MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Financial Services: Organizational resilience

C. HUYGENS - Tuesday, January 22, 2013
They're at different ends of the ROE continuum, but both JPMorgan Chase and Deutsche Bank share one common attribute that is a hallmark of the financial services sector: remarkable resilience. Both keep taking a licking of one form or another and keep on ticking.

Earlier this month, the Board of Directors at JPMorgan Chase stepped into the fray, took up Barney Frank’s 2012 suggestion, and slashed Jamie Dimon’s bonus for the $6bn London Whale affair and for, as the press reports, “damaging the bank’s reputation.”

Yet objective measures of reputational value would argue otherwise. An institution in the throes of a reputational value crisis cannot buy $2.85 billion in credit at rock-bottom prices. In addition to paying only 77 basis points above US Treasuries for fixed-rate securities due October 2015, with an unprecedented low rate of 1.1 percent, the largest US bank paid only 66 basis points more than 3-month LIBORs for floating rate securities for the balance. Moreover, a CEO in the center of a reputational crisis is unlikely to be nominated by Warren Buffet to be Secretary of the US Treasury. And an institution in a reputational crisis is unlikely to report net income of $5.7bn for the fourth quarter, up sharply from $3.7bn a year earlier, as JPMorgan Chase shared last week.

Meanwhile an Italian judge recently convicted Deutsche Bank together with  JPMorgan Chase, Switzerland's UBS and a German-Irish bank, Depfa, for their role in overseeing fraud by their bankers in the sale of interest rate bets to the city of Milan. In parallel, Deutsche Bank is part of a worldwide investigation for altering the British benchmark interest rate (Libor) and its euro-counterpart (Euribor). The US Senate named the German bank alongside Goldman Sachs as the two institutions that played a “key role” in the financial crisis.

Once renowned for its solid and risk-averse business, Deutsche Bank became an aggressive investor under the leadership of Swiss top banker Josef Ackermann. His successor, Juergen Fitschen, who vowed to change the company's culture, recently came under fire in Germany for having phoned up the regional governor to complain about the police raids which are denting his bank's reputation.

The Steel City Re Reputational Value Metrics show JPMorgan Chase far ahead on most measures. As shown in the vital signs chart below, Deutsche Bank's RVM volatility, a measure of reputational value volatility, is been and still is more volatile that JPMorgan Chase's, its CRR, a measure of relative reputational ranking is lower, and its ROE is significantly lower. But in a nod to last week's Mission Intangible Monthly Briefing on organizational resilience, Deutsche Bank's reputational ranking, its CRR, is rapidly on the rise and therefore its reputational stability (reflecting change) is also lower than JPM's. These reputational value measures are forward-looking indicators of economic value. Therefore, notwithstanding all of the scandalous news, these reputational value metrics indicate that in the setting of a rapidly rising CRR, profitability at Deutsche Bank (read: ROE) is sure to follow.


Financial spreads

Nir Kossovsky - Thursday, January 28, 2010
Reputation is the collective perception held by stakeholders of how a company manages its intangible assets. In the 74-member Capital Markets sector, those intangible assets underlying reputation comprise three types of risk management—operational, market and credit. “In a market system based on trust, reputation has a significant economic value,” noted Alan Greenspan, a former chair of the US Federal Reserve Board. In the absence of trust following the loss of reputation, liquidity is at risk. During the 2007-2009 financial crises, stakeholders perceived failures in one or more of those risk management processes and precipitated the liquidity crisis. We look at some exemplary reputation data.





As described in great detail in the forthcoming book, Mission: Intangible. Managing risk and reputation to create enterprise value, the data show that there is a strong association between reputation and long-term economic returns. The rank order of 3-year returns for BlackRock (NYSE:BLK), Goldman Sachs (NYSE:GS), Deutsche Bank (NYSE:DB), and Morgan Stanley (NYSE:MS) shown in the chart above adapted from bigcharts.com correspond to their rank order Steel City Re Corporate Reputation Index metrics and inversely to the volatility value and vector of that metric.



The data also show, as illustrated in the above chart that also shows Morgan Stanley's acute reputation drop, that the Capital Markets sector as a group experienced a reputation rise this past year, but that the variance within this group also increased.

Last, as described previously, the data show that the short term distortions of extraordinary returns following extraordinary losses do not skew the reputation metrics. Firms that have superior reputations are more resilient, will fall more slowly in periods of upheaval, and therefore have less ground to regain. The bright side of this relative lack of short-term upside is that the lower volatility translates to lower cost of capital.

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