Details show why financial sector has returned to sports
Published January 3, 2011
Banking and sports marketing were made for each other. Both are global but driven locally. Both thrive on the passion for success but at the end of the day are judged solely on results. That's why we are seeing a resurgence of interest, as the financial sector begins to turn on the lights again.
This assessment isn't simply based on the flurry of recent deals, such as Chase's substantial media and marketing sponsorship with Madison Square Garden, HSBC's renewal with the British Open, and BBVA's multiyear agreement to be official bank of the NBA. While these deals are impressive in size and scope, one must examine the fundamentals that drive financial institutions to partner with sports properties, both in the United States and abroad.
It's important to note that, over the past year, stock prices for the four major retail banks in the United States have fluctuated wildly, although these stocks have risen significantly during the market rally over the past two months. Using data as of midday Dec. 27, Bank of America's stock is down 11.55 percent since January, and JPMorgan Chase's stock has gained more than 10 percentage points over the past two months to finish up 1.82 percent, year to date. Other bank stocks have risen substantially in value, such as the 42.75 percent climb for Citibank (albeit from severely depressed levels) and a 15.97 percent increase for Wells Fargo; regional U.S. banks have also done extremely well in 2010, with gains in excess of 30 percentage points. Banks outside of the United States haven't been the beneficiaries of the recent rally; among others, Royal Bank of Canada is down 4.35 percent, and Spain's Banco Santander is down 36.98 percent. In light of the volatility in these (and others) individual stocks, the KBW Bank Index, an economic index consisting of the stocks of 24 U.S. financial services companies, is up 22.2 percent, year to date. Ultimately, all this tells us is that we need more advanced metrics beyond stock price to determine why this sector is finally coming back to life in the sports marketing world.
I like to look at this recovery through the lens of how changes in key business metrics tracked by Wall Street analysts affect big marketing expenditures, inclusive of advertising. As such, I have compiled quarterly bank data since 2000 for three major U.S. banks that have a traditional sports marketing footprint: JPMorgan Chase, Citi and Bank of America. After conducting regression analysis on multiple bank health variables to determine the strength of relationships between marketing expenditures and other business metrics, two key pieces of data jumped off the page: the ratio of nonperforming loans to total loans outstanding, and the banks' overall return on capital.
Stepping back, both of these make a lot of sense. Nonperforming loans are loans that no longer earn income for the bank. In our analysis, the ratio of nonperforming loans to total loans is a key measure of bank health; a low nonperforming loans ratio translates into smaller losses for the bank, while a high and/or rising ratio signals trouble.
Our analysis shows an inverse relationship between marketing expenditure and the nonperforming loans ratio. For example, the regression coefficient for Citi is -68.30; this means that for every percentage point increase in the ratio, marketing expenditures drop by $68.30 million per quarter. In the case of Bank of America, the regression coefficient (and subsequent decline in quarterly marketing expense as the ratio increases) is even more severe: -84.94, translating into an $84.94 million drop in marketing spend for a percentage point increase in the nonperforming loans ratio.
Unlike the inverse relationship between marketing expenditure and nonperforming loans, an examination of a bank's return of capital shows a positive effect upon marketing spend. A bank's return on capital is a ratio that measures how efficient that bank is in employing its resources to generate profits; a higher return on capital equates to stronger investor return.
Our regressions clearly confirm this positive relationship. For example, for every percentage point increase in ROC for JPMorgan Chase, marketing expenditure increases by $36.98 million. Similarly, a 1 percent increase in ROC for Citi equates to a $28.54 million increase in marketing spend.
Looking at the first three quarters of 2010, these relationships remain largely intact. JPMorgan Chase's nonperforming loans ratio has fallen 6.01 percent and its ROC has risen 21.7 percent from the first quarter to the third quarter, and, not surprisingly, its marketing spend has increased 11.66 percent. In the identical time period, Citi's nonperforming loans ratio has dropped 14.22 percent and ROC has increased by 39.64 percent, translating into a rise in marketing spend of 51.66 percent. It's difficult to determine values for Bank of America because of a few one-time charges incurred last quarter.
All in all, these metrics are leading indicators that make me confident that banks are clearly back to investing in sports properties. Sports marketing has always been a cornerstone for this sector, and now there are solid reasons for that to continue. n
Rob Prazmark (firstname.lastname@example.org), founder and CEO of 21 Sports and Entertainment Marketing, Greenwich, Conn., is a former NBC sales executive and longtime Olympic representative.