BANK OF IRELAND EARNINGS POWER VALUATION(STUDY CASE)

In my last article I’ve presented a business valuation technique using cash flow projections,but  today I will present another valuation technique which implies actual earnings.

This method is  known as Earnings Power Value was popularised by Professor Bruce Greenwald from Columbia University.My study case for today is Bank of Ireland one of the imporatant financial institution in Republic of Ireland.In my evaluation I will focus on earnings.Why earnings? Warren Buffet once had said that earnings are  key valuation tools of bank and not book value.

Step 1 Find and adjusted resonable EBIT margin

	2012	2013	2014	2015	2016
Revenue	3471	3989	5051	4804	4672
EBIT	-2138	-546	920	1135	998
EBIT Margin(EBIT/Revenue)	-61.00%	-14%	18%	23.62%	21.36%

Average EBIT Margin	20.90%
Adjusted EBIT Margin	23.62%
Normalized EBIT(Revenue*Adjusted EBIT Margin	4662656
Research and Development
Selling ,General and Administrative Expenses	3206
Normalized EBIT	4665862

I will choose and adjusted EBIT Margin of 23.62%  The reason is that can I observe that earnings margin of company will increase that because the bank reduced their non performing loans portofolio from 14.7 billion in june 2015 to 7.9 billion euros dec 2016.

Step 2 : Add Research and Development Costs and Selling,General and Administrative

Research and Development:

Selling ,General and Administrative Expenses 3206 2012 2013 2014 2015 PROFIT AFTER TAX -1824 -487 786 940 TAX(EBIT-PROFIT AFTER TAX) -314 -59 134 195 TAX RATE(TAX/EBIT) 17.21491228 12.11498973 17.04834606 20.74468085 AVERAGE TAX RATE 18.59482538 ADJUSTED TAX RATE 20% Step 3: Account for possible under/overstate depreciation and amortization NORMALIZED EARNINGS AFTER TAX 3732689 DEPRECIATION,AMORTIZATION 132 CAPEX (CORE BANKING PLATFORM) 41 3732862  Step 4:          WCCO( Weighted Average Cost of Capital) TOTAL DEBT 113728 FINANCE COST(EXPENSES) 3466 COST IN DEBT% 3.047622397 EQUITY 9401 ESTIMATED COST OF EQUITY 10% RATIO OF EQUITY 76% RATIO OF DEBT 2.77% ESTIMATED COST OF CAPITAL 16.76%  Step 5: Discounted Normalized Earnings and add cash less debt EARNINGS DISCOUNTED AT COST OF CAPITAL 22352467.07 ADD CASH 5192 LESS DEBT 113728 22243931.07  Step6 : Calculate EPV/share: NO OF OUTSTANDING SHARES 1077884401 EPV/SHARE 20.63EURO/SHARE ACTUAL SHARE PRICE:7.23 EURO/SHARE Conclusions: Bank of Ireland shares  might be undervalued.The problem of this valuation is the calculation of WACC(Weighted Average Cost of Capital.I've calculated WACC after the formula: WACC+E/V*Re+D/V*Rd*(1-Tc) Where: Re- cost of equity                 Rd-cost of debt                 D-market value of the company debt                 V-marked value of the company combined(E+D)                E/V- percentage  of the total financing consisting equity                E/D-percentage of the total financing consisting debt                Tc-(the corporate Income tax rate) (all rights reserved for this article)