| dc.description.abstract | This thesis carries out a fundamental valuation of SpareBank1 SR-Bank utilising an alternative
discounted free cash flow to equity method presented by Aswath Damodaran. The objective of
this thesis was twofold; primarily the valuation of a regional bank in the light of the
contemporary banking Crisis of March 2023 and the subsequent challenge of valuing banks,
alongside the application of the proposed alternative method. The following question was put
forth to scope the thesis:
"What is the share price target for Sparebank1 SR-Bank?"
Key findings from the strategic analysis were the coming contraction of the economic cycle.
This means more challenging times for SpareBank1 SR-Bank as retail and corporate clients
will experience a more challenging economic environment with high inflation and interest rates
and potentially lower GDP. Further, pressure from an economic contraction can increase the
price-sensitivity of customers, leading to an increase in customer mobility and subsequently
lowering the net interest margin of banks and increasing competition.
The accounting analysis identified SpareBank1 SR-bank as having a solid market position and
strong credit quality and capitalisation. However, the bank has high exposure to specific
segments like real estate and is limited by geographic location rendering it more exposed to the
oil and gas sector. Moreover, the bank has shown a strong return on equity, although somewhat
driven by a higher reliance on market funding to drive growth, which carries more risk. The
risk appears controlled, and the bank benefits from the funding.
The fundamental valuation executed the alternative method, which has proven logical and
successful in targeting the core of banking, providing a pathway to the free cash flow to equity
without getting disorientated by the unique characteristic of banks and debt.
The alternative discounted free cash flow to equity valuation resulted in a base, bull, and bear
case representing different scenarios of the key finding from the strategic and accounting
analysis. The most likely scenario forecasts a slowdown in growth as we enter an economic
contraction, followed by more competition and a lower net interest margin and return on equity.
Nevertheless, SR-Bank will still perform relatively well with a stable capital requirement and
a strong position. The result is a share price target of Kr 137.55 and a 16% upside as of
14.07.2023. | |
