How can you use bank valuation concepts to influence how you think and how you lead?
That’s the question that I asked in a session at the Best Banks in America Super Conference put on by the Emmerich Group in Minneapolis last week. It was a fantastic event. If you’re a banker, I wish you could have been there. If you aren’t a banker, you would have found it interesting. I’m not and I certainly did.
That question though is an important one because we talked about bank valuation as if it were something that exists in a vacuum.
What I’m here to suggest is that the basic concepts of valuation can help us think about how we look at banks and how we manage banks and how we lead when we manage those banks.
Value, in business valuation or bank valuation terms, is equal to earnings in the bank – that would be net income – over R, a discount rate, minus G. So it’s a capitalization of earnings – that’s the interpretation of value.
So, to make it easy to understand, if earnings are $10 a share – the discount rate is 15% and growth is 5% – 1 over 10% is a multiple of 10. 10 times $10 per share earnings would be $100 per share. That’s the P/E we observe in the public marketplaces.
That’s not new at all. What I think might be a little bit new for some of us is to use those very valuation concepts to think about the bank as we look at it, as we see it, as we interact with people, as we go to various places in the bank.
For example, earnings.
You know, earnings are important because we have to generate cash flow and we have expenses and that sort of thing – I’m talking about at the margin. Let’s look at it a little differently.
Let’s look at retention – are we retaining customers? Because you see customer retention influences growth. If I can retain a customer, I have to sell less to grow next year.
Cross-selling – cross-selling is key to customer retention. I’m sort of stuck at my community bank because I have a number of accounts there, and it would be really, really difficult for me to leave. Not that I want to, I don’t even want to, but it would be difficult should something happen that I would want to.
Incremental pricing – the decisions that you make and that people in the bank make about incremental pricing have an influence on earnings.
The Top 100 Customers Focus as advocated by the Emmerich Group – well, focus on your best customers. They’re your biggest opportunity for growing earnings.
Staffing levels – maybe they’re too thin and they affect service – service affects growth, service affects risk, service affects earnings, and then staff work levels.
Staff turnover – staff turnover, we don’t think so much about staff turnover, but staff turnover impacts earnings, it costs money to train and replace people. So there are new ways to look maybe at the earnings through valuation eyes.
Customer retention – a customer that you retain is less risky than one that you might have to go get.
Loan quality decisions at the margin – well, clearly we have to make good loan quality decisions. Loan deposit and maturity pricing and maturity decisions are certainly important.
Service levels affect risk because bad service causes people to leave the bank.
Acquisition decisions – I need not say more and then staff turnover affects risk because when there’s turnover we lose institutional memory and we lose the ability to provide ongoing good service.
Customer retention – did I mention that a minute ago? Customer retention is very important.
Cross-selling is very important for growth because if you think about the number of customers that you have today is this what I can tell you is that those customers will attrit over time that’s called attrition, customer attrition. I use the word “attrit.” But anyway, if you slow down the rate of attrition, you have to sell less to grow. It’s just a real simple concept.
Staff turnover, once again impacts growth.
Selling attitude at your bank impacts growth, and then of course service levels.
This is a Valuation Video at www.chrismercer.net and on LinkedIn and perhaps at the Emmerich Group (we’ll see), but what I want to do is focus you on one question – how to use bank valuation concepts to influence how you think and how you lead.
I hope in this short video I have influenced the way that you think and that you may lead just a little bit.
This is Chris Mercer – Valuation Video. Good day.