What is the Financial Impact?
This approach is not just a real estate transaction or a sale of properties, but a financial transaction to adjust the bank’s balance sheet and income statement. A non-earning real estate asset becomes an earning asset when the proceeds are re-deployed.
The operating lease costs will replace the bank’s previous depreciation expense, generating larger after tax savings on an annual basis. The newly acquired capital will be re-deployed to earn the equivalent return of the bank’s ROE.
The net present value comparison of the cash required to own versus lease is the key decision criteria. If the lease costs are reasonable and within the range indicated, the net present value of leasing is generally 12-15% higher.
Two key points to consider: 1) the value of the bank’s real estate has no impact on the value of the bank’s stock, and 2) the bank is “valued” based on earnings and book value, where depreciation costs are a detriment and reduce earnings.
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