The New Capital of Smarter Banks

In today’s evolving financial world, bank leaders should look to intellectual capital to create shareholder value.  

Banking: It’s a financially leveraged industry run by financial experts who like to geek out on… well, finance.

These days the world of finance even dons matching uniforms with “Finance Bro” vests. And when these finance brothers and sisters think about a bank’s franchise value, they immediately reference equity capital.

According to the FDIC, the banking industry has roughly $2.5 trillion of capital today.

Bank valuation is typically expressed as a price-to-book ratio, and today the average bank trades between 1.5 and 1.75 times book value. Stock darlings like JPM Chase trade at 1.9 times book value. In heated M&A transactions, a bank may fetch twice the book value for shareholders.

However, as banking morphs into a niched and diverse, tech-driven industry led by knowledge workers, a new form of capital needs to enter the banker’s vocabulary: intellectual capital.

The Corporate Finance Institute defines intellectual capital as:

The value of a company’s collective knowledge and resources that can provide it with some form of economic benefit. It’s also used to identify a firm’s intangible assets and divide them into meaningful categories.

In today’s world, value is not created simply with physical or financial assets, but rather the institutional “smarts” that help predict future competitive advantage and earnings. For illustration, look at the price-to-book multiples of other companies versus the banking industry.

What’s noticeable? Certainly brand, technology and unique assets like patents play a huge role in what drives a company’s overall price-to-book value or “intellectual capital.” These are crazy times to watch Nvidia stock explode, but think about the patents, chip design expertise and AI market lead driving this rocket ship to shareholder value.

Executives may wonder: Are banks just different animals (like the old utility stocks), or can intellectual capital play a more significant role in future shareholder value creation? This answer is yet to be revealed, but banks that seek to enhance franchise value may want to reflect on how well their organizations are developing the three core sources of intellectual capital:

• Human Capital – all the knowledge and experience of employees within an organization. It consists of their education, practical skills and work experience. It also includes the health of the culture and how it positively impacts customer loyalty and performance. Think of a company like global consultants Accenture, which has deep finance, technology and process knowledge and certifications, and an 8.0 price-to-book value.
• Relationship Capital – all the relationships that fuel the organization’s resiliency and growth potential: customers, employees, suppliers and strategic partners. Think about the relationship stickiness Amazon has with 200 million Prime members or that Starbucks has when 17 million customers use its mobile app each month.
• Structural Capital – nonhuman intangible assets such as patents, proprietary data, brand equity and unique processes or systems. Banks have paid too little attention to this area, which has tremendous potential to unlock the value of data or proprietary knowledge surrounding specific industries or processes. Bankers who want to appreciate data’s value need only glance at the historical stock chart for analytic giant Fair Isaac (price-to-book value near 100).

So Gonzo bankers, as the industry kicks into strategic planning for 2025, leadership should consider the following questions:

Human Capital

• What strategies are we undertaking to develop skills that drive value but are hard to replicate? How do we put teeth into skill development?
• Why is our bank the best career option for the most talented banking producers in our market? If we aren’t the best option, what gaps need to be addressed?
• Do we have the technical talent in data, architecture, development, artificial intellitence and security to compete in the future industry?

Relationship Capital

• What percentage of new revenue is generated by existing clients and how do our retention and loyalty trends compare to peers and high performers?
• What specific industries, trade associations, channel partners, etc., provide us with a competitive edge in growing our business? How do we protect and cultivate these relationships?
• Do any of our technology and strategic partners truly provide us with a competitive advantage? If so, which ones? What type of partnerships could provide an advantage in the future?

Structural Capital

• What data could we better capture, organize and leverage to drive future revenue?
• What processes or experience can we provide that no competitor can match? What new capabilities could be built to gain an advantage in the future?
• If we turned one of our businesses into a rapidly growing digital app, what would this business and app look like?

In our travels, the Cornerstone team sees certain Gonzo bankers conducting test-and-learn experiments with the creation of intellectual capital. Think about the niche capabilities and nationwide relationships Live Oak Bank has built with its SBA-driven small business platform. Think of small Citizens Bank of Edmond launching the military-focused digital brand Roger. Think of Eastern Bank developing the Numerated small business credit application and spinning out into an independent company.

Banking is a highly leveraged business, and it’s great that our industry has built an intense rigor around managing financial capital. However, in the new world of finance, Smarter Banks will transcend not just financial capital but also the drivers of intellectual capital to achieve the greatest value creation over time.

Let’s go, future Smarter Banks!

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Steve Williams is a founder and chief executive officer of Cornerstone Advisors. Tune in to Steve’s Plugged In podcast and follow him on LinkedIn and X.