Weekly Roundup, 21st May 2019

Weekly Roundup, 21st May 2019

Watch the metrics

Simon Samuels

Simon Samuels

In the FT, Simon Samuels – a banking consultant at Veritum Partners – viewed the current crisis at Metro bank as an example of what happens when a single number becomes all important.

The UK challenger bank’s latest problems started in mid-January, when it announced it had been calculating the amount of capital it needs to fund its loans in an incorrect (and falsely flattering) way.

The bank has now been forced to raise £375m in a discounted share placement to shore up its balance sheet.

Simon believes that the most important question that you can ask a management team is “what matters?” – which metric do they care about the most?

  • For example, Northern Rock FD Bob Bennett used to check the 3-month money market interest rate first thing each morning.

The trouble with that is that the rate was an external metric which Bob couldn’t affect,

  • He was right about the rate being important, though – it was a spike in this rate that led to Northern Rock’s problems.

Internal metrics generated by management are even more dangerous:

We should be asking how reliable that metric is and how transparent the process is for calculating it.

Investors must also wonder how much management has staked its reputation on delivering the number, and what damage might be done in the process.

Examples from history include:

  1. The Rentokil CEO who was known as “Mr 20%”, because he was committed to increasing earnings by this amount each year – until he couldn’t.
  2. Lloyds Bank and Wells Fargo, who each targeted cross-selling of products to existing customers – with predictable results (mis-selling and fake accounts).
European divergence

Value vs quality

Value vs quality

In the Economist, Buttonwood looked at the divergence between value and quality stocks in Europe.

  • He compared Nestle (founded in 1867) with Daimler (1890).

Nestle is quality (Spin-offs



The newspaper also looked at whether corporate spin-offs generate shareholder value.

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