Estimating the Cost of Equity Capital for Banks using the Full-Information Beta and the Build-up Method

Oh, Sekyung; Park, Kinam

doi:2019.48.3.325

Korean J Financ Stud > Volume 48(3); 2019 > Article

Korean Journal of Financial Studies 2019;48(3):325-342.
DOI: https://doi.org/10.26845/KJFS.2019.06.48.3.325 Published online June 30, 2019.

Estimating the Cost of Equity Capital for Banks using the Full-Information Beta and the Build-up Method

Sekyung Oh, Kinam Park

완전정보베타와 적산법을 이용한 은행의 자기자본비용 추정에 관한 연구

오세경, 박기남

¹건국대학교
²주택도시보증공사

Abstract

An increase in the risk of banking business after the financial crisis in 2008 has been increasing the need for an accurate estimation of the opportunity cost of banks’ equity capital. This study aims to estimate the cost of equity capital of Korean banks using the full-information beta and Ibbotson’s build-up method and compare the results with those calculated by other methods. As of December 29, 2017, the average cost of equity capital of listed banks and financial holding companies in Korea is 10.32%. The average cost of equity capital of six listed holding companies is 8.85%, while the equity costs of Shinhan Financial Group and KB Financial Group are 5.41% and 5.47%, respectively. Additionally, the average cost of equity capital in the four major commercial banks in Korea (KB, Shinhan, Hana, and Woori) is 7.08%, while the average capital cost of listed banks is 16.54%.

Key Words: 완전정보베타,적산법,자기자본비용,금융지주,은행,Full-information Beta,Build-up Method,Cost of Equity Capital,Financial Holding Company,Bank