March 2013 Issue
“We get it. The old ways weren’t the right way to behave nor did they deliver the right results – for banks themselves or for wider society,” said Anthony Jenkins, the new chief executive officer of Barclays Bank PLC. With this contrite admission Mr Jenkins ushered in a new era for the UK’s third largest bank, and set about building what he called “a better Barclays”.
Barclays will now undergo a complete strategic and cultural revolution, aimed at reducing the company’s cost base by £1.7bn to £16.8bn in 2015 and providing “greater disclosure and transparency around our financial performance”. With this increased lucidity the bank is intent on repairing the considerable damage done to its reputation, which has been so badly tarnished by scandal. “Barclays is changing. We intend to change what Barclays does and how we do it and have set out clear commitments against which our progress can be measured. Our goal is to make Barclays the ‘go-to’ bank for all our stakeholders,” said Mr Jenkins.
Barclays has borne the brunt of a tremendous amount of negative press in recent years. A degree of that negativity can be blamed on misconceptions and a general lack of understanding of the banking sector, which has a complex and opaque industry. However, the ruthless and often unethical practices of the banks and their employees have contributed enormously to the public’s mistrust of the industry. The suspicions of the public have been brought more clearly into focus as the world has had to endure, not only the repercussions of the financial crisis of 2008, which continue to rumble on five years later, but also the various scandals, controversies and corporate failures that have permeated the banking industry in the subsequent years.
Barclays has had to withstand its own share of these controversies. The bank has seen the loss of scandal riddled American chief executive Bob Diamond as well as a host of other influential executives; it has also had to endure the imposition of significant financial penalties in the form of a £290m fine for attempting to manipulate the London Interbank Offered Rate (Libor). Additionally Barclays has had to foot the bill for mis-selling payment protection insurance to the public; the pot set aside for these PPI repayments has now run to £2.6bn. Furthermore, the fresh scandal surrounding the mis-selling of complex insurance products to small businesses will also see the bank hit with a considerable compensation charge.
Nonetheless, no matter how damaging the financial implications of the bank’s recent troubles may be, the toxic nature of the reputational damage caused to Barclays may prove to be of greater significance for its future. With the financial sector attempting to rebuild its reputation, and the public’s faith in its various institutions clearly shaken, Barclays needs to perform a drastic ethical u-turn, Mr Jenkins believes.
In a departure from previous Barclays’ strategic review announcements, typically held at the bank’s headquarters in Canary Wharf, Mr Jenkins outlined his master plan at London’s Royal Horticultural Hall. The bank’s decision to hold the event at the environmentally friendly horticultural hall not only created a striking dichotomy with previous events held at Barclays’ more familiar corporate surroundings, but it also hinted at the bank’s new responsible direction.
Accordingly, in this setting Mr Jenkins announced on 12 February that the bank would be undergoing a major restructuring program, which will see a broad shake up of the group’s worldwide operations, a result of which will see 3700 jobs – or 4 percent of the bank’s workforce – lost across the business. The bank anticipates that the new master plan will take five to 10 years to complete.
Mr Jenkins, who ascended to the position of chief executive in August 2012, outlined his hopes for the bank’s future, declaring that “Barclays is changing. There will be no going back to the old way of doing things. We are changing the way we do business. We are changing the type of business we do. I understand why there is cynicism and scepticism out there given the track record of banks in the past. You should judge us by what we deliver in the next one, two, five or ten years”.
Closures and redundancies
In an effort to rebuild the bank’s battered reputation and boost profitability, the restructuring of Barclays will take on a number of forms. Following a rigorous ‘root and branch’ review of the bank’s 75 business units, four will definitely be closed. An additional 17 units will be closed, sold or scaled down in response to subdued market activity. Thirty-nine of the bank’s other units, however, are said to be performing well and will be given investment to grow.
The most notable closure laid out by Barclays will see the controversial Structured Capital Markets (SCM) unit disbanded. Although the alleged tax avoidance unit was relatively small, employing approximately 100 members of staff, it had proven to be incredibly profitable for the bank. Mr Jenkins declined to clarify exactly how much the unit had earned Barclays, but it is believed to have brought in around £1bn a year in profit. SCM was responsible for building a network of almost 300 offshore tax haven subsidiaries which meant Barclays paid only £113m in UK corporation tax in 2009, despite profits that year of £4.6bn. The unit was accused of carrying out “industrial scale” tax avoidance, said former chancellor Lord Lawson.
However, Mr Jenkins admitted that the bank would continue to make profits from intricate tax structures as some existing schemes would not be wound down. The SCM unit will take Barclays up to 10 years to disband as the group will wind down some long term schemes for its clients.
In addition to shutting down the SCM unit, the bank will also halt the controversial speculation on food commodities as it no longer fits Barclays’ more ethical direction. As a result Barclays will be giving up £500m in annual revenue. Mr Jenkins noted that “we feel this is the right thing to do”.
With transparency and ethical values becoming paramount to the bank’s future it is imperative that the investment bank, which is one of “an increasingly small group” of firms winning business and improving margins, acts in a manner sympathetic to the bank’s new set of principles. While the investment bank will be retained, it will be one of the hardest hit units. Despite the unit generating more than half of the bank’s annual earnings, 1800 of the redundancies will come from the corporate and investment banking sectors.
Barclays will also reorganise the way in which bonuses are paid out to its staff. By mid-2013, staff will be measured on the basis of a ‘balanced score card’ against five core values: respect, integrity, service, excellence and stewardship. Bonuses will no longer be based entirely on profit generating. 2012 saw Mr Jenkins trim the average bonus for investment bankers by 17 percent to £54,100. The bank also announced a raise in its dividend payout from the current ratio of 20 percent to 30 percent “over time”. Mr Jenkins noted that “We need to give our investors a bigger share of the income we generate”.
Although Barclays intends to scale back the investment banking unit it is clear that the company will continue to rely on it going forward. Given that the investment bank drives the majority of the group’s profit, and since Mr Jenkins hopes to increase the bank’s returns on equity, it would be unwise to clip the unit’s wings too drastically.
Barclays intends to focus primarily on its core operations in the US, the UK and Africa while retreating from its unprofitable European and Asian retail branches. Nearly 30 percent of branches across Italy, Spain, Portugal and France will close; those remaining will focus on more affluent customers in their respective regions. The restructuring of the group’s European retail and business banking units will see an additional 1900 jobs culled.
In addition to the strategic review announcement, Barclays also revealed a number of financial results. Excluding adjustments set aside for compensation for customers and small businesses, as well as a charge the bank took against the value of its own debt, Barclays would have reported a pre-tax profit of £1.1bn for Q4 2012, almost twice the level recorded for the same period in 2011. However, in 2012 the bank posted a net loss of £1bn, compared with a profit of £3bn for 2011.
The investment banking unit recorded a pre-tax profit of £858m for Q4, a huge increase on the £267m pre-tax profit reported in Q4 2011. The bank’s retail and business banking unit announced a pre-tax profit of £732m, up 17 percent on 2011’s figure. The corporate banking division’s pre-tax profit almost tripled to £107m.
Ethical banking
Immediately following Mr Jenkins’ announcement, shares in Barclays surged to a near two year high, rising 7.5 percent to 325 pence per share. Evidently the promise of increased transparency, higher dividend payouts and, perhaps crucially, a more ethical practice genuinely struck a chord with investors.
As Barclays attempts to ‘shred’ the legacy of former chief executive Mr Diamond, one of the bank’s main performance targets is to generate a return of equity equal to its cost of equity by 2015. Essentially Mr Jenkins has promised that the bank will stop losing money in three years. While this assertion is certainly encouraging, at this early stage it will be difficult for analysts and investors to take Barclays at its word. In order to meet this target, the bank will need to remain scandal-free in the foreseeable future. However, in the wake of the various scandals of the past, the bank now faces questions in both the US and Britain regarding fees it paid to Qatar’s sovereign wealth fund in 2008 to secure $5bn of investment and thus avoid a government bailout.
Although Barclays has retained the investment bank at its heart, Mr Jenkins has made it clear that the misdeeds of the past will no longer be tolerated and that “individuals must take responsibility for their own behaviour”. Taking Mr Jenkins’ calls for a cultural revolution at face value, it would appear that the party may well be over for those employees looking to make huge sums of money through aggressive and questionable means.
Whether the ‘new’ Barclays can maintain the lofty ethical standards put before it by Mr Jenkins is still up for debate.
© Financier Worldwide
BY
Richard Summerfield