David Ricardo, a renowned economist, is majorly recognised for his theory on wages and profits, theory of international trade, theory of rents and labor theory of value. His economic thinking dominated throughout majority of the 19th century.
Considered as the best hedge fund manager of his generation, David Tepper is an American businessman with net worth of USD 12 billion. He is a President and Founder of an US-based fund management company, Appaloosa Management.
Capital Adequacy Ratio is a bank’s level of capital for its inherent risks, and capital under the requirement serves a loss-absorbing purpose for banks. It is stated as a percentage of an institution’s risk-weighted assets. Capital of a bank is segregated into two parts, namely Tier 1 and Tier 2 Capital. Both the tiers are intended to save the bank in the event of a crisis, which may lead to a threat to the bank’s going concern. However, each tier of capital has its purpose when a bank incurs losses or risks to the going concern increases. To calculate CAR for an institution, the sum of Tier 1 and Tier 2 capital of the banks is divided by risk-weighted assets. Tier 1 capital consists of Common Equity Tier 1 (CET1) and Additional Tier 1 Capital (AT1). Under Basel III, the Basel Committee requires banks to have over 4.5% CET1 capital, and after including AT1, the level of Tier 1 Capital should be over 6%. Also, the sum of capital instruments held by banks, including Tier 1 and Tier 2 capital should be minimum 8%. AT1 capital of the institutions could include perpetual contingent convertible instruments, but CET1 capital is pure common equity. How Capital Adequacy Ratio Arrived In Banking Regulations? Money has sometimes been mankind’s problem. In the Great Depression of the 1930s, there was a dramatic imbalance between fiscal policy and monetary policy, reflecting the inability of policymakers to strike a balance since interest-rates were raised at the outset of an economic crisis. This was also partly responsible for the development of Keynesian Economics, which laid the foundations for monetary policy. Capital Adequacy Ratio is administered by the banking regulator in a country, which could be the Central Bank, like in the US or a separate body like the Australian Prudential Regulation Authority (APRA) in Australia. The growing internationalisation of banks led to the creation of Committee on Banking Regulation and Supervisory Practices in 1974. Also known as Basel Committee, it was headquartered in Basel at the Bank for International Settlements. After the failure of Bankhaus Herstatt in West Germany, the Basel Committee was formed to oversee the international supervisory standards, improve resilience in the financial system worldwide, and to co-operate on banking supervision with member nations. Since 1975, the Basel Committee on Bank Supervision (BCBS) has published landmark supervision protocols for national regulators and global standards, including Basel I, Basel II, Basel III capital adequacy accords. The need for Capital Adequacy Ratio was felt after the Latin American crisis in the early 1980s. Over the past two decades into the 1980s, the Latin American nations borrowed heavily to fund industrialisation, but a global recession and interest rate hikes in 1970s and 1980s led to the Latin American Debt crisis. It was the time when global policy thinktanks stressed on the need for capital reserves; commercial banks held a large amount of capital invested in Latin American bonds, which were then presented with looming risks of default. The Basel Committee was concerned with the deteriorating capital ratios of international banks, resulting in the need for measurement of capital adequacy and abolishment of erosion of capital standards. Now banks started measuring capital adequacy based on weighted risks, including on and off-balance sheet risks. How Is the Origin And Evolution Of Basel Accord Mapped? In July 1988, the G10 Governors approved Basel I, which required banks to maintain a minimum ratio of capital to risk-weighted assets of 8%. Banks were given until 1992 to implement Basel I Accord, which was also adopted by members outside the Committee. Additional amendments to Basel I continued until the proposal of Basel II, which was a new capital framework. The new accord led to a revised capital framework in 2004. It sought to develop and expand the rules for minimum capital requirements enacted in 1988. Basel II also focused on the supervision of capital adequacy and internal assessment process by institutions, and disclosure requirements to bolster ethical practices and market discipline. As a result of financial innovation, there was a need for a framework to better reflect the underlying risks. It also set the tone for continued improvement in efficiency of risk measurement and control. But the Committee realised the need of further improving capital framework before the collapse of Lehmann Brothers in 2008. The Global Financial Crisis during 2007-09 reinforced the need for an improved capital framework in the wake of the banking crisis. Initially, the Committee released guidelines on liquidity risk management in the month when Lehmann Brothers failed. BCB extended the approach of Basel II and released guidelines on the treatment of trading book exposure, off-balance sheet vehicles, and securitisation. In September 2010, the body introduced higher minimum capital guidelines. During the same year, Basel III was endorsed by the Committee, which has amended the accord several times since 2010, including implementation dates. This accord included a range of areas for efficient risk management and control in the banking system. Improved guidelines on quality, quantity of regulatory capital, especially common equity capital. Capital Conservation Buffer (CCB), an additional layer of common equity, was introduced. Failure to meet CCB requirement restricts pay-out to meet the minimum common equity requirement by the banks. Countercyclical Capital Buffer was announced to limit a bank’s participation in widespread credit booms. Basel III also introduced leverage ratio, minimum liquidity ratio, liquidity coverage ratio, and further requirements for systematically important banks. ASX Banks And Capital Requirements Australian major banks include Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Limited (ASX:NAB), Westpac Banking Corporation (ASX:WBC), and Australia and New Zealand Bank Limited (ASX:ANZ). Over the past years, the banking regulations in Australia galloped forward in contrast to the global developments. Financial System Inquiry 2014, under the leadership of David Murray AO, also recommended increasing the bank’s capital requirements to over 10%. As a result of these recommendations, the banks now have large capital reserves in Australia. Basel III implementation pushed further ahead to 2023 In the wake of COVID-19, the implementation of Basel III standards has been further postponed to one year later to 1 January 2023. It was understood that the deferral of implementation would provide the banking sector the necessary capacity in response to COVID-19 economic deterioration. In addition to meeting the Basel III requirements, global systemically important financial institutions (SIFIs) must have higher loss absorbency capacity to reflect the greater risks that they pose to the financial system. The Committee has developed a methodology that includes both quantitative indicators and qualitative elements to identify global systemically important banks (SIBs). The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank’s systemic importance.
What is Value Investing? Value investing is an investment strategy seeking to target business that is selling at a level below their perceived intrinsic value. The investment philosophy was developed by Benjamin Graham and David Dodd, and it was elaborated in the book Security Analysis. Value-driven opportunities are found by evaluating companies according to book value or tangible book value. It is understood that value stocks are those trading at a discount to their book value or tangible book value or intrinsic value. A lesson in investing strategies: Types of Investment Strategy in Equity Market What are value stocks? Earlier in the last century, the markets used to pay more attention to annual dividend yield, which was an important metric. Also, the tangible asset backing in the company is also assessed by the investors. The price-to-earnings ratio (P/E ratio) grew popular in the US during the late 1920s. It also reflected that earnings could grow higher than the dividends. While dividends yields, P/E ratio and asset-backing were the main things to be assessed, the retained earnings of the business were also evaluated. Although the P/E ratio remains popular, the essence of price-to-book ratio (P/B ratio) grew in evaluating value stocks. Evidently during the times of stock market bubble, the P/E ratio for companies with high expectations has reached to extraordinary levels. Value stocks are traded at prices well below their perceived intrinsic value, typically due to some sort of headwinds that the business or the sector is undergoing. The intention is to buy stocks that are underestimated by the market at given price levels. It is also understood that market prices of stocks should reflect intrinsic value over time. Value investing is a long-term strategy seeking to buy such stocks. But not all quantitatively cheap stocks reflect value, therefore the focus on quality of businesses increased as quantitatively cheap stocks could sometimes reflect true value rather relatively lower multiples than peers. Benjamin Graham called this difference between intrinsic value and market price as the margin of safety. Value stocks should provide a sufficient margin of safety to be determined as a value stock. This margin of safety exists due to the inefficiency of markets to price stock accurately. The disparity between the intrinsic value and market price of the stock can extend to years; it is the reason why value investing is a long-term approach. Over the years, value investing has been championed by great investors like Warren Buffet, Peter Lynch, Seth Klarman, Templeton etc. Good read: Should you follow Templeton's investment mantra in today's scenario? Modern considerations in Value Investing Competitive advantages: A firm can be better off rival firms through developing competitive advantages over its rival firms. Competitive advantages are strategies for operating a business that gives an edge over the firms. Companies can develop competitive advantages by investing in intellectual property, know-how, improving labour productivity, geographical presence, manufacturing at relatively lower costs, developing brand image and awareness. Competitive advantages enable a business to generate better margin than peers, therefor generating value for the business and owners. At the same time, they must be hard to replicate to avoid competition. Cash flows and applications: Investors prefer cash-generating companies, and companies tend to strive for high cash generation to achieve better profits and scale. Cash flows are crucial to pay-off obligations and investments. Free cash flow is a widely used metric in corporate finance to evaluate the business’ capability to pay off its obligations after incurring cash outflow on capital expenditure. It reflects the cash generated by a business operationally after capex. Value investors look for businesses that can reinvest net cash from operations into the business to increase the enterprise value of the firm. Capital expenditure and investments of the business should be deployed efficiently to expand the business. Asset-backing: The investments undertaken by a firm mostly result in the addition of the assets or increase in the value of assets. Value investors prefer companies having assets that could generate long-term gains for the business. Although they look for the asset base of the company, it becomes imperative to evaluate the return generated on those assets. Capital allocation is one of the key decisions undertaken by firms to grow assets, but capital allocation could sometimes prove to be detrimental as well. Value investors evaluate the capital allocation decisions of the firm carefully to assess the potential impact on the business over the future. Investments undertaken by the management can either make or break the company’s future. Barriers to entry: These are the obstacles faced by new competition while entering a new market where existing players have developed a barrier to entry to avoid competition. Barriers to entry can include technological challenges, intellectual property, high start-up costs, licensing, Government regulations etc. Value investors have stressed on the need for barriers to entry as it allows the business to grow profits across cycles. Read: Become A Millionaire By Investing In Value Stocks! Balance sheet: It is a financial statement of the company which enumerates the assets and liabilities of the business as of business date. A balance sheet reflects the obligations of the company and assets, which can be used to settle obligations. Value investors prefer looking at the balance sheet as it allows to assess near-term and long-term obligations of the business. Read: Be A Smart Investor, Escape These Myths While Investing In Stocks Value investing Vs Growth Investing Value investing is usually applied to investing in companies that are profitable and established. Growth investing can include companies that are relatively new to the markets and are growing relatively better than their peers. Even though legendary investors have avoided value and growth debacle, noting that both are same. The divergences in the expectations from the business also set two investing philosophies apart. Investors expectation are high for growth, translating into a higher premium in the share price, while expectations from value stocks are relatively lower. Read: The battle of Investment Philosophies; Growth Vs Value Investing in Australia
What is Brand Loyalty? Brand Loyalty is an emotional attachment to the products or services associated with a brand. It is considered as an intangible asset which cannot be measured in quantifiable terms. Brand Loyalty is far more complex, and it defined when consumers repeatedly purchase or avail products or services by one particular company instead of other company with similar offerings. It is often based on consumer perception. Often a user consistently purchases or avails the same product or services because of the personal choice based on various opinions and views. One such example is Apple as they seem to have incredibly dedicated followers. Even when there are similar other competitive options available in the market with comparatively lesser price, Apple fans still buy the products. They could be trusting Apple or liking its operating system or just owning the product for the sake of brand loyalty. ALSO READ: How Has COVID-19 Impacted Brands? Are People Adopting Quality-Conscious Behaviour? What Are Some Famous Examples of Brand Loyalty? Apart from Apple, one such brand which has a religiously loyal customer base is Harley Davidson. There are other best performing vehicles in the market, and yet brand evokes loyalty so much so that its customers get the brand logo tattooed on them. Amazon is another prominent brand that is now gaining brand loyalty by offering diversified products and services, continually upping its service standards and customer equation. ALSO READ: How the Amazon share price has risen over time, management changes that we know about What are the Types of Brand Loyalty? Attitudinal loyalty is exhibited when the customer is willing to purchase a product or service from the brand at any cost, irrespective of prevailing circumstances. This depicts emotional attachment of the consumer as the product fulfills some emotional or functional requirement. This factor is psychological and leads to the behavioral aspect. Behavioral loyalty is related to repurchasing from the same brand regularly. It could be because of laziness or brand preference. INTERESTING READ: Fundamentals of the Retail sector and the importance of marketing What is the Significance of Brand Loyalty? Brand Loyalty plays an important role in business sustenance and profitability given the fiercely competitive world. Below are some of the benefits companies leverage by enjoying brand loyalty: Brand loyalty reduces the cost of products because of the higher sales volume. Companies with loyal customers don't have to spend a lot of money on marketing the product or creating brand awareness; the brand is already established with a loyal consumer base. This permits the company to focus on retaining the existing consumers. Primarily their brand-loyal consumers are their brand ambassadors, as they influence the market knowingly or unknowingly. Companies with reasonable brand loyalty emphasizes on maintaining more earnings or investing in other resources. Another interesting fact is that such companies are unbending when it comes to premium pricing. It increases the profit margins as the loyal consumers are irrationally unaffected in purchasing the product. How to Develop Brand Loyalty? Creating brand loyalty is an important parameter to survive in contemporary extremely competitive world. Below are some aspects that can be looked at while working on enhancing brand loyalty: Creating Sense of Commitment: A critical factor to be considered while developing brand loyalty is building a connection between the consumer and the brand. Commitment can consist of both attitudinal and behavioral components, and both of them are equally important. Many brands also offer brand loyalty programs to keep their existing customers engaged and connected. Ensuring Consistency of Purchases: Businesses convince potential customers about the significant advantages their products offer over other products in the market. It helps them justify the consistency of their purchase of the products. Staying on the Toes for Consistent Quality Offering: Businesses need to focus their energy on client’s expectations, which if unfulfilled will lead to clients substituting with competitor’s offerings. Delivering quality products matching with customer preferences and tastes is critically important. Advertisement and Marketing Plays a Key Role: Companies who produce quality and reliable products or services at perfect pricing to dominate the market space optimise brand loyalty by advertising these variables successfully. They can frequently advertise with feel-good elements, catchy phrases, humour or emotional appeal or interest. Advertising the brand and its eye-catchy logo, along with key features and pricing on different media and social platforms aid in enhancing the process of brand loyalty. Creating Brand Loyalty Towards the Business: Many times, marketers are seen boosting the preference given by the customers to their products over other products. With such advertising promoting brand loyalty to one of the products, marketers try to develop brand loyalty towards the overall company and other products. Building Loyalty with Customers: It is said that the way to increase brand loyalty with the customers is to be loyal to the customers. Brands which develop solutions to deliver the right service and support along with the quality product achieve loyalty from customers. Satisfactory Customer Service: Marketers often wonder if it is developing a unique product enough. In times like these, when one unique product is launched, within a few months, ' competitors will come up with a similar product probably with less price and more features. Hence the brand loyalty now depends on the services the company offers and how it communicates with the customer. When a satisfied customer is engaged for a more extended period, it creates a connection between the customer and the company which is beyond a business relationship. Brands these days use social media as a platform to reach out and connect with the customers. When a consumer shows devotion, bond and commitment to repurchase and continue to use a brand's products or services, regardless of the competitors’ products or pricing, companies can be assured of their success in creating brand loyalty. How to Evaluate Brand Loyalty? Time, volume, frequency and price of sales are quantifiable measures to measure brand loyalty. While, Customer satisfaction, as well as an emotional appeal are statistical approximations that are unreliable most of the time. Big data provides statistical information, but it's not an accurate permutation combination formula to determine brand loyalty. Therefore, it is said that brand loyalty is like an art and not a science. Below influencing factors are considered while evaluating brand loyalty success: Price Geography Time spent viewing product ads Volume of the product at the store shelves Frequency of the ads shown to the audience Emotional appeal These factors do not determine brand loyalty accurately with merely having statistical results. There is no such possible cause-effect analysis of the data as brand loyalty depends on many vague concepts and variables.