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Bank of England governor Sir Mervyn King – whose resemblance to a stern Victorian papa grows daily – is using cautionary tales to instruct his wayward charges, the banks. The moral tome of choice on Thursday was the Bank’s winter financial stability report, a kind of prudential Struwwelpeter, but with more graphs and fewer pictures of children having their fingers cut off.
Herein, naughty UK banks could read The Fearful Story of Dexia, Who Over Lent and Was Confounded. The tale of the continental bank, bailed out by France and Belgium, reminded one of Henry King, Who Chewed Bits of String, and Was Early Cut Off in Dreadful Agonies.
Dexia had a core tier one capital ratio of 12.1 per cent, a level of financial strength above recommended minima. Yet it still came a cropper. Leverage, as measured by assets to equity, topped 60 times. The story highlighted the potential deceptiveness of capital ratios held up as tokens of robustness by everyone from Barclays to Société Générale.
The talismanic core tier one number is calculated by expressing easily obliterated capital as a percentage of risk-weighted assets. But risk is in the eye of the beholder. Hence, a temptation for banks to jack up capital ratios to desired levels by reining in risk weightings.
Jamie Dimon, chief executive of JPMorgan, overcame his natural shyness this year to condemn the “aggressive” risk calculations of European banks. Merv evidently agrees, insisting that UK banks should publish leverage ratios, which are less malleable, by the beginning of 2013. Spurious risk ratings helped cripple the world’s financial system.
The consequent tendency of investors is to distrust any measure of solidity that banks can game. Low stock prices are one result. The situation of the banks is encapsulated in the title of Hilaire Belloc’s poem: Matilda, Who Told Lies and Was Burned to Death.
A man for all seasons
Retailers generally use the weather as an excuse for poor sales, so it is refreshing that Kingfisher is making money from climatic unpredictability, writes Claer Barrett. On Thursday, the DIY group ascribed a 13 per cent boost in operating profits to soaring sales of garden furniture at its B&Q chain, which rose 68 per cent in the third quarter to the end of October as balmy autumn temperatures tempted Britons to relax in their gardens. Chief executive Ian Cheshire said that B&Q sold as many barbecues in the last week of September as in the whole of June.
Kingfisher’s French DIY chain Castorama meanwhile recorded a 17 per cent jump in sales of lawnmowers, suggesting counter-intuitively that Gallic customers are pursuing less leisurely lifestyles than Anglo-Saxon peers. Shoppers on both sides of the Channel are preparing for the worst that winter can throw at them with sales of rock salt and sledges both rocketing.
The sales boost has prompted analysts to upgrade pre-tax profits estimates marginally, though most caution that the impact of the unfolding eurozone crisis may yet precipitate on Kingfisher’s parade. However, Mr Cheshire has been saving up for just such a rainy day. Revealing that the business now has a (modest) net cash position, he is not afraid of “doing another Focus” and expanding further into continental Europe by acquiring stores from distressed competitors. That, coupled with a move to increase common ranges across Kingfisher’s store chains, could fatten margins no matter what the weather.
Dugout data mining
Chief executives of big companies resemble Premiership football club managers. Both are high profile, highly paid and highly likely to be fired.
Henley Business School has researched the phenomenon in football. The work echoes the number-crunching of the Oakland Athletics baseball team celebrated in the movie Moneyball. Using a fund management methodology, researchers stripped out distorting factors such as transfer budgets to compare manager performance against theoretical averages.
Stars such as Manchester United’s Sir Alex Ferguson were rated predictably highly. But the study found that Scandinavian scapegoat Sven-Goran Eriksson had excelled with slimmer resources at Manchester City. The takeaway is that marginal underperformers should be given time and serial blunderers the elbow. Chief executives might be rated similarly. That would help investors distinguish bosses doing a good job managing a struggling business from directors as hopeless as the companies they front.