Posts From Allan Millar

Allan Millar
Allan has an MBA from Strathclyde Business School, where he specialised in Finance. He is also a Chartered Global Management Accountant. He has worked in commercial and financial roles and currently works for a global Bank. Allan lives near Glasgow, with his wife and son.
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Value At Risk (VaR): Insights And Considerations For Risk Managers

We looked at the calculation of Value at Risk (VaR) in my last article. The definition was “the possible loss a portfolio, or position, may make over a specific time period under normal market conditions, within a known confidence interval”. A few people take exception with this definition, Taleb being one of them. In an article dating from 1997, well before the crisis, he argued that: “I would rather hear

How Value At Risk (VaR) Reporting Works For Banks Today

Value at Risk (VaR) was much maligned immediately after the crisis but it still plays a fundamental role in banks’ risk management today. Its origins date back to the 1980s when the then Chairman of JPMorgan (JPM), Dennis Weatherstone, became rather fed up with the excessively long risk reports that landed on his desk. No detail was spared and the reports were not ideal for the senior management group. It

Why Core Tier 1 (CET1) Is Important To Banks and Investors

In my last two articles we looked at the Liquidity Coverage Ratio and Net Stable Funding Ratio. These are important liquidity standards and the leverage ratios they give us combine with the Core Tier 1 ratio (CET1) to give us an overall view of Funding Risk. As you know, these ratios and standards are a result of the financial crisis in 2007 and the ratios, if they are not maintained,

Net Stable Funding Ratio: Avoiding A Northern Rock Scenario

More bite size banking insights today. In my last article we looked at the Liquidity Coverage Ratio, this time we will consider the Net Stable Funding Ratio (NSFR), also known as the Northern Rock rule. You may remember that Northern Rock ran into trouble in September 2007 (maturing money market borrowings could not be replaced). They needed emergency funding and the Bank of England, perhaps unwisely, decided upon a high

Banking In 2015 And Beyond: The Liquidity Coverage Ratio

My next few articles will look at banking and Basel III implications for banks. In this one, we will focus on the Liquidity Coverage Ratio, also known as the Bear Stearns Rule (although it could equally well be called the Lehman Bros. Rule). The basic principle is that a bank has sufficient liquid assets (of a high quality) to offset net cash outflows under a 30 day stress scenario. Since

Using And Applying The Dividend Valuation Model

In the final article of my series looking at ways in which to value a business, we will look at the Dividend Valuation Model (DVM). The theory is that an entity is worth the sum of its discounted future cash flows. As noted in my previous article on discounted cash flows, if all free cash flows are paid out as dividends, and the same growth rate is used, the same

The Discounted Cash Flow Method: Company Valuation Tools

When valuing a company, an analyst has several options for valuation tools. In this valuation series, we have considered the Asset Valuation method, Calculated Intangible Value and the P/E Method. There was also a brief digression to look at the Weighted Average Cost of Capital (WACC) calculation and the PEG Ratio. This time, we will look at the discounted cash flow method (DCF); theoretically speaking this is probably the best way

Using The PEG Ratio As A Valuation Tool

In my last few articles we have looked at several valuation metrics, using Caterpillar, Inc. (CAT) as an example. The final method will use discounted cash flow, but before that it is worth considering the PEG ratio – price/earnings to growth. This has the advantage of being very easy to calculate. When considering the PEG ratio, remember that it is considering a company’s future earnings, whereas P/E most commonly uses

How To Apply WACC: Weighted Average Cost Of Capital

In previous articles, using Caterpillar, Inc. (CAT) for the figures, we have looked at different ways in which to value the company. Those considered so far have been Asset Valuation, Calculated Intangible Value and P/E Method. In a future article we will consider perhaps the most reliable – the discounted cash flow. To calculate this, we need a weighted average cost of capital (WACC) for CAT, and that is what

Applying The P/E Valuation Method To Today’s Market

We have looked at asset based valuation and calculated intangible value, and in this article we will look at the P/E valuation method (price to earnings).  It is the most commonly used way to value an entity. And it is simple to calculate: Company value = post-tax earnings x P/E Breaking this down, we know that the P/E ratio is the share price of the entity divided by its earnings