A Survey Of Methods Used To Value Commercial Banks By Practitioners In Kenya

Abstract

The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. The financing decision is one of the most important roles played by a modern finance manager as it determines the value of a firm. Commercial bank valuation is not a straight fonvard issue as banks make profits from both sides of the balance sheet as well as owning different types of assets some of which are intangible and have no direct measurable values in the market. Also, forces of demand and supply may not always apply in practice due to ineffiencies in the market and may involve forecast of the future of the firm. This study is a survey of the different methods used by valuation practitioners to value commercial banks in Kenya. The objectives of the study were to find out which methods are the most preferred by the practitioners and their reasons for using these methods. The population consisted of practitioners stationed in 944 firms from which a sample of 121 practitioners were selected. Primary data was collected through questionnaires and 50 practitioners responded positively and data analyzed through descriptive statistics. Further analysis was done using factor analysis and rotated component matrix. The study found out that the fundamental method is the most frequently used method and gives the truest value followed by discounted future dividends and market multiples approaches. Comparative analysis showed that the different practitioners preferred different valuation methods and factored in some level of subjectivity in the valuation process. The study concluded that there is need for further research in the area of commercial bank valuation to come up with an objective process that would give its true value and also start a regulated professional umbrella body to deal with valuation issues like in the developed countries.