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How to value a bank share

Picture of Owen Rask

Owen Rask

In a recent update to Rask Invest members (who are now part of Rask Core 🌏), I’m taking a very valuable tutorial straight out of the Rask Value Investor Program with Equity Mates. 

If you want to learn how to value any investment with a consistent income stream (LICs, banks, insurers, ETFs, REITs, etc.), this is a great tutorial for you to learn. 

This tutorial is just for you, Rask members, so please do me a favour and don’t share this content around (even if you love it).

🎙 This tutorial coincides with an upcoming Australian Finance Podcast episode in which Kate and I dive into the CBA business model.

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Valuing CBA

In this case study, Owen will introduce you to investing in banks and using something called a dividend discount model (DDM). Basically, since a bank like Commbank doesn’t produce ‘free cash flow’ the easiest way to value it is to take the dividends as ‘cash flow to equity investors’, and value the dividend stream. Either with, or without, franking credits.

The chart below compares the CBA share price to the diversified Vanguard Australian Shares Index ETF (ASX: VAS) over 5 years (1825 days). It does not include dividends paid by either the VAS ETF or CBA.

Valuation case study: Commbank shares

From there, there’s a bit of jargon — and a lot of faith in the banking system and its regulators — required. For example, Owen will show you how to find banking statistics and industry data, under the key ratios and metrics banks publish and then highlight the importance of regulators.

Warren Buffett has been a huge investor in bank shares, such as Bank of America and Wells Fargo.

In Australia, the biggest banks are ‘implicitly’ protected by our Government because ‘if the banks go bust, we’ve got bigger problems than missing a dividend payment’. In practice, this means the big banks are highly regulated (good for investors) and, in the event of an economic collapse, are unlikely to go bust. That said, equity investors can still lose money!

Resources (links open in new tabs):

Picture of Owen Rask

Owen Rask

Owen is the Chief Investment Officer of Rask Invest and Founder of Rask. Since founding The Rask Group in 2017 in the hillside suburb of Upwey, Victoria, Owen has overseen the growth of the Rask platform to over 400,000 investor followers. Today, Owen oversees the Rask Analyst team, which helps more than 4,000 Aussies build core portfolios from ETFs and shares, he hosts Australia's biggest investing podcast, The Australian Investors Podcast, appears on Rask's other channels, covering Property, Business and Finance; and leads Rask Education - our education platform which has enrolled over 33,000 Australians into free finance courses. Prior to founding Rask, Owen was an investment analyst at the highly regarded managed funds research business and a writer/analyst for one of the most well-known share market publications. Owen’s formal qualifications include a Master of Applied Finance and Master of Financial Planning from Kaplan Professional, Bachelor of Technology (Information Systems) from Swinburne University of Technology, Advanced Diploma of Financial Services (Financial Planning) and Diploma of Mortgage Broking Management. He's also completed level 1 of the Chartered Financial Analyst (CFA) program.

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