Page 24 - Banking Finance February 2025

ARTICLE

expected future cash outflows the institution is obliged significantly impact the final EVE value. Market
to pay. conditions, credit risk, and liquidity all play a role in
A positive EVE signals that the bank's assets generate setting this rate, and any miscalculations can lead to
misleading results.
adequate cash flow to cover its liabilities and yield
returns to shareholders. Market Value vs. Book Value: EVE utilizes market

Conversely, a negative EVE indicates that the bank's values for assets and liabilities, which may deviate from
their book values, reflected on the balance sheet. This
liabilities surpass its assets, potentially leading to
challenges in meeting financial obligations. difference can introduce additional complexities in the
calculation.

Challenges and limitations to Economic
Conclusion
Value of Equity (EVE) To conclude, Economic Value of Equity (EVE) is a critical
Despite its utility, EVE is subject to certain challenges and metric for banks, transcending mere accounting measures
limitations, some of which are mentioned as under:- to become a comprehensive indicator of long-term financial
Assumptions and Estimates: EVE calculations rely on health and susceptibility to interest rate risk. EVE assists in
various assumptions and estimates, such as discount assessing vulnerability to interest rate fluctuations, with
rates, growth rates, and terminal values. Changes in rising rates potentially adversely affecting EVE due to
these parameters can significantly impact the resulting declining present values of fixed-rate assets, while declining
valuation rates may have a positive impact.

Reliance on Forecasts: The calculation hinges on
Overall, EVE serves as a cornerstone in company valuation,
accurate forecasts of future cash flows for both assets
investment analysis, and financial decision-making, providing
and liabilities. Any errors in these estimations can
a holistic perspective on intrinsic value and growth potential.
significantly distort the true picture of EVE.
Despite complexities and limitations, EVE remains
Market Volatility: Market fluctuations and investor indispensable for navigating the financial landscape and
sentiment can cause discrepancies between market
fostering economic prosperity. Understanding and leveraging
value and intrinsic value, making it challenging to EVE empower stakeholders to make informed decisions,
determine EVE accurately
allocate resources efficiently, and drive sustainable value
Accounting Practices: Differences in accounting creation in the global economy.
standards and practices across jurisdictions can affect
the consistency and comparability of EVE calculations. References:-

Discount Rate Uncertainty: Determining the Asset Liability Management book by US GARP
appropriate discount rate is a complex task that can Corporate finance institute website

Government Mulls Personal Income Tax Cuts to Boost Consumption

The Indian government is considering reducing income tax for individuals earning up to Rs. 15 lakh annually in the
upcoming February budget. The proposed cuts aim to provide relief to the middle class and stimulate consumption
amid slowing economic growth, according to government sources.
The initiative could benefit millions of taxpayers, particularly urban residents facing high living costs. It targets those
opting for the new 2020 tax regime, which offers lower tax rates but eliminates major exemptions like housing rental
benefits.
Under the new system, annual incomes between Rs. 3 lakh and Rs. 15 lakh are taxed at rates ranging from 5% to
20%, while higher incomes attract a 30% tax rate. Sources indicated that the size of the potential tax cut is still
under deliberation, with a final decision expected closer to the February 1 budget announcement.

22 | 2025 | FEBRUARY | BANKING FINANCE