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International Journal of Information Technology and Business Management 29th April 2015. Vol.36 No.1
© 2012 -2015 JITBM & ARF. All rights reserved
ISSN 2304-0777 www.jitbm.com
17
BRAND OF THE POLISH STATE-OWNED DEVELOPMENT
BANK (“THE BANK GOSPODARSTWA KRAJOWEGO”)
Sebastian Skuza
PhD, Assistant Professor at University of Warsaw, Faculty of Management
Abstract
The Bank Gospodarstwa Krajowego (the BGK, the Bank) has been established by the state to realize a public
mission, in particular by financially supporting the government’s economic policy, which provides a link to the
institution’s prewar traditions. The main activity objectives of the Bank, in the scope specified in the Act and
separate provisions, include support for governmental social and economic programmes as well as local
government and regional development programmes.
Possession of a strong brand is generally considered a significant factor in the success of an enterprise. The
value of a brand is dependent on the line of business in which the enterprise conducts its activity. However, a
question emerges as to whether these same methods of brand valuation may also be used for state-owned
development banks, e.g., the Bank Gospodarstwa Krajowego, which on account of the scope of their activity, as
a principle, do not directly compete with commercial banks. In this chapter the author attempts to analyze the
brand value of an entity which acts as a main partner of the state in handling social and economic programs in
Poland.
Keywords: the Bank Gospodarstwa Krajowego, the state-owned development bank, the
brand, the value, 25% rule method, the Relief from Royalty method
1. THE BANK GOSPODARSTWA
KRAJOWEGO AS A POLISH STATE-
OWNED DEVELOPMENT BANK
On 14 March 2003, the Sejm of the Republic of
Poland passed the Bank Gospodarstwa Krajowego
Act (Journal of Laws No. 65, item 594). The Statue
entered into force 45 days after the date of
publication (i.e., on 1 June 2003). The bill of the
Act was drafted by the government in furtherance
of the “Entrepreneurship - Growth - Work”
economic strategy programme. Due to the character
of the activities assigned to the BGK, which consist
of performing public tasks, the Bank occupies a
special, expressly distinct position among other
banks operating in the market. Regulating the basic
rules and scope of BGK activities became necessary
both because of formal and legal considerations and
the pending integration with the European Union
[20].
The Bank Gospodarstwa Krajowego (the BGK, the
Bank) has been established by the state to realize a
public mission, in particular by financially
supporting the government’s economic policy,
which provides a link to the institution’s prewar
traditions. According to Article 4 of the BGK Act,
the main activity objectives of the Bank, in the
scope specified in the Act and separate provisions,
include support for governmental social and
economic programmes as well as local government
and regional development programmes, which
include in particular the following projects [23]:
1) projects realized with the use of means
obtained from funds of the European Union
and international financial institutions;
2) infrastructural projects;
3) projects related to the development of the SME
sector
- including projects realized with the use of public
means.
Apart from its main activity objectives, BGK may
also conduct market activities more typical of other
banks. Both the reference to the Banking Law Act
contained in the BGK Act and the provisions of
BGK Statute (enacted by an order of the Minister of
Treasury) allow BGK to perform banking
International Journal of Information Technology and Business Management 29th April 2015. Vol.36 No.1
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operations and other specific activities typical of the
banking sector.
The main activity objectives of BGK are also
reflected in tasks realized by the Bank
Gospodarstwa Krajowego and listed in Article 5 of
the BGK Act, which include among others [23]:
1) carrying out the actions set forth in the Banking
Law Act of 29 August 1997;
2) providing services related to funds established,
entrusted or transferred to the BGK under
separate statutes;
3) providing services related to export
transactions with the use of export support
instruments and support for exporting Polish
goods and services, pursuant to separate
regulations or in the course of realizing
government programmes;
4) conducting direct or indirect guarantee or
surety activities in the course of realizing
governmental programmes or in the name and
on behalf of the Treasury under the Act on
Sureties and Guarantees Granted by the
Treasury and Certain Legal Persons 8 May
1997, in particular for the small and medium
enterprises sector;
5) supporting the development of residential
housing, in particular efforts aimed at
constructing residential premises for rental,
according to separate provisions or in the
course of realizing governmental programmes.
The BGK Act enables the Bank to maintain
solvency standards, provide means to increase
BGK’s statutory fund, transfer securities to increase
BGK’s statutory fund, and be granted a loan from
state budget means to increase basic or
supplementary funds. In order to ensure that BGK
complies with liquidity standards specified in
provisions of the Banking Law Act of 29 August
1997, the minister responsible for public finances
may guarantee, in the name of the Treasury, the
payment of credits and credit lines granted to BGK
by a domestic or foreign bank or credit institution,
and the performance of pecuniary considerations
from debentures issued by the BGK, in particular
bonds or banking securities.
The objectives stated in the BGK Act expressly
determine its public mission and the specific
character of its activities in the banking market. The
basic objectives of BGK activities include
supporting governmental economic and social
programmes, as well as local government and
regional development programmes realized with the
use of public funds. Currently, BGK combines
domestic and foreign trading activities in the
market with financial support for economic and
social undertakings of the state. Market mission
activities are, however, meant to increase the
effectiveness of carrying out commissioned tasks
and to expand and reinforce the BGK infrastructure
and assets used to carry out tasks commissioned by
public administration authorities.
In realizing its mission, the BGK becomes:
1) the bank of first choice for the state in carrying
out commissioned tasks and stipulated
statutory provisions, ensuring operational
efficiency and rational costs;
2) an institution effectively supporting the
realization of governmental policies and
eliminating the inefficient operation of the
financial sector by means of its own
programmes that include, among others:
a) supporting entrepreneurs,
b) servicing selected strategic industries,
c) supporting exports.
Table 1. Areas of activity of the Bank Gospodarstwa Krajowego
Governmental programmes:
payments from European Union funds;
development and modernization of infrastructure;
providing banking services related to receivables and liabilities of the Treasury;
supporting the realization of EU programmes;
governmental export support programmes;
surety and guarantee programmes;
providing services related to other governmental programmes.
Providing services to other public finance units:
International Journal of Information Technology and Business Management 29th April 2015. Vol.36 No.1
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Source: [28].
2. THE NOTION AND MOST
IMPORTANT ASPECTS OF THE
BRAND
Possession of a strong brand is generally considered
a significant factor in the success of an enterprise.
The value of a brand is dependent on the line of
business in which the enterprise conducts its
activity. The most valuable brands are developed in
the service, consumer goods, and retail industries,
while those brands with the lowest value belong to
government and social welfare institutions and in
the mining or intermediate goods industries [25]. In
the case of the banking sector, possession of a
brand has not been traditionally seen as a key factor
determining success, meaning that banks’ offers
were not differentiated on the basis of their brands.
What is more, banks tended to perceive a brand as
being an identifier of an organization rather than as
a tool for supporting sales and improving the entire
bank’s results. The banking sector’s approach to the
role played by brands in banking activity is
currently undergoing change. Over the last few
years there has been a growing trend in activity
relating to promotional operations aimed at
branding among many financial institutions, both in
Poland and worldwide [31].
Analyses of the trends relating to and valuations of
the most valuable bank brands in the world are
becoming more widespread with the increasing
importance of brands in the banking sector. This
can be seen as a result of globalization processes
and the strategy of some banks to develop unified
global brands in addition to rising levels of
competition within the sector. Attempts at valuing
the brands of commercial banks, as the financial
institutions actively compete for clients, do not
give rise to methodological doubts.
The valuation of a bank’s brand also allows for a
valuation of the bank itself through use of the
adjusted net asset method. The brand possesses an
actual economic value even though it is not
recognized in the balance sheet.
The starting point for an analysis of a bank’s value-
generating ability is its capacity to generate a return
for equity holders which exceeds the cost of capital
employed, i.e., the rate of return expected by the
equity holders [18]. The capacity to generate a
return for equity holders results above all from the
bank’s level of acquired profit and the value of its
net assets. Analysis of a bank’s value should,
however, be limited exclusively to examination of
financial data.
Presented below is a list of the most important
factors shaping the value of a bank.
Figure 1: Bank value generators
consolidation of public finances;
providing banking services to public finance sector units;
acting as a representative of the Ministry of Finance.
Activities related to own programmes:
investment projects and funds;
local government units, municipal companies, health care facilities (financing and transactional banking);
strategic sectors such as energy and production of arms.
Limiting the ineffectiveness of the financial sector:
complex proactive and anti-cycle activities.
Competitive advantage period
Growth Capital expenditures
Additions to operating assets
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Source: [5].
Taking into account banks’ own individual
characteristics, it is possible to distinguish the
following factors that shape their value [27]:
1) competitive advantage period - period of
generating a return exceeding equity cost;
2) capital expenditures - expenditures for new
fixed assets;
3) additions to operating assets - receivables,
securities, etc.;
4) net interest margin - interest earned in relation
to assets;
5) non-interest income ratio - earned through
commissions, securities, and financial
transactions;
6) cost/income ratio - a measure of the bank’s
income necessary to cover its costs;
7) bad debt ratio - approximation of the cash
effects of distressed assets;
8) cash tax rate - income tax paid in relation to
gross profit;
9) regulatory requirements - these result in cash
flows not reaching shareholders as a result of
the bank’s requirement to fulfill capital
adequacy norms;
10) equity capital cost - rate of return expected by
equity holders of the bank.
As an example, valuing a bank using the adjusted
net asset method consists of specifying the values
of its assets based upon records held in accounting
books and appraisal reports and prepared by
certified appraisers. These asset values must be
verified by means of an adjustment and then
reduced by the amount of foreign capital employed
in financing the bank’s activity (also previously
adjusted). At the same time, those assets not
recognized in the bank’s balance sheet, including in
particular its intangible assets (e.g., trademarks), are
themselves identified and valuated.
In accordance with the Accounting Act of 29
September 1994 and the Order of the Minister of
Finance of 1 October 2010 on special rules of bank
accounting, most bank assets and liabilities are
valuated in accordance with the methodology of
determining fair value or other related approaches.
This means that the net value of assets figure
recognized in the bank’s financial statement should
approximately reflect the fair value of its assets.
However, a question emerges as to whether these
same methods of brand valuation may also be used
for state development banks, e.g., the Bank
Gospodarstwa Krajowego, which on account of the
scope of their activity, as a principle, do not directly
compete with commercial banks. In this chapter the
author attempts to analyze the brand value of an
entity which acts as a main partner of the state in
handling social and economic programs in Poland
[24].
From an economic perspective there are many
definitions of a brand, which serves to prove the
multi-aspect nature of this type of intangible asset.
It should also be taken into account that it is
Income
Risk
Net interest margin
Non-interest income ratio
Cost/income ratio
Bad debt ratio
Interest rate
Regulatory requirements
Equity capital cost
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unreasonable to solely examine the perception of a
brand as a name or a graphic sign, irrespective of
the product or service it represents or any
associations that it brings. A product provides a
purchaser with functional benefits, while the brand
is a carrier of emotional values [26].
The PWN Polish Dictionary defines brand as the
quality or type of goods of a given company. The
American Marketing Association defines brand as a
name, term, symbol or design, or a combination
thereof, which aims at identifying products and
services of one seller or a group of sellers as well as
their differentiation from competitors. The British
Chartered Institute of Marketing defines brand as a
group of physical characteristics of a product or
service along with the convictions and expectations
related thereto - a unique association caused in the
consciousness of recipients by a name or a logo or a
product or service [24].
The intangible nature of a brand’s added value
includes the entirety of its characteristics and
benefits, which, in the subjective sense of a client,
is represented by a company, product or service. A
view may also be adopted that a brand is not a sign
but rather a kind of a promise, a vow, which should
shape the entire behavior and strategy of a
company’s activities [16].
A brand and its value are related to the notion of
customer-based brand equity or “CBBE” [14]. This
means the “difference in the consumer’s behavior in
reaction to marketing activities resulting from their
(previous) knowledge of the brand.” The
fundamental assumption of CBBE is that a brand’s
power depends upon a consumer’s earlier
experiences with it - on what the customer felt and
heard as well as how he reacted to the brand in the
past [15]. This suggests that CBBE is a value which
consumers attribute to the brand and the power of
the brand is dependent on the memory/experiences
of consumers. The value of the brand is created by
sellers, by the relative quality of the brand, the
social status which it allows consumers to achieve,
the trust that consumers place in the brand, and
their self-identification with it. “CBBE is present if
the consumer possesses a high level of awareness
and knowledge of the brand as well as certain
strong, advantageous, and unique associations with
the brand in his memory.” Literature on the subject
measures the value of brand equity using many
aspects, such as brand awareness [1], perceived
quality [2], loyalty towards the brand [34], brand
image or associations with the brand [3].
CBBE is characterized by consumers’ behaviors
and/or associations. Appraising the power of
CBBE, conclusions may be drawn about the
significance of the brand in the activity of an
enterprise as well as its commercial value. The
power of the CBBE will vary between enterprises
depending on its historically conducted marketing
activities [24].
Acts regulating the legal protection of trademarks in
Poland are the Industrial Property Law of 30th June
2000 and the Order of the Prime Minister of 8th
July 2002 on Filing and Processing of Trademark
Applications. A trademark is defined as a marking
presented in graphic form (e.g., drawing, spatial
form) which allows for the differentiation of the
goods of individual enterprises in economic trading.
The described characteristics essentially come
down to providing a distinguishing feature which
allows the consumer of a branded product or
service to make a conscious selection from among
many other competing offers. The issue therefore
concerns both the typographic aspect of the product
marking and the sector to which it is assigned.
From the perspective of an enterprise’s activity, the
basic factors influencing the value of the enterprise,
which is in turn influenced by the brand, are its
sales volume and operating profit margin.
A brand does not always have to be the means by
which a company achieves higher prices in
comparison to its competitors. In some cases, on
competitive markets, it may affect the volume of
sales. In the case of financial services where
products are relatively homogeneous in nature, the
impact of a provider’s brand may be higher sales of
products if, for instance, that brand is associated
with a level of security. In such an event the brand
generates quantifiable benefits [13].
Relief from Royalty Method
There are three main methods of valuation with
regards to determining the value of a brand. These
are income, market and cost-based approaches. The
valuation method used most often in practice is the
Relief from Royalty method. This method
combines two approaches: the income approach, as
it is based on planned revenues and profits resulting
from the possession of a given brand; and the
market approach, as royalties are taken into
consideration, the rates of which are established in
license agreements conducted under market
conditions. The Relief from Royalty method is
recognized by tax authorities and the courts as it is
based on commercial transactions that take place in
the real world and it can be carried out based on
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publicly available financial information. What is
more, this method complies with International
Valuation Standards Committee (IVSC)
requirements concerning the specification of the
market value of brands [8].
The estimation of a brand’s value using the Relief
from Royalty method is based on the notional
royalty rate which an enterprise would have to pay
in respect of acquiring the right to utilize a given
brand. A market example of this type of right is a
franchising contract. The royalty rate used most
often is a percentage calculated on the basis of
revenues earned with regard to possession of the
rights to use a given brand, specified by both parties
within a license contact. The exact royalty rate is
variable and depends on many factors such as the
level of profitability of the products sold under a
given brand, the level of capital expenditure
incurred for the purposes of its creation and
development, a given brand’s life cycle phase, its
character and the market in which it functions. The
royalty rate also varies depending on the industry
sector in which a given entity conducts its activity.
The royalty rate used most often for the purposes of
assessing a given brand is based on previously
disclosed transaction information.
According to this method, the value of a brand is
determined according to its capacity to generate
future positive cash flows. This notional future
income stream is itself based on the hypothetical
royalties stemming from the right to utilize the
brand, after calculation of tax and taking into
account the brand’s residual value. The method is
based on calculating cash flows in subsequent
periods and then using a specified discount rate to
obtain a net present value (NPV) figure [33].
The starting point for the specification of free cash
flows (“CF”) is normally the enterprise’s revenue
stream generated as a result of owning the brand in
question. With regard to the valuation of a bank’s
activities, revenues are defined as interest revenue
and commission revenue.
Annual revenue derived from the charging of the
“royalty” is calculated as a percentage of sales
value (the rate of the royalty expressed in percent).
These revenue values are subject to taxation and the
result is the net royalty revenue - the cash flow
generated as a result of using a given brand.
This method combining both income and market
approaches has been utilized to conduct an analysis
of the BGK Brand.
Formula for calculating cash flows:
( ) (1)
where:
S - Net revenues of the enterprise resulting from sales of the “brand” products
RR - rate of royalties expressed as a percentage
TR - Income tax rate
The value of the brand is the sum of the free cash
flows generated in the form of a net royalty income.
Taking into account the time value of money, the
free cash flows generated are discounted using a
discount rate for a specified moment in time (date
of valuation).
Formula for calculating the value of the brand:
∑
( )
( ) (2)
where:
FCFt - free cash flow for the company on account of possessing a given brand
kc- equity cost taking into account the brand risk
RVn - residual value of cash flows
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The author uses equity capital cost as the discount
rate for valuation of the brand. Equity capital cost is
most often derived using the Capital Asset Pricing
Model (CAPM). According to the CAPM model,
the cost of equity capital is determined using the
following formula.
(3)
The rate of return expected by the investors is the
function of the rate of return on risk-free securities
(risk-free securities are government bonds of the
country in which a given entity conducts its
activity) and the risk premium appropriate for a
given enterprise. The risk premium reflects future
value and not historical value, as the cost of capital
should reflect the rate of return anticipated by
investors in the projection period.
When appraising intangible assets the cost of equity
capital is increased by an additional risk premium
related to the specific characteristics of these assets.
As a general rule, intangible assets and their related
cash flows carry a higher level of risk than
enterprise or tangible assets [28].
One element of the cost of equity capital calculation
is the beta coefficient. The beta coefficient reflects
the variability of prices of shares of a given
enterprise compared to the variability of the entire
share index. The greater the variability of the
enterprise share price in relation to the market
index, the higher the systematic risk and thus the
higher the value of the beta coefficient. The
following formula is used to calculate the beta
coefficient:
( )
∑ ( ) (
)
∑ ( )
(4)
where:
βEa - beta coefficient of the model company
cov (rit’ rmt) - covariation of the rate of return of the model company’s shares with the market
var (rmt) - variation of the rate of return of the market
rit - rate of return on the shares of the model company in period t
rmt - market rate of return in period t - period in which the model’s parameters are specified
rm (with upper dash) - average rate of return on the shares of the model company in period t
Residual or Terminal Value can be used to assess
the value of the brand as well as the enterprise. If a
brand is assessed as having high potential (i.e.,
large brand capital) that will extend into the
foreseeable future, it is legitimate to assume that the
brand in question has the potential to generate
benefits for its owner beyond the forecast period. A
residual value is thus calculated to reflect the value
of the brand’s benefits after the forecast period. A
detailed cash flow forecast is usually prepared for a
period of five to ten years. The forecast period
should be sufficiently long so as to enable a level of
stability in the predicted cash flows. Cash flows
generated by an enterprise outside of the detailed
forecast period are calculated using a formula for
residual value [17].
Formula for calculating the residual value of the
brand:
( ) (5)
where:
gn - stable growth rate, constant after the forecast period
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Methodological aspects of value estimation
The most important elements of the BGK brand are
[27]:
1. Recognizability.
2. Identity.
3. Assignment of generated benefits.
4. Regulated issues of ownership rights.
5. Legal protection.
Ad 1.
Bank Gospodarstwa Krajowego, as the only state-
owned bank in Poland, is a well-known institution.
By undertaking tasks ordered by the state, including
those aimed at supporting the country’s economic
development, it is a mainstay of the government’s
economic policy. On account of this the Bank
occupies a position of strength in Poland’s societal
consciousness and its brand is perceived as
representative of a public institution in support of
the economy rather than as a trademark used to
conduct profit-generating activity. With regard to
the nature of the activity it conducts the BGK is
therefore perceived to be an institution in which the
public can trust.
Ad 2.
The Bank’s identity is well established in the
consciousness of Poles, stemming from, amongst
other things, its 90-year history and traditions.
Ad 3.
The author adopts the assumption that the Bank
realizes benefits from its utilization of the BGK
trademark. It is also necessary to examine the extent
to which cash flows stem from the specific
legislative environment accorded to the Bank on the
one hand, and the extent to which cash flows stem
from the utilization of the BGK brand on the other.
It is possible that the Bank’s cash flows would not
be significantly different should the Bank
discontinue its utilization of the current brand. The
realization of tasks entrusted to it by the state are in
fact the result of legal stipulations. In this chapter
the assumption was taken that the efficiency with
which the bank realizes these tasks is, at least to a
certain extent, a function of the strength of the
brand.1 On the basis of these assumptions it is
1In order to affirm the possibility of assignment of
material benefits to the brand with a greater degree of
probability it seems necessary to conduct research into
the strength of the brand among consumers. Such
research would provide verification of the brand’s
possible to identify the benefits generated in
relation to the brand. However, a conclusive
quantification of these benefits is somewhat
limited. This concerns in particular the brand’s
contribution to profits and the association of the
cash flows currently achieved by the Bank with the
BGK brand [30].
Ad 4.
The issue of ownership rights of the BGK brand,
understood as a trademark, is fully regulated. The
owner of the BGK brand is the Bank Gospodarstwa
Krajowego. There are no known cases of claims
related to this trademark.
Ad 5.
The BGK trademark is registered in the Patent
Office of the Republic of Poland and no cases of
infringements of its ownership rights have been
identified. The authorized entity is the Bank
Gospodarstwa Krajowego, and the exclusivity right
granted constitutes adequate legal security for the
BGK.
In the author’s opinion, in light of the
aforementioned criteria, the BGK brand fulfills all
necessary requirements for it to be the subject of
assessment. The only area of doubt is the issue of a
conclusive assignment of benefits pertaining to use
of the brand. Doubts related to estimating the
economic benefits that may be assigned to the
brand have been indicated within the scope of this
publication. With regard to this, both the valuation
procedure and its results should be interpreted with
a degree of caution, taking into account all of the
stipulated reservations and assumptions.
The activity of the BGK is regulated by the Bank
Gospodarstwa Krajowego Act of 14 March 2003,
the Order of the Minister of Treasury of 11 May
2010 on granting Statute to the Bank Gospodarstwa
Krajowego, as well as the Banking Law Act of 29
August 1997. The BGK, similarly to other state-
owned banks, is subject to the supervision of the
Financial Supervision Authority and is obliged to
adhere to the capital and liquidity requirements
specified by regulations of the Banking Law Act of
29 August 1997. From a capital and liquidity
perspective the BGK holds indirect statutory
guarantees of the Treasury.
The BGK is the main partner of the state in
handling governmental social and economic
programs realized to assist entrepreneurs and
commercial potential.
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infrastructural as well as residential investments.
The BGK’s activities also include public finance
sector entities (e.g., handling bank accounts and
consolidation of public finance).
In this article the author makes an attempt to assess
the market value of the BGK brand (“Brand”). For
the purposes of the following analysis market value
should be understood as the price which would be
acquired for the sale of an item or paid in order to
transfer an obligation between market members on
the day of valuation. This definition assumes that a
hypothetical transaction would take place between
entities interested in concluding a transaction, that
these entities possess similar knowledge about the
object of the transaction, and that they each act in
their own interests [21]. The analysis of the value of
the Brand will be conducted in accordance with the
state as of 31 December 2012.
For the purposes of valuation, an intangible asset,
including the right to a typographic symbol, is
understood as an “asset without physical substance,
utilized in production and/or distribution (of goods
and services) and/or leased to other entities, or
controlled by a unit as a result of past events, with
regard to which future economic benefits may be
expected” [6].
Table 2. Characteristics of the valuated trademark
Source: [9] [24].
The author takes the assumption that the BGK
accrues benefits resulting from use of its trademark,
and the efficiency with which it realizes tasks
entrusted to it by the state is at least to some extent
the function of the strength of its brand.2
In the case of the BGK, the identification of similar
brands (at least on the Polish market), which could
be the subject of licensing, seems impossible.
Severe restriction also applies to the specification of
2With regard to the above, both the valuation procedure
and its results should be interpreted with a certain degree
of caution, taking into account all the stipulated
assumptions. In order to affirm the possibility of
assignment of material benefits to the BGK brand with
greater certainty it would be necessary to conduct
research into the strength of the brand among customers.
a level of royalties associated with banking activity.
As a consequence, in order to apply the method in
question to the case of the BGK it is necessary to
adopt specific assumptions [24].
For the purposes of conducting analysis of the value
of the BGK, financial forecasts of the Bank for the
years 2013-2017 have been prepared on the basis of
historical statements of the Bank for 2010-2012.
Amount of the Royalty Rate
The basis of the assessment is the net price of goods
or services. Statistics prepared on the basis of
information from the database RoyaltySource™
indicate that the average royalty rate amounted to
6.4% of revenues related to the sales of
trademarked products, while the median of these
rates amounted to 4.8% [32]. According to other
Name BGK
Type of mark Typographic
Protection right TOW: 189373
Application TOW: 294922
Date of filing 13-05-2005
Decision on registration 04-05-2007
Right-holder Bank Gospodarstwa Krajowego
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26
researches the royalty rates fluctuate between 0.5%-
5.0% of net sales revenues [4] [35].
In accordance with the results of research described
in the publication “Factors Affecting Royalty
Rates,” the amount of royalties for a trademark in
87% of the enterprises examined remained between
0% and 10% [19].
As can be observed in Table 3, percentage rates of
royalties in individual industries show considerable
variation. Differences may also occur in the amount
of rates within the same industry, depending on the
type of product in question.
Table 3. Royalty rates in individual branches of the economy
Source: [19] [27].
Musa Pinar, Tulay Girard, and Zeliha Eser
conducted research on the Turkish market
concerning the customer-based brand equity of
banks (“CBBE”) [22]. In the scope of their research
they divided banks conducting activity in Turkey
into private, domestic, and foreign banks. The
research proved that CBBE is significantly higher
for private banks. On the other hand, the difference
between domestic and foreign banks is not
substantial.
What is more, research indicates that the value of a
brand also depends to a large extent on the industry
in which it operates. The lowest values are achieved
by the brands of governmental and social welfare
institutions, while the highest values are achieved
by brands in the service industry.
Industry Royalty Rate Category
0-2% 2-5% 5-10% 10-15% 15-20% 20-25% >25%
Aerospace - - 40% 55% 5% - -
Automotive 35% 45% 20% - - - -
Chemical 18% 57% 24% 1% - - -
Computer 43% 58% - - - - -
Electronics - 50% 45% 5% - - -
Energy - 50% 15% 10% - 25% -
Food/Consumer 13% 63% 25% - - - -
General Manufacturing 21% 52% 20% 3% 1% 1% 3%
Government/University 8% 39% 36% 16% 0% 1% -
Health care Equipment 10% 10% 80% - - - -
Pharmaceuticals 1% 21% 67% 9% 1% 1% 0%
Telecommunications - - - 100% - - -
Other 11& 41% 29% 16% 1% 1% 1%
Number of Deals by
Royalty Rates 87% 13%
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27
Figure 2: Relationship between the value of the brand and the industry
Source: [25].
It would be reasonable to assume that the value of
the BGK brand, belonging as it does to an entity
which combines characteristics of a state-owned
bank and an institution realizing governmental
programs subject to the Minister of Finance, should
be lower than the value of brands of typical
commercial private banks. Therefore, an
assumption that the hypothetical royalty rate for the
BGK brand will be around the lower limit of the
observed market ranges might also be deemed
reasonable. In order to perform analysis of the value
of the BGK brand, calculations have been made for
the value of the royalty rate being within the range
of 0.2% and 7.7%.3 In these considerations the
author assumes that this rate amounts to 0.6%.
3However, in the case of the BGK there is no basis for a
conclusive specification of the amount of royalty rates.
The value of the royalties which form the basis for
the valuation of the BGK brand is estimated by the
author in relation to the revenues resulting from
interest and commission acquired by BGK. The
present value of these royalties is estimated by the
author using a discount rate calculated for cash
flows related to the BGK brand. The discount rate
has been calculated on the basis of the CAPM
model and increased by a premium of two
percentage points on account of the additional risk
related to intangible assets.
Go
ver
nm
ent
and
so
cial
inst
itu
tio
ns
Min
eab
le g
oo
ds
Inte
rmed
iate
go
od
s
Par
ts
Ind
ust
rial
ser
vic
es
Wh
ole
sale
Dis
trib
uti
on
Ret
ail
Co
nsu
mer
go
od
s
Ser
vic
es
val
ue
classification
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28
Table 4. Calculation of the discount rate
Source: [own study]
The residual value has been calculated by the
author with the assumption of an increase in cash
flows after the forecast period in the order of 2.0%.
This reflects the value of the inflation target of the
NBP decreased by a 0.5 percentage point. Cash
flow from the last forecast period (2017) has been
adopted for the purposes of estimating the residual
value.
3. BRAND OF THE BANK
GOSPODARSTWA KRAJOWEGO IN
THE CONTEXT OF ANALYZING ITS
VALUE
The author has prepared two versions of the
analysis of the value of the BGK brand using the
Relief from Royalty method.
Table 5. Analysis of the value of the BGK brand using the Relief from Royalty method, estimated in
relation to revenues (PLN millions)
Calculation of the discount rate for cash flows related to the BGK brand
Risk-free rate 3.74% profitability of treasury bonds as of 31.12.2012
Market risk premium 5.50% in accordance with the recommendation of Duff and
Phelps as of 31.12.2012
Beta 0.58 http://www.damodaran.com, beta for banks
Equity capital cost 6.95% result of the calculation
Premium for risk related to
intangible assets 2.00% assumption
Discount rate - Brand 8.95% result of the calculation
Description 2013 2014 2015 2016 2017
Revenues assigned to the brand 2,575.5 3,406.1 4,402.2 4,901.7 4,904.5
Royalty rate 0.60% 0.60% 0.60% 0.60% 0.60%
Gross royalties 15.5 20.4 26.4 29.4 29.4
Tax rate 19.00% 19.00% 19.00% 19.00% 19.00%
Net royalties 12.5 16.6 21.4 23.8 23.8
Discount rate 8.95% 8.95% 8.95% 8.95% 8.95%
Discount factor 0.92 0.84 0.77 0.71 0.65
Discounted royalties 11.5 13.9 16.5 16.9 15.5
Accumulated discounted
royalties 11.5 25.4 41.9 58.9 74.4
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29
Residual value
Net royalty in 2017 23.8
Growth rate after the forecast period 2.00%
Residual value 350.0
Discounting factor 0.65
Discounted residual value 228.0
Brand value 302.4
Source: [own study]
Table 6. Analysis of the sensitivity of the value of the BGK brand using the Relief from Royalty method
(PLN millions)
Source: [own study]
An alternative approach to estimating the
hypothetical royalty rate is the 25% rule [7] [10]
[12].
With regard to the difficulty in specifying an
appropriate (market) level of royalty rates, the
author has also conducted analysis of the value of
the BGK brand using a method based on the
amount of the royalty rate calculated on the basis of
net profit (the so-called 25% rule). In this method it
is assumed that royalties constitute 25% of the net
profit, which corresponds to the average amount
occurring in economic practice [11].
Table 7. Estimation of the royalty rate with use of the 25% rule
Source: [own study]
Royalty rate
Dis
cou
nt
rate
7.7% 4.6% 3.1% 1.5% 1.4% 0.8% 0.6% 0.3% 0.2%
7.95% 4,590.3 2,754.2 1,836.1 918.1 829.6 459.0 355.5 183.6 118.5
8.45% 4,220.8 2,532.5 1,688.3 844.2 762.8 422.1 326.9 168.8 109.0
8.95% 3,904.6 2,342.8 1,561.9 780.9 705.7 390.5 302.4 156.2 100.8
9.45% 3,631.1 2,178.7 1,452.4 726.2 656.2 363.1 281.2 145.2 93.7
9.95% 3,392.1 2,035.3 1,356.8 678.4 613.1 339.2 262.7 135.7 87.6
Description 2010 2011 2012
Revenues assigned to the brand (PLN
millions) 1,547.0 2,220.0 2,135.4
Revenue due to interest (PLN millions) 1,495.3 2,157.0 2,063.7
Revenue due to commissions (PLN
millions) 5.7 63.0 71.7
Net profit (PLN millions) 414.5 450.6 479.2
Net profitability (Net profit / revenues
assigned to the brand) 26.79% 20.30% 22.44%
Average profitability 2010-2012 23.18%
25% rule - royalty 0.25 net profitability 5.79%
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30
Table 8. Valuation of the BGK brand using the 25% rule in the variant assuming (PLN millions)
Residual value
Net royalty in 2017 377.2
Growth rate after the forecast period 2.00%
Residual value 5,539.0
Discounting factor 0.65
Discounted residual value 3,608.7
Brand value 4,625.5
Source: [own study]
With regard to the specific activity of the BGK,
including in particular its relatively high level of
profitability which may reflect the Bank’s specific
legal conditions (i.e., a monopoly in the realization
of part of those tasks ordered by the state), royalties
estimated on the basis of the 25% rule may only
partially reflect the actual value of the Brand. It is
therefore necessary to repeat the reservation that in
the case of the BGK there is no basis for a
conclusive specification of the amount of royalty
rates, and the assumption of licensing itself may
raise doubts.
Taking into account the specificity of its
functioning it seems legitimate to analyze
modifications of the 25% rule. In these
modifications the author adopted an assumption
that the Brand does not generate 25% of the net
profit (on the basis of the average profitability
2010-2012 from Table 9). Appropriate royalty rates
for levels other than the 25% rule are presented
below.
Table 9. Examples of modifications of the 25% rule and implied royalty rates
Source: [own study]
Table 10. Modifications of the 25% rule and implied royalty rates (PLN millions)
Description 2013 2014 2015 2016 2017
Net profit 794.9 907.0 1,284.5 1,860.1 1,862.9
Revenues assigned to the brand 2,575.5 3,406.1 4,402.2 4,901.7 4,904.5
Royalty rate 25.00% 25.00% 25.00% 25.00% 25.00%
Gross royalties 198.7 226.8 321.1 465.0 465.7
Tax rate 19.00% 19.00% 19.00% 19.00% 19.00%
Net royalties 161.0 183.7 260.1 376.7 377.2
Brand equity cost 8.95% 8.95% 8.95% 8.95% 8.95%
Discount factors 0.92 0.84 0.77 0.71 0.65
Discounted royalties 147.7 154.7 201.2 267.4 245.8
Accumulated discounted royalties 147.7 302.5 503.6 771.0 1,016.8
Modifications of the 25% rule 25.00% 15.00% 10.00% 5.00% 2.50%
Average profitability 2010-2012 23.18% 23.18% 23.18% 23.18% 23.18%
Royalty rate after taxation 5.79% 3.48% 2.32% 1.16% 0.58%
Royalty rate before taxation 7.15% 4.29% 2.86% 1.43% 0.72%
Description 2013 2014 2015 2016 2017
Net profit 794.9 907.0 1,284.5 1,860.1 1,862.9
Revenues assigned to 2,575.5 3,406.1 4,402.0 4,901.7 4,904.5
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31
Residual value
Net royalty in 2017 107.9
Growth rate after the forecast period 2.00%
Residual value 1,584.9
Discounting factor 0.65
Discounted residual value 1,032.6
Brand value 1,323.5
Source: [own study]
An analysis of the BGK brand using the Relief
from Royalty method is presented below with
royalty rates specified in the above modifications of
the 25% rule.
Table 11. Analysis of the sensitivity of the value of the BGK brand with use of the modifications of the
25% rule and implied royalty rates (PLN millions)
Source: [own study]
With regard to the BGK’s specific activity, in the
author’s opinion, royalties estimated on the basis of
the 25% rule may only partially reflect the actual
value of the BGK brand. In analysis of an
alternative approach to estimating the amount of the
hypothetical royalty, the effect is the generation of a
value range between PLN 52.9 million - with the
assumption that 0.29% of profit generated by the
Bank is created owing to the Brand - and PLN
4,625.5 million, with the assumption of 25%.
Taking into account the conditions described and
the assumptions adopted, the value of the BGK
brand calculated using the Relief from Royalty
method (which is more appropriate in the author’s
opinion), estimated in relation to revenues as of 31
December 2012 was between was between 0.2%
(amounting to PLN 100.8 million) and 0.8%
(amounting to PLN 390.5 million).
In the author’s subjective opinion the most
appropriate course of action is to adopt an
the brand
Royalty rate 7.15% 7.15% 7.15% 7.15% 7.15%
Gross royalties 56.9 64.9 91.9 133.1 133.3
Tax rate 19.00% 19.00% 19.00% 19.00% 19.00%
Net royalties 46.1 52.6 74.4 107.8 107.9
Brand equity cost 8.95% 8.95% 8.95% 8.95% 8.95%
Discount
factors 0.92 0.84 0.77 0.71 0.65
Discounted royalties 42.3 44.3 57.6 76.5 70.3
Accumulated
discounted royalties 42.3 86.6 144.1 220.6 290.9
Royalty rate
Dis
cou
nt
rate
25.00% 15.00% 10.00% 7.15% 4.29% 2.86% 1.43% 0.72% 0.29%
7.95% 5,462.8 3,277.7 2,184.1 1,563.1 937.8 625.2 312.6 156.3 62.5
8.45% 5,011.5 3,006.9 2,004.6 1,433.9 860.4 573.6 286.8 143.4 57.4
8.95% 4,625.5 2,775.3 1,850.2 1,323.5 794.1 529.4 264.7 132.4 52.9
9.45% 4,291.8 2,575.1 1,716.7 1,228.0 736.8 491.2 245.6 122.8 49.1
9.95% 4,000.4 2,400.2 1,600.2 1,114.6 686.8 457.9 228.9 114.5 45.8
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assumption based on the level of 0.6%, this figure
being within the limits of PLN 302.4 million.
The span of the estimated ranges is relatively large,
with the minimum value being two times lower
than the highest value. With regard to the
specificity of the Bank’s activity and the lack of
market information pertaining to royalties for
similar institutions, the large span of the value
range has been retained.
Conclusion
In the author’s assessment, the research perspective,
in addition to that of economic practice, requires
that attention be paid to the issue of valuating the
brands of public financial institutions. While the
issue of valuating bank brands has been extensively
discussed in the literature, valuating the brands of
public financial institutions is much more
challenging. Difficulties in this matter may arise
when determining the income generated by the
institution’s brand, especially if that institution
holds the exclusive right to provide certain services.
The author attempted to estimate the value of the
BGK brand as of 31 December 2012 (the date for
which audited data were available at the time of
writing this publication) based on the Relief from
Royalty method and making supplementary use of
the so-called “25% rule”.
While preparing the BGK brand evaluation, the
author made certain subjective assumptions
concerning the royalty rates and impact of the
Brand on the amount of income generated. The
capital cost was likewise estimated based on
simplified assumptions (for example, as to the
premium). Apart from those reservations noted
above, it would be reasonable in the view of the
author to at least open the discussion on valuating
public financial institution brands, an issue that the
author intends to research further.
The brand may be included in an estimation of the
Bank value using an adjusted net assets method that
also includes an adjustment for intangible assets
(not shown in the balance sheet). The proper
estimation of the brand would therefore have a
practical use, as it provides a more reliable
estimation of the value of the entire Bank.
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