Financial Analysis in Banking: The Challenge of Segment Reporting*

Abstract

An equity analyst at Q&M Independent Research Corporation is assessing the financial and business prospects of two Canadian banks: Bank of Montréal and Canadian Imperial Bank of Commerce. Relying on recent information provided in the financial statements and proxy circulars from both banks, the analyst faces some challenges in performing a prospective analysis, a key input to any valuation model. The case highlights the cost-benefit analysis of disclosure that banks may perform when applying IFRS 8 – Operating Segments. The case also illustrates the challenges that segment disclosure poses to financial analysts and investors as they attempt to forecast a bank's earnings and to perform a valuation. Furthermore, the case develops the process by which a bank's business model is linked with its financial reporting and, ultimately, its valuation.