Brand valuation for Vietnam’s commercial banks

1.2 Scope of research There are two approaches that result in very different brand value: - Calculate brand value by market research called “Brand evaluation” by the author - Calculat

PREAMBLE

1 Introduction

1.1 The necessity of the subject

In banking business, trust is the key factor for millions of individuals and

organizations to send their savings, satisfy their demand for loans, or for effective

financial consultancy Moreover, together with the development of science and

technology, as well as integration process, the competition in banking is increasingly

fierce The deciding factors for customers to choose a bank are not only tangible and

material elements but also ones related to emotion, perception, trust, etc Therefore,

brand in banking has become an essential factor for the success of commercial banks So

the question of how to measure a commercial bank’s brand value in a specific

financial figure, while the economic value of a bank’s brand is widely accepted, is of

great concern to managers

From this above situation, the author has chosen the subject “Brand valuation for

Vietnam’s commercial banks” as dissertation topic

1.2 Scope of research

There are two approaches that result in very different brand value:

- Calculate brand value by market research (called “Brand evaluation” by the

author)

- Calculate brand value by financial data (called “Brand valuation” by the

author)

The purpose of thesis is to propose a brand valuation model for Vietnam’s

commercial banks based on financial data

Brand valuation for commercial banks is a process with many steps; however,

the thesis will concentrate on researching and proposing brand valuation

model for Vietnam’s commercial banks

1.3 Purpose of research

(i) Systemize theories of calculating brand value

2 (ii) Propose brand valuation model for Vietnam’s commercial banks (iii) Experiment the proposed brand valuation model on Bank for Investment and Development of Vietnam (BIDV) to calculate its brand

(iv) Establish conditions to apply brand valuation model for Vietnam’s brands in practicality

1.4 Subject of research: Brand valuation for Vietnam’s commercial banks

2 Research methodology and sources of statistics

2.1 Research methodology

- Inherited method

- Analytical – comparative method

- Interdisciplinary research method

- Case study research method

- Dialectical materialism method

2.2 Sources of statistics

The sources of statistics used in the thesis are from the website of The State Bank

of Vietnam (49 Ly Thai To Street – Hoan Kiem District – Hanoi), Annual Report audited in 2010, 2011, 2012 and confidential report named Valuation before IPO of Bank for Investment and Development of Vietnam (35 Hang Voi Street – Hoan Kiem District – Hanoi)

3 The contribution of the thesis

3.1 In terms of academic literature

- Summarize two brand valuation approaches for commercial banks, including: (i) Calculate brand value for commercial banks based on market research; (ii) Calculate brand value for commercial banks based on financial data

- Select the estimated income based method of the second approach, combining with analysis on characteristics of commercial banks’ business operation to propose a

3.2 In terms of practical application

• Help to confirm that brand is a valuable asset of commercial banks, which has to

be reported on the annual bank’s balance sheet

• Make it easier and more accurate in acquisition, merger or brand franchising plans

or transactions

• Help to complete reports on commercial bank valuation

• Users: Can be used by all subjects that have demand for brand valuation for

commercial bank

• Time of use: Can be implemented anytime

• Used for all commercial banks

4 Research model

Basing on research methods used in the thesis, a research model is designed as

below:

5 The layout of the thesis

Apart from preamble, conclusion, list of tables, figures and refereces, the thesis is

divided into 4 chapters:

Financial forecast

Brand contribution value

Brand valuation model for Vietnam’s commercial banks

Brand discount rate

Financial value of commercial bank’s brand

Discounted cashflows generated

by bank’s brand

Financial

data of

commercial

banks

4

• Chapter 1: General research on brand and brand valuation

• Chapter 2: Theory of brand valuation for commercial bank

• Chapter 3: Current situation of legal system for brand valuation and Vietnam’s commercial banking system

• Chapter 4: Developing brand valuation model for Vietnam’s commercial banks

CHAPTER 1 GENERAL RESEARCH ON BRAND AND BRAND VALUATION

1.1 Overview of brand

1.1.1 Concept of brand

“Brand is customer’s perception, emotion and trust in all elements of an enterprise”

1.1.2 Functionality of brand

1.2 Overview of brand valuation

1.2.1 The process of brand value recognition in the world 1.2.2 Approaches to research on brand valuation

- Calculate brand value based on market research: the basis of this method is to conduct investigations/surveys on attitudes, perceptions, emotions, reactions, etc, of customers and concerned parties towards brand The results of this method are qualitative

- Calculate brand value based on financial data: basing on financial data of

commercial banks (can use historical or future data) to calculate brand value The results

of this method are quantitative

CONCLUSION OF CHAPTER 1

Chapter 1 has fulfilled the thesis’ first and second objectives First, it has used Susan’s concept of brand as standard definition for the thesis Second, it has summarized two approaches of brand valuation theory For each approach, the thesis

5 has summarized the content, advantages and disadvantages of its methods and models

for brand valuation

CHAPTER 2 THEORY OF BRAND VALUATION FOR COMMERCIAL BANK

2.1 Overview of commercial bank

2.1.1 Definition of commercial bank

2.1.2 Basic functionality of commercial bank

2.1.3 Role of commercial bank

2.2 Overview of brand valuation for commercial bank

2.2.1 Theory and concept of brand valuation for bank

2.2.1.1 Definition of commercial bank’s brand

“A bank’s brand is a combination of factors in order to satisfy customers’ financial demand,

and to gain their perception, trust and emotion towards the bank.”

Diagram 2.2: Commercial bank’s brand

2.2.1.2 Theory on brand valuation for commercial bank

The thesis’ objective is measuring brand value for commercial banks in a specific

financial figure, therefore the estimated income based approach of Aswath Damodaran is

Customer

Loyalty

Emotion Behavior

office, Logo, slogan, uniform,

Interior-exterior architecture, etc

Type of ownership, organization

objective, etc

6 selected as the basis for researching the brand valuation model for Vietnam’s commercial banks

2.2.1.3 Definition of brand valuation for commercial banks

“Brand valuation for a commercial bank is a set of jobs to calculate financial value

of the commercial bank’s brand.”

2.2.2 Conditions and the necessity of brand valuation for comercial banks

2.3 Basic model for brand valuation for commercial banks

Table 2.1: Comparison of different brand valuation methods of financial data based approach

The cost based approach

Brand value is calculated by total cost invested to create a new or replace an existing brand

Calculating brand value by brand cost is unreasonable in both theory and practice

based approach

Brand value is calculated by the price at which seller and buyer agree in the brand transaction

Market data about brand are

disproportioned

The estimated income based approach

Brand value is calculated by the present value of future earnings generated by the brand over the rest of its useful life

Use bank’s financial data to calculate => up to now, it is the most suitable method to measure brand value

In order to propose an approach model for brand valuation for banks, the thesis will conduct deep research on two models of the estimated income based method, as follows:

2.3.1 Interbrand’s model

Step 1: Market segmentation Step 2: Financial analysis Step 3: Demand analysis Step 4: “Brand strength” and “discount rate” determination Step 5: Brand’s net present value determination

7 Example of applying Interbrand’s valuation model is Binh Minh Plastic joint stock

company with “Binh Minh Plastic” brand which is valuated 349.4 billion VND by the

University of Economics Ho Chi Minh City’s research group

2.3.2 Brand Finance’s model

The brand valuation process is illustrated by this below diagram:

Diagram 2.5: David Haugh’s brand valuation model

Step 1: Market segmentation

Step 2: Financial forecast

Step 3: Brand value added (BVA) calculation

Step 4: Discount rate determination

There are differences between Brand Finance’s and Interbrand’s summary reports

on most valuable brands Although Interbrand and Brand Finance use the same basic

theory for brand valuation, which is discounted cashflow method, to calculate brand

value, the difference between two models is at the calculation step of brand’s

contribution value to businesses Interbrand use “brand index” scoring template with 7

Brand forecasts

Market

data

Demand drivers

Risk factors

Financial data

Economic value added

Brand value added

Brand value added index

Brand ß analysis

Brand value

Discount rate

8 criteria: leadership, stability, market, geography, brand trend, support activities, brand protection; whereas, Brand Finance’s brand ß scoring template includes 10 criteria: time

in the market, distribution channel, market share, market position, sale growth rate, price premium, price elasticity, marketing spend, advertising awareness, brand awareness This different step leads to different valuation results of two models Each table of criteria has advantages and disadvantages, and the status and level of advantages and disadvantages depend on each valued brand

CONCLUSION OF CHAPTER 2

Chapter 2 has fulfilled the thesis’ first and third objectives Regarding the first objective, the thesis has given out the definition of a commercial bank’s brand, which is

“a set of factors in order to satisfy customers’ financial demand, and to gain their perceptions, trust and emotion towards the bank.” Regarding the third objective, from Aswath Damodaran’s original idea of using financial instruments for brand valuation in business valuation, the thesis has based on the income approach and used two brand valuation models of Interbrand and Brand Finance as reference to propose a new model that can approach to brand valuation for Vietnam’s commercial banks

CHAPTER 3 CURRENT SITUATION OF LEGAL SYSTEM FOR BRAND

VALUATION AND VIETNAM’S COMMERCIAL BANKING SYSTEM

3.1 Legal framework for brand valuation in Vietnam

3.1.1 Legal framework for brand and international integration of brand in Vietnam

- The legal system of regulations primarily derives from section VI of the Civil

Code of the Socialist Republic of Vietnam in 2005

- The agency that is responsible for granting permission is the National Office of

Intellectual Property of Vietnam

- The agencies that are responsible for enforcement are Court, Market Surveillance,

Economic Police, Culture and Information Inspector, Science and Technology Inspector,

Deparment of Customs

• Regarding legal framework

• Government’s point of view on brand

• International integration of brand

3.1.2 Legal framework for brand valuation in Vietnam

Up to now, the system of legal documents in Vietnam has no official definition of

brand These documents mainly stipulate a number of contents related to brand such as

intellectual property, trademark, geographical indication, trade name, but not directly

mention brand in general and brand valuation in particular

3.2 The current situation of Vietnam’s commercial banking system

3.2.1 Characteristics of Vietnam’s commercial banks

3.2.2 Brand valuation for Vietnam’s commercial banks

CONCLUSION OF CHAPTER 3

Chapter 3 has presented the current situation of commercial banking system and

legal system of brand valuation in Vietnam These are important bases for the next

10 chapter to fulfill the forth, fifth and sixth objective of the thesis

CHAPTER 4 DEVELOPING BRAND VALUATION MODEL FOR VIETNAM’ S

COMMERCIAL BANKS

4.1 Orientation in building brand valuation model for Vietnam’s commercial banks 4.2 Brand valuation model for Vietnam’s commercial banks

The author has combined Interbrand and Brand Finance’s calculation steps with specific characteristics of Vietnam’s commercial banking system to propose a new model to approach brand valuation for banks, including 4 following steps:

Step 1: Financial forecast

Collect, analyze and process information to predict a bank’s revenue and expense

in a period of 3 to 5 years – from which calculate its brand’s economic value added in the future This step can be done by the bank itself or inherit annually financial forecast results from reputable sources in the world like S&P, Ernst&Young, Moody, etc

Step 2: Calculate Brand Value Added - BVA

Calculate the proportion of brand contribution to economic value added or use available figures of position, target customers, growth rate of an equivalent bank, which are available in the US or UK market, when researching, based on theory 1 – brand valuation based on research

The process of taking step 1 and 2 is similar to Interbrand and Brand Finance’s calculation processs – these are standard process accepted by most researchers and practice

Step 3: Calculate brand discount rate

Factors including the time value of money and the risks that may impact must be taken into account when calculating discount rate

Calculate brand ß index

Discount rate

- Calculate brand ß index:

From Brand Finance’s scoring template for brand ß index and Interbrand’s “brand

strength” calculation table, together with particular characteristics of Vietnam’s

commercial banking system, the scoring template for brand discount rate of commercial

banks is researched, adjusted and proposed as below:

Table 4.1: Scoring template for brand discount rate of Commercial banks

-Attribute 1 – Time in the market: is a factor that represents a bank’s brand strength

because a bank can be maintained and exist for a long time only when it receives trust

and recognition from customers Time in the market is proportional to attribute score

Based on the milestones of Vietnam’s economy, the scoring criteria for this

attribute are proposed as below:

Table 4.2: Scoring criteria for the attribute of time in the market

Established parallel to the movement for independence (the 1954

period)

15-12 Established during the economic transformation process (the 1986

period)

12-9

Established after 1986 and before the U.S removed the embargo

against Vietnam in 1995

9-6

- Attribute 2 – Branch network: is an important factor for a bank to serve its

12 customers, from which it can gain its brand awareness Branch network is proportional

to attribute score

The criteria for building scoring template for the attribute of branch network are: + The number of branches in 63 cities and provinces and 3 regions (North – Central – South), so smaller criteria for network segmentation are 1/2, 2/3 and total number of

63 cities and provinces

+Level of international cooperation, measured by: Does a bank open overseas branches? does it have joint venture with foreign companies? does it act as an agent for a foreign bank? with levels as follow:

Level 1: Open branches or subsidiaries overseas, act as an agent for a foreign bank, have international business transactions

Level 2: Open branches or subsidiaries overseas, or act as an agent for a foreign bank, or have international business transactions

Level 3: Open overseas representative offices Level 4: Have no form of cooperation

Table 4.3: Scoring template for the attribute of branch network

Have branches in 63 cities and provinces, have international cooperation level 1 15 Have branches in 63 cities and provinces, have international cooperation level 2 14 Have branches in 63 cities and provinces, have international cooperation level 3 13 Have branches in 63 cities and provinces, have international cooperation level 4 12 Have branches in 2/3 of 63 cities and provinces, have international cooperation level 1 11 Have branches in 2/3 of 63 cities and provinces, have international cooperation level 2 10 Have branches in 2/3 of 63 cities and provinces, have international cooperation level 3 9 Have branches in 2/3 of 63 cities and provinces, have international cooperation level 4 8 Have branches in 1/3-2/3 of 63 cities and provinces, have international cooperation

level 1

7 Have branches in 1/3-2/3 of 63 cities and provinces, have international cooperation

level 2

6 Have branches in 1/3-2/3 of 63 cities and provinces, have international cooperation

level 3

5 Have branches in 1/3-2/3 of 63 cities and provinces, have international cooperation

level 4

4 Have branches in less than 1/3 of 63 cities and provinces, have international

cooperation level 1

3

13 Have branches in less than 1/3 of 63 cities and provinces, have international

cooperation level 2

2 Have branches in less than 1/3 of 63 cities and provinces, have international

cooperation level 3

1 Have branches in less than 1/3 of 63 cities and provinces, have international

cooperation level 4

0

Attribute 3 – New products growth rate:

Developing new products is required for continuous growth and prosperity for a

bank The new products growth rate shows the capability of creating and maintaining

the development of the bank’s brand It is based on two criteria:

+ The creation of new financial products based on four orgininal banking products

including saving, loan, payment and financial consultancy is an important factor for

maintaining brand in the market

+ Rewards or votes for a bank or its products, with levels as follow:

Level 1: Receive international reward and domestic vote for product or bank

Level 2: Receive international reward

Level 3: Receive domestic vote for product or bank

Level 4: Receive no reward or vote

New products growth rate is measured by the number of banking products in the

researched year compared with that of the previous year This rate is proportional to

attribute score

Table 4.4: Scoring template for the attribute of new products growth rate

Have new products in 4 groups, receive reward, vote level 1 15

Have new products in 4 groups, receive reward, vote level 2 14

Have new products in 4 groups, receive reward, vote level 3 13

Have new products in 4 groups, receive reward, vote level 4 12

Have new products in 3 groups, receive reward, vote level 1 11

Have new products in 3 groups, receive reward, vote level 2 10

Have new products in 3 groups, receive reward, vote level 3 9

Have new products in 3 groups, receive reward, vote level 4 8

Have new products in 2 groups, receive reward, vote level 1 7

Have new products in 2 groups, receive reward, vote level 2 6

Have new products in 2 groups, receive reward, vote level 3 5

Have new products in 2 groups, receive reward, vote level 4 4

Have new products in 1 group, receive reward, vote level 1 3

14 Have new products in 1 group, receive reward, vote level 2 2 Have new products in 1 group, receive reward, vote level 3 1 Have new products in 1 group, receive reward, vote level 4 1

- Attribute 4 – Number of customers growth rate: Banks are institutes that serve

all types of customers whenever they have financial needs Therefore, commercial banks have more diverse and abundant customers than any other organization in the economy The attribute of number of customers growth rate clearly reflects customers’ preference and trust in a bank This attribute is calculated by a bank’s number of customers including household and organization in 4 groups of products in the calculated year compared with that of the previous year, and is proportional to attribute score

Table 4.5: Symbols for the calculation of the attribute of number of customers growth rate

Combined with analyses of the attributes of proportion of mobilized captital, proportion of outstanding balance and new products growth rate, this attribute is measured by the combination between household and organization customers growth rate (or 1 out of 2 types of customers) with products with from high to low importance: Saving (S) hoặc Loan (L), Payment (P) and Financial Consultancy (FC) There are many combinations between customer growth rate and products, in which the more important criterion is customer growth rate because there is already an attribute for product growth rate Therefore, the scoring template for the attribute of number of customers growth rate is as follow:

Table 4.6: Scoring template for the attribute of number of customers growth rate

Increase H or O with (S, L), or Increase H or O with (S, P, FC), hay

Increase H or O with (L, P, FC)

3

- Attribute 5 – Proportion of Mobilized capital: Customers’ deposit is the

deciding factor for a bank’s capital There are several factors that affect the amount of

deposit on a bank, among which the bank’s reputation and customers’ trust in it is the

main one The proportion of a bank’s mobilized capital in total mobilized capital of the

economy is proportional to attribute score, which is calculated as below:

+ Attribute score is 5 = Average mobilized capital for a commercial bank (A)

16 Total mobilized capital of the economy in the year before

calculated year

A =

Total number of banks in the year before calculated year + The attribute score of 10 is for the credit institution having highest mobilized capital in the year before calculated year

+ The bank having highest mobilized capital has maximum score of 10 The gap between maximum score of 10 and average score of 5 is 5 points, so each higher-than-average point is calculated by: preceding attribute score + B, with:

Mobilized capital of the commercial bank having highest mobilized capital in

the year before calculated year – A

B =

5 + The bank having lowest mobilized capital has minumum score of 1 The gap between minimum score of 1 and average score of 5 is 4 points, so each lower-than-average point is calculated by: preceding attribute score – C, with:

A- Mobilized capital of the commercial bank having lowest mobilized

capital in the year before calculated year

C

=

4

Table 4.7: Scoring template for the attribute of proportion of mobilized capital

For example, the calculated year is 2013, total amount of mobilized capital of 48

17 commercial banks in 2012 is 3.2 million billion VND, in which Max commercial bank

has the highest amount of mobilized capital of 540,000 billion VND, Min commercial

bank has the lowest amount of 15,000 billion VND So the calculation of attribute 3 is:

Total mobilized capital of the

economy in the year before

calculated year

3.2 million billion VND

VND Total number of banks in the year

Mobilized capital of the

commercial bank having

highest mobilized capital in

the year before calculated year

– A

540,000 – 66,500

VND

A- Mobilized capital of the

commercial bank having lowest

mobilized capital in the year before

calculated year

66,500 – 15,000

billion VND

Table 4.8: Scoring template for the attribute of proportion of mobilized capital

18

- Attribute 6 – Proportion of outstanding balance:

To commercial banks, credit is a traditional and basic business, accounting for high

proportion in asset structure and revenue structure However, it is also a complex and

risky business The proportion of a bank’s outstanding balance in total outstanding

balance of the economy is proportional to attribute score The basis for calculating score

for the attribute of proportion of outstanding balance is similar to the that of mobilized

capital, as follow:

+ Attribute score of 5 = Average outstanding balance for a commercial bank

Total outstanding balance of the economy in the year before calculated

year

D =

Total number of banks in the year before calculated year

+ The attribute score of 10 is for the credit institution having highest outstanding

balance in the year before calculated year

+ The bank having highest outstanding balance has maximum score of 10, the one

having lowest outstanding balance has minumum score of 1

+ The gap between maximum score of 10 and average score of 5 is 5 points, so

each higher-than-average point is calculated by: preceding attribute score + E, with:

Outstanding balance of the commercial bank having highest outstanding

balance in the year before calculated year – D

E =

5 + The gap between minimum score of 1 and average score of 5 is 4 points so each

lower-than-average point is calculated by: preceding attribute score - F, with:

D- Outstanding balance of the commercial bank having lowest outstanding

balance in the year before calculated year

F =

20

4