Magazine article American Banker

Bank's True Value May Be off the Balance Sheet

Magazine article American Banker

Bank's True Value May Be off the Balance Sheet

Article excerpt

The changes overtaking the banking industry are throwing many historical assumptions and rules for success out the window. Yet when bankers gauge their prospects for long-term health-how their institutions will look in three to five years-they blindly adhere to old ways of analysis.

Accounting models are woefully inadequate to uncover the key components of a bank's sustainable strategic momentum-its ability to capitalize on future opportunities. Traditional accounting models are snapshots of what a bank was, not what it will be.

This means investors, senior managements, and the public are shortchanged, with access only to data on physical and financial assets. Lacking are the leading indicators of true worth in such areas as employee knowledge, professional skills, marketing and customer data bases, and customer franchise data.

It is possible to make generalizations on the true value of these intangible assets by looking at the gap between a bank's market capitalization and its book value, and at the difference between the acquisition price and the target's book value.

These estimates are not necessarily based on objective, systematic, or rational assessments.

They are based on an analyst's composite picture of a bank-personal knowledge of new products, technological innovations, leadership-or on visions expressed by senior managements.

But there can be a more complete framework for establishing long-term strategic value based on a bank's dynamic, but hidden and unmeasured, characteristics.

This is not meant to imply that we need to abandon the conventional accounting rules and models, but they cover less than 40% of the factors capturing a bank's true worth. We can complement those methods by looking into five key categories, mostly off the balance sheet:

Pertaining to motivation, loyalty, skills, professionalism, and the like, these factors include turnover rates, average years of service, customer response time, a motivation index based on employee polling, a service-quality index, technology-literacy index, training expenses, and incentive-pay approaches. …

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