BRAND OF THE POLISH STATE-OWNED … 36th Volume/sabastian3.pdfdevelopment banks, e.g., the Bank Gospodarstwa Krajowego, which on account of the scope of their activity, as a principle,

International Journal of Information Technology and Business Management 29th April 2015. Vol.36 No.1

© 2012 -2015 JITBM & ARF. All rights reserved

ISSN 2304-0777 www.jitbm.com

17

BRAND OF THE POLISH STATE-OWNED DEVELOPMENT

BANK (“THE BANK GOSPODARSTWA KRAJOWEGO”)

Sebastian Skuza

PhD, Assistant Professor at University of Warsaw, Faculty of Management

[email protected]

Abstract

The Bank Gospodarstwa Krajowego (the BGK, the Bank) has been established by the state to realize a public

mission, in particular by financially supporting the government’s economic policy, which provides a link to the

institution’s prewar traditions. The main activity objectives of the Bank, in the scope specified in the Act and

separate provisions, include support for governmental social and economic programmes as well as local

government and regional development programmes.

Possession of a strong brand is generally considered a significant factor in the success of an enterprise. The

value of a brand is dependent on the line of business in which the enterprise conducts its activity. However, a

question emerges as to whether these same methods of brand valuation may also be used for state-owned

development banks, e.g., the Bank Gospodarstwa Krajowego, which on account of the scope of their activity, as

a principle, do not directly compete with commercial banks. In this chapter the author attempts to analyze the

brand value of an entity which acts as a main partner of the state in handling social and economic programs in

Poland.

Keywords: the Bank Gospodarstwa Krajowego, the state-owned development bank, the

brand, the value, 25% rule method, the Relief from Royalty method

1. THE BANK GOSPODARSTWA

KRAJOWEGO AS A POLISH STATE-

OWNED DEVELOPMENT BANK

On 14 March 2003, the Sejm of the Republic of

Poland passed the Bank Gospodarstwa Krajowego

Act (Journal of Laws No. 65, item 594). The Statue

entered into force 45 days after the date of

publication (i.e., on 1 June 2003). The bill of the

Act was drafted by the government in furtherance

of the “Entrepreneurship - Growth - Work”

economic strategy programme. Due to the character

of the activities assigned to the BGK, which consist

of performing public tasks, the Bank occupies a

special, expressly distinct position among other

banks operating in the market. Regulating the basic

rules and scope of BGK activities became necessary

both because of formal and legal considerations and

the pending integration with the European Union

[20].

The Bank Gospodarstwa Krajowego (the BGK, the

Bank) has been established by the state to realize a

public mission, in particular by financially

supporting the government’s economic policy,

which provides a link to the institution’s prewar

traditions. According to Article 4 of the BGK Act,

the main activity objectives of the Bank, in the

scope specified in the Act and separate provisions,

include support for governmental social and

economic programmes as well as local government

and regional development programmes, which

include in particular the following projects [23]:

1) projects realized with the use of means

obtained from funds of the European Union

and international financial institutions;

2) infrastructural projects;

3) projects related to the development of the SME

sector

- including projects realized with the use of public

means.

Apart from its main activity objectives, BGK may

also conduct market activities more typical of other

banks. Both the reference to the Banking Law Act

contained in the BGK Act and the provisions of

BGK Statute (enacted by an order of the Minister of

Treasury) allow BGK to perform banking




18

operations and other specific activities typical of the

banking sector.

The main activity objectives of BGK are also

reflected in tasks realized by the Bank

Gospodarstwa Krajowego and listed in Article 5 of

the BGK Act, which include among others [23]:

1) carrying out the actions set forth in the Banking

Law Act of 29 August 1997;

2) providing services related to funds established,

entrusted or transferred to the BGK under

separate statutes;

3) providing services related to export

transactions with the use of export support

instruments and support for exporting Polish

goods and services, pursuant to separate

regulations or in the course of realizing

government programmes;

4) conducting direct or indirect guarantee or

surety activities in the course of realizing

governmental programmes or in the name and

on behalf of the Treasury under the Act on

Sureties and Guarantees Granted by the

Treasury and Certain Legal Persons 8 May

1997, in particular for the small and medium

enterprises sector;

5) supporting the development of residential

housing, in particular efforts aimed at

constructing residential premises for rental,

according to separate provisions or in the

course of realizing governmental programmes.

The BGK Act enables the Bank to maintain

solvency standards, provide means to increase

BGK’s statutory fund, transfer securities to increase

BGK’s statutory fund, and be granted a loan from

state budget means to increase basic or

supplementary funds. In order to ensure that BGK

complies with liquidity standards specified in

provisions of the Banking Law Act of 29 August

1997, the minister responsible for public finances

may guarantee, in the name of the Treasury, the

payment of credits and credit lines granted to BGK

by a domestic or foreign bank or credit institution,

and the performance of pecuniary considerations

from debentures issued by the BGK, in particular

bonds or banking securities.

The objectives stated in the BGK Act expressly

determine its public mission and the specific

character of its activities in the banking market. The

basic objectives of BGK activities include

supporting governmental economic and social

programmes, as well as local government and

regional development programmes realized with the

use of public funds. Currently, BGK combines

domestic and foreign trading activities in the

market with financial support for economic and

social undertakings of the state. Market mission

activities are, however, meant to increase the

effectiveness of carrying out commissioned tasks

and to expand and reinforce the BGK infrastructure

and assets used to carry out tasks commissioned by

public administration authorities.

In realizing its mission, the BGK becomes:

1) the bank of first choice for the state in carrying

out commissioned tasks and stipulated

statutory provisions, ensuring operational

efficiency and rational costs;

2) an institution effectively supporting the

realization of governmental policies and

eliminating the inefficient operation of the

financial sector by means of its own

programmes that include, among others:

a) supporting entrepreneurs,

b) servicing selected strategic industries,

c) supporting exports.

Table 1. Areas of activity of the Bank Gospodarstwa Krajowego

Governmental programmes:

payments from European Union funds;

development and modernization of infrastructure;

providing banking services related to receivables and liabilities of the Treasury;

supporting the realization of EU programmes;

governmental export support programmes;

surety and guarantee programmes;

providing services related to other governmental programmes.

Providing services to other public finance units:




19

Source: [28].

2. THE NOTION AND MOST

IMPORTANT ASPECTS OF THE

BRAND

Possession of a strong brand is generally considered

a significant factor in the success of an enterprise.

The value of a brand is dependent on the line of

business in which the enterprise conducts its

activity. The most valuable brands are developed in

the service, consumer goods, and retail industries,

while those brands with the lowest value belong to

government and social welfare institutions and in

the mining or intermediate goods industries [25]. In

the case of the banking sector, possession of a

brand has not been traditionally seen as a key factor

determining success, meaning that banks’ offers

were not differentiated on the basis of their brands.

What is more, banks tended to perceive a brand as

being an identifier of an organization rather than as

a tool for supporting sales and improving the entire

bank’s results. The banking sector’s approach to the

role played by brands in banking activity is

currently undergoing change. Over the last few

years there has been a growing trend in activity

relating to promotional operations aimed at

branding among many financial institutions, both in

Poland and worldwide [31].

Analyses of the trends relating to and valuations of

the most valuable bank brands in the world are

becoming more widespread with the increasing

importance of brands in the banking sector. This

can be seen as a result of globalization processes

and the strategy of some banks to develop unified

global brands in addition to rising levels of

competition within the sector. Attempts at valuing

the brands of commercial banks, as the financial

institutions actively compete for clients, do not

give rise to methodological doubts.

The valuation of a bank’s brand also allows for a

valuation of the bank itself through use of the

adjusted net asset method. The brand possesses an

actual economic value even though it is not

recognized in the balance sheet.

The starting point for an analysis of a bank’s value-

generating ability is its capacity to generate a return

for equity holders which exceeds the cost of capital

employed, i.e., the rate of return expected by the

equity holders [18]. The capacity to generate a

return for equity holders results above all from the

bank’s level of acquired profit and the value of its

net assets. Analysis of a bank’s value should,

however, be limited exclusively to examination of

financial data.

Presented below is a list of the most important

factors shaping the value of a bank.

Figure 1: Bank value generators

consolidation of public finances;

providing banking services to public finance sector units;

acting as a representative of the Ministry of Finance.

Activities related to own programmes:

investment projects and funds;

local government units, municipal companies, health care facilities (financing and transactional banking);

strategic sectors such as energy and production of arms.

Limiting the ineffectiveness of the financial sector:

complex proactive and anti-cycle activities.

Competitive advantage period

Growth Capital expenditures

Additions to operating assets




20

Source: [5].

Taking into account banks’ own individual

characteristics, it is possible to distinguish the

following factors that shape their value [27]:

1) competitive advantage period - period of

generating a return exceeding equity cost;

2) capital expenditures - expenditures for new

fixed assets;

3) additions to operating assets - receivables,

securities, etc.;

4) net interest margin - interest earned in relation

to assets;

5) non-interest income ratio - earned through

commissions, securities, and financial

transactions;

6) cost/income ratio - a measure of the bank’s

income necessary to cover its costs;

7) bad debt ratio - approximation of the cash

effects of distressed assets;

8) cash tax rate - income tax paid in relation to

gross profit;

9) regulatory requirements - these result in cash

flows not reaching shareholders as a result of

the bank’s requirement to fulfill capital

adequacy norms;

10) equity capital cost - rate of return expected by

equity holders of the bank.

As an example, valuing a bank using the adjusted

net asset method consists of specifying the values

of its assets based upon records held in accounting

books and appraisal reports and prepared by

certified appraisers. These asset values must be

verified by means of an adjustment and then

reduced by the amount of foreign capital employed

in financing the bank’s activity (also previously

adjusted). At the same time, those assets not

recognized in the bank’s balance sheet, including in

particular its intangible assets (e.g., trademarks), are

themselves identified and valuated.

In accordance with the Accounting Act of 29

September 1994 and the Order of the Minister of

Finance of 1 October 2010 on special rules of bank

accounting, most bank assets and liabilities are

valuated in accordance with the methodology of

determining fair value or other related approaches.

This means that the net value of assets figure

recognized in the bank’s financial statement should

approximately reflect the fair value of its assets.

However, a question emerges as to whether these

same methods of brand valuation may also be used

for state development banks, e.g., the Bank

Gospodarstwa Krajowego, which on account of the

scope of their activity, as a principle, do not directly

compete with commercial banks. In this chapter the

author attempts to analyze the brand value of an

entity which acts as a main partner of the state in

handling social and economic programs in Poland

[24].

From an economic perspective there are many

definitions of a brand, which serves to prove the

multi-aspect nature of this type of intangible asset.

It should also be taken into account that it is

Income

Risk

Net interest margin

Non-interest income ratio

Cost/income ratio

Bad debt ratio

Interest rate

Regulatory requirements

Equity capital cost




21

unreasonable to solely examine the perception of a

brand as a name or a graphic sign, irrespective of

the product or service it represents or any

associations that it brings. A product provides a

purchaser with functional benefits, while the brand

is a carrier of emotional values [26].

The PWN Polish Dictionary defines brand as the

quality or type of goods of a given company. The

American Marketing Association defines brand as a

name, term, symbol or design, or a combination

thereof, which aims at identifying products and

services of one seller or a group of sellers as well as

their differentiation from competitors. The British

Chartered Institute of Marketing defines brand as a

group of physical characteristics of a product or

service along with the convictions and expectations

related thereto - a unique association caused in the

consciousness of recipients by a name or a logo or a

product or service [24].

The intangible nature of a brand’s added value

includes the entirety of its characteristics and

benefits, which, in the subjective sense of a client,

is represented by a company, product or service. A

view may also be adopted that a brand is not a sign

but rather a kind of a promise, a vow, which should

shape the entire behavior and strategy of a

company’s activities [16].

A brand and its value are related to the notion of

customer-based brand equity or “CBBE” [14]. This

means the “difference in the consumer’s behavior in

reaction to marketing activities resulting from their

(previous) knowledge of the brand.” The

fundamental assumption of CBBE is that a brand’s

power depends upon a consumer’s earlier

experiences with it - on what the customer felt and

heard as well as how he reacted to the brand in the

past [15]. This suggests that CBBE is a value which

consumers attribute to the brand and the power of

the brand is dependent on the memory/experiences

of consumers. The value of the brand is created by

sellers, by the relative quality of the brand, the

social status which it allows consumers to achieve,

the trust that consumers place in the brand, and

their self-identification with it. “CBBE is present if

the consumer possesses a high level of awareness

and knowledge of the brand as well as certain

strong, advantageous, and unique associations with

the brand in his memory.” Literature on the subject

measures the value of brand equity using many

aspects, such as brand awareness [1], perceived

quality [2], loyalty towards the brand [34], brand

image or associations with the brand [3].

CBBE is characterized by consumers’ behaviors

and/or associations. Appraising the power of

CBBE, conclusions may be drawn about the

significance of the brand in the activity of an

enterprise as well as its commercial value. The

power of the CBBE will vary between enterprises

depending on its historically conducted marketing

activities [24].

Acts regulating the legal protection of trademarks in

Poland are the Industrial Property Law of 30th June

2000 and the Order of the Prime Minister of 8th

July 2002 on Filing and Processing of Trademark

Applications. A trademark is defined as a marking

presented in graphic form (e.g., drawing, spatial

form) which allows for the differentiation of the

goods of individual enterprises in economic trading.

The described characteristics essentially come

down to providing a distinguishing feature which

allows the consumer of a branded product or

service to make a conscious selection from among

many other competing offers. The issue therefore

concerns both the typographic aspect of the product

marking and the sector to which it is assigned.

From the perspective of an enterprise’s activity, the

basic factors influencing the value of the enterprise,

which is in turn influenced by the brand, are its

sales volume and operating profit margin.

A brand does not always have to be the means by

which a company achieves higher prices in

comparison to its competitors. In some cases, on

competitive markets, it may affect the volume of

sales. In the case of financial services where

products are relatively homogeneous in nature, the

impact of a provider’s brand may be higher sales of

products if, for instance, that brand is associated

with a level of security. In such an event the brand

generates quantifiable benefits [13].

Relief from Royalty Method

There are three main methods of valuation with

regards to determining the value of a brand. These

are income, market and cost-based approaches. The

valuation method used most often in practice is the

Relief from Royalty method. This method

combines two approaches: the income approach, as

it is based on planned revenues and profits resulting

from the possession of a given brand; and the

market approach, as royalties are taken into

consideration, the rates of which are established in

license agreements conducted under market

conditions. The Relief from Royalty method is

recognized by tax authorities and the courts as it is

based on commercial transactions that take place in

the real world and it can be carried out based on




22

publicly available financial information. What is

more, this method complies with International

Valuation Standards Committee (IVSC)

requirements concerning the specification of the

market value of brands [8].

The estimation of a brand’s value using the Relief

from Royalty method is based on the notional

royalty rate which an enterprise would have to pay

in respect of acquiring the right to utilize a given

brand. A market example of this type of right is a

franchising contract. The royalty rate used most

often is a percentage calculated on the basis of

revenues earned with regard to possession of the

rights to use a given brand, specified by both parties

within a license contact. The exact royalty rate is

variable and depends on many factors such as the

level of profitability of the products sold under a

given brand, the level of capital expenditure

incurred for the purposes of its creation and

development, a given brand’s life cycle phase, its

character and the market in which it functions. The

royalty rate also varies depending on the industry

sector in which a given entity conducts its activity.

The royalty rate used most often for the purposes of

assessing a given brand is based on previously

disclosed transaction information.

According to this method, the value of a brand is

determined according to its capacity to generate

future positive cash flows. This notional future

income stream is itself based on the hypothetical

royalties stemming from the right to utilize the

brand, after calculation of tax and taking into

account the brand’s residual value. The method is

based on calculating cash flows in subsequent

periods and then using a specified discount rate to

obtain a net present value (NPV) figure [33].

The starting point for the specification of free cash

flows (“CF”) is normally the enterprise’s revenue

stream generated as a result of owning the brand in

question. With regard to the valuation of a bank’s

activities, revenues are defined as interest revenue

and commission revenue.

Annual revenue derived from the charging of the

“royalty” is calculated as a percentage of sales

value (the rate of the royalty expressed in percent).

These revenue values are subject to taxation and the

result is the net royalty revenue - the cash flow

generated as a result of using a given brand.

This method combining both income and market

approaches has been utilized to conduct an analysis

of the BGK Brand.

Formula for calculating cash flows:

( ) (1)

where:

S - Net revenues of the enterprise resulting from sales of the “brand” products

RR - rate of royalties expressed as a percentage

TR - Income tax rate

The value of the brand is the sum of the free cash

flows generated in the form of a net royalty income.

Taking into account the time value of money, the

free cash flows generated are discounted using a

discount rate for a specified moment in time (date

of valuation).

Formula for calculating the value of the brand:

∑

( )

( ) (2)

where:

FCFt - free cash flow for the company on account of possessing a given brand

kc- equity cost taking into account the brand risk

RVn - residual value of cash flows




23

The author uses equity capital cost as the discount

rate for valuation of the brand. Equity capital cost is

most often derived using the Capital Asset Pricing

Model (CAPM). According to the CAPM model,

the cost of equity capital is determined using the

following formula.

(3)

The rate of return expected by the investors is the

function of the rate of return on risk-free securities

(risk-free securities are government bonds of the

country in which a given entity conducts its

activity) and the risk premium appropriate for a

given enterprise. The risk premium reflects future

value and not historical value, as the cost of capital

should reflect the rate of return anticipated by

investors in the projection period.

When appraising intangible assets the cost of equity

capital is increased by an additional risk premium

related to the specific characteristics of these assets.

As a general rule, intangible assets and their related

cash flows carry a higher level of risk than

enterprise or tangible assets [28].

One element of the cost of equity capital calculation

is the beta coefficient. The beta coefficient reflects

the variability of prices of shares of a given

enterprise compared to the variability of the entire

share index. The greater the variability of the

enterprise share price in relation to the market

index, the higher the systematic risk and thus the

higher the value of the beta coefficient. The

following formula is used to calculate the beta

coefficient:

( )

∑ ( ) (

)

∑ ( )

(4)

where:

βEa - beta coefficient of the model company

cov (rit’ rmt) - covariation of the rate of return of the model company’s shares with the market

var (rmt) - variation of the rate of return of the market

rit - rate of return on the shares of the model company in period t

rmt - market rate of return in period t - period in which the model’s parameters are specified

rm (with upper dash) - average rate of return on the shares of the model company in period t

Residual or Terminal Value can be used to assess

the value of the brand as well as the enterprise. If a

brand is assessed as having high potential (i.e.,

large brand capital) that will extend into the

foreseeable future, it is legitimate to assume that the

brand in question has the potential to generate

benefits for its owner beyond the forecast period. A

residual value is thus calculated to reflect the value

of the brand’s benefits after the forecast period. A

detailed cash flow forecast is usually prepared for a

period of five to ten years. The forecast period

should be sufficiently long so as to enable a level of

stability in the predicted cash flows. Cash flows

generated by an enterprise outside of the detailed

forecast period are calculated using a formula for

residual value [17].

Formula for calculating the residual value of the

brand:

( ) (5)

where:

gn - stable growth rate, constant after the forecast period




24

Methodological aspects of value estimation

The most important elements of the BGK brand are

[27]:

1. Recognizability.

2. Identity.

3. Assignment of generated benefits.

4. Regulated issues of ownership rights.

5. Legal protection.

Ad 1.

Bank Gospodarstwa Krajowego, as the only state-

owned bank in Poland, is a well-known institution.

By undertaking tasks ordered by the state, including

those aimed at supporting the country’s economic

development, it is a mainstay of the government’s

economic policy. On account of this the Bank

occupies a position of strength in Poland’s societal

consciousness and its brand is perceived as

representative of a public institution in support of

the economy rather than as a trademark used to

conduct profit-generating activity. With regard to

the nature of the activity it conducts the BGK is

therefore perceived to be an institution in which the

public can trust.

Ad 2.

The Bank’s identity is well established in the

consciousness of Poles, stemming from, amongst

other things, its 90-year history and traditions.

Ad 3.

The author adopts the assumption that the Bank

realizes benefits from its utilization of the BGK

trademark. It is also necessary to examine the extent

to which cash flows stem from the specific

legislative environment accorded to the Bank on the

one hand, and the extent to which cash flows stem

from the utilization of the BGK brand on the other.

It is possible that the Bank’s cash flows would not

be significantly different should the Bank

discontinue its utilization of the current brand. The

realization of tasks entrusted to it by the state are in

fact the result of legal stipulations. In this chapter

the assumption was taken that the efficiency with

which the bank realizes these tasks is, at least to a

certain extent, a function of the strength of the

brand.1 On the basis of these assumptions it is

1In order to affirm the possibility of assignment of

material benefits to the brand with a greater degree of

probability it seems necessary to conduct research into

the strength of the brand among consumers. Such

research would provide verification of the brand’s

possible to identify the benefits generated in

relation to the brand. However, a conclusive

quantification of these benefits is somewhat

limited. This concerns in particular the brand’s

contribution to profits and the association of the

cash flows currently achieved by the Bank with the

BGK brand [30].

Ad 4.

The issue of ownership rights of the BGK brand,

understood as a trademark, is fully regulated. The

owner of the BGK brand is the Bank Gospodarstwa

Krajowego. There are no known cases of claims

related to this trademark.

Ad 5.

The BGK trademark is registered in the Patent

Office of the Republic of Poland and no cases of

infringements of its ownership rights have been

identified. The authorized entity is the Bank

Gospodarstwa Krajowego, and the exclusivity right

granted constitutes adequate legal security for the

BGK.

In the author’s opinion, in light of the

aforementioned criteria, the BGK brand fulfills all

necessary requirements for it to be the subject of

assessment. The only area of doubt is the issue of a

conclusive assignment of benefits pertaining to use

of the brand. Doubts related to estimating the

economic benefits that may be assigned to the

brand have been indicated within the scope of this

publication. With regard to this, both the valuation

procedure and its results should be interpreted with

a degree of caution, taking into account all of the

stipulated reservations and assumptions.

The activity of the BGK is regulated by the Bank

Gospodarstwa Krajowego Act of 14 March 2003,

the Order of the Minister of Treasury of 11 May

2010 on granting Statute to the Bank Gospodarstwa

Krajowego, as well as the Banking Law Act of 29

August 1997. The BGK, similarly to other state-

owned banks, is subject to the supervision of the

Financial Supervision Authority and is obliged to

adhere to the capital and liquidity requirements

specified by regulations of the Banking Law Act of

29 August 1997. From a capital and liquidity

perspective the BGK holds indirect statutory

guarantees of the Treasury.

The BGK is the main partner of the state in

handling governmental social and economic

programs realized to assist entrepreneurs and

commercial potential.




25

infrastructural as well as residential investments.

The BGK’s activities also include public finance

sector entities (e.g., handling bank accounts and

consolidation of public finance).

In this article the author makes an attempt to assess

the market value of the BGK brand (“Brand”). For

the purposes of the following analysis market value

should be understood as the price which would be

acquired for the sale of an item or paid in order to

transfer an obligation between market members on

the day of valuation. This definition assumes that a

hypothetical transaction would take place between

entities interested in concluding a transaction, that

these entities possess similar knowledge about the

object of the transaction, and that they each act in

their own interests [21]. The analysis of the value of

the Brand will be conducted in accordance with the

state as of 31 December 2012.

For the purposes of valuation, an intangible asset,

including the right to a typographic symbol, is

understood as an “asset without physical substance,

utilized in production and/or distribution (of goods

and services) and/or leased to other entities, or

controlled by a unit as a result of past events, with

regard to which future economic benefits may be

expected” [6].

Table 2. Characteristics of the valuated trademark

Source: [9] [24].

The author takes the assumption that the BGK

accrues benefits resulting from use of its trademark,

and the efficiency with which it realizes tasks

entrusted to it by the state is at least to some extent

the function of the strength of its brand.2

In the case of the BGK, the identification of similar

brands (at least on the Polish market), which could

be the subject of licensing, seems impossible.

Severe restriction also applies to the specification of

2With regard to the above, both the valuation procedure

and its results should be interpreted with a certain degree

of caution, taking into account all the stipulated

assumptions. In order to affirm the possibility of

assignment of material benefits to the BGK brand with

greater certainty it would be necessary to conduct

research into the strength of the brand among customers.

a level of royalties associated with banking activity.

As a consequence, in order to apply the method in

question to the case of the BGK it is necessary to

adopt specific assumptions [24].

For the purposes of conducting analysis of the value

of the BGK, financial forecasts of the Bank for the

years 2013-2017 have been prepared on the basis of

historical statements of the Bank for 2010-2012.

Amount of the Royalty Rate

The basis of the assessment is the net price of goods

or services. Statistics prepared on the basis of

information from the database RoyaltySource™

indicate that the average royalty rate amounted to

6.4% of revenues related to the sales of

trademarked products, while the median of these

rates amounted to 4.8% [32]. According to other

Name BGK

Type of mark Typographic

Protection right TOW: 189373

Application TOW: 294922

Date of filing 13-05-2005

Decision on registration 04-05-2007

Right-holder Bank Gospodarstwa Krajowego




26

researches the royalty rates fluctuate between 0.5%-

5.0% of net sales revenues [4] [35].

In accordance with the results of research described

in the publication “Factors Affecting Royalty

Rates,” the amount of royalties for a trademark in

87% of the enterprises examined remained between

0% and 10% [19].

As can be observed in Table 3, percentage rates of

royalties in individual industries show considerable

variation. Differences may also occur in the amount

of rates within the same industry, depending on the

type of product in question.

Table 3. Royalty rates in individual branches of the economy

Source: [19] [27].

Musa Pinar, Tulay Girard, and Zeliha Eser

conducted research on the Turkish market

concerning the customer-based brand equity of

banks (“CBBE”) [22]. In the scope of their research

they divided banks conducting activity in Turkey

into private, domestic, and foreign banks. The

research proved that CBBE is significantly higher

for private banks. On the other hand, the difference

between domestic and foreign banks is not

substantial.

What is more, research indicates that the value of a

brand also depends to a large extent on the industry

in which it operates. The lowest values are achieved

by the brands of governmental and social welfare

institutions, while the highest values are achieved

by brands in the service industry.

Industry Royalty Rate Category

0-2% 2-5% 5-10% 10-15% 15-20% 20-25% >25%

Aerospace - - 40% 55% 5% - -

Automotive 35% 45% 20% - - - -

Chemical 18% 57% 24% 1% - - -

Computer 43% 58% - - - - -

Electronics - 50% 45% 5% - - -

Energy - 50% 15% 10% - 25% -

Food/Consumer 13% 63% 25% - - - -

General Manufacturing 21% 52% 20% 3% 1% 1% 3%

Government/University 8% 39% 36% 16% 0% 1% -

Health care Equipment 10% 10% 80% - - - -

Pharmaceuticals 1% 21% 67% 9% 1% 1% 0%

Telecommunications - - - 100% - - -

Other 11& 41% 29% 16% 1% 1% 1%

Number of Deals by

Royalty Rates 87% 13%




27

Figure 2: Relationship between the value of the brand and the industry

Source: [25].

It would be reasonable to assume that the value of

the BGK brand, belonging as it does to an entity

which combines characteristics of a state-owned

bank and an institution realizing governmental

programs subject to the Minister of Finance, should

be lower than the value of brands of typical

commercial private banks. Therefore, an

assumption that the hypothetical royalty rate for the

BGK brand will be around the lower limit of the

observed market ranges might also be deemed

reasonable. In order to perform analysis of the value

of the BGK brand, calculations have been made for

the value of the royalty rate being within the range

of 0.2% and 7.7%.3 In these considerations the

author assumes that this rate amounts to 0.6%.

3However, in the case of the BGK there is no basis for a

conclusive specification of the amount of royalty rates.

The value of the royalties which form the basis for

the valuation of the BGK brand is estimated by the

author in relation to the revenues resulting from

interest and commission acquired by BGK. The

present value of these royalties is estimated by the

author using a discount rate calculated for cash

flows related to the BGK brand. The discount rate

has been calculated on the basis of the CAPM

model and increased by a premium of two

percentage points on account of the additional risk

related to intangible assets.

Go

ver

nm

ent

and

so

cial

inst

itu

tio

ns

Min

eab

le g

oo

ds

Inte

rmed

iate

go

od

s

Par

ts

Ind

ust

rial

ser

vic

es

Wh

ole

sale

Dis

trib

uti

on

Ret

ail

Co

nsu

mer

go

od

s

Ser

vic

es

val

ue

classification




28

Table 4. Calculation of the discount rate

Source: [own study]

The residual value has been calculated by the

author with the assumption of an increase in cash

flows after the forecast period in the order of 2.0%.

This reflects the value of the inflation target of the

NBP decreased by a 0.5 percentage point. Cash

flow from the last forecast period (2017) has been

adopted for the purposes of estimating the residual

value.

3. BRAND OF THE BANK

GOSPODARSTWA KRAJOWEGO IN

THE CONTEXT OF ANALYZING ITS

VALUE

The author has prepared two versions of the

analysis of the value of the BGK brand using the

Relief from Royalty method.

Table 5. Analysis of the value of the BGK brand using the Relief from Royalty method, estimated in

relation to revenues (PLN millions)

Calculation of the discount rate for cash flows related to the BGK brand

Risk-free rate 3.74% profitability of treasury bonds as of 31.12.2012

Market risk premium 5.50% in accordance with the recommendation of Duff and

Phelps as of 31.12.2012

Beta 0.58 http://www.damodaran.com, beta for banks

Equity capital cost 6.95% result of the calculation

Premium for risk related to

intangible assets 2.00% assumption

Discount rate - Brand 8.95% result of the calculation

Description 2013 2014 2015 2016 2017

Revenues assigned to the brand 2,575.5 3,406.1 4,402.2 4,901.7 4,904.5

Royalty rate 0.60% 0.60% 0.60% 0.60% 0.60%

Gross royalties 15.5 20.4 26.4 29.4 29.4

Tax rate 19.00% 19.00% 19.00% 19.00% 19.00%

Net royalties 12.5 16.6 21.4 23.8 23.8

Discount rate 8.95% 8.95% 8.95% 8.95% 8.95%

Discount factor 0.92 0.84 0.77 0.71 0.65

Discounted royalties 11.5 13.9 16.5 16.9 15.5

Accumulated discounted

royalties 11.5 25.4 41.9 58.9 74.4




29

Residual value

Net royalty in 2017 23.8

Growth rate after the forecast period 2.00%

Residual value 350.0

Discounting factor 0.65

Discounted residual value 228.0

Brand value 302.4

Source: [own study]

Table 6. Analysis of the sensitivity of the value of the BGK brand using the Relief from Royalty method

(PLN millions)

Source: [own study]

An alternative approach to estimating the

hypothetical royalty rate is the 25% rule [7] [10]

[12].

With regard to the difficulty in specifying an

appropriate (market) level of royalty rates, the

author has also conducted analysis of the value of

the BGK brand using a method based on the

amount of the royalty rate calculated on the basis of

net profit (the so-called 25% rule). In this method it

is assumed that royalties constitute 25% of the net

profit, which corresponds to the average amount

occurring in economic practice [11].

Table 7. Estimation of the royalty rate with use of the 25% rule

Source: [own study]

Royalty rate

Dis

cou

nt

rate

7.7% 4.6% 3.1% 1.5% 1.4% 0.8% 0.6% 0.3% 0.2%

7.95% 4,590.3 2,754.2 1,836.1 918.1 829.6 459.0 355.5 183.6 118.5

8.45% 4,220.8 2,532.5 1,688.3 844.2 762.8 422.1 326.9 168.8 109.0

8.95% 3,904.6 2,342.8 1,561.9 780.9 705.7 390.5 302.4 156.2 100.8

9.45% 3,631.1 2,178.7 1,452.4 726.2 656.2 363.1 281.2 145.2 93.7

9.95% 3,392.1 2,035.3 1,356.8 678.4 613.1 339.2 262.7 135.7 87.6

Description 2010 2011 2012

Revenues assigned to the brand (PLN

millions) 1,547.0 2,220.0 2,135.4

Revenue due to interest (PLN millions) 1,495.3 2,157.0 2,063.7

Revenue due to commissions (PLN

millions) 5.7 63.0 71.7

Net profit (PLN millions) 414.5 450.6 479.2

Net profitability (Net profit / revenues

assigned to the brand) 26.79% 20.30% 22.44%

Average profitability 2010-2012 23.18%

25% rule - royalty 0.25 net profitability 5.79%




30

Table 8. Valuation of the BGK brand using the 25% rule in the variant assuming (PLN millions)

Residual value



Residual value 5,539.0


Discounted residual value 3,608.7

Brand value 4,625.5

Source: [own study]

With regard to the specific activity of the BGK,

including in particular its relatively high level of

profitability which may reflect the Bank’s specific

legal conditions (i.e., a monopoly in the realization

of part of those tasks ordered by the state), royalties

estimated on the basis of the 25% rule may only

partially reflect the actual value of the Brand. It is

therefore necessary to repeat the reservation that in

the case of the BGK there is no basis for a

conclusive specification of the amount of royalty

rates, and the assumption of licensing itself may

raise doubts.

Taking into account the specificity of its

functioning it seems legitimate to analyze

modifications of the 25% rule. In these

modifications the author adopted an assumption

that the Brand does not generate 25% of the net

profit (on the basis of the average profitability

2010-2012 from Table 9). Appropriate royalty rates

for levels other than the 25% rule are presented

below.

Table 9. Examples of modifications of the 25% rule and implied royalty rates

Source: [own study]

Table 10. Modifications of the 25% rule and implied royalty rates (PLN millions)

Description 2013 2014 2015 2016 2017

Net profit 794.9 907.0 1,284.5 1,860.1 1,862.9

Revenues assigned to the brand 2,575.5 3,406.1 4,402.2 4,901.7 4,904.5

Royalty rate 25.00% 25.00% 25.00% 25.00% 25.00%

Gross royalties 198.7 226.8 321.1 465.0 465.7

Tax rate 19.00% 19.00% 19.00% 19.00% 19.00%

Net royalties 161.0 183.7 260.1 376.7 377.2

Brand equity cost 8.95% 8.95% 8.95% 8.95% 8.95%

Discount factors 0.92 0.84 0.77 0.71 0.65


Accumulated discounted royalties 147.7 302.5 503.6 771.0 1,016.8

Modifications of the 25% rule 25.00% 15.00% 10.00% 5.00% 2.50%

Average profitability 2010-2012 23.18% 23.18% 23.18% 23.18% 23.18%

Royalty rate after taxation 5.79% 3.48% 2.32% 1.16% 0.58%

Royalty rate before taxation 7.15% 4.29% 2.86% 1.43% 0.72%

Description 2013 2014 2015 2016 2017

Net profit 794.9 907.0 1,284.5 1,860.1 1,862.9

Revenues assigned to 2,575.5 3,406.1 4,402.0 4,901.7 4,904.5




31

Residual value



Residual value 1,584.9


Discounted residual value 1,032.6

Brand value 1,323.5

Source: [own study]

An analysis of the BGK brand using the Relief

from Royalty method is presented below with

royalty rates specified in the above modifications of

the 25% rule.

Table 11. Analysis of the sensitivity of the value of the BGK brand with use of the modifications of the

25% rule and implied royalty rates (PLN millions)

Source: [own study]

With regard to the BGK’s specific activity, in the

author’s opinion, royalties estimated on the basis of

the 25% rule may only partially reflect the actual

value of the BGK brand. In analysis of an

alternative approach to estimating the amount of the

hypothetical royalty, the effect is the generation of a

value range between PLN 52.9 million - with the

assumption that 0.29% of profit generated by the

Bank is created owing to the Brand - and PLN

4,625.5 million, with the assumption of 25%.

Taking into account the conditions described and

the assumptions adopted, the value of the BGK

brand calculated using the Relief from Royalty

method (which is more appropriate in the author’s

opinion), estimated in relation to revenues as of 31

December 2012 was between was between 0.2%

(amounting to PLN 100.8 million) and 0.8%

(amounting to PLN 390.5 million).

In the author’s subjective opinion the most

appropriate course of action is to adopt an

the brand

Royalty rate 7.15% 7.15% 7.15% 7.15% 7.15%

Gross royalties 56.9 64.9 91.9 133.1 133.3

Tax rate 19.00% 19.00% 19.00% 19.00% 19.00%

Net royalties 46.1 52.6 74.4 107.8 107.9

Brand equity cost 8.95% 8.95% 8.95% 8.95% 8.95%

Discount

factors 0.92 0.84 0.77 0.71 0.65


Accumulated

discounted royalties 42.3 86.6 144.1 220.6 290.9

Royalty rate

Dis

cou

nt

rate

25.00% 15.00% 10.00% 7.15% 4.29% 2.86% 1.43% 0.72% 0.29%

7.95% 5,462.8 3,277.7 2,184.1 1,563.1 937.8 625.2 312.6 156.3 62.5

8.45% 5,011.5 3,006.9 2,004.6 1,433.9 860.4 573.6 286.8 143.4 57.4

8.95% 4,625.5 2,775.3 1,850.2 1,323.5 794.1 529.4 264.7 132.4 52.9

9.45% 4,291.8 2,575.1 1,716.7 1,228.0 736.8 491.2 245.6 122.8 49.1

9.95% 4,000.4 2,400.2 1,600.2 1,114.6 686.8 457.9 228.9 114.5 45.8




32

assumption based on the level of 0.6%, this figure

being within the limits of PLN 302.4 million.

The span of the estimated ranges is relatively large,

with the minimum value being two times lower

than the highest value. With regard to the

specificity of the Bank’s activity and the lack of

market information pertaining to royalties for

similar institutions, the large span of the value

range has been retained.

Conclusion

In the author’s assessment, the research perspective,

in addition to that of economic practice, requires

that attention be paid to the issue of valuating the

brands of public financial institutions. While the

issue of valuating bank brands has been extensively

discussed in the literature, valuating the brands of

public financial institutions is much more

challenging. Difficulties in this matter may arise

when determining the income generated by the

institution’s brand, especially if that institution

holds the exclusive right to provide certain services.

The author attempted to estimate the value of the

BGK brand as of 31 December 2012 (the date for

which audited data were available at the time of

writing this publication) based on the Relief from

Royalty method and making supplementary use of

the so-called “25% rule”.

While preparing the BGK brand evaluation, the

author made certain subjective assumptions

concerning the royalty rates and impact of the

Brand on the amount of income generated. The

capital cost was likewise estimated based on

simplified assumptions (for example, as to the

premium). Apart from those reservations noted

above, it would be reasonable in the view of the

author to at least open the discussion on valuating

public financial institution brands, an issue that the

author intends to research further.

The brand may be included in an estimation of the

Bank value using an adjusted net assets method that

also includes an adjustment for intangible assets

(not shown in the balance sheet). The proper

estimation of the brand would therefore have a

practical use, as it provides a more reliable

estimation of the value of the entire Bank.

Bibliography

1. Aaker, D. A. (1991). Managing brand equity.

New York: The Free Press.

2. Aaker, D. A. (1996). Building strong brands.

New York: The Free Press.

3. Aaker, J. L. (1997). Dimensions of brand

personality. Journal of Marketing Research,

No. 34(3).

4. Abratt, R., & Bick, G. (2003). Valuing Brands

and Brand Equity: Methods and Processes.

Journal of Applied management and

Enterpreneurship, Vol. 8 No. 1.

5. Black, A., Wright, P., Bachman, J. E., &

Davies, J. (1998). In search of Shareholder

Value. Managing The Drivers of Performance.

London: Financial Times Pitman Publishing.

6. Epstein, B. J., & Mirza, A. A. (2005).

Interpretation and Application of International

Accounting and Financial Reporting

Standards. New Jersey: John Wiley & Sons

Inc., Hoboken.

7. Finnegan, M. B., & Mintz, H. H. (1978).

Determination of a Reasonable Royalty in

Negotiating a License Agreement; Practical

Pricing for Succesful Technology Transfer. The

Bussines of Licensing, Clark Boardman

Company, Ltd.

8. Fishman, J. E., & S. P. Patt, W. J. (2013).

Standards of value: Theory and applications.

New York: Willey.

9. http://www.bazy.uprp.pl. (2013). Retrieved

from http://www.bazy.uprp.pl.

10. http://www.consor.com. (2013). Retrieved from

http://www.consor.com/intellectual-property-

advice/valuation-approaches.html.

11. http://www.huizenga.nova.edu. (2013).

Retrieved from

http://www.huizenga.nova.edu/Jame/articles/br

and-equity.cfm.

12. http://www.wsurf.org. (2013). Retrieved from

http://www.wsurf.org/ValuationMethods.aspx.

13. Kall, J., Kłeczek, R., & Sagan, A. (2013).

Zarządzanie marką. Warsaw: Wolters Kluwer,

Poland.

14. Keller, K. L. (1993). Conceptualizing,

measuring and managing customerbased brand

equity. Journal of Marketing, No. 57(1).

15. Keller, K. L. (2008). Strategic brand

management: Building, measuring and




33

managing brand equity. New York: Upper

Saddle River, Pearson Prentice Hall.

16. Kotler, P. (2006, May 17th). The New

Marketing and Sales-Strategies and Tactics.

XIX Seminar of the Series Authorities.

17. Machała, R. (2011). Zarządzanie finansami i

wycena firmy. Wrocław: Unimex, Poland.

18. Marcinkowska, M. (2003). Wartość banku:

kreowanie wartości i pomiar wyników

działalności banku. Łódź: Wydawnictwo

Uniwersytetu Łódzkiego, Poland.

19. McGavock, D. M., Haas, D. A., & Patin, M. P.

(1992). Factors Affecting Royalty Rates. Les

Nouvelles, CRA International, Vol. 27, No. 2.

20. Olszówka, T., & Skuza, S. (2003). Ustawa o

Banku Gospodarstwa Krajowego. Prawo

Bankowe, No. 9/2003.

21. Paszkiewicz, A. (2005). Wycena marki na

podstawie opłat licencyjnych. Prace i

Materiały Wydziału Zarządzania Uniwersytetu

Gdańskiego No. 2/2005. Gdańsk, Poland.

22. Pinar, M., Girard, T., & Eser, Z. (2011). An

Exploratory Study of Consumer Based Brand

Equity in Turkish Banking Industry. Services

Marketing Quarterly, Vol. 21, Issue 4.

23. Skuza, S. (2015). The Bank Gospodarstwa

Krajowego as a public financial institution in

the domesticsystemic environment. Warsaw:

Difin, Poland.

24. Skuza, S., Orłowska, H., & Orłowski, L.

(2014). Zarządzanie i Finanse. Journal of

Management and Finance. Ocena znaczenia i

wartości marki państwowego banku rozwoju na

przykładzie Banku Gospodarstwa Krajowego.

Gdańsk, Poland: Universytet Gdański, No. 3,

Part 2, Vol. 12.

25. Smith, G. V. (1997). Trademark Valuation.

New York: John Wiley & Sons Inc.

26. Szulce, H., & Janiszewska, K. (2006).

Zarządzanie marką. Poznań: Wydawnictwo

Akademii Ekonomicznej w Poznaniu, Poland.

27. (2013). The Advisory Report. Poland: 4

Conusliting Sp. z o.o.

28. (2013). The BGK Strategy for the years 2010-

2014. Poland.

29. Urbanek, G. (2008). Wycena aktywów

niematerialnych przedsiębiorstwa. Warsaw:

PWE, Poland.

30. Urbanek, G. (2011). Kompetencje a wartość

przedsiębiorstwa. Zasoby niematerialne w

nowej gospodarce. Warsaw: Wolters Kluwer,

Poland.

31. Urbanek, G. (2012). Siła marki a wyniki

finansowe banków. Gdańsk, Poland: Prace i

Materiały Wydziału Zarządzania Uniwersytetu

Gdańskiego, No. 4/2.

32. Weiler, G. D. (2004, 8th December). Valuing

Your Intellectual Property for Strategic

Alliances and Financing. NJSBDC

Presentation.

33. Witek-Hajduk, M. K. (2011). Zarządzanie silną

marką. Warsaw: Wolters Kluwer, Poland.

34. Yoo., B., & Donthu, N. (2001). Developing and

validating a multidimensional consumer-based

brand equity. Journal of Business Research,

No. 52(1).

35. Załucki, M. (2008). Licencja na używanie

znaku towarowego: stadium porównawcze.

Warsaw: Wolters Kluwer, Poland.

Documents

BRAND OF THE POLISH STATE-OWNED … 36th Volume/sabastian3.pdfdevelopment banks, e.g., the Bank Gospodarstwa Krajowego, which on account of the scope of their activity, as a principle,