The changes overtaking the banking industry are throwing many historical assumptions and rules for success out the window. Yet when bankers gauge their prospects for long-term health-how their institutions will look in three to five years-they blindly adhere to old ways of analysis.

Accounting models are woefully inadequate to uncover the key components of a bank's sustainable strategic momentum-its ability to capitalize on future opportunities. Traditional accounting models are snapshots of what a bank was, not what it will be.

This means investors, senior managements, and the public are shortchanged, with access only to data on physical and financial assets. Lacking are the leading indicators of true worth in such areas as employee knowledge, professional skills, marketing and customer data bases, and customer franchise data.

It is possible to make generalizations on the true value of these intangible assets by looking at the gap between a bank's market capitalization and its book value, and at the difference between the acquisition price and the target's book value.

These estimates are not necessarily based on objective, systematic, or rational assessments.

They are based on an analyst's composite picture of a bank-personal knowledge of new products, technological innovations, leadership-or on visions expressed by senior managements.

But there can be a more complete framework for establishing long-term strategic value based on a bank's dynamic, but hidden and unmeasured, characteristics.

This is not meant to imply that we need to abandon the conventional accounting rules and models, but they cover less than 40% of the factors capturing a bank's true worth. We can complement those methods by looking into five key categories, mostly off the balance sheet:

Pertaining to motivation, loyalty, skills, professionalism, and the like, these factors include turnover rates, average years of service, customer response time, a motivation index based on employee polling, a service-quality index, technology-literacy index, training expenses, and incentive-pay approaches.

Factors that can reflect the duration and profitability of relationships include products sold per customer, elapsed times between customer contacts and responses, annual customer turnover rates, customer support expenses, and frequency of customer visits.

To get a perspective on how technological tools are used to create value, these factors include information technology investments as a percentage of gross revenue or assets and as a percentage of product and corporate overhead, and technology spending per employee.

To get at flexibility and adaptiveness, factors can include new-product revenue as a percentage of the total, new-business development costs, and marketing and "competence development" costs per employee.

An enhanced package of measures can include assets, gross revenue, and deposits per employee; profitability ratios like return on assets, return on equity, and net interest margin; efficiency and capital ratios; overhead spending and accounts per employee; and economic value added per employee.

Pioneering work in this area has been done by Leif Edvinsson of Skandia AFS, the largest financial services company in Sweden.

An effort such as this to create a comprehensive yardstick for measuring a bank's true and total worth is especially appropriate in a favorable economic climate. Managers who do not get up to speed in tracking these dynamic factors and maintain a sense of urgency about it could find themselves facing a real crisis sooner than they may have imagined.

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