โ
ICICI Bank crossed โน10 Tn in Market Capitalization
โ ICICI Bank is inching towards โน30 Tn in Enterprise Value (EV)
๐๐ฉ = ๐ ๐ฎ๐ฟ๐ธ๐ฒ๐ ๐ฉ๐ฎ๐น๐๐ฒ + ๐๐ฒ๐ฏ๐ – ๐๐ฎ๐๐ต
๐๐ฉ ๐ฎ๐ป๐ฑ ๐๐ฉ ๐บ๐๐น๐๐ถ๐ฝ๐น๐ฒ๐ ๐ฎ๐ฟ๐ฒ ๐ป๐ผ๐ ๐ฎ ๐ด๐ผ๐ผ๐ฑ ๐ณ๐ถ๐ ๐ณ๐ผ๐ฟ ๐ฏ๐ฎ๐ป๐ธ๐ and other financial services because of 2 reasons:
๐ญ. ๐๐ฒ๐ฏ๐ ๐ถ๐ ๐ฟ๐ฎ๐ ๐บ๐ฎ๐๐ฒ๐ฟ๐ถ๐ฎ๐น ๐ณ๐ผ๐ฟ ๐ฏ๐ฎ๐ป๐ธ๐
For non financial services, Debt is a key source of capital and not a raw material. For non FS, EV and EV multiples (e.g., EV/EBIT) are relevant.
For banks, Debt is a key raw material.
Depositor money (akin to debt; appears as liability in balance sheet), is used for core operating activity i.e., make loans to customers.
Hence, for banks and financial services, adding Debt to EV does not make sense the same way.
๐ฎ. ๐๐๐๐ง๐๐ ๐ฑ๐ผ๐ฒ๐ ๐ป๐ผ๐ ๐บ๐ฎ๐ธ๐ฒ ๐๐ฒ๐ป๐๐ฒ ๐ณ๐ผ๐ฟ ๐ฏ๐ฎ๐ป๐ธ๐
EB”๐”TDA (earnings ๐ฃ๐ฆ๐ง๐ฐ๐ณ๐ฆ ๐ช๐ฏ๐ต๐ฆ๐ณ๐ฆ๐ด๐ต, taxes and depreciation) is used to assess operating performance of a business. Interest is a financing cost and is hence added back to earnings to arrive at EBITDA or operating profit.
At banks, interest on debt is paid back to depositors and is a significant operating expense — and not a financing cost.
So one canโt have EBITDA or EBIT to evaluate operating performance for banks.
Hence, EV, EBITDA and EV/EBITDA are not good metrics for banks
Which valuation multiples are suited for financial services?
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