■ In a post Global Financial Crisis world, investors are questioning long-term earnings and valuation prospects for the banking sector. Tougher regulation, particularly on capital, liquidity and structure, are exerting pressure on the traditional banking business and clouding the outlook for investors.
To better understand an evolving banking landscape, we offer a new framework based on the concept of “legitimacy”. Our framework is designed to help investors assess the quality of an institution’s relationships, as they convey a willingness to continue to engage with a bank – whether as a customer, shareholder, regulator, employee or community member.
We discuss the key elements of “legitimacy” and outline the steps and structure of the framework. We then provide an illustrative example where we assess the relationship between 1) Wells Fargo’s (WFC) corporate officers and non-management employees and 2) Wells Fargo and its consumer lending clients.
We believe that assessing “legitimacy”, or the quality of a bank’s relationships with key stakeholders, enhances investors’ analysis of factors that influence that bank’s valuation. Our legitimacy framework is not limited to the banking sector and can be applied broadly across other sectors and industries.
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