Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
Securities trading
In comparison to industrial companies banks are likely to have significant
securities classified as trading. In this case the fair value movements of these
items will pass through the income statement. A sizeable component of this may
well be unrealised resulting in a divergence between earnings and cash flow.
Loan loss provisions
As provisions are such an important aspect of the balance sheet it is no surprise
that they are a core expense in the income statement. Normal rules apply
regarding the income statement recognition of movements in provisions as items
of income and expense.
When analysing the operations of banks different terminology typically applies
to margin calculations. For example the first margin calculated will typically be
the interest margin calculated as:
Net interest / interest earning assets
whereas an operating margin would be based on:
Operating profit / net banking revenues*
*(defined as net interest income + net fee and commission
income + net trading gains)
The above commentary covers some of the differences between banking
financials and those of more traditional corporates. However, it should be
appreciated that the activities of banks tend to be very complex which ultimately
can manifest itself in issues such as accounting for securitisations and derivatives
(see Chapter four) thereby complicating the picture regarding what is actually
recognised in the financials. Furthermore, there is much disagreement about the
methodologies that should be employed in order to reflect many of these numbers
in the financials. For example, look at Exhibit 6.7 showing graphs of the net
income under UK GAAP and US GAAP for two major UK banks.
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