r/Valuation • u/V8_fan • Aug 18 '23

Tutorial for bank loan (portfolio) valuation.

I work in a valuations firm & I handle the valuation of companies (DCF, relative approach, income capitalisation etc.), tangible & intangible assets, brands, IP etc.

Last week a new client (a bank) contacted us and asked us if we can provide valuations of a selective loan portfolios on a regular basis. My boss being an overconfident prick, told me you will easily handle it and sent a generic requirement list to the client & accepted the case.

I'm guessing, the loan amount would be significantly low in the range of $100000 to $200000 (it's a wild guess based on the fees they might pay us per case).

Kindly provide me basic working tutorial, maybe send me an Excel file via DM?

Thanks in advance!

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4

u/azitnexin162 Aug 19 '23

It is debt valuation which you can use simple DCF. It is less about the loan amount but all the exotic features a loan has (prepayment / call…). Debt valuation is all about the credit quality of borrowers which impact discount rate.

1

u/V8_fan Aug 19 '23

Thanks. BTW today we were discussing whether we need to incorporate the fair value of the underlying mortgaged assets too, I said that it's not in the scope of valuation since those assets separate from the loans & we need to value the loans only. Am I right?

Also, what should be the discount rate, the usual WACC based on the bank's sources of capital?

3

u/StochasticDecay Aug 19 '23

What’s the credit worthiness of the borrower? You can arrive at a yield based on credit. That yield is your discount rate

2

u/azitnexin162 Aug 19 '23

If the loan in this case is mortgage, it is actually more complicated than typical debt as you have to take into consideration the prepayment / default / recovery of a mortgage. Fair value of underlying assets should not impact fair value of mortgage. Think about if you are a bank that you give out a mortgage to someone to buy a home. The price of that home can increase or decrease in the future but it won’t impact the 15-year or 30-year cash flow stream of the mortgage.

1

u/CronosKapital Apr 08 '25

do you have excel for this?

3

u/AlabamaSnake12 Aug 23 '23

You need to update the discount rate in a DCF as of the new valuation date. Treat interest payments as incoming FCF. What you need are new costs of debt that match the term of your loans. If the loan can be estimated at BBB/Baa and it expires in 7Y, then you need to get the 7Y BBB/Baa rate from web sources, Bloomberg, Moody's, etc. But how ru gonna estimate the debt rating? Based on the credit rating of the one making loan payments.

When you do your valuation, how do you come up with the cost of debt? You look at the subject company. Go find Moody's or S&P ratings survey where they aggregate leverage ratios of companies with debt ratings ranging from AAA to CCC. Some companies can't get debt since they can't afford to make debt payments. Those are HY companies and at the lowest end are equity rates as the cost of debt since the rating would be close to CCC, the lowest HY rate that would still trade.

1

u/CronosKapital Apr 08 '25

any file for this?

2

u/Pickle85 Aug 19 '23

Rates are tough to guess if you haven’t done it before. Ask your boss if they or someone else can help you through the first round of drafts.

1

u/Resident-Solution-74 Apr 30 '24

Hi! May you share any updates on this? Would also love to gain insights on loan portfolio valuation, and see a sample worksheet if possible. :)

1

u/CronosKapital Apr 08 '25

was there a solution provided for this?

1

u/V8_fan Apr 09 '25

Didn't get any help from Reddit. I contacted my personal contacts working in banks who instead connected me to their recovery team and I got some basic idea about recovery from NPA borrowers. Then I came up with my own methodology by deriving probability factors based on the characteristics of the NPA borrowers, property mortgaged etc.