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During the last few decades, the shareholder value approach has been the management concept that has most significantly shaped today’s economies and the way companies do business. In fact, shareholder value has become the pre-eminent performance indicator for companies worldwide, and maximizing shareholder value represents the ultimate directive for managerial decisions in all industries and, in particular, in banking.

The shareholder value approach and its aim of shareholder value maximization is currently the most important comprehensive management tool in use. For banks, the shareholder value approach is not only an important strategic management tool; its overarching objective of shareholder value maximization is vital for banks to exist. Unlike non-banks, banks are required to secure their business with equity capital. Consequently, the provision of equity capital is conditional for the growth of banks’ business volume and therefore is a highly critical function for banks. As higher shareholder value eases access to equity capital, a shareholder value orientation is especially important for banks. In addition, the equity returns of European banks and German banks in particular, are low relative to international banks, and this, coupled with the increasing competition and globalization in banking, makes it even more important to take action and to become more strongly oriented towards shareholders’ interests. Despite its relevance to banks, the shareholder value approach has only recently gained importance in the banking industry.

The concept of shareholder value has gained worldwide acceptance since the constitutional work of Rappaport (1986). Based on the idea that the management’s primary responsibility is to increase value, shareholder value has become not only the standard for measuring business performance, but also an important tool in strategic management. The basis of the shareholder value approach is the assumption that the capital market prices a company’s shares according to the market’s expectations of its long-term productivity, i.e. its sustainable competitive advantage. In consequence, a company creates shareholder value by creating sustainable competitive advantage. This basic assumption turns the shareholder value approach into a holistic management approach that links the operating performance of a company to an external market view.

Bank stock is’ story paper’, not ‘numbers paper’. This does not mean that stories are unquantifiable, only that their documentation relies on the new metrics.” Applying the metrics of shareholder value to banks, the objective of this paper is to quantify the story behind the shareholder value of banks and, more specifically, retail banks.