Financial and Business Performance Analysis of Barclays Plc


Introduction

Chosen Research Topic

2009 was a very difficult year for the international financial sector. Far from being resolved, the downturn which began in August 2007 deepened during 2009. The result has been a significant restructuring in the banking sector including major international Banks. Despite treatments by governments and central banks, the return to stability will probably still take some time. The financial crisis is also quickly and intensely feeding through to the real economy. Developed economies are already in recession and the growth of emerging ones is slowing. In this downturn, well-organized and proficient banks that are well diversified, customer-oriented and have a positive balance sheet, like Barclays Bank, have a competitive advantage in the market.

I have chosen to research and analyse business and financial performance for an organisation over three year period which is from year 2007 to year 2009. The organisation I choose for my research and analysis is Barclays Bank Plc. My research is carried from the shareholders point of view and stakeholders who intend to know financial situation of Barclays Bank Plc. I will be benchmarking Barclays Bank Plc with Lloyds Bank. The reason I benchmark Barclays with Lloyds TSB because they have similar business environment and they are also global bank.

Research rationale

The reason behind choosing this topic is I believe that I am quite familiar with this task after completing paper F7 and P2 of ACCA. I am also looking forward to work as financial analyst. Thus being an accounting student, I can complete this project by using my knowledge to determine profitability ratios, financial ratios and etc. There were lots of practical problems when doing an analysis of business and financial performance of an organization especially benchmarking. It was not like doing exam which have all the information of an organization in the paper. Although financial information of an organization is easily obtained from company’s annual report but for global company will have consolidated accounts, adjusted figures and so on. There was some indirect information for me to figure out.

Moreover by doing this project it will help me to enhance my report writing skill and financial data interpretation it will be beneficial for allowing me to gain a prospective and direction to analysis any company using similar method. This project will serve as a guidance to analyse business and financial performance of a company that I can make used of the knowledge that I have learnt from my course and to apply practically on this real report.

Aims and Objectives

  • Research will aim upon demonstrating the financial analysis particularly the ratio analysis for the 2007, 2008 and 2009 with respect to benchmarking of Barclays and Lloyds, concentrating toward the financial position of Barclays      .
  • Continuation of financial analysis for Barclays’ financial investment decision related to business expansion strategy, merger and acquisitions and partnerships in different markets.
  • Research will also underline the past performance of the business, strategies used in current economic climate and strategies that an organisation is adopting in order to improve the management processes and business operations.

My analysis of financial performance of Barclays is also from the point view of potential shareholders and investors. When measuring accomplishment of the organisation and financial performance of the company the ratio analysis is most significant measurement which reflects their good working strength. Ratios solely cannot yield results. So it is necessary to compare this ratios with prior year’s achievements, industry average or competitors performance. That is why I am going to compare Barclays’ results with their close competitor Lloyds TSB. In this financial analysis I have included following ratios.

Profitability

Profitability ratios relate to Barclays’ capacity to secure acceptable revenue in order to ensure that the financiers and shareholders would continuously supply it the necessary capital. There is a link between Barclay’s profitability and liquidity as revenues generated contribute to the cash flow. For these reasons, earning ratios have prime importance for investors and shareholders.

Earnings ratios in my analysis include flowing ratios:

  • Operating Profit Ratio
  • ROCE

I will also analyse Barclays’ and Lloyds TSB’s growth of profit before tax.

Investors Ratio

An investor is interested in:

1) The income earned by the company for him;
2) The return on his investment.

For an ordinary shareholder the relevant information will be contained in the following ratios:

  • Earnings Per Share
  • Dividend Per Share
  • Price Earnings Ratio

Risk/Liquidity

Risk ratio is one of the important aspects of Barclays’ performance. Liquid assets are important for the organization so that it can successfully meet its debt when they fall due. Key liquidity ratios in my analysis  is Liquidity Ratio

Growth Strategy

My report will focus on Barclays’ future growth strategy. For example I will look at Barclays’ marketing strategy used in order to maintain the growth of turnover and profit. At the same time, I will also look at the action taken by Lloyds TSB which may affect financial performance of Barclays.

 Possible Risk

I will include Barclays’ possible risk factors. Risks are the opportunities and dangers associated with uncertain future events. Risk can have an adverse or favourable impact on Barclays’ objectives. The process of establishing a risk management system is summarised in the following diagram:

 Proess risk manaement - Barclays analysis

(Kaplan Publishing P1)

  Strategic Evaluation

I will also include SWOT analysis to evaluate Barclays’ business performance. A Swot analysis is an instrumental framework to evaluate the strengths, weaknesses, threats and opportunities for organisation. The strengths and weaknesses are considered to be the inner value, which can enhance or destroy factors such as skills, resources, assets, etc. opportunities and threats are considered to be the external factors, which generate or eliminate the factors, which cannot be controlled by the organization.

 Information Gathering

Data collection is the selection of sources of information and selection of methods and procedures for gathering the data needed for any research. “The search for answers to research questions is called collection of data”. Data are facts and other relevant materials serving as bases for study & analysis”. Basically there are two sources of data collection:

Primary sources

The primary information is the information can be collected by face to face surveys on the street or questioners to people on the phone. This kind of research involve a substantial amount of cost and time and it is hard to do for academic research project

Secondary sources

The secondary information is the information which is available from companies report, books, newspapers, library’s databases, trade journals and articles. This kind of research involve a substantial amount of cost and time and it is hard to do for academic research project and for those reason I have used a secondary source of information. The secondary information I have used are:

  • Statement of Financial Position and Statement of comprehensive Income for the last three years.

These financial reports have helped me very much to compare and analyse the performance of the Barclays and Lloyds TSB banks. I have used this published data through out my project to analyse financial position of both organisations. I have downloaded both organisations’ annual reports from following websites.

  • Chairman, Chief executive and Directors reports

These reports are very useful to find out company’s growth, its future opportunities, weakness and their future expansion strategies.

  • Independent Analysis report

Most of these reports come from independent third parties, so this is very useful and reliable sources of information for Shareholders and Stakeholders.

  • Text Books and Notes

I have used books published by Kaplan Publishing to gain extra knowledge. These books allowed me to get detailed knowledge about accounting ratios.

  •  Newspaper and Articles

The Financial Times, Student Accountant magazine and specific ‘banking’ journals, amongst others, were evaluated to gain broader knowledge of the research topic. 

Sources of Information Gathering

  • Internet

Internet is fast way of getting access to useful information about organisation. I have used following two websites to obtain annual reports respectively.

  • Library Research

Library has provided significant information in my analysis. I have been to British Library and City Business Library in London to get more information of two organisations. I have gone through some of very useful database from business library like, Mintel, Amadeus, FAME, Euromonitor, Global References Solutions, Kompass Worldwide, Mint, One Source, Datamonitor etc. Information from these sources has helped me very much.

Analysis and Presentation

Industry Profile

The banking industry profile comprises activities of banks and similar institutions, offering savings, loans, mortgages, and related financial services to consumers and businesses. It was very difficult to combine whole world’s banking industry so that is why I have included Europe’s banking industry. For the purposes of this report, Europe consists of Western Europe and Eastern Europe.

Western Europe comprises Germany, Netherlands, Spain, Sweden, Denmark, Belgium, France, Italy, Norway and United Kingdom. Eastern Europe comprises of Czech Republic, Hungary, Poland, Romania, Russia and Ukraine. The total assets held by the European banks industry reached a total value of $51,746.6bn in 2009, with the compound annual growth rate (CAGR) of 7.9% from 2005 to 2009. The Bank Credit division was the industry’s largest segment in 2009, holding total assets to the value of $31,171.3bn, equivalent to 60.2% of the industry’s overall value. The performance of the industry is forecast to accelerate, with an anticipated CAGR of 8.6% for the five-year period 2009-2014, which is expected to drive the industry to a value of $78,345.2bn by the end of 2014. (DATAMONITOR)

Barclays’ History

Founded in 1896, Barclays developed as a British banking and trust firm registered under the name Barclay & Company. The company accepted the name Barclays Bank in 1917. In 1918, the company mingled with the London, Provincial and South Western Bank to become one of the UK’s largest banks. In 1981, Barclays the first ever international bank to file with the Securities and Exchange Commission in Washington and increased the long-standing capital in the New York market. In the year 1986, it was listed in Tokyo and New York Stock Exchanges. Its international strategy to expand globally was given additional drift by the formation of innovative investment banking operation, Barclays de Zoete Wedd (BZW) in 1986.

In 1995, Barclays bought San Francisco-based fund manager Wells Fargo Nikko Investment Advisers, which amalgamated with BZW Investment Management to form Barclays Global Investors. Barclays acquired Woolwich, a top mortgage bank and ex-building society, to increase its geographical coverage and possible client base in 2000. Barclays and Canadian Imperial Bank of Commerce (CIBC) merged their retail, corporate and offshore banking operations in the Caribbean to make First Caribbean International Bank in 2001. In the same year, Barclays formed a strategical coalition with Legal & General to trade in life pensions and investment products throughout UK.

In 2004 Barclays Bank acquired a 50% stake in established business processing outsource supplier, Intelenet Global Services, from Housing Development Finance Corporation (HDFC), the pioneer of housing finance in India. Barclays sold 43.7% of its stake in First Caribbean International to Canadian Imperial Bank of Commerce (CIBC) in 2006. The company also purchased a financial website Comparetheloan which provides competitive loan quotes for homeowners and non homeowners in the UK in the same year.

In 2008, Barclays acquired Goldfish credit card business from Discover Financial Services. Barclays bought Expobank from Petropavlovsk Finance in Russia. Barclays got delisted from the Tokyo Stock Exchange. Barclays PLC acquired a stake of 4.92% in CMB – Compagnie Maritime Belge in 2008. In November 2009, Barclays manage to shape Crescent Real Estate Holdings LLC, a joint venture with Goff Capital, Inc., to acquire Crescent Real Estate Equities Limited Partnership (Crescent) from Morgan Stanley Real Estate Funding II. Barclays declared that it finished the acquisition of Standard Life Bank Plc, in January 2010. (DATAMONITOR 2010)

Barclays’ Profile

Barclays is in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. The company primarily operates in the UK, the US, Europe, Africa and has a growing presence in Asia. Barclays is a financial services organization which lends, invests and protects money for more than 30 million customers across 50 different countries

Barclays’ primary objective is maximise shareholders’ wealth. But Barclays acknowledge that they can, and should, in ways logical with that objective, contribute to the well-being of society by conducting their business responsibly and by performing well, on behalf of their clients, Barclays essential functions of payments and money transmission, safe storage of deposits, maturity transformation and lending, and the provision of consultation and execution in underwriting and trading.

Barclays has carried out its operations through ten business divisions: Barclays Capital, Barclaycard, UK retail banking, Barclays’ commercial bank, GRCB – Absa, Barclays Global Investors, GRCB – Western Europe, Barclays Wealth, GRCB – Emerging Markets, and head office functions. In 2009, Barclays Global Investors was sold.

Major Competitors

The following companies are the major competitors of Barclays.

  • Lloyds TSB Group plc
  • Abbey National plc
  • Alliance & Leicester plc
  • Allied Irish Banks plc
  • Bank of Ireland
  • HSBC Holdings plc
  • Standard Chartered PLC
  • Bradford & Bingley Plc
  • Kensington Group plc
  • Deutsche Bank

(DATAMONITOR 2010)

Strategies of Barclays

Among the various strategies of Barclays plc partnership, joint ventures and acquisitions are the significant strategies for future development growth and expansion. Barclays’ private banking division plans to double its assets in Asia Pacific, increase its staff and acquire new businesses over the next few years, with the aim of becoming one of the leading private banks in the region by 2012. Barclays Bank has increased its net private banking staff by around 5% in 2008 to reach around 3,000, excluding its global support centre in Singapore. Robert Morrice, chairman and chief executive of Barclays in Asia Pacific, said he expected further hiring for 2009 and a net growth of 5-6% for 2010.

This is part of Barclays’ objective to come forth as one of the leading foreign banks operating in Asia Pacific over the next few years. Barclays Wealth, the bank’s private banking arm, wants to double its assets under management for the region (excluding Japan) from an expected $10 billion by the end of 2009, up to $20 billion by 2012. Barclays said that the bank would consider acquisitions to bulk up its operations in India and the rest of the Asia Pacific region if the ‘right opportunities’ materialize. Barclays’ expansion plans come at a time when other western-based rivals such as Citi, Bank of America/Merrill Lynch, RBS and UBS are redefining their businesses and even making cutbacks. Barclays’ move to increase its head count in the Asia Pacific region is a sign of financial strength and growth, key attributes for private banks to have in the wake of the financial crisis as wealthy clients are placing more importance on provider stability than previously seen.

Barclays’ growth plans will ensure that the bank is well positioned to proposer from the expected global economic recovery over the next few years. In fact, certain Asia Pacific economies, including India, are expected to bounce back ahead of the rest of the world. If the bank can increase its presence in the region and provide greater client support through its staff, then it is likely to see its market share increase.

 Financial Analysis

Profit before Tax Growth

Profit before tax is a key indicator of financial performance to the majority of Barclays’ stakeholders.

Graph

Year

2009

2008

2007

Barclays

11,642

6077

7076

Lloyds TSB

1042

807

4000

Barclays

Barclays has seen its profits in 2009 increase by 92% to £11.6bn in 2009. The figure was hiked by the sale of its BGI fund management arm to US firm BlackRock last year. Stripping this out, profits were £5.6bn compared with £1.6bn in 2008, though that figure included brawny write-downs. BGI was sold resulting in a profit on disposal of £6,331m and a retained 19.9% economic interest in the enlarged BlackRock group. Group profit before tax was £6,077m, down 14% on 2007. Profit included Gains on acquisitions of £2,406m, including £2,262mrelating to Lehman Brothers North American businesses. Profit on disposal of the closed life assurance book of £326m. According to BBC Gains on Visa IPO and sales of shares in MasterCard of £291m Gross credit market losses and impairment of £8,053m. Gains on own credit of £1,663m. Barclays performed well during 2007, despite the difficult market conditions. Although profit before tax fell 1%, profit before business disposals rose 3%. The excellent results of the first half were achieved in a relatively pleasant environment; in the second half Barclays were not immune from the impact of the credit market turbulence, but profit before business disposals for the year still increased 3%. Barclays report profits again above £7bn, which is well ahead of the average level of the previous three years.

Lloyds TSB

Lloyds TSB has statutory profit before tax of £1,042 million includes an £11,173 million acquisition-related negative goodwill credit in 2009. Lloyds TSB has resilient core businesses performance despite year-on-year margin pressure and weak economy. Lloyds TSB has provided £35 billion of gross new mortgage lending and approximately 100,000 new commercial accounts.  Statutory profit before tax in 2008 was decrease by 80 per cent to £807 million. A resilient underlying business performance was offset by the impact of market dislocation and adverse volatility relating to the Group’s insurance businesses. Profit before tax, on a continuing businesses basis, totalled £2,426 million, a decrease of 35 per cent which reflected the impact of £1,270 million of market dislocation and higher impairment levels.  In 2007 Statutory profit before tax was 6 per cent lower at £4,000 million compare to 2006, largely reflecting adverse policyholder interests’ volatility.

Profitability Ratios

  • Operating Profit Ratio

Graph

Year

2009

2008

2007

Barclays

22.91

10.7

11.08

Lloyds TSB

4.34

3.76

10.96

 

Barclays

According to Telegraph in 2009 Barclays’ operating profit margin was 22.91% which is highest in last three years. Operating margin went up from 10.7% to 22.91%.  Although Barclays Interest income went down by 24.18% to £21,236 m. On the other hand Barclays had reduced their Interest Expense to £9,318 in 2009 compare to £16,541 in 2008 this because customer has withdraw significant amounts from their Barclays’ bank accounts. In 2009 Barclays has paid £2,716m to their customers as interest on their deposits. Where as in 2008 it was £6,697m. That means Interest Expense has gone down more than Interest Income. In 2008 operating margin was 10.7% which lowest in last three years. Operating Profit margin push down to 10.7% in from 11.08% in 2007. This is because operating expenses in Administration has gone up to £5,305m in 2008 but on the other hand income has not gone up that much. Interest Income in 2008 was £28,010m which is highest in three years but Interest Expense was all time high of £16,541 as well. In 2007 operating profit margin was 11.08% a second highest profit margin in three year period. Although economic down turn was on peak in this year Barclays managed to good operating profit margin in this year.

Lloyds TSB

According to Telegraph in 2009 Lloyds TSB’s operating profit margin was just 4.34%. That is 18.57% low compare to Barclays. This is due to large operating expenses of £15,984m. This includes Government Asset Protection Scheme fees (GAPS) of £2,500m. Another significant increase was in staff salaries of £4,369m. In 2008 Lloyds TSB’s operating profit margin was down to 3.76 % compare to 10.96% in 2007.

 

  • Return on Capital Employed (ROCE)

ROCE considered to be a key ratio, ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per £ 1 invested.

Graph

Year

2009

2008

2007

Barclays

7.84

12.82

21.79

Lloyds TSB

2.36

8.32

32.19

Barclays

In 2009 Barclays’ ROCE decrease from to 7.84% to 12.82% in 2008. This is due to non cash expense of Impairment Charges and other Credit Provisions increased significantly in 2009 to £8,071m compare to £5,419m in 2008. This Impairment arises due to Barclays was exposed to credit risks arising from investments in debt securities and other exposures arising from its trading activities including, non-equity trading portfolio assets, derivatives as well as settlement balances with market counterparties and reverse repurchase loans. Another reason for this decline is that in 2009 Barclays’ capital has increased to £58,478m compare to £47,411m in 2008. Where as profit before tax has declined to £4,585m to £6,077m in 2008. In 2008 ROCE was 12.82% better than 2009 but very poor compare to 21.79% in 2007. This is due to profit before tax was down by 14% in 2008 compare to 2007. Impairment charges and other credit provisions of £5,419m increased 94%on the prior year. Impairment charges included £1,763marising from US sub-prime mortgages and other credit market exposures. Other wholesale impairment charges increased significantly as corporate credit conditions turned sharply worse in economic downturn.

Lloyds TSB

In 2009 Lloyds TSB ROCE has fallen record low to 2.36% from 32.19% in 2007 a decline of almost 30 %. Lloyds TSB is constantly under performing in these three years compare to Barclays.

Investors Ratio

  • Earnings per Share (EPS)

This is the basic measure of a company’s performance from an ordinary shareholder’s point of view. It is the amount of profit, in pence, attributable to each ordinary share.

Graph

Year

2009

2008

2007

Barclays

86.2p

59.3p

68.9p

Lloyds TSB

7.5p

6.6p

58.3p

  • Dividend Per Share

Year

2009

2008

2007

Barclays

25p

11.5p

34p

Lloyds TSB

36.1

34.7

 

Barclays

The calculation of basic earnings per share is based on the profit attributable to equity holders of the Parent and the number of basic weighted average number of shares excluding own shares held in employee benefits trusts and shares held for trading. Earnings per Share for Barclays rose from 59.3p in 2008 to 86.2p in 2009. This was due to Barclays managed to boost their net profit to £ 10,288. Barclays’ Total income net of insurance claims grew 34% to £30,986m, and income from continuing operations grew 37% to £29,123 m, with particularly strong growth in Barclays Capital. Barclays has paid 2.5p of dividend per share in 2009 this means that Barclays paid 29% of earnings as a dividend where as in 2008 dividend pay out ratio was 19.39% of earnings.

In 2008 Earnings per Share for Barclays dropped to 59.39p (14%) from 2007. This is due to gross credit market losses and impairment of £8,053m, or £4,957m net of related income and hedges of £1,433m and gains on own credit of £1,663m. One of the Barclays business divisions Barclays Capital was affected by very challenging market conditions in 2008, with income falling by £1,888m (27%) on 2007, reflecting gross losses of £6,290m relating to credit market assets partially offset by gains of £1,663m on the fair valuation of notes issued by Barclays. This drop is also reflecting the impact of share issuance during 2008 on the weighted average number of shares in issue. In 2007 Earnings per Share was 68.9p. Barclays increased the full year dividend payout to 34p, with pay out ratio of 48.5% a rise of 10%.

Lloyds TSB

In 2009 Lloyds TSB’s Earnings per Share was just 7.5p which is very low compare to Barclays’ 86.5p. Lloyds had combined businesses loss of £6,300 million for the year (2008: £6,713 million loss). In November 2009 Lloyds TSB launched the largest ever capital rising comprising a £9 billion debt exchange and a £13.5 billion rights issue. Lloyds Banking Group was offering shareholders a 59.5% discount on 23rd November 2009’s closing share price in a rights issue. The bank, which is 43% state owned, has embarked on a £22.5 billion fund raising to avoid participation in the Government’s Asset Protection Scheme (APS). In 2008 Earnings per Share was 6.6p but Lloyds TSB has paid 36.1p as a dividend per share which is detrimental to the growth of the company in future and could lead to reduction in Shareholder’s wealth since Lloyds TSB has declared dividend more than they company have earned per share.

  • Price Earnings Ratio

This is the basic measure of a company’s performance from the market’s point of view. Investors estimate a share’s value as the amount they are willing to pay for each unit of earnings. It expresses the current share price as a multiple of the most recent EPS. If a PE ratio is high, investors expect profits to rise. This does not necessarily mean that all companies on high PE ratios are expected to perform to a high standard, merely that they are expected to do significantly better than in the past. They may have greater growth potential because they are coming from a low base.

(Kaplan Publishing F9)

Year

2009

2008

2007

Barclays

9.67

2.58

7.31

Lloyds TSB

6.72

8.81

8.10

 

Barclays

In 2009 Barclays made net profit of £10,288. This is 94% higher than 2008 profits. As net profit increased PE ratio has increased significantly to 9.67. As PE Ratio increasing investor can expect better profits in 20210. In 2008 Barclays made net profit of £ 5827 m where as in 2007 net profit was £5,095. This should signal the market to react in positive direction. But it was not the case in Barclays. Although net profit has increased by £192m (14%) where as PE Ratio fell to 2.58 from 7.31. The reason is weighted average number of shares in issue in the year ended 31st December 2008 was increased by 1,034million shares. So this increase in number of shares has affected to EPS.

Lloyds TSB

The confidence of the market in Lloyds TSB has been reducing over the last three years since the Price/Earnings ratio of the company has decreased from 8.10 times in 2007 to 6.72 times in 2009.

Risk/Liquidity Ratio

  • Liquidity Ratio/Solvency Ratio

Graph

Year

2009

2008

2007

Barclays

2.31

2.61

Lloyds TSB

2.39

2.19

3.8

       (Mint Report 2010)

  • Equity to Liabilities

Year

2009

2008

2007

Barclays

4.52

2.40

2.72

Lloyds TSB

2.52

2.34

4.10

     (Mint Report 2010)

Barclays

Barclays can be seen as risk averse company as only 4.24% of total equity is financed by debt equity. Though over the three years Barclays’ solvency ratio is constantly increasing which alarming. According to the new legislation structure Banks are require to hold more capital and more liquidity. There will be a new focus on top down supervision to ensure that regulators have the tools to manage collective risk (in particular, the amount of debt) in the system. In 2009 Barclays’ capital requirement has increased to £38,850m from £32,900m.

Lloyds TSB

Lloyds had launched the largest ever capital rising comprising a £9 billion debt exchange and a £13.5 billion rights issue. This right issue has contributed to bring solvency ratio to 2.39 from 3.80 over the three years. In both companies’ case both have very low liquidity ratio. According to Miller and Modigliani with tax Theory Company should seek to maximum solvency ratio to get benefit of Tax savings on interest paid to Debt holders.

 Strategic Evaluation

SWOT Analysis

Barclays leverages its leading position in the UK and the world to benefit from economies of scale. However subprime exposure could affect the flow of new money while weak economic prospects in the UK could impact the company’s revenue and margins.

(P3 Kaplan Financial)(2009-2010)

Strengths

Weakness

– Extensive network in Europe provides business strengths.

– Focus on cost efficiencies ensuring relatively higher profitability.

– Ability to lend among reduced balance sheet size.

– Strained trading income impacting the             revenue diversity.

– Barclays Capital credit market exposure impacting financial position and performance.

Opportunities

Threats

– Intended current investments to help in clutching likely future opportunities.

– Retail banking foray in India and UAE likely to supplement growth.

 

– Bleak outlook for the UK Economy.

– Regulatory fines may compress margins and financial position Increase in online frauds to impose security concerns.

Strengths

Barclays (Barclays) is a leading global financial services provider operating in over 50 countries in Europe, the US, the Middle East, Latin America, Australia, Asia and Africa. Barclays’ strong UK franchise and network in Europe enable it to become one of the leading global financial services providers. Over the past few years, Barclays remained focus on cost optimization and was able to contain its operating costs. The company’s productivity as measured by its cost to income ratio improved from 62.1% in 2005 to 58% in 2009. As a result, the company was able to increase its operating income and net income by high double digit margins in 2009. Focused control over costs enables the company to continually post reasonably higher profits relative to its peers even in difficult global financial conditions. At the end of 2009 Barclays’ balance sheet was reduced to one third of its size at the end of 2008. The majority of this came from a decrease in derivative assets. The reduction in loans and advances was largely in Barclays Capital, especially in relation to financial institutions. Adjusted gross leverage improved from 28 times in 2008 to 20 times in 2009. Despite reduction in the size of the balance sheet, Barclays was still able to extend £35 billion of new loans in the UK during 2009. The company’s ability to lend amidst resource constraints helps it to maintain a profitable business run-rate.

Weakness

In 2008, the group’s net trading income declined to £1,329 million from £3,759 million in 2007. The decline is attributable to higher losses in credit related business. Of the total net trading income, a £2,096 million net loss was made on the purchase and sale of securities and the revaluation of both securities and derivatives. In 2007, net trading income accounted for 16.3% of total revenues while in 2008, the contribution declined to 5.8%.The weakness in trading operations is impacting the revenue diversity of the group. Barclays has exposure to US subprime through its own books in Barclays Capital and also through EquiFirst, a mortgage originator that was acquired in March 2007. The trend in credit market exposure related losses could continue to affect the group’s balance sheet and P&L statement in 2010 as well.

Opportunities

Barclays Wealth announced its intention to make an additional £350 million of investment during 2010-2015. These investments are in people and technology. Barclays Wealth’s geographic focus will be on large wealth pools in the UK and the US, as well as on the high growth global markets, which it will serve from existing hubs in London, Geneva and Singapore. Likely investments in Barclays Wealth could accelerate revenue and profit growths at this business division. The company has stripped into retail banking industry in India and UAE. The company has also taken initiatives to start commercial banking operations in these markets. Banking markets in these geographies have been expanding at a faster pace than in other regions. These geographies are expected to experience profitable growth for the next few years. So, the group is expected to benefit from the market growth.

Threats

The UK economy remains in the grips of a downward spiral, caught between a contraction in lending activity and declining economic demand. The latest economic forecasts from the IMF, which come as unemployment surged through the 2 million mark. The IMF also predicted that the UK will be the only country to keep shrinking through 2010. A bleak outlook for the UK economy implies that there would be less demand for the products and services offered by Barclays. With the advent of automation in the financial service sector the fraud related to internet and credit transaction has seen a surge. There has been increase in security breaches in the UK, threatening the use of sensitive customer data for frauds and hacking. With the increased demand for automation of services, prevention of online fraud would be a major challenge to Barclays (Datamonitor 2010).

Revenue Analyses

The Barclays recorded revenues of £31,817 million in the financial year ended December 2009, an increase of 36.2% over 2008. Barclays generates revenues through ten business divisions:

  • Revenues by Division

During 2009, the Barclay Capital division recorded revenues of £6,934m (30.1%) an increase of 11.7% over 2008. The UK banking division recorded revenues of £6,913m (30.1%) in 2009, an increase of 1.6% over 2008. The International retail and commercial banking division recorded revenues of £3,510m (15.3%) in 2009, an increase of 9% in 2008. The Barclaycard division recorded revenues of £2,340m (10.2%) in 2009, a decrease of 0.6% in 2008. The Barclay Global Investors division recorded revenues of £1,915m (8.3%) in 2009, an increase of 14.7% over 2008. The Barclay Wealth division recorded revenues of £1,343m (5.8%) in 2009, an increase of 12.1% over 2008. The head office functions and other operations division recorded revenues of £45m (0.2%) in 2009, a decrease of 68.3% over 2008.

Risks

Risk factors, which may influence the productivity of Barclay’s future, are different materially from the expected outcome. However, it should be noted that such factors cannot negatively influence Barclay’s result and the factors presented in this report must not be taken as complete arrangement of all possible uncertainties and risks. 

Business conditions and general economy

Barclays is considered to be a global bank and it provided wide ranging services such as inflation-risk hedging for different governments and organizations, current accounts for personal clients, etc. it has considerable amount of activities in several countries. However, the modifications in the business and the general economy may influence Barclay’s profitability at all levels; whether it works as a Group or works individually in different countries, where it operates.

It should be noted that in countries such as South Africa, Spain, US, UK, etc, the rate of unemployment is higher and this has amplified the debts in Barclay’s credit card portfolios. As the GDP decreases, the credit quality of Barclay’s corporate portfolios has been cut-down. There is also decline in the property prices, which have reduced the value of collateral and is responsible for market losses in its trading portfolios.

The business conditions in front of Barclays’ in 2009 are question to important uncertainties; particularly:

  •  The magnitude and sustainability of financial upturn and asset value in US, UK, Spain and South Africa as governments take into account on how and when to remove stimulus packages.
  •  The rate of unemployment and its dynamics in those markets and the effect on delinquency and charge-off
  •  The rate and extent of probable increase in the interest rates in US, UK and European region.
  •  The probability of further decline in prices of properties in UK, Spain and South Africa.
  •  The possibility of single name threat and individual losses in different areas and sectors, where credit positions are influenced by the downturn in economy.
  •  The further decline in the remaining credit market exposures, which includes leveraged finance and commercial real estate.
  •  The possible influence of weakening independent credit quality.
  •  Modifications and changes in the Sterling value in context to other currencies, which would augment the risk weighted assets and therefore, increase the capital requirements.
  •  The Group may experience a decline in their income because of the liquidity and instability of the capital markets and the investors’ appetite for uncertainty.

Conclusion

The ROCE ratio of Barclays is constantly falling which may lead to investors reluctant to provide future capital. Barclays have unbalanced dividend pay out ratio, which demonstrates that revenue generation is highly fluctuating. In the year 2009, it has seen full profits, which increased by 92 percent to £11.6bn. The figure was increased by the deal of its BGI fund management arm to the American firm BlackRock last year. Removing this out, the total revenue generated was £5.6bn as compared to £1.6bn in 2008. In accordance to BBC lending and asserts are equal to twenty times its equity capital, because of it accumulation of valuable capital and because its total asserts have experienced a decline from £2.1tn to £1.4tn. In simple words, it needs to have a higher proportion of its assets in order to experience bankruptcy as the case was in 2008. It successfully retained 9.6 bn earnings, making it a very safe bank.

In the second half of the year, it credit costs increased to 63% to £4.6 billion as compared to the first hald and 2.17% of loans on a yearly basis. Impairments increases and has an impact on Barclaycard’s international portfolio and in the Global Retail and Commercial Banking (Western Europe, Emerging Markets and South Africa). It got away with Lehman’s American operations out of economic failure. the organization’s debts are increasing and deteriorating its investment banking revenues and more significantly future and uncertain regulatory modifications are intimidating it, which would decreases it profitability. Although issues on Barclay’s viability have reduced, uncertainties about write-downs and long term profitability issues still remain. In the first half of 2009, there was rapid increase in loan losses, which were nearly triple in commercial banking and are most likely to negatively influence the Bank’s profitability.

Recommendations

Most of Barclays’ operation is carried out in US and UK. These countries are well deep in recession. The latest economic forecasts from the IMF, which come as unemployment surged through the 2 million mark. The IMF also forecasted that the UK will be the only country to keep cringing through 2010. A gray outlook for the UK economy implies that there would be less demand for the products and services offered by Barclays. Barclays should consider diversify their operation through out Asia as these Asian economies are expected to experience profitable growth for the next few years. So, the group can expected to benefit from the market growth. Today it is the Asian, Brazilian and Indian market that are well capitalised and run conservatively.

For economic down turn we have seen from 2007 Banks were criticize heavily for risky strategies and bonus culture. Barclays was not immune from this criticism. Barclays should impose very strict rule in credit providing services. Barclays also have to avoid negative publicity by establishing government recommended bonus pay out system. Barclays’ gearing is very low which makes the Capital to be expensive since Capital structure of Barclays consists of 4.24% of Debt which is a cheaper form of finance compared to capital. Barclays should try and maximise the benefits of cheaper finance available.

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