23rd Apr 2015 15:06
LONDON (Alliance News) - Barclays PLC still requires a "great deal" of work, according to new chairman John McFarlane, who wrote to shareholders on Thursday to tell them that the bank's restructuring needs to speed up in an effort to bolster returns, as the outgoing chairman urged shareholders not to be disheartened as they see further "issues" emerge this year.
McFarlane had already been expected by financial analysts to accelerate Barclays' turnaround, as he joins the bank with a strong reputation due to his work on a turnaround at Aviva PLC that saw the recovery of the once ailing life insurer's performance and share price.
In a letter to shareholders published on the day of Barclays' annual meeting of shareholders, McFarlane pledged to achieve a "satisfactory rate of revenue growth, greater cost discipline and a more dynamic reallocation of capital" as well as "clarity on the proposition we are trying to build".
The incoming chairman said that Barclays has had to be selective about the opportunities it chooses for growth as a result of the "significant resources" it has to allocate to other priorities, which have included fines, litigation, higher regulatory costs and the need to retain more capital against risky assets. However, McFarlane wrote that he wants Barclays to get into a position that allows it to pursue more of those growth opportunities.
"We do have a number of growth options. Unfortunately we are not able to pursue as many of them as we would wish in earnest, as we currently need to allocate significant resources to other priorities. We need to get ourselves into a position where we can pursue more of them," he wrote in his letter.
McFarlane wants to "advance" work on ring-fencing Barclays' retail and commercial business from investment banking operations in the UK, as well as creating an intermediate holding company in the US. He also picked out the need to advance work on winding down non-core assets and meeting targets for financial strength.
Parts of the group that aren't providing high enough returns must be repositioned and improved, according to McFarlane, who raised the prospect of disposing of assets that are beyond help.
"We need to take a considered view as to their prospects as well as the probability of their future success, and put in place plans and action to improve them or curtail those that are unable to be resuscitated," McFarlane wrote in the letter.
McFarlane emphasised the importance of completing the group's restructuring so as to create an attractive proposition for investors and to move towards an "appropriate balance" between dividend yield and earnings per share growth.
"This would require us to produce free capital and cash flow for dividends and investment. Recently, since below the line costs broadly offset our above the line operating profit, we have so far been unable to secure such a position satisfactorily. We therefore need to get the errors of the past behind us, to achieve a satisfactory rate of revenue growth, greater cost discipline and a more dynamic reallocation of capital," McFarlane wrote.
David Walker, the outgoing chairman, used his final appearance at Barclays' annual meeting as the group chairman to urge the bank's shareholders not to be disheartened as they see further "issues" emerge this year, while Chief Executive Anthony Jenkins said he expects to make "significant, through sometimes difficult" progress in resolving the issues that have hampered the bank since the financial crisis.
"There will be further issues to resolve this year. I urge you not to be disheartened when you see these as they emerge," Walker told shareholders.
"This is simply further evidence of our commitment to deal with the past and, most importantly, learn from it," Walker said, as he highlighted all the steps Barclays has taken to improve its reputation and financial position in the last couple of years.
"By working more closely and proactively with our regulators than ever before, we will also move towards greater resilience, transparency and sustainability," the Chairman added.
Barclays, like its peers in Europe and North America, has been stung by a raft of costs that have dragged down returns for shareholders and brought into focus the importance of compliance and risk management functions. In the UK, banks including Barclays have paid out billions to customers who were mis-sold insurance that was meant to protect them against the risk of losing out on income due to illness, while fines relating to the manipulation of key benchmarks used in financial markets have also weighed heavily on the global sector.
The threat posed by fines to the banking sector was reinforced as it emerged Thursday that German lender Deutsche Bank is to pay USD2.5 billion and install an independent monitor in connection with the manipulation of a range of interbank benchmark rates. Barclays itself paid a GBP290 million over the Libor rigging scandal back in 2012 but the bank and its shareholders are now awaiting news of the impact of regulators' investigations into manipulation of currency markets.
Barclays decided against joining a settlement that saw six of its rivals fined USD4 billion by UK and US regulators in November 2014 for their part in the foreign exchange rigging scandal, though it provisioned GBP1.25 billion over the scandal over last year as a whole.
"We remain focussed on addressing the behaviours at the centre of historic conduct issues, including those relating to the on-going investigation into foreign exchange," CEO Jenkins told shareholders at the meeting.
"I share your frustration as shareholders, and the frustration felt by my colleagues, that legacy matters like these continue to cast a shadow over our business. Resolving these issues is an important part of our plan for Barclays, and I expect that we will make significant, though sometimes difficult, progress in this area in 2015," Jenkins said.
Although fines, litigation and the higher costs have hurt profit and the ability to build financial resilience to economic shocks, Jenkins told shareholders that Barclays is on its way to taking the question of capital strength off the table for good.
Jenkins, who was brought in to replace Bob Diamond after the latter's resignation over the Libor scandal in July 2012, said Barclays will continue to cut costs and run down non-core assets over 2015. The chief executive also said he wants to oversee an increase in dividend payments to shareholders, reiterating his target of reaching a 40%-50% payout ratio of adjusted earnings over time.
Meanwhile, McFarlane hit out at the UK government's bank levy in his letter to shareholders, which Chancellor of the Exchequer George Osborne again recently increased.
"Significantly, we will also be forced to absorb the burden of the recently increased UK bank levy on our global liabilities, which prior to this was already a significant drag on our returns, and, beyond this, it reduces the returns from our overseas activities compared with non-UK competitors," McFarlane said.
"All of this has, and continues to require, considerable management and board attention, with consequent significant restructuring cost and regulatory fines, much of which is non-tax deductible," he added.
All of the resolutions proposed at Barclays annual meeting passed without any major protest votes.
Barclays shares were up 1.8% at 257.90 pence on Thursday afternoon in London.
By Samuel Agini and Steve McGrath; [email protected]; @SamuelAgini; [email protected]; @stevemcgrath1
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