Banks' and Insurance Companies' Share Prices Suffering from Inadequate Disclosure.

NEW YORK--(BUSINESS WIRE)--December 1, 1999--

PricewaterhouseCoopers' Studies Shows Growing Need to Communicate

Non-Financial Information

Bank and insurance company executives should re-evaluate their corporate disclosure practices if they want to obtain a fairer value for their listed shares, according to a PricewaterhouseCoopers study released today.

The companion papers, "Value and Reporting in the Banking Industry" and "Value and Reporting in the Insurance Industry" found that hurdles to achieving better stock valuations include an "information gap" in how well companies are satisfying the market's information needs. This information gap is often based upon a "reporting gap" where companies concede that they are not providing certain information to the market that they find useful in running their companies. The capital markets are calling for greater transparency in reporting from banks and insurance companies.

The survey results reported in this study demonstrate that:

- The market is excessively focused on short-term earnings

- The market believes that the short-term market focus often

prevents banks and insurance companies from making long-term 

value-creating decisions

- Most banks and insurance companies believe their shares are

undervalued in the market

- Banks and insurance companies view their disclosure efforts as

better than the market does

- Communication of some key financial and other performance

measures is lacking

- Banks and insurance companies can benefit significantly by

improving their disclosure practices, including better share

prices

"Companies could benefit from improved disclosure of selected measures," said John Fletcher, a PricewaterhouseCoopers Banking Assurance and Business Advisory Services Partner and co-author of the banking paper. "In particular, companies need to enhance their communication of non-financial information such as customer penetration, customer retention and quality of management. The benefits of greater transparency and more effective communication outweigh the costs and the risks."

Analysts and investors in the banking and insurance industries reported that large information gaps continue to exist in more than 15 key performance measures such as Customer Retention, Quality of Management and Market Risk Exposure. They also reported information gaps for financial measures such as Economic Profit and Return on Risk-Adjusted Capital.

All groups surveyed acknowledged that in the long-term, improved disclosure would create better share prices. According to the study, 67 percent of bank CFOs and 65 percent of insurance company CFOs consider their stock to be undervalued. At the same time, only 10 percent of bank and insurance investors, 21 percent of bank analysts and 33 percent of insurance analysts found financial reports very useful.

The Study

The study, co-authored by Dr. Robert G. Eccles, President of Advisory Capital Partners, Inc., measures gaps between the beliefs of CFOs and the investment community regarding the importance of 29 performance measures and satisfaction with current levels of disclosure. The study asked CFOs to rate their own disclosure practices on issues they deem important, if they were actively reporting information on each measure and to rank the quality of information they were able to generate internally.

The goal of the study was to obtain data on the dynamics of the capital markets, corporate disclosure practices in the banking and insurance industries and how financial and non-financial industry-specific performance measures are reported. The study was conducted between April and October of 1999. The study surveyed 51 institutional investors; 39 sell-side analysts who follow banks; and 36 sell-side analysts who cover the insurance industry. Senior management (most often the CFO) of 39 banks and 26 insurance companies in Australia, Canada, Europe and the U.S. were also surveyed.

Importance of Non-Financial Measures

While there was general consensus on the importance of most performance measures, bank and insurance company CFOs placed significantly more focus on non-financial measures of success such as Employee Satisfaction, Regulatory Reputation, Delivery/distribution Channels and Brand Equity. For example, 79 percent of bank executives, and 85 percent of insurance executives, thought that employee satisfaction was important to managing their companies. Only 35 percent of banking and insurance investors, 31 percent of banking analysts and 33 percent of insurance analysts thought that employee satisfaction was important.

"As executives recognize the importance of their `human assets,' they have started to pay more attention to measuring their success in human resource management," said Michael P. Nelligan, co-author of the insurance paper. "However, because the market places much less emphasis on this measure, it is doubtful that companies doing an effective job have been rewarded by the capital markets. To change this, companies must convince the market that satisfied employees, and similar non-financial outcomes, play an important part in creating shareholder value."

Insufficient Information on 50 Percent of Performance Measures

For banking and insurance investors, insufficient information was provided in 15 of 29 performance measures used in the survey. From the banking and insurance analysts' perspective, a larger gap exists in performance measures: 16 of 29 for banking and 18 of 29 for insurance. One of the largest gaps was identified in reporting information about Customers and Markets.

"Information about customers is becoming increasingly important as the market better understands the benefits of high retention and penetration rates. Investors and analysts are increasingly aware of the high cost of acquiring new customers and the lower incremental cost of new revenues from current customers. Disclosure of these measures not only supports forecasts of higher earnings and improved cash flows but should go some way toward reducing the market's current excessive focus on short-term earnings," said Mr. Nelligan.

Mr. Fletcher added, "A common reason cited for not reporting such information is that it would be potentially useful to competitors. We are skeptical, however, because companies often have competitive information that they believe their competitors lack. Moreover, there are many legitimate ways for competitors to get such information. Rather, we believe that one of the reasons companies are not disclosing some of this information is that they may not fully appreciate the importance the market places on receiving it. And, in some cases, certain information can be difficult to get."

The study found that executives overestimate how well they meet the market's need for information on seven key measures, including Asset Quality, Capital Management and Performance by Business Segment. Fewer perception gaps exist in Europe, particularly for investors. "This may suggest that U.S. analysts are demanding more information," explained Mr. Fletcher.

Internal Systems Could be Improved

The survey asked CFOs to assess if they could reliably produce information about measures using their internal systems. The study found quality shortcomings (40 percent or greater) for measurements such as Product Innovation, Brand Equity, Customer Retention and Customer Penetration.

Mr. Fletcher said, "These shortfalls were not surprising given they require hard-to-get external or intangible information. Of more interest were the quality gaps for key financial measures such as return on risk-adjusted capital, economic profit and performance by business segment. While the CFOs reported to having more and better information on these issues than they currently provide to the market, they concede their systems could be better."

More Communication Required Directly with Investors

"The study also found that executives must make a greater effort to communicate directly with investors instead of relying on analysts' recommendations to investors," said Mr. Nelligan.

Although 77 percent of bank CFOs and 84 percent of insurance company CFOs believe that investors rely on sell-side analysts when making investment decisions, only 45 percent of banking and insurance institutional investors agree. Furthermore, 36 percent of bank CFOs believe that institutional investors understand their strategies very well, while only 13 percent believe credit sell-side analysts have a similar level of understanding.

From the insurance perspective, in the U.S., more companies hold a more positive view of how well institutional investors understand their business strategies (33 percent think they understand them very well) compared to sell-side analysts (13 percent) than do European companies (institutional investors, 9 percent; analysts, 18 percent). Sell-side analysts, of course, hold a much more positive view of their own understanding of company strategies (47 percent strongly agree that they do; 60 percent in the U.S. and 42 percent in Europe).

Mr. Nelligan concluded, "Banks and insurance companies must re-evaluate their corporate disclosure practices, which derive from an historical model of providing only what is mandated by regulators. More effective is a philosophy of greater transparency, where banks and insurance companies make more and better information readily available because it is in their own self-interest to do so."

PricewaterhouseCoopers (www.pwcglobal.com) is the world's leading professional services organization. Drawing on the knowledge and skills of 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance.

PricewaterhouseCoopers refers to the US firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization.