As many financial services organizations are working overtime to restore public and shareholder trust, new disclosure requirements are diluting the impact of banks’ annual reports. Financial statements may have become more transparent, but relevant information has become much more difficult to identify. Now, more than ever, is the time to take a step back and consider how banks can more effectively communicate their business story to better convey shareholder value.
Annual reports in the banking industry are increasingly burdened with detailed financial data, which isn’t translating to increased public and shareholder trust. By building on recent — largely positive — financial disclosure enhancements, banks can work to eliminate overlapping disclosures and better draw out the most relevant financial information. This could serve as a first step to not only restore and maintain trust through coherent business reporting, but also reduce the potential for further tightening of disclosure obligations.
The opportunity to increase shareholder trust lies in aligning the report more closely with a bank’s own business model and individual short-medium and long-term prospects. To successfully convey how the changes banks are making to their business models are helping to protect and develop shareholder value, banks must move beyond data tables and build an integrated reporting structure.
Risk decisions in financial services have an immediate impact on financial performance and therefore offer essential context to understand current earnings. Financial services regulators, securities regulators and industry working parties have all significantly improved risk reporting obligations, but there is often an information gap in what this information means for business performance. Linking risk reporting with earnings performance could help shareholders compare profitability across banks with different strategies.
Source: KPMG International, 2014
Analysis of earnings and balance sheet risk analysis provides only part of the enterprise value story. Bank reporting should show how key business assets, such as a retail bank’s customer base, have been developed and protected. Such operational reporting would offer a more complete assessment of shareholder value and business prospects. Some potential relevant indicators of performance include:
Operational risk, such as key staff retention
Progress in managing risks and opportunities, such as the status of a retail branch refresh program
Operational outcomes, such as customer churn rates.
Investors can then compare these indicators across the industry or to the bank’s track record over time.
Financial business reports need to provide shareholders with credible, objective data that allows them to assess actions taken to preserve long-term business prospects. Focusing on “Why are we good for society?” instead of “How have we protected enterprise value?” offers only a list of good deeds disconnected from shareholder value.
Organizations investing to protect and enhance long-term shareholder value should distinguish themselves from those prioritizing short-term financial performance — in part by helping investors understand the fundamental implications of the regulatory uncertainties faced by financial organizations.
A single magic-bullet measure of shareholder value based on one financial ratio or metric won’t meet shareholder needs any better than overly complicated, unintelligible annual reports. Business reporting must instill shareholder confidence by providing the complete picture of long-term value, not just short-term earnings. Each of these ideas should be viewed as a starting point — rather than an end goal — for how banks can improve their dialogue with shareholders. Only then will we start to see annual reports that actually improve the relationship banks have with shareholders.
Do you feel the information you have provided to your shareholders in the past has enabled them to form a view of the long-term prospects and value of your business?
What is the value creation story — not just the financial disclosure — for your business?
How can you accurately convey to your shareholders what it means for your business to have a ‘good year’ — beyond meeting earnings targets?
What other information do you think your shareholders would appreciate and how can you use this information to build trust?