Valuation of SpareBank 1 SR-Bank
Master thesis
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https://hdl.handle.net/11250/3116692Utgivelsesdato
2023Metadata
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- Studentoppgaver (TN-ISØP) [1411]
Sammendrag
This thesis carries out a fundamental valuation of SpareBank1 SR-Bank utilising an alternativediscounted free cash flow to equity method presented by Aswath Damodaran. The objective ofthis thesis was twofold; primarily the valuation of a regional bank in the light of thecontemporary banking Crisis of March 2023 and the subsequent challenge of valuing banks,alongside the application of the proposed alternative method. The following question was putforth 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 clientswill experience a more challenging economic environment with high inflation and interest ratesand potentially lower GDP. Further, pressure from an economic contraction can increase theprice-sensitivity of customers, leading to an increase in customer mobility and subsequentlylowering the net interest margin of banks and increasing competition.The accounting analysis identified SpareBank1 SR-bank as having a solid market position andstrong credit quality and capitalisation. However, the bank has high exposure to specificsegments like real estate and is limited by geographic location rendering it more exposed to theoil and gas sector. Moreover, the bank has shown a strong return on equity, although somewhatdriven by a higher reliance on market funding to drive growth, which carries more risk. Therisk appears controlled, and the bank benefits from the funding.The fundamental valuation executed the alternative method, which has proven logical andsuccessful in targeting the core of banking, providing a pathway to the free cash flow to equitywithout 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 bearcase representing different scenarios of the key finding from the strategic and accountinganalysis. The most likely scenario forecasts a slowdown in growth as we enter an economiccontraction, 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 anda strong position. The result is a share price target of Kr 137.55 and a 16% upside as of14.07.2023.