Overview
One of a banks sources of revenues is fees that the bank collects for services.
- Deposit Account Fees
- Loan Origination Fees
- Load Servicing Fees
- Asset Management Fees
Valuation
The fee based business is particularly amenable to discounted cash flow analysis.
A simple present value calculation can be performed on the average fees collected and assuming a growth rate of the fees.
As going concern in its own right, the fee based business of a bank can be valued in much the same way as other non-financial firms. (see valuation)
Originate to Distribute
Some banks engage in a model that is in some ways a hybrid of the fee generating business and the asset business. In this model, the bank originates loans, with the intent to then securitize the loans (see structured securities) and sell them to the market. That is, they do not intend to hold the loan.
In such a case, the bank may not be subject to much market risk in the time between loan origination and sale. If this is true, this activity can be viewed within the lens of a fee based business.
The originate to distribute model is most prevalent where there are sophisticated deep markets for securitized loans, such as in the United States. European banks tend not to engage in this type of banking.