Bank Brand Value: Calculated!

I ask and ask and ask: what does brand get you?

Does it get you pricing power, shorter sales cycles, better employees, more loyal customers? Or does it get you increased expenses without measurable results?

Forbes calculated brand value in their "World's Most Valuable Brands" by taking anything that a company achieves over an 8% return on equity. Many people pay close attention to the ranking. Although I find the calculation to be arbitrary. What if the company is more capital intensive, and has to carry more capital than other companies? So the ROE is lower. Or what if a company is excellent at expense control? Driving ROE higher, but hardly due to its brand.

No, I do not like Forbes' calculation. It particularly doesn't work well for financial institutions. Which is probably why the first bank on their list is ranked 43rd. And it's Wells Fargo! Didn't help out Tim Sloan.

Bank Brand Value ("BBV")

So how would I calculate a financial institution's brand value? When I speak, I use great brand images such as Starbucks, JW Marriott, and Mercedes Benz. Why do these brands command higher price points than Dunkin, Best Western, and Kia?

Price points. A superior brand usually would command superior price points. And we can measure this by looking at a financial institution's cost of interest bearing deposits, and yield on loans, compared to other regional players that have similar balance sheets. Spread is usually 80%-85% of a community bank's revenues. An inferior or non-existent brand likely grows deposits and loans via decisions made in pricing committee.

Math

Fortunately, we have good data via Call Reports to make the calculation. And I propose the BBV method so you can calculate and track your BBV.

The first step is to select regional financial institutions with a similar size, in the below case $1 billion - $10 billion in total assets. I selected a bank in this group, First Bank of Nashville, Tennessee, because I was recently there. I then searched for banks with a similar loan composition to First Bank; fifty-to sixty percent commercial and commercial real estate loans to total loans. I netted yield on loans by their npa's/loans so those banks with riskier loan books are discounted. Banks that achieve a better than median yield on loans after netting npa's/loans, with a similar loan book in a similar region, likely do so because they are perceived to deliver better value to customers. i.e. brand. And First Bank passes this test, achieving 78 basis points over the loan peer median.

I then ran a second peer group for cost of interest bearing deposits. I kept it regional, and the same asset size range. And used less than 30% funded with time deposits, as First Bank was funded 27% with CDs. I could not use transaction accounts because of financial institutions' reclassing transaction accounts to savings/ money market accounts to reduce their Fed requirement. 

Anything under the median cost of interest bearing deposits, I attributed to brand. This didn't work out so well for First Bank, as their cost of interest bearing deposits was 37 basis points greater than deposit peer median. 

And then I added those two numbers together, giving a pre-tax brand value, and then tax effecting it and calculate as a percent of net income. If the bank is publicly traded, as First Bank is (Ticker: FBK), you can then calculate the BBV percent of net income as the percent of market capitalization to get an aggregate brand value. If not a publicly traded bank, you can calculate the BBV contribution to net income and multiply by a peer p/e multiple to get your aggregate BBV.

My suggestion is that you trend your BBV, looking to continuously improve. In First Bank's case, I would look to maintain my loan BBV advantage, and continuously improve my deposit one. 

Imagine continuous improvement of BBV as a strategic planning SMART goal?

See the table. Calculate your own BBV. How did you fare?

~ Jeff

The Untapped Power of Brand in Banking

“Our money is the same as the bank’s down the street.” And so were the Uber cars in my recent trips to Los Angeles and Nashville.

But something was different. Something that immediately made me feel better about being in Nashville than LA. And my wife nailed it: “the Uber drivers were so much friendlier.” 

Could that early impression pave the way for positive reinforcing interactions with other locals? Leading to our perception that Nashville is friendlier than LA. And why my wife was interested in tagging along to a recent banking conference there.

So, if you are asking, “what does brand get you?”, there ya have it. The Marsico’s doubled up on their visit.

Ask the Experts

My firm is not a marketing or branding firm. We leave that to the able hands of folks like Tim Pannell of Financial Marketing Solutions, a recent This Month in Banking podcast guest. Tim had great insights for banks on brand. And in our discussion, he mentioned how great brands tend to drive more value than firms operating in the same industry. 

To the point, Forbes estimates the brand with the greatest year over year growth in brand value was Netflix at 35%. These values are based on revenue over an 8% ROE; Forbes’ estimate of what a brandless firm could achieve. For Netflix, Forbes estimates the brand value at $11.5 billion. The best brand, Apple, was valued at $182.8 billion. Is brand worth it?

There are other measures that Tim mentioned in our podcast, and I encourage you to listen to it. So you can adopt your own version of tracking the evolution of your brand.

What do you want your brand to say? How do you want your customers to feel about your bank? And how will you track progress?

Bad Habits

Old habits may work against the brand you are trying to create.

For example, at that Nashville conference, one presenter went into detail about increasing deposits through odd-lot rate

promotions (see a pic I snapped of a slide). We know the trick. Run a 7-month CD special, in the hopes that a very high percentage that take it will roll into the standard 6- month rate. 

In other words, take advantage of customers that don’t keep tabs on you. I’m not saying there is no place for such promotions. But the unintended consequence is customers having to watch their back. Not a great place for your brand to be, right?

I moderate bank strategic planning sessions. And no banker or director ever said that they wanted to take advantage of their customers. Because it is contrary to the mantras I often hear: relationship building, community, and trust.

No, the odd-lot rate promotion is one old-school tactic that keeps our customers on edge. There are other ways to lower cost of funds. Such as increasing the relative size of transaction accounts to total deposits. But that takes long term planning, diligence, and brand building. So those customers that get angry at their current bank for trying to screw them can look to your bright, shining brand as an alternative to business as usual. 

Brand building is hard work. It's not just a name change and an ad campaign. Bankers should write down the type of bank they want to project. Create the guardrails for everyday interactions and decision making. Produce videos of positive, brand-consistent customer interactions. Get all employees on the same page.

Because as Tim said in our podcast, a great brand will mobilize a community bank's greatest asset, its people. Untap it.

~ Jeff




This post is related to my firm's Strategic Management service. To learn more, click here.

You call yourself a brand manager?

The Pennsylvania Turnpike’s Valley Forge rest stop is a common waypoint for me on my travels. This week, I stopped and bought a 12oz cup of coffee from the Starbucks kiosk… cost: $1.69. Curious, I moved 10 feet to my right and asked the helpful Burger King clerk the price of a 12oz cup of coffee… $1.15. I paid 32% more so my cup would say Starbucks on it. I must be a victim of a saturation ad campaign. Oh wait, I can’t recall ever seeing a Starbucks ad.

We make premium pricing decisions every day (see chart). For reasons that may be different by customer, we place a monetary value on a good or service that is greater than a similar replacement good or service. We do so even when it is difficult to justify paying the higher price, such as my coffee example. Sure, we rationalize by saying it tastes better, or some other reason. This reminds me when my daughter performed a soda taste test at the local swimming pool, pitting Coke, Pepsi, RC, and a generic brand against each other. The winner: generic brand. Without the labels, top-selling brands are difficult to pick out.

So why can’t we achieve premium pricing in community banking? Why do our lenders price aggressively to “get the deal done” or branch managers rely on rate promotions to grow deposits? A response I often receive is that money is a commodity, and one bank’s greenbacks are the same as another’s. But isn’t a cup of coffee also a commodity? And what about “superior customer service” or “access to decision makers” I keep hearing about in community bank strategy sessions?

I believe that a critical component missing in community banking is a brand. Resist it if you must, but people pay more for a Marriott Hotel room because it’s Marriott and more for a Mercedes because it’s Mercedes. Those brands stand for something that people are willing to pay for. What does your brand stand for?

I am on the faculty on the ABA School of Bank Marketing Management (aside: I am tardy submitting my lesson plan). These students are tough when it comes to instructor critiques. So before I receive my traditionally poor performance reviews and be perceived as having sour grapes, let me be tough on them. Marketing in community banks has not been successful in positioning the function with a strategic focus, pays far too much time dabbling in retail, and has not descended from 10,000 feet to the ground level in building the bank brand. Although I’m sure there are some, I cannot think of one community bank where customers feel they have to bank there regardless of price variations, like they do when they talk about going to Starbucks.

Not to lay all of this at the feet of marketing. Many, if not most, community banks are run by former lenders. The commercial lending function does not often call on marketing for assistance. They think marketing runs the ad budget. And as one CEO told me, “we don’t get business customers from running a billboard campaign.”

Fair enough. But can you get customers to pay more for your money than the competitors? Are you positioned as a trusted advisor? Are your lenders knowledgeable enough to advise? Do business customers rave about you to their contemporaries? Are you the “go-to” bank for education on small business balance sheet management?

My ABASBMM students are pretty bright, and they talk a good strategic marketing game. But what’s the point if they go back to their banks and run the next spring home equity campaign? I get frustrated when my company performs a costing study at a bank focused on commercial customers and the marketing department expends 80% of their time in retail banking endeavors, or is subordinate to the head of retail (both true stories). If your marketing department fits a similar mold and is not aligned with your bank’s strategy, or your bank does not have a strategy, it’s time for a change. Force the issue! Don’t wait for the former commercial lending CEO to take the initiative. The success of your brand, your bank, and your future depends on it.

- Jeff