreviations List of Symbols XIX XXI XXIII XXV I. Introduction 1 II. How to measure the shareholder value of banks? 9 II. 1 Motivation and key research questions Overview of bank valuation literature Bank specifics in the context of valuation Definition and business structure of banks Definition of banks Analysis of the balance sheet and income statement Value-relevant specifics of banks Specific role of financing and risk-taking Bank-specific laws and regulations Specifics of the operating business Valuation methods and their applicability to banks Market-oriented approaches Asset-oriented approaches Cash flow-oriented approaches Residual income-oriented approaches 39

10 XIV Table of Contents II.4.5 Discussion 44 II.5 Measuring the shareholder value of banks Definition of a performance measure Cash flow to equity Use of the indirect approach Derivation of free cash flow to equity Estimation of reinvestments Residual income Forecasting of future prospects Specifics in bank planning Forecast horizon Forecast method Determination of terminal value Cash flow-oriented approaches Residual income approaches Estimating the cost of equity Capital Asset Pricing Model Arbitrage Pricing Theory Alternative approaches Discussion Valuation of business units Definition of business units Definition of a business unit-specific performance measure Allocation of interest income using funds transfer pricing Allocation of overhead costs Estimation of the business unit-specific cost of equity Discussion 93

11 Table of Contents XV II.6 Conclusions and outlook 98 III. Empirical relevance of shareholder value for banks 101 III. 1 Motivation and key research questions Overview of existing research Data and methodology Data 112 IIL3.1.1 Data set used Sample characteristics Sample coverage Residual income model Structure of the model Potential adjustments to accounting variables Calculation of economic equity Calculation of residual income Discounted dividend model Estimation of cost of equity Use ofthe Capital Asset Pricing Model Estimation of risk-free rate Estimation of market risk premium Estimation of systematic risk Accuracy and explanatory value of residual income value estimates 136 III.4.1 Descriptive results 13 6 III.4.2 Residual income vs. discounted dividend value estimates Accuracy of the value estimates Explanatory value ofthe value estimates 140

12 XVI Table of Contents IIL4.2.3 Robustness of the results 141 III.4.3 Comparison to prior research on industrial companies Determinants of the prediction error Hypotheses Descriptive statistics of results Regression analysis Basic model specification and methodological approach Application of the pooled regression model and results Application of the between effects model and results Application of the fixed effects model and results Application of the random effects model Discussion Sensitivity analyses Alternative specifications of cost of equity parameters Alternative adjustments of accounting variables Alternative specification of decay rate in Phase Discussion Conclusions 173 IV. Value drivers of retail banks 175 IV. 1 Motivation and key research questions 175 IV.2 Derivation of value driver model for banks 177 IV.3 Data and methodology 182 IV.3.1 Data 182 IV Data set used 182

13 Table of Contents XVII IV Sample characteristics 183 IV Representativeness of the data set 186 IV.3.2 Estimation of intrinsic value 187 IV Definition of residual income 187 IV Estimation of cost of equity 188 IV Definition of accounting variables 191 IV.3.3 Model structure 193 IV Basic model 193 IV Model specification 196 IV Fit of model specifications 198 IV.4 Empirical results 202 IV.4.1 Descriptive statistics 202 IV.4.2 Regression results 207 IV Business mix 207 IV Branch structure 209 IV Cost efficiency 212 IV Risk capabilities 215 IV.4.3 Discussion 217 IV.5 Conclusions 220 References 223 Appendices 235

14 List of Figures XIX List of Figures Figure II-l: Assessment of valuation models for banks 46 Figure II-2: Components of consolidatedfinancialstatements 50 Figure II-3: Derivation of Free Cash Flow to Equity for banks 52 Figure II-4: Accounting adjustments to bank residual income 60 Figure II-5: Forecast horizon for banks using a DCF approach 69 Figure II-6: Allocation of interest income using funds transfer pricing 89 Figure II-7: Key adjustments to DCF and residual income models for banks 94 Figure III-l: Model design 103 Figure III-2: Outline of analysis 104 Figure III-3: Research on market value and economic performance 107 Figure III-4: Development of return - Total sample vs. DS World Banks 114 Figure III-5: Characteristics of the sample by region 115 Figure III-6: Characteristics of the sample by bank type 116 Figure III-7: Sample coverage of DS banking indices 118 Figure III-8: Structure of the model 121 Figure III-9: Dispersion of prediction error - Mean = Figure III-IO: Prediction error by region 147 Figure III-11: Prediction error by bank type 149 Figure III-12: Prediction error by bank size 150 Figure III-13: Prediction error by ROE 151

15 XX List of Figures Figure III-14: Prediction error by year 152 Figure III-15: Development of prediction error by region 153 Figure III-16: Assessment of hypotheses 163 Figure III-17: Overview of sensitivity analyses 171 Figure IV-1: Types of value drivers and examples 177 Figure IV-2: Value metrics framework 179 Figure IV-3: Value driver tree for retail banks 180 Figure IV-4: Sample characteristics - Universal Banks vs. Savings Banks 184 Figure IV-5: Sample characteristics by year 185 Figure IV-6: Structure of regression models 193 Figure IV-7: Development of RIOE by year 203 Figure IV-8: Mean values of variables by sample 204 Figure IV-9: Mean values of variables over time 206 Figure IV-10: Overview of regression results 217

16 List of Tables XXI List of Tables Table II-l: Overview of bank-specific valuation literature 14 Table II-2: Overview of empirical studies on bank shareholder value 16 Table II-3: Structure of the balance sheet of banks vs. non-banks 20 Table II-4: Structure of the income statement of banks vs. non-banks 22 Table III-l: Overview of empirical evidence on performance indicators 109 Table III-2: Descriptive statistics of sample characteristics 113 Table III-3: Descriptive statistics of prediction error 136 Table III-4: Prediction error - Residual income vs. discounted dividend model 138 Table III-5: Regressions of market value on value estimates 140 Table III-6: Comparison of results with prior research 144 Table III-7: Overview of independent variables 155 Table III-8: Sensitivity of IV to changes in beta methodology 166 Table III-9: Sensitivity of IV to changes in assumed risk premium 167 Table III-IO: Sensitivity of IV to accounting adjustments 168 Table III-l 1: Sensitivity of IV to decay rate assumption 170 Table IV-1: Descriptive statistics of sample characteristics - Total sample 183 Table IV-2: Calculation of operating income 192 Table IV-3: Descriptive statistics of RIOE by sample 202 Table IV-4: Regression results for business mix 207

17 XXII List of Tables Table IV-5: Between effects results for business mix by subsample 209 Table IV-6: Regression results for branch structure 210 Table IV-7: Regression results for cost efficiency 212 Table IV-8: Between effects results for cost efficiency by subsample 213 Table IV-9: Regression results for cost efficiency - Staff vs. Non-staff costs 214 Table IV-10: Regression results for risk capabilities 216

18 List of Abbreviations XXIII List of Abbreviations APT APV ARl Bn CAPM CIR DCF DNA DS DSGV EP EPS EUR EVA EV/EBIT EV/EBITDA HGB HVB IAS IFRS IT IV LLP LM LSDV MAI M&A M/A Arbitrage Pricing Theory Adjusted present value First-order autoregressive process Billion Capital Asset Pricing Model Cost-income ratio Discounted cash flow Deoxyribonucleic acid Datastream Deutscher Sparkassen- und Giroverband Economic profit Earnings per share Euro (currency) Economic value added Enterprise value to earnings before interest and taxes (multiple) Enterprise value to earnings before interest and taxes, depreciation and amortization (multiple) Handelsgesetzbuch (German accounting standards) HypoVereinsbank International Accounting Standards International Financial Accounting Standards Information technology Intrinsic value Loan loss provision Langrange Multiplier (test) Least squares dummy variable (model) First-order moving average (autoregressive) process Mergers and acquisitions Market value to book assets (multiple)

19 XXIV List of Abbreviations M/B Mn MVA N NOPAIT OLS P/E PV P-value R^ R&D RAROC RI RIOE ROE ROIC SDC SIC TMT TRS TV UK US USD US GAAP WACC Market value to book equity (multiple) Million Market value added Number of observations Net operating profit after interest and taxes Ordinary least squares Price to earnings (multiple) Present value Probability value (exact level of significance) Coefficient of determination Research and development (expense) Risk-adjusted return on capital Residual income Residual income on equity Return on equity Return on invested capital Securities Data Company (worldwide M&A database) Standard Industrial Classification (industry code) Telecommunication, media, and technology (sector) Total return to shareholders Terminal value United Kingdom United States (of America) US Dollar (currency) United States Generally Accepted Accounting Principles Weighted average cost of capital

20 List of Symbols XXV List of Symbols A a at ait b beta BM bu fin Pe,n c Q CO d DD DIV E d EE ^{rm) f FCF, BS g i IR IND Assets (control variable) Intercept coefficient (constant) Intercept coefficient (time-variant) Intercept coefficient (time- and unit-variant) Subscript denoting business model Beta (systematic risk of the equity) Business mix Subscript denoting business unit Slope coefficient for model variables Sensitivity of the equity risk to factor n Unobserved effect Cost of equity Cost efficiency Decay rate Discounted dividend (model) Dividends Equity Subscript denoting earnings before taxes Economic equity Expected rate of return on the market portfolio m Subscript for explicit forecast interval (Phase 1) Free cash flow to equity Branch structure (Expected) growth rate Subscript denoting individual banks Industry / bank type subsample (dummy variable) Interest rate (control variable)

21 XXVI List of Symbols IV Yn m MV n NOPAIT^aj ^bm 7 RC REG RI RIOE ROE ROIC S s t T TV u V WACC YEAR Intrinsic value Risk premium of the factor n Subscript denoting the market Market value Subscript denoting the country Adjusted net operating profit after intei Rate of return on the benchmark index Risk-free rate of return Risk capabilities Regional subsample (dummy variable) Residual income Residual income on equity Return on equity Return on invested capital Sample type (control variable) Subscript denoting the sector Subscript denoting time (year) Length of the explicit forecast period Terminal value Regression residual (disturbance) Random effects residual (disturbance) Weighted average cost of capital Year (dummy variable)