I am trying to understand businesses engaged in lending money (Banks, NBFCs, MFIs). While each category may have different risk profile, each of these businesses follow similar underlying model - get money from one hand and lend it to other hand at a higher interest rate.
While understanding the strengths and weaknesses of business models, management profile and underlying (and often hidden) risks itself is a major challenge, I find it challenging to value them. Since all these entities are leveraged and subject to regulatory restrictions, free cashflow may not be a proper metric to value them. While all of these companies make use of leverage, only companies with solid credit discipline and low cost tend to survive in long run. Hence market opportunity cannot be the sole driver of value. This leaves only handful of companies like HDFC, Gruh Finance etc. But since every analyst knows this, these companies get richly valued.
I want to understand the framework to value these businesses. Since these are regulated industries and few proven businesses with solid track record (e.g. HDFC) are in a best position to capture growth over a long period of time (assuming they don’t mess up which is anyways futuristic), can an analyst simply buy them at a market price assuming that the multiple (P/E or P/B) would remain the same (or decline only slightly as future growth rate reduces owing to already big size) over a really really long period of time? Of course this thought process assumes that asset quality and management quality is top notch. Graham-Dodd style investing approach may not be right in banking and financial services sector.
I tried to search this topic over this site, but couldn’t find one. I would be grateful if someone points me to the right link. Alternately you can point me to good blog posts or recommend a book on this topic.