2. Profit margin: It is the ratio of net income to the operating revenue, and this ratio represents the financial efficiency of the bank. The corresponding value for First National Bank is 8.51% as compared to 6% for its peers. In other words, the First national Bank makes more profit per unit of operating revenue, thereby making this bank more efficient that its peers.
Hence, the overall profitability of the bank can drastically improved by and wealth can be unlocked by increasing the loan ratio and hence valuing the bank based on present financial performance may lead to undervaluing the bank.
To calculate the valuation of the First National Bank using the discounted free cash flow or the present value of future earning process, the extra piece of information required will be the rate of growth of dividend.
However, the valuation of the bank can also be calculated by the price/earnings ratio. Since, as has been discussed above, the present earnings are sub optimal the bank should not be valued by multiplying the earning by the PE ratio. ...