Banks' shareholder value

Banks’ shareholder value is banks’ value pertained to payouts to shareholders. In shareholder value analysis, a bank can be undervalued or overvalued from its share price. Based on the result of valuation done by analysts, the market may react and the share price may change in the near future.

The composition of debt and equity in capital management may also influence banks’ value. To increase value, a bank needs to increase level of leverage but should stop at an optimum level. A higher level of leverage may generate a lower cost of capital because the cost of debt is normally much lower than the cost of equity. As a result, with an unchanged return on capital, the lower cost of capital may add value to the bank.

Even though the value of the bank increases, return on equity can be unchanged or decreased indicating a lower profitability. This is because the income generated has been deducted with the interest expenses as the consequence of adding more debts or liabilities.