When discussing the extremely wide discounts to net asset value at which European banks are currently trading, Patrick Jenkins cites a business school principle that if a company is trading for a sustained period below the value of its net assets, it should be closed down or broken up (“Europe’s zombie banks are grappling with distinctive drawbacks”, Opinion, December 5).
For a hugely asset-heavy business admire a bank, the value of the goodwill of the business is tiny in comparison with the return from the assets, so a big discount to net assets is not necessarily a bargain.
Valuation really needs to be done on an enterprise value basis and — given the huge financial gearing of banks — even a big discount to net assets may well translate into just a few percentage points on gross assets, which may well simply ponder the stock market’s more up-to-date or realistic view of the value of the banks’s assets than the mark-to-market valuation at which they are held.
Martin Allen
London N1, UK
