global banking brands 2006

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November 2006

Global 100 Banking Brands IndexAn annual review of the top banking brands in the world


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Contents

Foreword 3About Brand Finance 4

Executive Summary 5

1. Introduction: the valuation of intangible assets 62. The Global 100 Banking Brand Index (1-50) 73. Commentary on the top 10 banking brands 94. Brand Architecture 125. What role does brand play in consumer and business banking? 156. Impact of national origin on bank brand perceptions 197. Accounting and tax implications of banks brand values 20

(i) The Impact of IFRS3 on banking businesses 20(ii) Key requirements of IFRS 3 with implications for brand and other intangible assetvaluation 21(iii) Tax planning: IP-holding companies 23

Appendix 24

(i) The growth of intangible assets 24(ii) Explanation of Brand Valuation 26(iii) Notes to the Global 100 Index 28

Global 100 Most Valuable Banking Brands - 2006 2


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Foreword

This report is the first publicly available table

analysing the financial value of the worldstop one hundred banking brands. It will bepublished annually and incorporates datafrom the worlds twenty-four largest stockmarkets.

Brand Finances league tables are unique. Theytake a sector approach, enabling brands to bedirectly compared against their peers rather thanagainst brands in unrelated sectors. This allows

more accurate and revealing comparisons to bedrawn and, due to the transparency of themethodology, highlights how valuation-basedstrategies can bridge the gap between marketingand finance.

The report serves to provide an opinion as to point-in-time valuations of the biggest banking brands,and also illustrates how the methodology andfindings can be used to determine the impact ofbrand equity on business performance.

David HaighChief ExecutiveBrand Finance Plc



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About Brand Finance

Brand Finance is an independent consultancy focused on the management andvaluation of brands and of branded businesses. Since 1996, Brand Finance has

performed hundreds of brand valuations with an aggregate value of over $150billion. The valuations have been in support of a variety of business needsincluding:

o Technical valuations for accounting, tax and legal purposeso Valuations in support of commercial transactions (acquisitions, divestitures,

licensing and joint ventures) involving different forms of intellectual propertyo Valuations as part of a wider mandate to deliver value-based marketing strategy

and tracking, thereby bridging the gap between marketing and finance.

Brand Finance is headquartered in London and has representative offices inToronto, New York, So Paolo, Madrid, Amsterdam, Paris, Zagreb, Dubai,Bangalore, Colombo, Singapore, Hong Kong and Sydney.

www.brandfinance.com



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Executive Summary

Only four bank brands: Citi (Citigroup), Bank of America, HSBC and AmericanExpress receive triple A (AAA- to AAA) brand ratings.

Credit card oriented bank brands display the highest proportion of brand valueto market capitalisation. This is because emotional and image related factorsare significant drivers of demand in this sector.

American Express and Capital One are ranked 4th ($18,109m) and 25th($5,701m) respectively, despite their relatively small market caps in relation tothe banks included in the Index.

Consumer-focused banks generally display a higher brand value to market capthan corporate-focused banks. This is because consumer banking involvesmore emotional and image related factors than business and wholesalebanking.

In the last 10 years a small number of banks have created strong globalbrands. Citi (1st: $35,148m) and HSBC (2nd: $33,495m) are good examples ofhow fragmented and undifferentiated banks have become well-liked andvaluable international bank brands.

Investment and wholesale banks display surprisingly large brand values. Thisis because banks of this type do not need large retail networks, infrastructureand similar tangible assets. Much of their value is intangible and the two mainassets are key personnel know-how and the corporate brand itself.

The top 10 most valuable bank brands are all headquartered in Europe or theUS. No emerging market banks make it into the top ten.

11 of the top 20 most valuable bank brands are headquartered in the US.

Banks that are domiciled in large and rapidly emerging markets, such as Braziland India, benefit from increasing business banking activity, and the increasingdemand for consumer banking services from emerging middle-classes in thosecountries. For example, the State Bank of India ($3,084m) and Banco do Brasil($2,365m) are ranked 61st and 52nd respectively.

There are no Chinese bank brands in the Global 100 Banking Brands Index(Global Banking 100). However, the Chinese market is rapidly growing and wetherefore expect to see Chinese bank brands entering the top 100 in the nearfuture.


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1. Introduction: the valuation of intangible assets

The valuation of intangible assets isbecoming an increasingly important

and recognised approach for guidingoverall business strategy across mostindustries, including banking.

This is attributable to both the introduction ofInternational Financial Reporting Standard(IFRS) 3 Business Combinations and itslocal equivalents around the world, and thechanging attitudes of Executive Boards.

It is now acknowledged that these assets are

directly responsible for driving customeracquisition, reducing customer churn ratesand staff turnover, thereby increasingprofitability and helping to influence analystsand investors perceptions.

For the first time, The Global Banking 100Index illustrates the most valuable bankingbrands using a transparent and robustapproach that has been reviewed anddeemed fit for use in tax and law courtsaround the world.

This methodology calculates brand values byreferencing documented third partytransactions and is performed on the basis ofpublicly available financial information. Thismethod of valuing the top Global Banking100 brands also ensures our results aredirectly comparable year on year.

This report is based on analysis of theworlds 500 largest banks by marketcapitalisation. The final table shows the 100

most valuable banking brands, ranked byfinancial value in US dollars1.

The other columns show:

o Country of domicile: the countrywhere the bank is registered (usingthe regional short form e.g. US, GB,ES)

o Market Capitalisation (US$)o Brand value/ Market capitalisationo Brand rating (based on BrandBeta

analysis)o Share Price/ Net Asset Value

This report also looks at the impact ofIFRS3 and explores how much the

subsequent recommended guidance onthe valuation of intangibles will affectM&A planning and post-mergerintegration.

As a result of the increased importancein marketing intangibles, many sectorsare experiencing an increase in theimplementation of Brand Scorecards detailed tracking models that linkmarketing expenditure and brand

building to financial performance - andthe establishment of Intellectual PropertyCompanies (IPCos).

IPCos enable banks to transfer their IPmanagement team to one specificlocation, overseeing a global operationfrom one consistent viewpoint whilstcollaborating and liaising with theiroperational colleagues (see page 23)which can also be used to inform taxplanning activity.

1All financial figures are taken from Bloomberg, annual reports or respective company websites



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2. The Global 100 Banking Brand Index (1-50)



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The Global 100 Banking Brand Index (51-100)



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3. Commentary on the top 10 banking brands

1. Citi (Citibank)Brand value: $35,148m Brand Rating: AAA- Country: USA

The most valuable banking brand in the world also achieves thesecond highest Brand Rating of AAA-.

Despite owning other powerful brands in financial services(notably Travellers and Smith Barney), the decision to adoptconsistent branding across the majority of the 97 countries ofoperation means the Citi-stem and red umbrella logo, coupledwith the banks strong product offerings, excellent distributionand economies of scale, tops the Global 100 Banking BrandIndex.

2. HSBCBrand value: $33,495m Brand Rating: AAA Country: Great Britain

The banks Managing for Growth strategic plan has reapedhuge rewards in growing the earnings, shareholder returns andthe overall global footprint of the business. The consistency ofbranding, logo and distribution amongst key developingmarkets has helped the bank to drive an 18.4% revenue growthrate over the last five years. The managements attention to thebrand is epitomised by the creation and subsequentsponsorship of a new advertising channel: the airbridges - thegateways linking aeroplanes and passenger terminals - atmajor international airports.

3. Bank of AmericaBrand value: $ 31,495m Brand Rating: AAA- Country: USA

The 2004 acquisition of FleetBoston by Bank of America (BofA)highlighted the managements intention to focus on their corebrand whilst ensuring that the newly acquired customers werealso retained. Customer churn immediately post-acquisition,coupled with corporate culture clashes, are two of the majorissues that destabilise potentially successful acquisitions.

BofAs intention to develop its investment banking arm, rather

than acquiring an established player, has so far led tocomparatively disappointing results despite extensive outlayson recruiting experienced hires. The bank retains its healthyposition in the US but international markets are morechallenging.



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4. American ExpressBrand value: $18,109m Brand Rating: AAA- Country: USA

Established 156 years ago, now operating in over 130countries, with a brand value of $18,109 and the highestproportion of brand value to market cap within the Global 100,American Express (AmEx) is the clear brand leader amongstpublicly-listed credit card companies.

AmExs strong distribution and international brand appeal,particularly amongst high-spending consumers and businessclients, is bolstered by the companys ongoing commitment tobrand building via sponsorship, advertising, co-brandedpromotions and reward schemes.

5. Santander (Grupo Santander)Brand value: $17,063m Brand Rating: AA- Country: Spain

On acquiring Abbey, the UK high street bank, in November2004, Santander retained the original name but replaced theexisting logo with the Santander flame. As Abbeys brandvalue is listed separately within the Global 100 (no.66),Santander is placed fifth in the table, but receives an AA- brandrating.

The banks strong network in Latin America, rapid revenue and

earnings growth outside of Europe and successful acquisitionshave all contributed to the brands high value.

Speculation that Santander will make another acquisition withinthe UK retail market continues (Alliance & Leicester andClydesdale and Yorkshire Bank have both been suggested),but it is likely that any UK takeover target will initially retain itsoriginal branding, meaning Santanders financial brand valuewill not be directly affected.

6. UBSBrand value: $15,137m Brand Rating: AA- Country: Switzerland

The UBS brand is shown to be the most valuable of the non-retail focused banks, with a value of $15,137m and receiving anAA- brand rating.

The banks one firm approach taken in June 2003 has meantthe removal of the Warburg and PaineWebber brands, whichpotentially risked alienating both internal stakeholders andlongstanding clients, has begun to translate to a more coherentand integrated branded business model.



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7. Wells FargoBrand value: $14,277m Brand Rating: AA Country: USA

The fourth largest diversified financial services company in theUS by market cap, Wells Fargo has leading positions within theUS community and agricultural markets, meaning it was ranked29

thin Fortunes 2005 Most Profitable Companies report.

Its powerful brand positioning and stagecoach imagerydeliberately evokes association with the evolution of the OldWest (of America), the Gold Rush. Given its intrinsic link with adistinctive period in American history, convincing consumers inoverseas markets of its relevance to local financial productsmay be more complex

8. BNP ParibasBrand value: $12,278m Brand Rating: A Country: France

The largest Eurozone bank (by market capitalisation) has asignificant presence in most major markets including Europe,the Middle East, North America and Asia. The current size andprofile of the bank is the result of several mergers, most notablyBanque Nationale de Paris (BNP) and Paribas. The banksmanagement took the decision to change to a single brandbeginning in November 2004.

9. BarclaysBrand value: $12,186m Brand Rating: A Country: Great Britain

Barclays strengths lie in its heritage, balance sheet and overallfinancial muscle its wholesale banking arm is increasinglytaking business from the more traditional investment banks.The decision to re-brand Woolwich branches as Barclays willhelp increase the financial value of the Barclays brand but therestructuring will be a delicate process given the negative publicreaction following 171 simultaneous branch closures in 2000.

10. Chase (JPMorgan Chase)Brand value: $12,083m Brand Rating: AA- Country: USA

Chase has the fourth largest retail network in the US and is thesecond largest issuer of credit cards. The 126-year-old Chasebrand has a value of $12,083m. Chases modest 12% shareprice increase since the acquisition of Bank One (July 04) ismatched by the banks low exposure to business in emergingmarkets. However, strong domestic performance and a brandrating of AA- means Chase Manhattan still emerges in tenthplace: ten places higher than its investment banking business.



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4. Brand Architecture

General principles

Brand architecture is the hierarchywithin which corporate and subbrands in a companys portfolio arerelated to each other, differentiatedfrom each other and supported byeach other. The characteristics sharedby strong brands today are as follows.Clarity: The brand is a single entity with acommon vision, mission and set of values,which are distinctive and relevant, and which

are recognized and understood by staff, thetrade, the financial community, the mediaand the consumer.

Consistency: The brand adopts, embedsand manifests its values wherever it appearsand in whatever form (from the visual identityand advertising to the way the phone isanswered).

Leadership: To achieve a truly global

leadership status, the brand must lead andexceed expectations and take people intonew territories and new areas of product andservice.

Types of brand architecture

Monolithic: There is only one name andone visual identity e.g., HSBC or Barclays.

Endorsed: Several different brands orcompanies are endorsed with a group nameand visual identity.

This can be implemented in the followingways:

- Heavy endorsement e.g.,Santander (Santander Serfin,Banco Santander Puerto Ricoand Santander Banespa althoughthere are exceptions like Abbeyand Banesto) or Citigroup,(Citibank, CitiFinancial andCitiMortgage etc)

- Light endorsement e.g. ABNAmro (Banco Real in Brazil and

LaSalle Bank in the US sharevisual identity elements with ABNAmro in Holland but retain theirlocal names) or JPMorgan(JPMorgan and Chase whichhave similar visual identities)

Pluralistic: Several different brands orcompanies live side by side, unrelated toeither each other or to the group nameand visual identity e.g., HBOS (Bank ofScotland, Halifax) or RBOS (Royal Bank

of Scotland, NatWest, Citizens)

The examples above show that thedifferent types of architecture are notmutually exclusive. In manyorganisations they co-exist in a variety ofcombinations, and some organisationsmove from one type to another.

Figure 3 (below) provides examples ofthese differing brand architectures.



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Figure 3: Examples of different types of brand architecture

MONOLITHIC ENDORSED PLURALISTIC

Example

Pros:

Clear and consistent

Strong and

f scale

Cohesive

Mutually supportive

Simple consumer proposition

Clear individual identitymemorable

Equity transfer

Economies o

Flexible

Best of both worlds

Defined areas of competence

Creative flexibility

Cons:epetitive

Unsubtle

gment

Potential confusion

Requires strong parent

tion

Vulnerable to me-toos

Lacks family security

R

Inflexible

Hard to se

equity

Possible guilt byassocia

Duplicated cost

Limits brand extension

Fragmented cost

hich approach to branding has been more successful?

or mono-branding produces the greatest

e that an overlyagmented approach to branding creates

e that a diverse brand portfoliollows a bank the flexibility to target diverse

r groups.

approach isisplayed even by apparently determined

ma isareful economic analysis of which brand

W

Opinions differ as to whether multi-branding different consume

operational efficiency, economic return andshare price performance.

Some commentators argufrperceptions that a bank may lack clearstrategic or organisational focus, and may beunable to capture cost savings and internalsynergies.

Others arguamarket segments. An example of thisstrategy is HBOS which has built a highlysuccessful business based on a variety of its

own brands (plus own-label and affinitybranding activities) each brand appealing to

The pragmatic and flexibledmonolithic branding organisations. Forexample, while Barclays and HSBC havefocused on building master brands,Barclays sells Legal & Generals productsthrough its branch network and HSBC hasretained the First Direct brand (although itis endorsed with the HSBC brand).

The secret to this branding dilemcproduces the strongest customer reactionand the highest economic result for anorganisation. Drivers of demand analysis

and brand valuation are vital tools inmaking such decisions.



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igure 4 HSBC share price/ FT All Share (1992-1999)

he top five most valuable brands within thelobal 100 are all monolithic or endorsed.

umulatively, the brand portfolio values

1. Grupo Santander[Santander + Abbey]

lio = $18,766min the index

2.[JPMorgan + Chase]

lue = $18,466msition

. Royal Bank of Scotland Group

782m

The advocates of mono-branding point toHSBC as a compelling case study of thefavourable effect of a more monolithic

approach (see Figure 4 illustrating theimpact on share price performance overtime).

Monolithic branding strategy is said toleverage brand equity across differentproducts and geographies increasingcustomer contact with the brand. Such astrategy requires consistent delivery ofpromises across all contact points.

The period during which HSBC executedits transformation into a global brand (1992to 1999) coincided with a reappraisal of the

company by investors and a major re-rating of the shares.

With a multi-brand strategy there is agreater need to explain the businessrationale and impact to investors to avoidan impression of poor focus.

F

TG

If brand portfolios were to be addedcwould be as follows:

Total brand portfomoving them to fourth

JPMorgan Chase

Portfolio brand vaputting them in fifth po

3

[Royal Bank of Scotland + Natwest]Portfolio brand value = $10,

moving them to twelfth in the index



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5. What role does brand play in consumer and businessbanking?

The world economy has a significant

over-supply of products and servicesin all sectors. As a resultdifferentiation through strongbranding is becoming more and moreimportant. This is as true in financialservices as in consumer products.

Even non-traditional financial servicescompanies, like Virgin, have created an arrayof well-designed, differentiated, financialproducts. Both consumer and wholesalemarkets are saturated and with so many

alternatives, branding is becoming a decidingfactor.

As such, there is an increasing onus on eachbrands to communicate why it is uniquelyable to satisfy customer needs.

Banks need to provide a consistent brandexperience to prevent customers fromswitching to rival banks.

There are significant differences in prioritiesfor customers between the developed anddeveloping world. In the developing world,the emphasis is on trustworthiness and forfinancial strength and stability.

Decisions are often made on morepractical issues such as price andnetwork.

In the developed world, all banks have anassumed level of trustworthiness, financialstrength and stability. Differentiation mustderive from emotional and imageattributes. In reality banking services areoften inter-changeable so choices aremore frequently made on non-commercialgrounds.

Consumer banks have traditionallyinvested more in marketing activities thantheir wholesale counterparts. This ischanging as Executive Boards arerealising the value of brands in drivingbusiness. Consequently many banks aredeveloping Brand Scorecards to track andcorrelate the impact of marketingexpenditure with business performance.

However, many banks remain poor atanalysing the effectiveness of their

marketing investment across both theirproduct and service offering.

How do brands affect financial performance?

Linking brand and marketing metrics tofinancial performance is often a complexprocess.

However, using market research (targetingcustomer and key stakeholders) combinedwith competitor benchmarking as inputs, it ispossible to evaluate the effectiveness ofmarketing activities, and to establish thebrand contribution to each segment of abanking business.

The varying levels of brand involvement inthe purchasing decisions across a banksproduct and service portfolio are governed

by the Drivers of Demand the criticalfactors affecting purchasing decisions.

The exact nature of the drivers varies

according to the specifics of each particularmarket, although there are fundamentaldifferences between Consumer andBusiness banking.

Figure 3 and Figure 4 provide an overviewof the relationship between marketingactions and business performance, whichare linked by the resulting changes inperceived attributes and their impact oncustomer behaviour.



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Consumer Banking

In consumer banking functional drivers ofdemand, like the quality of product andservice, are the start point for customerchoice.

For most complex and high-value products,consumers prefer a face-to-face exchange, afact that is reflected by many leading banksreturning to their retail branch roots.

Increasing consumer access to the internet allowing potential customers to compareand review a wide range of financialproducts means that price and productfundamentals are scrutinised in more detail.But for the majority of consumers imageattributes often swing the final decision.

Figure 5 - Linking marketing actions to financial performance (Consumer)

ACTIONS

ProductPricingServiceTraining

Distribution

AdvertisingSponsorship

CRMPR

ATTRIBUTES

Value forMoney

Perceived

Quality

GoodService

Product

Satisfaction

Availability

BEHAVIOUR

Loyalty

Trial

Repeat

Frequency

Recommend

PERFORMANCE

Share

Growth

Premium

P

r

e

f

e

r

en

ce

A

w

a

r

e

n

es

s

ACTIONS


Distribution


CRMPR

ATTRIBUTES

Value forMoney

Perceived

Quality

GoodService

Product

Satisfaction

Availability

BEHAVIOUR

Loyalty

Trial

Repeat

Frequency

Recommend

PERFORMANCE

Share

Growth

Premium

P

r

e

f

e

r

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A

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Business Banking

A business-to-business purchasing decisionshould theoretically be more rational andinformed than a consumer purchasingdecision. However the brand and associatedintangible component is still extremelyimportant.

In our experience hygiene factors includeprice and technical capability. But the twomost significant drivers of demand inbusiness banking are personal relationshipsand brand reputation.

This is because a degree of practicalcompetence is assumed to be presentacross the competitor set.

A typical brand valuation analysis wouldincorporate data sets taken from marketresearch including areas such asrelationship depth, product penetration,share of mind, satisfaction and qualityindices and an assessment of recentmarketing activity.

Figure 6 - Linking marketing actions to financial performance (Business)

ACTIONS


Distribution


CRMPR

ATTRIBUTES

Value forMoney

PerceivedQuality

Good Service

Prestigious

Relevance

Professional

BEHAVIOUR

Loyalty

Trial

Repeat

Frequency

Recommend

P

r

e

fe

r

e

n

c

e

PERFORMANCE

Share

Growth

Premium

A

w

a

re

n

e

s

s

ACTIONS


Distribution


CRMPR

ATTRIBUTES

Value forMoney

PerceivedQuality

Good Service

Prestigious

Relevance

Professional

BEHAVIOUR

Loyalty

Trial

Repeat

Frequency

Recommend

P

r

e

fe

r

e

n

c

e

PERFORMANCE

Share

Growth

Premium

ACTIONS


Distribution


CRMPR

ATTRIBUTES

Value forMoney

PerceivedQuality

Good Service

Prestigious

Relevance

Professional

BEHAVIOUR

Loyalty

Trial

Repeat

Frequency

Recommend

P

r

e

fe

r

e

n

c

e

PERFORMANCE

Share

Growth

Premium

A

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Quantifying the brands impact

For the purposes of this global valuation

study Brand Finance has created a simplifiedBrand Index methodology, which draws onpublicly available data to score each brand ineach product and service area.

The Brand Index is expressed on a scale of0 to 100. It quantifies the strength of thebanks brand relative to its main competitors,with reference to key business and brandattributes.

Each competitor is scored out of 100 on

each chosen attribute. The attributes areweighted and aggregated into an index foreach brand. The exact weighting varies byproduct and service area, as the importanceof each attribute fluctuates according to thespecific drivers of demand.

Within this study, the Brand Index used bothquantitative and qualitative data. Thequantitative categories included marketshare and revenue growth. The qualitativedata sets are based on the 4 Ps of

marketing:

I. Price profitabilityII. Place distribution

(weighted score of territoriescovered, number of branches andATMs)

III. Product quality of

products (weighted analysisincorporating industry awards)IV. Promotion assessment of

quality and effectiveness ofmarketing communicationsactivity

In a more detailed valuation project withaccess to company specific research,additional benchmarking attributes inConsumer Banking include:

o Market shareo Customer satisfactiono Loyalty and trusto Reputation

Additional benchmarking attributes inBusiness Banking are:

o Market penetrationo Customer satisfactiono Relationship deptho Unprompted awarenesso Perceived quality

The Brand Index score is used to pinpointthe exact rate within the predeterminedroyalty range.

Figure 7 Example Brand Index (Consumer banking)

71

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Brand Index

100

0



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7. Impact of national origin on bank brand perceptions

Brand Finance recently contributed toan international country perception

study entitled the Anholt NationBrands Index1

The Anholt Nation Brands Index is the firstanalytical ranking of the worlds nationbrands. Each quarter, a worldwide panel ofconsumers are polled on their perceptions ofthe cultural, political, commercial and humanassets, investment potential and touristappeal of 35 developed and developingcountries. This creates an index of national

brand power, acting as a barometer ofglobal opinion.

The report uses polling panels of 1,000people in 20 of the 35 countries featured inthe Index and 200-500 people in each of theremaining 15 countries.

One of the questions included under theExports category in the survey asks:

You are about to buy a product when younotice that it is made in one of the followingcountries.

Please indicate whether you think thiswould make you: feel less good aboutbuying it, feel the same about buying it, orfeel better about buying it

Each answer was given a numerical score:the more positive the reaction, the higher

the resulting percentage.

This provides an interesting indication ofhow consumers are likely to perceive theservices of banks from different countries.The table below shows a summary of theresponses, based on an indexed average

The results:o The leading countries for

trustworthiness are: Japan, Germany,United States, Switzerland and the UK

o 19 of the top 20 banks in the Global100 Banking Brands Index are head-quartered in these countries ABNAMRO (NL) is the only exception

o Banks head-quartered in thesecountries constitute 8 out of the top 10worlds largest banks by Tier OneCapital

o The top 10 countries in the table have28 representatives in the top 30 banksin the Global 100 Banking Brands Index

o This suggests that there is arelationship between a banks countryof origin and its brand value, influencedby perceived national reputation.

1For a full copy of the report, please visit: Hwww.brandfinance.comH or Hwww.nationbrandsindex.comH



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8. Accounting and tax implications of banks brand values

(i) The Impact of IFRS3 on banking businesses

The introduction of IFRS represents a majorshift in the way that companies undertaketheir financial reporting.

Although differences remain, the newstandards in this area achieve a high degreeof convergence with US GAAP. FAS 141Business Combinations and FAS 142Goodwill and Other Intangible Assets in theUS have already had important implicationsfor brand owners and the way trademarksare valued and accounted for.

For the first time, trademarks and otheracquired intangibles had to be separatelyrecognised on the balance sheet followingan acquisition.2

IFRS 3 also requires identifiable assets to berecognised on the balance sheet of theacquiring entity, provided that certainconditions are met. This is a significantchange from most existing (non-US) national

accounting standards.

These and other significant newdisclosures in respect of the cost ofacquisition and the main classes of assetsand liabilities will mean greatertransparency and will require a muchmore detailed due diligence process.

Following recognition, the requirements ofthe new standards are more onerous thanbefore. Goodwill and intangible assetswith indefinite useful economic lives willneed to be tested at least annually forimpairment. Assets with finite useful livesare required to be restated where there isevidence of impairment to the particularasset.

It seems likely that many companies willrequire independent specialist valuationassistance in order to withstand themarket scrutiny that greater transparencywill bring and to satisfy the need forobjectivity and auditor independence.

IFRS 3 OverviewMethodThe purchase method of accounting (or acquisition accounting) must beused.

Assets and liabilities acquiredRecognition of more intangible assets and contingent liabilities at fairvalue at acquisition date.

Goodwill

Not amortised but tested for impairment at least annually.

Negative goodwillRecognised in the profit and loss account immediately.

Impairment testingDetailed disclosures about transactions, useful economic life andimpairment testing are required.

Historic transactionsAdopters of IFRS 3 can choose to restatee past deals.

2Internally generated brands cannot be put on a companys balance sheet



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(ii) Key requirements of IFRS 3 with implications for brand and other intangibleasset valuation

Allocating the cost of a businesscombination

At the date of acquisition, the acquirermust measure the cost of thebusiness combination by recognisingthe acquirees identifiable assets,liabilities and contingent liabilities(including any proportion attributableto minority interests) at their fairvalue. Any difference between the

total of net assets acquired and costof acquisition is treated as goodwill ornegative goodwill.

Intangible assets

All identifiable intangible assets of theacquired business must be recorded at theirfair values.

To be recognised as an intangible asset, itmust meet the following criteria:

o Separately identifiable (an asset isidentifiable when it either arises fromcontractual or other legal rights or isseparable. An asset is separable if itcould be sold, on its own or with otherassets)

o Controlled by the entity

o A source of future economic benefits

o It can be reliably measured in termsof its fair value

IFRS 3 includes a list of assets that areexpected to be separately recognised fromgoodwill. In many instances the valuation ofsuch assets is a complex undertaking andcompanies may prefer to outsource thisactivity to independent specialists.

Goodwill

After initial recognition of goodwill, IFRS 3requires that goodwill be recorded at costless accumulated impairment charges.Whereas previously under IAS 22 goodwillwas amortised over its useful economiclife (presumed not to exceed 20 years), itis now subject to impairment testing atleast once a year. Amortisation is notpermitted.

Impairment of Assets

A revised IAS 36 Impairment of Assetswas issued at the same time as IFRS 3.Previously an impairment test was onlyrequired if a triggering event indicated thatimpairment might have occurred. Underthe new rules, an annual impairment testis required for certain assets, namely:

o Goodwill tested annually and atany other time when an indicator ofimpairment exists

o Intangible assets with an indefiniteuseful economic life and intangibleassets not yet available for use

The recoverable amount of these assetsmust be measured annually (regardless ofthe existence or otherwise of an indicatorof impairment) and at any other time when

an indicator of impairment exists.



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Brands are one type of intangible asset,which are frequently claimed to haveindefinite useful economic lives. Whereacquired brands are recognised on thebalance sheet post-acquisition it will beimportant to establish a robust andsupportable valuation model using bestpractice valuation techniques that can beconsistently applied at each annualimpairment review.

The revised IAS 36 also introduces newdisclosure requirements, the principle onebeing the disclosure of the key assumptions

used in the calculation.

Increased disclosure is required where areasonably possible change in a keyassumption would result in actualimpairment.

The requirement for separate balancesheet recognition of intangible assets,together with impairment testing of thoseassets and also goodwill, is expected toresult in a significant increase in theinvolvement of independent specialistvaluers to assist with actual valuation andalso on appropriate disclosure.

Implications for intellectual property managers

Greater transparency, rigorous impairmenttesting and additional disclosure will result inmore scrutiny by the market and will have asignificant impact on the way companiesplan their acquisitions.

Intellectual property managers must ensurethat they have the necessary skills to satisfythe new requirements and to withstandmarket scrutiny.

More regular impairment testing is likely toresult in a greater volatility in financialresults. Analysts will need to be convincedthat a companys impairment review processis robust.

In the case of brand and other intangible

asset valuation, where a high degree ofsubjectivity can exist, it will be important todemonstrate that best practice techniquesare being applied.

The use of independent experts may helpconvince analysts that the impairmenttesting process is not overtly subjective.

In terms of planning prior to acquisition, adetailed analysis of all potential assetsand liabilities is recommended to assessthe impact on the consolidated groupbalance sheet and P&L post-acquisition.

For further information on goodwillimpairment reviews or Purchase PriceAllocations, please contact your localBrand Finance office or visit:www.brandfinance.com



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(iii) Tax planning: IP-holding companies

As well as impacting on M&A, strategic

planning and ROI analysis, the rise inimportance of marketing intangibles canoften mean there is a strong businesscase for setting up a central IP-holdingcompany (IPCo)

Most of the banks within the Global 100Index are active in multiple territories.Therefore locating and managing the IPCofrom one central location, potentially in a lowtax jurisdiction, makes a compelling

commercial case.

The size and authority of the IPCo arevariable and dependent on the requirementsof the bank in question. The benefits includegreater IP protection and consistency andimproved resource allocation - see below formore detailed explanation of benefits.

It is important that genuine commercialdrivers for the establishment of IPCo can bedemonstrated.

Examples of established IPCos from

other sectors include:

o BATMark (in UK, US, Switzerland &Netherlands)

o Shell Brand International AG(Switzerland)

o Socit des Produits Nestl(Switzerland)

o Philip Morris Products SA(Switzerland)

This can have the following results:

A. Accumulation of profits in a low taxjurisdiction

B. Tax deductions for the amortization ofintangible in IPCo

C. Tax deductions in high taxjurisdictions

D. Depending on double tax treaties, theelimination or reduction of withholdingtaxes on income flows resulting fromthe exploitation of the IP

Commercial benefits of central IPCos include

Governance and controls - more effective, efficient IPprotection

o This reduces the risk of infringement or loss ofa trademark in key categories and jurisdictions

Higher return on brand investmento Internal licenses should be used to clarify the

rights and responsibilities of the IPCo and

operating units. The adoption of consistent andcoherent brand strategy, marketing investmentand brand control improves brand performance

Better resource allocationo Internal royalties result in greater visibility of

the true economic performance of operatingcompanies

Improved earnings streams from external licenseso Clarity of the strength, value and ownership of

the IP ensures that full value is gained fromthird party agreements

Tax savings can be achieved in certain circumstances

Key tax issuesinclude: CFC rules Capital Gains Tax

on transfer to IPCo:o economic

versus legalownership

o

Wither on thevine approachto minimise CGT

Local income taxand WHT

Substance of IPCo Transfer pricing

(affected byfunctions and riskstaken by IPCo)

Intangible assetvaluation



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Appendix

(i) The growth of intangible assets

In order to better understand the changing nature of intangible assets, Brand

Finance has undertaken a global review of the worlds 25 largest stock markets. Theanalysis deconstructed each companys enterprise value into the followingconstituent parts: Tangible assets, Disclosed intangible assets and Undisclosedintangible assets/ Undisclosed Value. The table below demonstrates the splitusing the five largest banking groups by market capitalisation. .

Enterprise Value/ EV (% of global stockmarket)

- Tangible Assets

- Disclosed Intangible Assets

- Undisclosed Value

$5,456 billion (16%

$2,924 billion (17%)

$587billion (14%)

$2,682 billion (16%)

Top 5 groups DomicileEV ($bn,

30/6)% of sector

Brand Value($bn)

Citigroup US 257.3 5.1% 35.1

Bank of America US 240.0 3.9% 31.4

HSBC GB 226.2 3.8% 33.5

J.P.Morgan Chase US 168.6 3.1% 18.5

3

Mitsubishi UFJ Jap 155.0 2.7% 3.7

The enterprise value of the banking anddiversified financial services sector hasrisen by 21% per annum over the last threeyears from its 2002 low.

Most of the increase has come from anincrease in the premium to net asset value,with EV/Tangible assets increasing to 2.4xversus 1.9x at the end of 2002.

Sector value split ($bn) Sector performance relative to World Index

0

1,000

2,000

3,000

4,000

5,000

6,000

2002 2003 2004 2005 2006HY

Tangible Invested Capital Goodw ill

Other Disclosed Intangibles Additional Value

90

95

100

105

110

115

120

2001 2002 2003 2004 2005 2006

3JPMorgan value $6.4 bn and Chase $12.1bn



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Largest Disclosed Intangible Assets ($bn)

Group Intangible Asset Value

JPM Chase Mortgage Servicing Rights 6.5Citigroup Purchased Credit Card relationships 4.6

Citigroup Mortgage Servicing Rights 4.3

Largest deals announced in 2005 ($bn)

Buyer Target Announced Deal Value

Bank of America MBNA 30-Jun-05 35.4

Mitsubishi Tokyo UFJ 18-Feb-05 29.8UniCredit Bayerische Hypo-und Vereinsbank 12-Jun-05 18.1

M&A, 2002-2005 2002 2003 2004 2005

Number of deals 770 638 669 745

Value of deals ($bn) 186.6 100.1 128.2 225.7

Value of deals/ Sector Value 6.1% 2.4% 2.6% 4.2%



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(ii) Explanation of Brand Valuation

Brand Finance's methodology uses a Discounted Cash Flow (DCF) technique to discountestimated future royalties, at an appropriate discount rate, to arrive at a Net Present Value

(NPV) the value of the trademark and associated intellectual property (the brand value).The basic steps are outlined below:

1. Obtain brand-specific financial and revenue data (insurance revenues have beenstripped out)

2. Model the market (to identify market demand and the position of individual brands inthe context of all other market competitors. Usually the valuation model is segmentedto reflect the relevant competitive framework within which the brand operates).

Brand Finance has used three forecast periods:

I. An initial two-year period using Institutional Brokers Estimate System(IBES) consensus forecasts

II. A subsequent three-year forecast period based on an average ofavailable IBES figures, historic growth and GDP growth expectationsweighted by geographic split of revenues

III. A perpetuity growth figure based on GDP growth expectations

3. Establish the royalty rate for each brand

o Calculate brand strength score (Brand Index)o Determine royalty rate range

4. Calculate future royalty income stream

5. Calculate discount rate specific to each bank incorporating size, internationalpresence, reputation, gearing and randeta (see below)

6. Discount future royalty stream (explicit forecast and perpetuity periods) to a netpresent value = brand value

Royalty relief approach

The Brand Finance model uses a "relief from royalty" methodology for two reasons. Firstly, itis the valuation methodology that is favoured by the tax authorities and the courts because itcalculates brand values by reference to documented, third-party transactions; and secondly,because it can be performed on the basis of mostly publicly available financial information.

This is an economic use approach which determines the value of the brand in relation to theroyalty rate that would be payable for its use were it owned by a third party. The royalty rateis 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.



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--------------------------------------------------------------------------------------------------------------------------

Brand Finance determines the appropriate royalty rate using a variety of means. Initially acomparative study of publicly available royalty agreements is undertaken to determine arange of royalty rates for the banking sector, differentiating between Consumer Banking,Business Banking, Investment Banking and Credit Cards. In a full valuation project, eachbusiness unit within a bank is likely to be charged a different royalty rate, depending on itsstrengths versus the competitor set.

This range is then substantiated through a margin analysis of comparable companies.Finally, a competitive benchmarking study (Brand Index) is conducted in order to determinethe position of the banks brand along the royalty rate range.

randeta

randeta analysis is a benchmarking study of the strength, risk and future potential of abrand relative to its competitor set. It is conceptually similar to a credit rating, which

companies are awarded based on their strength, risk and future earning potential.

It serves the following purposes:

o Quantifies the strength and performance of the brand being valuedo Provides an indication of the risk attached to future earnings of the brand, and can be

used in the determination of an appropriate discount rate for valuation purposeso Provides basis for value-based brand tracking

The brand rating incorporates both quantitative and qualitative data. The quantitative datawas taken from Bloomberg, annual reports and the banks own Investor Relation materials.The qualitative data was compiled by the Brand Finance management team.

The categories were built around the 4 Ps of marketing: Price, Place, Product andPromotion. As proxies, the model uses profitability margins (for the last five years),distribution (a weighted scoring system utilising number of retail outlets, global coverage andnumber of cash points) and a judgemental assessment for the quality of products as well asthe success of recent promotion/ marketing activity.

The table also balances these scores against further quantitative data including marketshare, growth patterns and consistency of trademark.

Brand Ratings Definitions

The ratings from AA to CCC can bealtered by including a plus (+) orminus (-) sign to show their moredetailed positioning in comparisonwith the general rating group

Rating Definition

AAA Extremely strong

AA Very strong

A Strong

BBB Average

BB Under-performing

B Weak

CCC Very weak

CC Extremely weak

C Failing

The results in this report have been prepared using publicly available data and using BrandFinances judgement where necessary.



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--------------------------------------------------------------------------------------------------------------------------

(iii) Notes to the Global 100 Index

Revenue splits

Where possible, the Global 100 has removed revenues attributed to insurance, privateequity, asset management and securities. Thus these brand values equate to the financialvalue of the brands to the banking sector.

Sub-brands:

In the case of major sub-brands, the Global 100 has stripped out brand-specific revenues inorder to list them separately within the table. This has only been possible where the financialdata is available from annual reports, investor or analyst presentations/ report, Bloomberg oran assessment based on a combination of these data providers.

Intangible value

The total 'intangible value' is determined by the stock market. The ratio of our calculatedbrand value to the total intangible value will therefore be determined by our assessment ofstrength of the brand relative to the strength and performance (in the eyes of investors andanalysts) of the company that owns that brand.

Where the ratio is high, it may be, for example, because a strong brand is being employedrelatively unprofitably within a business; or that analysts and investors view the companyrelatively unfavourably even though the brand has performed well on our analysis.

Where the ratio is low, the opposite is true: the company may be highly profitable or wellregarded by investors even though the brand itself, based on our analysis, is not a majorcontributor to that performance; other intangible assets, instead, are driving the value of thebusiness.

Contributions

Brand Finance would like to thank BrandLogic Corporation for their assistance in providingscoring data for the banks domiciled in North America.



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Brand Finance is the leading independent intangibleasset valuation and brand strategy firm, helpingcompanies to manage their brands more intelligentlyfor improved business results.

For further enquiries relating to this report, please

contact:David Haigh, CEO [email protected]

Tim Boucher, Technical Director [email protected]

James Park, Development Director [email protected]

For further information on Brand Finances services and valuation experience, pleasecontact your local representative as listed below:

Name of contact Email address

Australia Tim Heberden [email protected]

Brazil Gilson Nunes [email protected]

Canada Oliver Schmitz [email protected]

Croatia Borut Zemljic [email protected]

France Florence Hussenot [email protected]

Germany Ferdy de Smeth [email protected]

Holland Marc Cloosterman [email protected]

Hong Kong Helen Willis [email protected]

India Unni Krishnan [email protected]

Russia Bryn Anderson [email protected]

Singapore Lucy Gwee [email protected]

Spain Gabriela Salinas [email protected]

Sri Lanka Ruchi Gunewardene [email protected]

Switzerland Jeff Turner [email protected]

UK James Park [email protected]

USA Bryan Partington [email protected]

USA Hampton Bridwell [email protected]

For all other countries, please email [email protected]

mailto:[email protected]:[email protected]:[email protected]:[email protected]


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global banking brands 2006

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