Abstract
M.Comm.
Warren Buffet, regarded as one of the world's leading investors said (Lowe, 1997:99): "Price is what you pay. Value is what you get." The world and South Africa have seen significant mergers in the financial services industry over the past ten years. Valuation models and results have been extensively debated, but to understand the true value of any company one has to analyse the underlying factors impacting the value. This valuation process can play an important role to determine what the impact of changes in the key ratios of a bank on the value of a bank will be.
The main purpose of this study was to develop a valuation model for banks based on key ratios commonly used in banks' financial statements that would enable the quantification of the impact of changes in key ratios on the value of a bank.
A literature study of available valuation methods were done to determine valuation theories on which the model could be based. Specific factors relating to valuation of banks were investigated. Key ratios were identified based on analysis of financial statements of banks and banking legislation requirements. A valuation model was developed based on these ratios. A prediction of future key ratios of the four main South African banks were obtained from three analysts and the valuation model tested by comparing the calculated value to the quoted market prices. Changes of 1% were made to key ratios and the impact on the value of each bank determined.