Value generation in banks and acting as a responsible citizen Contradiction or complementarity?

Transcription

1 Value generation in banks and acting as a responsible citizen Contradiction or complementarity? LMU Ludwigs-Maximilians-Universität Munich School of Management 10. BWL-Fakultätstag 2013 Dr. Olaf Scheer Munich, 16 November 2013

2 1 2 Value creation and sustainability - contradiction or complementarity? The road ahead - Sustainable business models in banking 2

3 zeb/belief: Perceived sustainability as major value driver for banking two dimensions of sustainability to be distinguished Double sustainability hypothesis FINANCIAL SUSTAINABILITY / Solid financial performance with volatility/ risks well under control DOUBLE SUSTAINABILITY FOR VALUE CREATION?! SOCIAL- ECOLOGICAL SUSTAINABILITY / Fair treatment of environment, all members of society & all generations 3

4 Banks with high financial sustainability generate superior TSR of 15.6% Characteristics of banks with high and low financial sustainability Top 100 banks, ¹ RoE Performance RoRWA TSR p.a. and avg. P/B ratio ,9% 2,4% TSR p.a. 15,4% 1,7% 15,6% Risk 4,3% Tier 1- ratio 2 Liquidity 3 Leverage ,8% P/B ratio ,2% Growth Asset growth rate 15,5% 14,6% Business Mix Share classic banking 4 66% 47% 1.56 Color coding: Banks with high financial sustainability (no outlier wrt/ financial constraints) Banks with low financial sustainability (> 1 outlier wrt/ financial constraints) 1) Top 100 listed banks available on Bloomberg. Values are based on years and are value weighted averages based on market cap ) Tier 1-ratio represents proxy for Core Tier 1-ratio for which data is not available; 3) Liquidity is defined as ratio between total customer deposits plus long term debt plus total equity to total assets at end of the year. Liquidity represents proxy for net stable funding for which data is not available; 4) Share of loans and deposits to 2x assets Source: zeb/value compass

5 Input Total Shareholder Return Share return Total Shareholder Return Share return Total Shareholder Return Share return zeb/value creation model integrates four value dimensions: Performance, growth, risk and constraints explanatory power increases to ~62% zeb/ value explanation model Backup RoE model Gordon-Growth model zeb/value explanation model 1) 200% 150% 100% 50% 0% -50% -100% -80% -60% -40% -20% 0% 20% 40% 60% RoE 400% 350% 300% 250% 200% 150% 100% 50% 0% -50% -100% -120% -80% -40% 0% 40% 80% 120% 160% 200% 240% 280% 320% Gordon growth model 200% 150% 100% 50% 0% -50% -100% -120% -80% -40% 0% 40% 80% 120% 160% TSR model Input Input Input Performance RoE Performance RoE Performance RoE Growth Asset growth Growth Asset growth Risk Cost of Capital Risk Cost of Capital Constraints Leverage, Liquidity, Tier 1 ratio, share of classic banking R 2 ~9% R 2 ~34% R 2 ~62% 1) zeb/value compass Source: zeb/research 5

6 Summary re/ financial sustainability: Profitability necessary but not sufficient condition to sustainably create value Success factors for financial sustainability + Profitability Solid performance still must-have / Efficient usage of capital (RoE) and assets (RoA) / Strong free cash-flow (adj. IBIT) Success factors for financial sustainability Growth Constraints Sustainable growth w/o violating profitability or constraints / Significant business in growth region ( The next 10 ) / Market leader in terms of innovations (products/channels/etc.) Zero tolerance re/ regulatory constraints / Capital: Reasonable capital base (EBA / Basel III definition) / Liquidity: Stable long- and short-term funding base Business Model Transparency is key / Strong focus on classic banking, no opaque business / Well-known brands, long-established in the markets, etc. Source: zeb/findings 6

7 Good corporate citizens with much better TSR performance in short- and longterm Social-ecological sustainability and TSR performance Average social-ecological rating of high/low cluster 56,4 57,1 64,8 TSR p.a ,6 Low Community High Low Employees High 1,6% -9,0% Low High 58,8 58,2 64,4 50,4 Low High Low High Environment Governance 1) Data on sustainability ratings 2012 from CSRHub database with separate ratings for dimensions community, employees, environment and governance; Analysis focused on developed markets due to data issues Source: zeb/research 7

8 Social-ecological sustainability difficult to grasp/measure sustainability ratings as proxy to measure it Overview social-ecological sustainability rating CSRHub as most comprehensive social/ ecological sustainability rating... Backup... based on a large number of renown sources Dow Jones Sustainability Index Global Reporting Initiative Great place to work Greenpeace Human rights campaign MSCI ESG Intangible Value Assessment NASDAQ OMX CRD Global Sustainability Index Newsweek green ranking SIPRI--Stockholm Intl. Peace Research Institute Transparency International / CSRHub database contains individual ratings for the dimensions community, employees, environment and governance Trucost UN global compact Source: CSRHub, zeb/research 8

9 Summary re/ social-ecological sustainability: To create sustainable value three aspects are important Success factors for social-ecological sustainability Relevant areas All evaluation clusters matter re/ TSR impact: / Community and employees / Environment and governance Success factors for socialecological sustainability Transparency It is key to be transparent about activities/initiatives: / No fig leaves / Openness and continuity Execution Alignment of management actions and messages necessary: / Overall perceived earnestness as important lever / Tie management practices to resource and culture mgmt. Source: zeb/findings 9

10 Value generation and acting as a socially responsible corporate citizen are complementary financial sustainability as clear pre-condition Financial vs. social-ecological sustainability TSR performance p.a. TSR along sustainability p.a. dimensions Key results Financially prudent Ø 2.8% 3 Ø 7.2% 3 / Banks with high financial sustainability have higher TSR performance Financial sustainability 1 Ø -8.6% 3 Ø -1.2% 3 / High social-ecological sustainability tends to push TSR / Social-ecological sustainability alone, however, cannot compensate for low financial sustainability Financially weak Positive TSR Negative TSR Low ( Poor corporate citizen ) Social/ ecological sustainability 2 High ( Good corporate citizen ) / Examples for banks in relevant cluster: / Weak-low: UBS,... / Prudent-high: Westpac,... 1) Financial sustainability proxied by number of outliers in dimensions liquidity, leverage, Tier1 ratio and share of classical banking; 2) Data on sustainability ratings 2012 from CSRHub database, analysis focused on developed markets due to data issues; 3) Market Cap weighted average TSR p.a. in respective cluster Source: zeb/research 10

11 1 2 Value creation and sustainability - contradiction or complementarity? The road ahead - Sustainable business models in banking 11

12 What are the management implications - Double sustainability to be included into a bank s overall TSR journey TSR journey management implications 3 Communicate performance to investors Strong TSR performance/ value creation Financial sustainability Disclosure standards/ Value Reporting + Social-ecological sustainability Sustainability as integral part of financial reporting 2 Tie management practices to value creation and deliver on/above financial targets Performance Mgmt. & value-based incentive schemes + Resource & Culture Management (e.g. via sustainability KPI) 1 Create TSR strategy based on market environment and expectations Business strategy based on holistic metric capturing financial sustainability + Firm s core values as common basis for business strategy Source: zeb/ 12

13 Your contact Dr. Olaf Scheer Managing Partner zeb/ group Phone Office Munich Theresienhöhe 13a Munich

14 CSRHub ratings as most comprehensive proxy for social-ecological sustainability CSRHub background information 1/2 Backup What is CSRHub? / Free website providing social, environmental, community and governance ratings on most major companies in North America, Europe and Asia / Goal: provide information for consumers and businesses on how companies perform and compare on sustainability and CSR issues What is their methodology? / CSRHub overall ratings are based on four categories: Environment, Employees, Community, and Governance categories / Each category has three subcategories for more details see: content/csrhub-data-schema / Proprietary tools combine > 20mn pieces of data on sustainability and CSR performance into a consistent set of ratings / Data stems from 9 premier SRI analysis firms, over 190 nongovernmental organizations (NGOs), government agencies, news feeds, social networking groups, smaller for-profit organ. and publishers / Thanks to large beta analysis a broad set of opinions is condensed into a small set of ratings / To ensure consistency information/ratings from individual data sources are harmonized and normalized / Text What is their data source? How reliable is the information? Source: zeb/ 14

15 CSRHub ratings as most comprehensive proxy for social-ecological sustainability CSRHub background information 2/2 Backup / Dow Jones Sustainability Index / Global Reporting Initiative / Great place to work / Greenpeace / Human right campaign Selected sources / MSCI ESG Intangible Value Assessment / NASDAQ OMX CRD Global Sustainability Index / Newsweek green ranking / SIPRI--Stockhold International Peace Research Institute / Transparency International / Trucost / UN global compact Source: zeb/ 15