8 ★ FINANCIAL TIMES Wednesday4 March 2020
Discount to stated book
value reflects uncertaintyover long-term returns
Simon Samuels’ interesting op-ed
“Beware ‘badwill’ in European bank
mergers and acquisitions” (March 2)
raises some important points. The
discount to book value at which many
European bank shares are trading are
likely to reflect two main concerns:
potential uncertainty over whether
banks’ balance sheet assets are in fact
realisable in all circumstances at their
stated book value, and whether banks
can earn a return on those assets equal
to their cost of equity.
A lot has been done to strengthen the
reliability of banks’ asset values since
the financial crisis and considerably
improve bank supervision including
through the use of stress tests.
Therefore, banks’ current market
discount to their stated book value
largely reflects uncertainty over long-
term returns rather than worries over
stated asset values.
In principle if these returns can be
increased through revenue and cost
synergies resulting from bank
consolidation, then the market may
begin to value bank shares closer to
book value. Furthermore, regulatory
permission for banks to include
acquired negative goodwill in their
capital base in support of much needed
European bank consolidation may in
fact be entirely appropriate.
Michael Lever
Head of Prudential Regulation,
Association for Financial Markets in
Europe (AFME),
London E14, UKConceptual and human
skills will come to the fore
Your report on the office-v-remote
working issue is timely (“Coronavirus
may mean lasting change in the office”,
March 2). While it notes that managers
were often promoted on the basis of a
particular technical skill, it could have
gone further: “back to the future”, to
1955, when Robert L Katz, in the
Harvard Business Review,
distinguished twin elements in skills.
Katz posited first a threefold
typology: not only technical, but also
human and conceptual skills; second, a
dynamic dimension to show their
changing relative importance overorganisational hierarchy. At lower
levels, technical skill requirements
were high but declined with movement
away from actual operations, when
conceptual skills became increasingly
critical with more responsibility. At
every level human skills — the ability
to work with others — was important
and also increased.
As organisations face a coronavirus
contagion, it is exactly these skills —
conceptual and human — that will be
ever more important for effective
leadership and then managing the
difficult and tricky changes needed
regarding work.
Prof Chris Rowley
Kellogg College, University of Oxford, UKWe should all accept the
virus impact where it falls
The markets appear to be almost
demanding that policymakers and
central bankers provide economic
stimulus in order to compensate them
for their losses — why? The markets
are behaving perfectly rationally and
price discovery is functioning well, in
that revenues and profits will decline
as a necessary impact of supply side
problems combined with demand
reduction. Neither of which are likely
to bounce back to prior levels
immediately the crisis subsides — this
is not an on-off switch. So why should
the market professionals presume that
stimulus will be provided just because
they have been blindsided by an
external shock?
Rather, we should all accept theimpact where it falls, equally or
unequally, and take the reset at the
new level. It is wholly irresponsible to
stimulate the market artificially from
borrowed or contrived funds that don’t
exist and that we don’t have — for what
purpose? To fool ourselves?
Let the markets recover naturally
once thevirus ither subsides or ise
overcome by the ingenuity of man. To
do otherwise is irresponsible and
ignorant of what the markets are there
for.
Michael O’Neill
London NW8, UKEU banks’ efforts in the
US were always doomed
Your Big Read article “A retreat from
Wall Street” (March 3) has captured
European investment banks’ failure in
US investment banking, but those
bankers who attribute that failure to
“lack of ambition” have missed what
doomed the effort from the start.
Historically, most European
(universal) investment banking efforts
were debt-led and not very
institutional — look up Eurobonds (the
old retail bonds, not today’s euro
bonds). The big US players, on the
other hand, developed from equity and
advisory shops. That mindset meant a
lot in terms of strategies of products
and fees, but mostly it led to Europeans
becoming more dependent on
leveraging low margin fixed-income
securities, currencies and commodities
businesses that were killed
(appropriately) by Basel III.
On a similar theme, the EU remains
dominated by non-market business
ownership and nation states (through
the provision of pay-as-you-go
pensions and national provision of
university education) remove the
equivalent of some of the US’s largest
long-term investors, ie pension funds
and endowments. How challenging is it
to master a financial skill abroad that
you don’t have at home?
Yes, banking is different by country,
but perhaps the ultimate parallel for
failure in US investment banking in the
1990s-2000s is the failure at US
commercial banking in the 1970s-80s
by banks in the European Community,
particularly the UK.
Pete Hahn
Retired Dean,
The London Institute of Banking &
FinanceIn happier times a fortnight ago, the
hand-scrawled notices taped to public
toilet doors, urging economy with loo
paper and politely urging customers
not to steal were just a disturbing
curio of life in Tokyo.
By last weekend, with shops across
Japan sold out of the precious tissue
and Prime Minister Shinzo Abe
preaching against panic, TV news
shows collated more ominous signage
from around the country — some
snarling that in-lavatory larceny
would bring a police response, others
closing their restrooms altogether,
defeated by the crime spree.
But it was the images that appeared
on Monday, of toilet paper rolls bound
to their dispensers with bicycle locks,
that finally told a nation that Japan
had descended intoLord of the Flies-
styledepravity. “Bicycle locks on a
¥50 toilet roll?” writhed social media.
In a country where even bicycles
sometimes don’t need locks? Are we
humans or beasts? What will they
think of us when (or if) the world
arrives in July for the Olympics?
Japan, of course, is far from alone in
responding to alarming coronavirus
news by stripping shops bare of toilet
paper. The sense of urgency spiked
after Mr Abe recommended telework
for the few who were able and
abruptly called forschools to close,
forcing households to stock up for an
unusual stint of extended time at
home. It doesn’t matter where you
are, what the crisis or how reassuring
the authorities sound when they say
supplies are plentiful (as they are inJapan). The least imaginative among
us can envisage the cost of running out
of toilet paper, and are overcome with
primal fear. “On this matter, we
cannot trust Abe. He says Japan is self-
sufficient in toilet paper, but anyone
can see the shops are empty,” said one
woman standing ninth in a queue for a
Tokyo pharmacy that would not open
for another hour.
But for Japan, those same demons
mount an extra, pernicious challenge.
The paper panic, however flimsy it
turns out to be, reveals as
unconquerable something Japan
dearly wants to believe it has
conquered. Worse, it comes at a time
when thecountry had hoped to put its
toilet triumphalism on the global
stage. The summer Olympics were to
have showcased Japan’s WC
supremacy: the three biggest toilet
makers — Toto, Lixil and Panasonic —
have ollectively spent morec than
$200m to be prominent sponsors of
the 2020 games.
For decades now, Japan’s
sophisticated toilets have seemed — to
foreign commentators — to be an
Enigma machine for decoding the
nation that produces them. The auto-
warming seats, the complex bank of
adjustable bidet sprays, the anti-
bacterial “pre-mist” self-cleaning
feature, the euphemistic pictograms:
what could be more Japanese?
But these marvels are just the front-
of-house stuff. Were it not currently
closed because of the coronavirus,
Tokyo’s “Rainbow” Sewerage Museum
would offer a fuller grasp of Japan’srelationship with this issue. This
facility explains in glorious civil
engineering detail how the world’s
most populous city went about
mastering its waste. It does this with
the nonchalant primacy of King
Kong’s captors boasting how the
terrifying beast was subdued. It is a
powerful reminder of Japan’s guiding
credo that the most forbidding forces
of nature can and must be tamed by
ingenuity, effort and economic might.
In the case of sewage and toilets,
Japan’s success in this endeavour is
undoubtedly — world-beatingly —
impressive. So much so that a
substance globally synonymous with
vileness and disease is comfortably
celebrated at a cutesy “poop museum”
that opened in Tokyo last year.
And yet, Japan has learnt in the past
few days that some monsters are only
ever superficially tamed.
For all of its extraordinary and
pioneering technology, Japan’s largest
toilet maker, Toto, confirmed this
week that the company has never
claimed that its machines provide an
alternative to toilet paper. You can
wow museum visitors with interactive
models of the world’s most advanced
sewerage systems, make bathroom
hygiene your Olympic calling card and
sell millions of top-of-the range
NeoRest toilets, but when human fear
takes over, the gulf between
civilisation and bathroom bicycle
locks is bridgeable only with a thin
tissue.[email protected]Toilet roll is the
flimsy barrier
between us and
‘Lord of the Flies’
Tokyo
Notebook
by Leo Lewis
Simon Samuels rightly warns that
investors should be sceptical of high
bids in bank M&A, but not for the right
reasons (“Beware ‘badwill’ in European
bank mergers and acquisitions”
(March 2).
The accounting rules for goodwill do
not allow high bids to generate paper
profits for the acquirer, as Mr Samuels
seems to suggest. Quite the contrary.
Goodwill and badwill are calculated on
the fair value of the net assets not the
book value of assets. If the market-to-
book ratio of European banks is below
1, it’s because the market assigns a fair
value to the banks’ net assets that is
lower than their book value. That
means that ifIntesa Sanpaolo s payingi
€4.9bn for something that is truly
worth $3.8bn (ie, if the market got it
right and the fair value of net assets is
indeed only €3.8bn) then this will be
recognised in the purchase priceallocation when all the assets (and
liabilities) are revalued to fair value,
which is done before calculating the
amount of goodwill or badwill. Hence if
the market capitalisation is indeed a
good indicator forUBI’s fair value of
net assets, then this would result in
about €1bn of goodwill. Only if the
market is too pessimistic about UBI’s
prospects (which is not implausible) or
Intesa knows something about the
value of UBI’s assets that the market
doesn’t, then does Intesa indeed get to
buy UBI for a bargain price. In that case
the transaction will create badwill
which is booked as a gain on purchase
at completion of the transaction.
However, such cases are rare and
usually occur in distressed situations or
(as in the case of Barclays’ acquisition
of Lehman) during bankruptcies.
In hisletter o Wolfgang Schäublet
last April, Andrea Enria, chair of theEuropean Central Bank’s supervisory
board, emphasised that badwill might
only increase regulatory equity if
supervisors “have sufficient confidence
that the valuation of the assets and
liabilities in the transaction has been
performed properly” and that such
transactions will be reviewed on a case-
by-case basis. The accounting rules
certainly do not encourage regulators
to recognise the gain from bargain
purchases as addition to regulatory
equity. In fact, goodwill is not
recognised by bank regulators and is
deducted from regulatory equity, so I
am surprised they would recognise
badwill — unless of course they want to
encourage bids for some of the
European zombie banks!
Amir Amel-Zadeh
Associate Professor of Accounting,
Saïd Business School,
University of Oxford, UKBank regulators don’t even recognise goodwill
Letters
W E D N E S DAY4 M A R C H 2 0 2 0Email: [email protected]
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If you are not satisfied with the FT’s response to your complaint, you can appeal
to the FT Editorial Complaints Commissioner: [email protected]Correction
cThe fine imposed on Neville Kahn
was not the ICAEW’s largest possible
sanction, as we incorrectly reported
(‘Investors turned £2 Comet into
£100m spoils’, February 13).The US is the latest foreign power to
confront the reality of Afghanistan’s
nickname as the “graveyard of
empires”. About3,000 American and
allied troops, and more than100,
Afghan civilians, have died there in an
18-year conflict that has cost the US at
least $1tn. Last weekend’speace agree-
ment ith the Taliban is preferable tow
spending years more in a bloody and
fruitless quest to stabilise the country
through military means. It provides, at
least, for an orderly US withdrawal,
and the start of inter-Afghan talks. But
there are real risks that the war’s
achievements, such as the expansion of
women’s rights, will be lost.
Under the deal signed in Doha, the
US willreduce its troops rom moref
than 12,000 to 8,600 in the next 135
days, if the Taliban keeps its promises.
These are to ensure foreign terrorist
groups such as al-Qaeda cannot use
Afghanistan as a base — the first time
the Taliban has given such commit-
ments — and to start talks with Afghan
politicians aimed at a power-sharing
agreement to end the civil war. Pro-
vided sufficient progress is seen, the US
will pull out all its troops by next year.
Critics have called the agreement a
cynical sellout by US President Donald
Trump so he can bring home several
thousand US troops before November’s
presidential election. Mr Trump came
to power promising to end America’s
entanglement in “endless wars”. The
White House is right to recognise, how-
ever, that the allied mission has long
been mired in a stalemate with no clear
aim. The promise of a respite from the
fighting has been met with celebration
by many Afghans.
Such jubilation may not last. The
planned US disengagement from the
longest war in its history carries echoes
of the exodus from its second-longest,
in Vietnam in the 1970s. Two years
after America signed the 1973 Paris
Accords with the governments of
North and South Vietnam, the forces of
the communist north swept into Sai-
gon. There is no guarantee the Taliban
will not similarly overrun Kabul again
once the last US soldier has departed.
Ever since Mr Trump signalled he
wanted to bring US troops home, the
Islamist group knew it needed only to
bide its time. It has little incentive to
agree to big concessions, such as drop-
ping its vision of reintroducing sharia
law, in the coming inter-Afghan talks.
Indeed, though the US made the
signing of Saturday’s deal conditional
on the Taliban delivering a week-long
reduction in violence, it remains
unclear whether its commanders can
control all its fighters, with 5,000 more
Taliban warriors to be released from
jail as part of the peace deal. Some may
choose to continue their association
with al-Qaeda. Afghan officials warn
the Taliban’s commitment to fight Isis
also may not last if its interests shift.
Securing any workable agreement in
the inter-Afghan talks will be compli-
cated, too, by the dispute between
President Ashraf Ghani and Abdullah
Abdullah, the opposition politician
who refused to recognise Mr Ghani’s
election victorylast September. Mr
Abdullah was threatening to set up a
parallel government until Washington
last week persuaded him not to.
A new Taliban takeover would jeop-
ardise the advances that have been
achieved in the past 18 years: women’s
rights to education and work, schooling
for millions of young people, the ele-
ments of democracy that have been
built. If any power-sharing arrange-
ment can be agreed, the best foreign
powers can do — including China,
which is building a presence — is to
offer co-ordinated investment. To
stand any chance of escaping the cycle
of killing of the past 40 years, Afghani-
stan will need all the help it can get.US agreement with the Taliban poses long-term risks for the country
A fragile peace accord in
war-scarred Afghanistan
The Federal Reserve’s 50-basis points
rate cut yesterday had a whiff of the
dark days of the financial crisis. It was
the biggest since 2009 and the first to
take place in between normal meetings
since 2008. It similarly underlined the
decisiveness of the Fed compared to its
peers: the move sends a strong signal —
the rate-setting committee was unani-
mous — that it will not hesitate to do
what it can to contain the economic
repercussions of the coronavirus.
The Fed chose to act despiteques-
tions over how much rate cutscan
really do. Economists point out that
monetary policy cannot address the
supply shock of people falling ill and
being unable to travel or work. Fed
chair Jay Powell said himself that a rate
cut will not “reduce the rate of infec-
tion or fix a broken supply chain”.
This may be why stocks reacted
more with a wobble than with eupho-
ria. Equity prices first surged then fell,
suggesting some investors took the Fed
move as a sign of the extent of the eco-
nomic damage to come. Echoes of the
financial crisis are not reassuring.
Yet the Fed has seen the insurance
value of prompt action. Even if the
epidemiological developments are
beyond its control, the financial reper-
cussions — especially broader confi-
dence and expectations in the econ-
omy — are not. As Mr Powell said, a rate
cut should go some way towards offset-
ting any retrenchment in consumption
and investment from fearful house-
holds and businesses.
Just as important is what the Fed is
leading these constituencies, and mar-
kets, to expect. Mr Powell is letting the
economy know that when things get
rocky, he is ready to act. This reduces
uncertainty around the strength of the
policy response. As the financial crisis
showed, if fear takes hold in credit mar-
kets and business financing seizes up, a
forceful monetary response is vital.
Other than the risk of spooking mar-
kets, there were few downsides to act-
ing swiftly. The global economy is
already shaky and inflation below the
central bank’s 2 per cent target; The
Fed’s preferred measure hit 1.6 per cent
in January. The dangers of excessive
caution were greater than those of
being trigger-happy.
Yet the Fed must be careful not to
look panicked, or as if it is being led by
markets. Members of itsboard gave no
hintthat they were thinking of cutting
rates in remarks last week.Stocks fell
further as Mr Powell explained the cen-
tral banks’ reasoning, as investors
found his logic unconvincing. The Fed
chair insisted US economic fundamen-
tals remained strong, but coronavirus
posed “evolving risks” to sectors such
as manufacturing, travel and hotels.
Other central banks must now
decide whether to follow. The Fed’s
move came swiftly after a communi-
que from the G7 economies that vowed
to take appropriate measures but fell
short of co-ordinated action. Markets
and economists were disappointed bya
statementthat largely repeated previ-
ous comments. The last time the Fed
cut rates by 50 bps it was in concert
with other central banks. This time it
moved alone.
That may reflect the fact that other
countries already have far lower inter-
est rates. The value of the European
Central Bank taking interest rates
deeper into negative territory is ques-
tionable. Still, the ECB has other
options available including targeted
measures aimed at small businesses.
The world’s capacity for multilateral
action has also been eroded since the
financial crisis. It would be useful if the
Fed’s decision served to encourage the
Trump administration, and other gov-
ernments around the world, to take the
epidemic as seriously as America’s
central bank does.Other central banks will now have to decide whether to follow suit
Fed rate cut is no cure-all
for coronavirus woes
Packaging is a key part
of the alchemy of wine
At the European Container Glass
Federation, we have read Jancis
Robinson’s article “It’s time to cut
glass” (February 22) and would like to
clarify some important elements.
As one of the world’s foremost wine
connoisseurs, Ms Robinson would
appreciate that wine texture or
structure is not just a matter of
ingredients, but alchemy in which
packaging plays a key part. Glass has a
lot to offer. No other packaging
materials come close to glass for
recyclability, health, and taste
preservation. But as an industry, we are
committed to doing more to increase
the sustainability of glass.
It is a fact that glass production is
energy-intensive and generates
emissions, and we are strongly
committed to address these limits by
continuously investing in research and
innovation and implementing practical
solutions.
Despite being the old kid on the
block, glass is already today 30 per cent
lighter, 70 per cent less energy-
intensive and emits 50 per cent less
CO2 than 50 years ago. As we speak, we
are exploring new breakthrough
technologies to make production
climate-neutral, and forging
partnerships throughout the value
chain to ensure that we maximise
recycled content for use in new
production loops. Further improving
the carbon footprint of the industry is a
challenge that requires a collective
effort, and this is why we work hand-
in-hand with all stakeholders, from
suppliers to local communities,
political decision makers, and our
customers.
Latest industry figures put collection
rates at 68 per cent in the UK, placing
glass head and shoulders above
alternatives of plastic pouches or
cartons (whose recycling is almost
impossible due to the use of several
materials glued together like plastic or
aluminium). Reusable glass is indeed
part of our industry’s journey toward
carbon neutrality, with bottles that can
be used up to 50 times before being
recycled for ew production;n
fortunately, for those not lucky enough
to live in proximity to a vineyard,
Europe’s extensive spread of glass
packaging manufacturing plants means
that bottle supplies for our customers
are at a short distance. Raw materials
such as sand are also sustainably and
locally sourced at less than 300km
from the glassworks, dramatically
reducing the carbon footprint.
In short, glass is a brilliant material
that deserves a complete analysis
compared with its competitors. We
hope that Ms Robinson will be eager to
restore glass to its rightful place, and
would like to take this opportunity to
invite her o one of our productiont
locations, at her convenience, where
she can see how glass packaging is
produced, recycled and used to bottle
one of the wines she loves.
Michel Giannuzzi
President, FEVE — the European
Container Glass Federation,
Brussels, BelgiumMARCH 4 2020 Section:Features Time: 3/20203/ - 19:09 User:gerry.white Page Name:LEADER USA, Part,Page,Edition:USA, 8, 1