China's Commercial Banks Valuation Analysis

Based on Efficient Markets Hypothesis, stock prices fully reflect corporate information, the stock market has valuation function, any valuation deviation will be find by arbitrageurs, the adjustment between supply and demand promote the stock prices converge with value. However, the capital market in China is not perfect, and vulnerable to government intervention, the capital market reflects the information inefficiently, stock prices can not fully reflect the true value of the enterprise. China’s banking stocks sector is a weight plate in the Shanghai Stock Exchange total market capitalization, accounted for about one-third. Bank stocks overvalued show that the A-share market is likely to face the downward pressure. If not correctly recognizing this situation, investors may blindly enter the market, and then stock market would bubble. If the bank stocks are undervalued, the capital market may be face the upward pressure, it is a opportunity to add value for Investors.Therefore whether bank stocks lie in a reasonable price interval, directly related to the formulation of the investment strategy of stocks. Tim Koller have said that the assessment of value of the financial institutions is the most complicated part of the company’s valuation in 《valuation》.How to assess the value of the stock of commercial banks, and to determine the bank stocks are undervalued, overvalued, or at a reasonable price, will be the contents of this paper is to study.At present, cost approach, market approach, income approach and options valuation method are main valuation methods. No method is absolutely reasonable, each method has its own applicable prerequisites, the value assessment of the target company has a unique nature and issues. We consider the nature of the target company and applicable conditions of the assessment methods to choose a reasonable valuation method. The banking industry has a high leverage ratio, and the banking industry is vulnerable to the impact of the national monetary policy.According to the characteristics of China’s capital markets and banks, combining to the valuation methods, I choose FCFE Model as the bank shares valuation method and adjusted the specific algorithm of FCFE in my paper. Taking Industrial and Commercial Bank of China Bank stock valuation as an example in my paper, work out the intrinsic value of the ICBC, and that ICBC is undervalued price.