Understanding the Economic Value of Bank Equity

The Economic Value of Equity (EVA) is a crucial metric for banking professionals and investors. It represents the true market value of a bank's equity, reflecting its performance beyond traditional accounting measures. This guide provides an overview of how to calculate EVA and directs you to detailed resources for a deeper understanding.

What is Economic Value of Equity?

The EVA is a measure used to assess the financial performance of banks by taking into account the costs of capital and other expenses. Unlike accounting earnings, EVA adjusts for capital costs, providing a more accurate reflection of a bank's economic performance.

Steps to Calculate EVA

Calculating EVA involves several steps:

Determine the Value of Bank Assets Generate a cash flow forecast that incorporates future default losses and voluntary prepayments. Ensure that the values of assets are at market, not book, value. Determine the Value of Bank Liabilities Generate liability cash flow forecasts using documented attrition and retention rates for deposit liabilities. Deploy the Accounting Equation Calculate Equity using the formula: Equity Assets - Liabilities. Subtract the capital cost (the opportunity cost of using capital) from the net operating profit after taxes (NOPAT).

These steps form the core of the EVA calculation process, reflecting the financial performance of a bank in a more comprehensive manner.

Where to Find Detailed Examples and Resources

For a deeper understanding of EVA and the process of calculating it, several resources are available:

Books and Handbooks: Dive into dedicated texts that explain the intricacies of bank asset-liability management. One such book is Bank Asset and Liability Management, which offers extensive coverage on the topic. Vendor Software: Various software vendors offer tools to perform complex calculations. Eurex Training provides training on these tools, making it easier to grasp the concepts and apply them. Custom Software Solutions: Companies like MIAC Analytics provide custom software solutions that can perform these calculations and generate proper cash flow modeling and yield assumptions. Their software is designed to handle the complexities involved in EVA calculations.

Conclusion

Understanding and calculating the Economic Value of Equity is essential for banking professionals and investors. By following the steps outlined in this guide and utilizing the resources provided, you can gain a comprehensive understanding of EVA and its importance in assessing a bank's performance.

Further Reading

Bank Asset and Liability Management Training
MIAC Analytics