A successful brand will deliver a better customer experience, higher revenues and more profits. The Banker’s Top 500 Financial Brands listing puts a financial value on the leading brands and ranks them accordingly. Report by Michael Imeson.

“Branding is everything,” wrote Wally Olins, arguably the world’s leading practitioner of corporate identity and branding, in his 2004 book Wally Olins On Brand (his new book, Wally Olins: The Brand Handbook, is due to be published in May). He was mainly referring to companies that focus on their ability to sell, or “seduce” customers into buying, their products and services, such as retailers like Virgin. “In companies that seduce, the brand is the focus of corporate life,” he wrote.

Branding is also important for the two other types of successful companies that Mr Olins identifies: the technically oriented, such as Sony and Microsoft, and those driven primarily by the desire to make money, such as Goldman Sachs and countless other highly profitable banks. Yes, other strengths matter and are perhaps more important: quality of products and service, expertise of staff and management, revenue growth, profitability and return on investment. But increasingly, and for large companies especially, it is the brand that encapsulates all of these attributes in the customer’s eyes; the brand creates a customer experience that feeds straight through to the bottom line and shareholder value.

There are many ways of measuring the strength of a brand: research into what customers and competitors think of it, measurement of the volumes of business achieved and calculations of the market share won. Yet how can management attach a financial value to a brand, which is an intangible asset, in hard currency – the only language that accountants, lawyers, analysts and investors really understand?

There are a number of specialists who can calculate such values, but they do not make their findings widely available. That is why The Banker has teamed up with Brand Finance, the leading UK-based independent brand valuation firm, to break the mould and create the Top 500 Financial Brands, the only publicly available listing analysing the value of the world’s leading bank brands. Our 2008 table builds on our first listing, published in November 2006, which covered the top 100 bank brands.

Vital element

“There is a significant over-supply of products and services in consumer, corporate and investment banking, so differentiation through strong branding is vital,” says David Haigh, Brand Finance’s chief executive. “Banks need to provide a consistent brand experience to prevent customers switching to rivals. However, many banks remain poor at analysing the effectiveness of their marketing investment in their branded products and services, and do not know the true worth of their brands.” A marketing department armed with such analysis can determine how much revenue each brand contributes to the bank’s business.

There are also accounting and tax reasons why banks find it useful, or essential, to attach a value to their brand. First, banks must comply with IFRS 3 Business Combinations. This is the international financial reporting standard on acquisition accounting, issued four years ago, which requires the value of acquired trademarks and other intangible assets, such as brands, to be shown separately on the bank’s balance sheet following an acquisition. It also requires goodwill and other intangible assets to be tested annually for impairment and for their values to be restated if there is impairment.

Second, it can make sense for banks with operations in several countries to create an intellectual property holding company (IPCo) to own and centrally manage the bank’s IP (including brand) in one low-tax country. The IPCo then charges each operating company of the bank a fee to use the IP. The benefits of this arrangement include being able to calculate the value of the bank’s IP, exercising greater control and protection over the IP, and accumulating profits in a low-tax jurisdiction.

As can be seen from the listings, each bank has been ranked 1 to 500 according to its brand value in dollars. Two other measures are given for each bank: its brand value expressed as a percentage of market capitalisation, and its brand rating in letters to benchmark the strength, risks and potential of its brand relative to others.

“The subprime crisis has had considerable influence on this year’s rankings,” notes Mr Haigh. “It has resulted in significantly adjusted expectations of future financial performance and brand values. In addition, we have seen the emergence of powerful financial institutions from China in the top 20 brands, indicating significant changes in the global financial market power base.”

The methodology used by Brand Finance to calculate values is complex (see branding methodology below) and two important points need to be made here:

  • There are three styles of brand architecture: monolithic (one brand, one name, one visual identity); endorsed (several brands, but endorsed with the group name and group visual identity); and pluralistic (several brands existing side by side, without the group name or group visual identity). The pluralistic brands are shown separately, but if they were combined the consolidated brand would appear higher in the list. For example, if NatWest (20) and Citizens (79) were added to owner RBS (26), RBS would have a combined brand value of $15.4bn, putting it in sixth place.

 

  • Private and mutual companies – such as Rabobank (Netherlands), WestLB (Germany) and Nationwide Building Society (UK) – do not appear in the listings because the relevant financial data could not be obtained.

Best of the best HSBC leads this year’s ranking with a brand value of $35.5bn, moving up from second place in 2006. Citi slips from first to second place, with a brand value of $27.8bn. And Bank of America remains in third place ($25.4bn). The same banks took the top three places in The Banker’s Top 1000 World Banks 2007 listings based on Tier 1 capital, though in the opposite order: Bank of America first, then Citi, then HSBC (The Banker, July 2007).

HSBC also achieves the highest brand rating of AAA, the same as in 2006. The only other bank to achieve AAA is American Express (fifth in the value rankings). HSBC has opted for a uniform brand identity across the world, and has supported its brand building by high-profile advertising. It is the world’s largest and most profitable emerging markets bank and, although it was hit by the subprime crisis in 2007 with reported losses of about $3.4bn, it has not been as badly hit as its biggest US competitors.

HSBC’s brand value is $2bn higher than in 2006. By contrast, Citi’s brand value is $7.3bn lower than in 2006, and its brand rating drops to AA from AAA-, largely because of the damage to its reputation caused by its subprime woes. Bank of America is in a similar position, with a brand value $6bn lower and a drop in rating to AA+ from AAA-, again due to big write-downs following the subprime lending crisis.

The top 20 most valuable brands in 2006 had their headquarters in Europe (nine) or the US (11). This year, two Chinese banks entered the top 20, Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CCB) – although they did not feature in the previous rankings due to lack of data. European banks now account for 11 of the top 20 and the US seven, a reversal of fortunes from last time, which reflects what has been happening in the financial markets.

The merger between Banca Intesa and Sanpaolo IMI in Italy led to a combined brand ranking of 19th this year. Banca Intesa ranked 49th in 2006 and Sanpaolo IMI was not in the top 100.

Banks in large and rapidly emerging markets, such as Brazil, Russia, India and China, continue to benefit from rapid economic growth in their territories. For example, Brazil has three banks among the top 60 brands: Banco Bradesco ($4.1bn), Banco do Brasil ($4bn), and Banco Itaú ($3.5bn), ranked 42nd, 45th and 53rd respectively. China has three: ICBC ($8.4bn), CCB ($7.8bn) and Bank of China ($6.7bn), ranked 16th, 18th and 23rd respectively. Russia has one: Sberbank ($3.4bn) ranked 55th; and State Bank of India ($2.9bn) is ranked 59th.

Among the top 20 brands, American Express has the highest percentage of brand value to market capitalisation (31%) and the second lowest market capitalisation ($51.5bn). On average, consumer banks display a higher brand value to market capitalisation than investment and corporate banks because consumer banking involves more emotional and image-related factors.

Brand specialists

“We’re thrilled to bits to be number one in your top brands listing,” says Chris Clark, head of marketing at HSBC Group. “It’s fantastic to get this sort of public acknowledgement of success, but it’s obviously a by-product of doing a good job rather than being our objective for the year. It’s also reflective of an organisation that now believes that branding is the job of the 310,000 people who work for this company, rather than primarily a function of the marketing department.”

HSBC does not measure the financial value of its brand, but last year it started to measure the strength of its brand based on independent market research surveys of customers and non-customers. What is measured is customer recommendation, brand visibility and impact. The results are incorporated into the performance scorecard for the business.

“It still doesn’t have a dollar sum attached to it but our brand’s performance compared with our competitors is a key performance indicator of our senior team’s objectives,” says Mr Clark. “We believe customer recommendation and brand health are probably the only two leading indicators of future business performance. If you have a healthy brand and high levels of customer advocacy, it is probable that – if you price, promote and distribute your financial services and products properly – you should do well.”

Acquisitions raise brand visibility

Fortis, the Belgo-Dutch financial group, was in the spotlight for much of 2007 because of its part in the consortium to acquire Dutch rival ABN AMRO. The publicity helped to raise its brand awareness around the world, propelling it up five places from 40th in our 2006 listing to 35th today.

“We’re really pleased to move up the table,” says Adrian Martorana, general manager for global branding and communications at Fortis. “Our involvement in the consortium, from March to October 2007, and the coverage we got in the press, helped the rest of world get to know who we are. That helped us to develop our brand equity because whatever problems were thrown at us during the acquisition, we were able to surmount them, reflecting our brand values of optimism and fulfilment of people’s dreams and ambitions.”

The serious groundwork for Fortis’s brand-building started, however, in January 2006, when Mr Martorana, who is from a fast-moving consumer goods marketing background, joined the company. He was instrumental in introducing a new campaign to increase the company’s brand awareness and brand equity. The central theme was about meeting people’s ambitions.

“We were, essentially, a Benelux brand. Outside the Benelux [region], recognition of the Fortis brand was low and specific to niche areas. Our campaign integrated all the advertising and sponsorship we already had in place, and we introduced a few different initiatives. For example, we painted the Thalys train that runs between Brussels and Paris in Fortis colours. We focused on the international traveller and devoted a lot of attention to airport advertising.”

Fortis does not do its own brand value measurements, preferring to use brand tracking and health monitors. Although he can see the benefits of attaching a value to a brand, Mr Martorana believes that it is much more important to ensure that the brand “lives”.

“Your customers and employees have to believe in it. They have to believe the promise you give them, and you have to prove to them that the promise is being delivered. When the two come together, you build a relationship and real brand equity,” says Mr Martorana.

“Brand is incredibly important in attracting new customers and massively important for customer retention. You also want your staff to reflect your vision of the brand. You take it from vision to mission, to your CEO’s idea of future, and your brand essence. You then begin to build a culture, and when that combines with advertising, you have a great pincer movement,” he says.

Sow and you shall reap

Bradesco, the highest-ranking Brazilian bank, has moved up from 50th to 42nd place. “We are reaping the fruits of the work we have put into managing and raising the value of our brand,” says Milton Vargas, vice-president and director of investor relations. The bank has pursued innovations in products, services and technology, improved performance in many areas and aligned brand management with business strategy.

Unlike HSBC and Fortis, Bradesco does measure the financial value of its brand, in all lines of business. “We can see the positive effects,” says Mr Vargas. “We are increasing our client base, and have improved our satisfaction and loyalty indicators in every area, which brings us greater scale and market share. We have increased the operational efficiency ratios for more than 16 consecutive quarters. Likewise, our market value has risen yearly since 2002. There is no doubt that these advances are linked to our concentration on making the Bradesco brand a factor in gaining new business.

“Although the brand is considered to be an intangible asset in technical terms, we regard it as something concrete and work to ensure that its value and importance are seen by the financial community, our clients and society as a whole. Internally, we want it to be associated with remuneration, training and career prospects and externally with relationships, credibility and a positive perception,” he says.

Bradesco intends to invest even more in its brand, which it describes as a “fundamental factor in the sustainability of the business”. It says that the brand helps it to define how much it can grow, what new markets it can conquer and how much extra profit it can make.

That says it all. The more you nurture your brand, the greater profits you shall reap.

BRANDING METHODOLOGY

The methodology employed by Brand Finance in this Top 500 Financial Brands listing uses a discounted cash flow (DCF) technique to discount estimated future royalties, at an appropriate discount rate, to arrive at a net present value (NPV) of the trademark and associated intellectual property: the brand value. The steps in this process are:

1. Obtain brand-specific financial and revenue data (insurance revenues have been stripped out). Every revenue stream for all 500 banks was obtained and put into four categories: corporate banking, investment banking, consumer banking and credit cards.

2. Model the market to identify market demand and the position of individual banks in the context of all other market competitors. Three forecast periods were used:

  • Estimated financial results for 2007 using Institutional Brokers Estimate System (IBES) consensus forecast.

 

  • A four-year forecast period (2008-2011), based on three data sources (IBES, historic growth and GDP growth).

 

  • Perpetuity growth, based on a combination of growth expectations (GDP and IBES).

3. Establish the royalty rate for each bank. This is done by:

  • Calculating brand strength – on a scale of 0 to 100 – for each product and service area, according to a number of attributes such as brand presence, emotional connection, market share and profitability, among others.

 

  • Determining the royalty rate for each of the four revenue streams mentioned in step 1.

4. Calculate future royalty income stream. 5. Calculate the discount rate specific to each bank, taking account of its size, international presence, reputation, gearing and brand rating. 6. Discount future royalty stream (explicit forecast and perpetuity periods) to a net present value – ie: the brand value.

Relief from royalty

Brand Finance uses a ‘relief from royalty’ methodology that determines the value of the brand in relation to the royalty rate that would be payable for its use were it owned by a third party. The royalty rate is applied to future revenue to determine an earnings stream that is attributable to the brand. The brand earnings stream is then discounted back to a net present value.

The relief from royalty approach is used for two reasons: it is favoured by tax authorities and the courts because it calculates brand values by reference to documented, third-party transactions; and it can be done based on publicly available financial information.

Brand ratings

These are calculated using Brand Finance’s ßrandßeta® analysis, which benchmarks the strength, risk and future potential of a brand relative to its competitors on a scale ranging from AAA to C. It is conceptually similar to a credit rating.

The data used to calculate the ratings comes from various sources including Bloomberg, annual reports and Brand Finance research.

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