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4.8.09
Barclays makes the case for universal banking
Barclays' success, in the words of its chief executive, John Varley, all comes down to the bank's "diversified business model". When one leg of the business is flagging the other can prop it up. The argument, a favourite of the old-fashioned conglomerates, certainly worked yesterday.
By Philip Aldrick
While profits in the global retail and commercial divisions tumbled 44pc to £1.26bn, those in the investment bank Barclays Capital doubled to £1.05bn, helping the bank to an 8pc rise in pre-tax profits of £2.98bn.
Facing calls from officials as senior as Bank of England Governor Mervyn King for the banks to be broken up, Mr Varley did not waste the opportunity. "The spread of businesses within our group has been a symptom of our resilience," he said. "Where the problem has been, predominantly, is in the monoline businesses, not the broad-based universal models."
Mr Varley's point glossed over the failures at Royal Bank of Scotland, UBS and Citigroup, banks far more "universal" in scope, but also failed to mention the role of good management in survival. Fortunately, Barclays has good management in spades. Even without BarCap, Barclays would never have gone the way of Northern Rock. [See separate report -cs]
The UK retail bank, a business the size of Northern Rock in its pomp, produced £268m of profit – far better than many of the lenders that overreached in the boom, albeit a 61pc decline after £469m of bad debts. Success alone can be measured in the fact the division is self-funding and profitable. Barclaycard, which should be reeling as credit card defaults pick up, managed to increase profits in the half by 1pc to £391m.
Like the retail bank, the commercial bank did not lend aggressively in the good years. Because it never joined the frenzy for commercial property it managed £404m of profit – a 42pc fall but a miracle compared with the corporate loan book at HBOS, now part of Lloyds Banking Group, which is expected to post £15bn of bad debts this year.
However, there is still work to be done in the rest of its global retail and commercial banking (GRCB) operation. Profits in western Europe fell 73pc to £31m as bad debts and restructuring charges soared. Emerging markets, which have served HSBC and Standard Chartered so well, made an £86m loss due to "significantly increased retail impairment in India and UAE" as well as the cost of investment in the new markets of Pakistan and Indonesia.
As it stands, it does not look like the same prudent behaviour that has served the UK operations so well is being replicated overseas. Profits from Barclays' South African operations fell 17pc to £248m but finance director Chris Lucas warned that the bank remains "cautious" about the coming year.
For now, the remarkable performance of BarCap, overseen by Bob Diamond, is overshadowing the GRCB business run by Mr Diamond's fellow executive Frits Seegers. But Mr Varley is clear about the future structure of the group. "Current markets will skew the relative contribution of investment banking for a while, but in future, two-thirds of profits will come from GRCB and Barclays Wealth," he said.
"In due course we will be growing our investment in Asia. The goal is for profits from the international divisions to equal those in the UK." The current split is 60pc UK, 40pc overseas. Barclays Wealth, the private bank, saw its profits fall 59pc largely as a result of the sale of its closed life assurance business.
The problem for Mr Varley is how he will "join up the bank", as his rivals over at HSBC are fond of describing it. Two years ago, with great intellectual fervour, he outlined the great advantages of cross-selling and interlinking clients – his cherished "universal banking model". Work has been done, and cross-selling from Barclays Wealth's clients into the retail bank is already working – but GRCB still looks like a disparate collection of regional businesses. Meanwhile, BarCap strides above GRCB's traditional banking operations like a colossus.
Should Barclays be forced to separate investment banking from retail – as some politicians and officials are keen on – the lender would lose its edge, but the business would still prosper.
The fear is, though, that without BarCap bringing in the high returns of investment banking, the rest of the business would have to take more risks to deliver the sort of returns to which shareholders have grown accustomed. [If separated p;resumably the existing shareholder would start by holding shares in each. Those who are prepared to take risks for greater gain would stay with the investment arm while those wanting greater safety and assurance would gravitate to the retail bank. -cs]
The hunt for yield was HBOS's undoing but Barclays never had to take what regulators call "concentration risk" in its traditional lending book because its "diversified" model ensured it would always make better returns from the investment bank. Fortunately, Barclays managed risks in investment banking better than some other so-called "casinos". [That is the whole key! -cs]
Regulators are threatening to snuff out those high investment banking returns by raising the amount of capital that must be held against the operations, a move Mr Varley said could prove "an overreaction because of what's happened". In any case, he argued, Barclays does little proprietary trading, where the largest risks are. "It is mostly flow business," Mr Diamond added, foreign exchange and interest rate trading against which there is no need to hold much more capital.
Analysts say there is no doubt Barclays would be a solid bank without BarCap, but it would be like switching a Ferrari for a lawnmower. It's little wonder then that Mr Varley said: "I don't see a break-up as progressive."
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