Investor Valuations and Measuring Bank Intangible Assets

Abstract

This paper examines the value-relevance and reliability of bank intangible asset measures. The majority of bank intangible assets are not recognized and few banks voluntarily disclose estimates or provide other information about these assets. Investors therefore have limited direct information about this important component of bank value. I incorporate publicly available financial and market information to estimate four customer-based intangible assets: mortgage servicing rights, credit card intangible, core deposit intangible, and trust operations intangible. I find my estimates are value-relevant, increase the explanatory power of a valuation model compared to one containing balance sheet amounts; and, with the exception of the mortgage servicing rights, are more reliable than balance-sheet amounts and estimates derived from simple algorithms used in prior research. Intangible assets that are not separately reported (core deposit and trust operations intangibles) or that are reported by few banks (credit card intangible) drive the results. These intangible assets are also not subject to separate accounting recognition standards such as SFAS 122 for mortgage servicing rights, where I find weaker results. The evidence of value-relevance and reliability of intangible asset estimates based on current disclosures (and recorded mortgage servicing rights) suggests the existing financial reporting requirements provide useful information about intangible assets and change may not be necessary.

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