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Banks are central to every society; they provide the funding that facilitates business and entrepreneurship, support a sound financial system, and help to create jobs and wealth. Banks in the UK operate in a highly competitive, globalised but lightly-regulated environment. They face increasingly well-informed and ‘energetic’ customers, determined legislators, and electorates who are becoming environmentally aware. They have to adapt to changing economic and market conditions, fast changing consumer needs and expectations. Their business is influenced by global economic, political, regulatory, technological and other unpredictable factors.
Consequently, they have to device their strategies, policies and operations to adapt to these changes in order to meet stakeholder expectations and satisfy consumer needs. In this assignment, I try to describe and evaluate changing business environment of Barclays Bank Plc over the last five years.
About Barclays Bank Plc
Barclays is a major global financial services provider engaged in retail banking, credit cards, corporate banking, investment banking, wealth management and investment management services with an extensive international presence in Europe, the Americas, Africa and Asia.
Barclays Group headquarters is at 1 Churchill Place in London, UK, but it has operations all over the world, with products and services to meet the needs of customers and clients in local markets. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs more than 144,000 people. Barclays moves, lends, invests and protects money for more than 48 million customers and clients worldwide.
Barclays is made up of two ‘Clusters’: Global Retail Banking, and Corporate and Investment Banking and Wealth Management, each of which has a number of Business Units.
The third major area of the business is Group Centre, which comprises all our essential support functions.
UK Banking Industry
UK’s banking sector, following the US and Japan, is the world’s third largest and considered foremost in terms of: efficiency, dynamism and return on capital. In addition to having one of the largest commercial banking industries, the UK is also a major international centre for investment and private banking. The UK banking sector’s strong international orientation is reflected in the substantial foreign presence and sizeable assets of foreign banks in London. It services 95% of the population with about 3.5% of UK’s workforce - over a million workers.
Banks and financial services contribute £70bn to the UK’s national output (6.8% of GDP) and provide 25% of total corporation tax (£8bn) to the UK Government. The main retail banks provide over 125m accounts, clear 7bn transactions a year and facilitate 2.3bn cash withdrawals per year from its network of over 30,000 free ATMs. Banks in the UK contribute well over £100m per year to charities and local community initiatives.
UK banks are authorised and regulated by Financial Services Authority under the Financial Services and Markets Act 2000 (FSMA). Financial Services Authority is an independent non-governmental body which exercises statutory powers under the FSMA. The FSMA requires the FSA to pursue four objectives: to maintain confidence in the UK financial system; to promote public understanding of the financial system; to secure an appropriate degree of protection for consumers whilst recognizing their own responsibilities; and to reduce the scope for financial crime. Banks of England is responsible for maintaining overall stability of the financial system a whole. The Bank sets interest rates of UK and is also responsible for identifying and limiting systemic financial risk.
Barclays bank operates almost all over the world and hence its actions are influenced by the global economic conditions. I have used PESTEL framework to describe and evaluate business environment of Barclays Bank plc. It categorises environmental factors into six main types: political, economic, social, technological, environmental and legal.
* Government stability
* Taxation policy
* Foreign trade regulations
* Social welfare policies
* Business cycles
* GNP trends
* Interest rates
* Money supply
* Income distribution
* Social mobility
* Lifestyle changes
* Attitudes to work and leisure
* Levels of education
* Government spending on research
* Government and industry focus on technological effort
* New discoveries/development
* Speed of technology transfer
* Rates of obsolescence
* Environmental protection laws
* Waste disposal
* Energy consumption
* Monopolies legislation
* Employment law
* Health and safety
* Product safety
The change in the business environment of Barclays bank
The collapse of a global housing bubble, which peaked in the U.S. in 2006, caused the values of securities tied to real estate pricing to plummet thereafter, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability, and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during late 2008 and early 2009. Economies worldwide slowed during this period as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts.
The subsequent emergence of a wider set of credit problems – in mortgages and in corporate lending, and in particular in commercial real estate – generated credit capacity constraints and economic slowdown. An initial focus on funding problems, with the failure of Northern Rock caused not by immediately evident solvency/credit quality problems, but by the drying up of the market for both securitised credit assets and wholesale funding availability. Such funding issues were also critical to the problems of Bradford & Bingley and HBOS in September/October 2008.
The UK economy was officially declared to be in recession on 6th May 2009. The Office of National Statistics said that Gross domestic product (GDP) fell by 1.5% in the last three months of 2008, after a 0.6% contraction in the previous quarter. Recession is generally defined as two quarters of successive contractions in GDP, which means the UK had been in recession since July 2008. Industrial production fell by a massive 3.9 per cent over the quarter, while the dominant services sector fell by one per cent. Unemployment had also risen to 2.47 million in the three months to July 2009. It was at its highest level in 14 years since May 1995.
The UK economy came out of recession in 2010, after figures showed it had grown by 0.1% in the last three months of 2009. In the second week of January 2010, UK unemployment fell for the first time in 18 month. The UK's production and service sectors each grew by 0.1% during the quarter. The UK recession began in the April-to-June quarter of 2008, and was the longest UK recession on record. During 18 months of recession, public borrowing increased to an estimated £178bn, while output slumped by 6%.
Impact on Barclays Bank’s performance
Barclays announced record profits of more than £11 billion for 2009 – a 92% rise on the previous year. Its performance driven largely by a strong revival in its investment banking arm Barclays Capital. Profits were also boosted by sale of fund management business Barclays Global Investors, and the addition of the New York operations of failed investment bank Lehman Brothers at the end of 2008. The BGI sale added £6.3 billion to pre-tax profits. Barclays Capital contributed £2.5 billion of the bank’s underlying profit of £5.3 billion which was 13% down on 2008’s £6 billion. However, the bank’s profit was highly affected by the global economic slowdown and deteriorating economic conditions in the UK.
Its UK Retail Banking profit before tax in 2009 decreased 55% (£757m) to £612m (2008: £1,369m), impacted by low interest rates resulting in margin compression on the deposit book and increased impairment charges which together more than offset well controlled costs and an improved assets margin. Impairment charges rose to £974m (2008: £414m), reflecting the impact of the economic recession across the business with continued pressure on corporate liquidity, rising default rates and lower asset values.
Barclays enforced strict criteria on new credit card applications, using a scoring system that takes over 400 variables into account when assessing an applicant’s likely ability to manage their credit. Around 50% of applications for credit cards are declined as a result. Strong income growth (2009) across the portfolio driven by increased lending, improved margins and foreign exchange gains, was offset by higher impairment charges, driven by the deterioration in the global economy. Impairment charges in the international businesses increased £444m, driven by higher delinquencies due to deteriorating economic conditions. UK portfolio charges were higher as a result of rising delinquencies due to the economic deterioration, especially in the loan portfolios, and the inclusion of Goldfish in UK Cards.
The impairment charge in Global Retail and Commercial Banking increased by 85% (£2,473m) to £5,395m (2008: £2,922m) as charges rose in all portfolios, reflecting deteriorating credit conditions across all regions.
Impairment charges on loans and advances increased 50% (£2,445m) to £7,358m (2008: £4,913m). The increase was primarily due to economic deterioration and portfolio maturation, currency movements and methodology enhancements, partially offset by a contraction in loan balances.
In Investment Banking and Investment Management, impairment was broadly unchanged at £1,949m (2008: £1,980m). The impairment charge against available for sale assets and reversed repurchase agreements increased by 41% (£207m) to £713m (2008: £506m), driven by impairment against credit market exposures.
During 2008, the UK government acted in the banking sector to recapitalise banks and guarantee toxic assets and deposits and new lending for essential infrastructure programmes. This was essential to shore up lending for consumers and businesses and restore confidence in banks. Also it was vital to avoid the unprecedented banking crisis having even more wide reaching and catastrophic effects in the wider economy. This decision was not taken lightly and wasn’t considered an easy ride for the banks. Banks wishing to participate in the Asset Protection Scheme for example had to make additional lending to households and businesses. But the overarching priority in the banking sector was first to ensure the continuing supply of credit to the wider economy. This means returning the banks to solvency and profitability, and maintaining financial stability.
On 13th October 2008, the government nationalised the Royal Bank of Scotland (RBS), taking up a 63 % stake in exchange for £20 billion of taxpayers' money (now 84% owned by the government) on condition that no executive bonuses paid during 2008; no dividend until the government's £5bn of preference shares are repaid and the government appointed three directors; RBS had to maintain mortgage lending at 2007 levels.
On 31st October 2008, Business secretary Lord Mandelson waived competition law for takeover of Lloyds TSB’s takeover of Halifax Bank of Scotland creating the fourth biggest bank of Britain to calm uncertainty about the strength of HBOS after a run on its shares. The combined bank accounts for a third of the mortgage market. Although the merged bank is smaller than Barclays, HSBC and Royal Bank of Scotland, because it has less of an international profile than the other banks, it is the market leader - in terms of savings - by a huge margin.
In order to shore up confidence in the banking system during 2008, the government injected money into Lloyds TSB Bank (£5.5bn) and HBOS (£11bn) and became owner of 43.5% of the combined group, directors were asked to receive 2008’s bonus in shares; no dividend until preference shares are repaid; government appointed two directors; Lloyds asked to maintain mortgage lending at 2007 levels for next three years. As the Financial Services Authority increased the capital ratio requirements for all UK banks, Barclays had been forced to raise £7.2 billion from Middle Eastern Investors on generous terms. A further £1.5bn was being raised from institutional investors to strengthen its balance sheet.
Chancellor Alistair Darling introduced a temporary one-off super-tax of 50% on bankers' bonuses paid above £25000 between December 2009 and April 2010. Bankers still had to pay income tax on any bonus they receive as usual. The new tax was designed to discourage banks from awarding large bonuses to employees in the wake of the major taxpayer support they have received in the financial crisis. Consequently, Barclays paid £225 million in windfall bonus tax for 2009.
According to British Retail Consortium (BRC), more people are using cash to pay for their purchases amid growing consumer concerns about how much money they are spending. The global credit crunch is causing consumers to be more cautious with their money. Figures from the organisation showed that cash was used for 60 per cent of all transactions during 2008, an increase of 54 per cent from 2007. Cash represented 34 per cent of all money spent in the retail sector during 2008, compared with 32 per cent in 2007. According to BRC, people’s enthusiasm for using cards is slipping as they are not only reluctant to borrow but also reluctant to use cards.
A survey released on 22nd January 2009 by communications consultants Cohn & Wolfe revealed the full scale of UK consumers’ anger with financial institutions. UK consumers perceive their banks to be ‘greedy’ and ‘impersonal’, according to the survey, which polled 852 consumers in January 2009. The study also revealed that 60% of consumers don’t believe that their bank is looking after their best interests. When asked which words best describe the perception of their financial institution, consumers identified ‘greedy’ (49%), ‘impersonal’ (36%) and distant (34%). Positive and desired descriptions including ‘ethical’ (2%), ‘trustworthy’ (4%) and ‘transparent’ (5%) were among the least common terms used by consumers to describe their financial institutions.
Almost two thirds (64%) of respondents’ trust in financial institutions had weakened over the last 18 months. A lack of confidence in banks was further emphasized with 74% of consumers saying that they do not believe that their bank would help them recover any money they had lost in 2008. Respondents also identified the financial services they trusted most. Retail banks were comfortably (59%) the most trusted type of financial service. At the other end of the scale, investment broker (2%), insurance providers (5%), online financial service providers and supermarket retailers (both 6%) come off worst.
Due to such negative attitude towards banking industry and intense public interest and concern for banks and bankers’ pay, Barclays chief executive John Varley and president Bob Diamond both agreed to sacrifice bonuses for two years, 2008 and 2009.
In late 2004, Chip & PIN technology was introduced as a strategic response to tackle counterfeit and lost & stolen card fraud in the face-to-face environment. Up until this point, UK consumers signed for their goods and services and only used their PIN for ATM withdrawals. During 2007, Barclays sent out ‘PIN sentry’ machines to over half a million customers in an attempt to prevent online banking fraud. The PIN sentry reader is meant to be used once an online account holder has logged in to the banking site.
After logging in, customers slot their bank debit card into the card reader, which generates a unique code which they must input before making a transaction. Also, retailers and banks are using more fraud screening detection tools and online fraud prevention tools, such as MasterCard SecureCode and Verified by Visa, which make cards more secure when people are shopping online. This led to phone, internet and mail order fraud losses falling 19 percent from £328.4 million in 2008 to £266.4 million in 2009.
Climate change has become the single biggest challenge the world faces at the beginning of the 21st century, and in response Barclays is focusing increasingly on its work on the environment, which includes both its direct and indirect impacts.
Barclays remains committed to increasing its energy efficiency, and reducing its carbon footprint on an ongoing basis, as well as helping its supply chain reduces its emissions. In 2007, it invested in emissions trading capability, and moved into the consumer market with new lower-carbon products and services.
An example is Barclaycard Breathe, a new card that gives consumers incentives when they buy green products, and donates half its profits to environmental projects. In the wholesale market Barclays Capital has committed to the EU emissions trading market to brings its full range of commodity trading and risk management expertise to bear to help clients manage their carbon risk. Since 2005 it has traded over 600 million tonnes of carbon credits, with a notional value of over $14 billion.
The global financial crisis resulted in a significant tightening of regulation and changes to regulatory structures globally. The changes in the legal framework, policies and banking regulatory action, have an impact on Barclays’ businesses and earnings.
The market for payment protection insurance (PPI) has been under scrutiny by the UK competition authorities and financial services regulators. In 2006, the FSA published the outcome of its broad industry thematic review of PPI sales practices in which it concluded that some firms fail to treat customers fairly and that the FSA would strengthen its actions against such firms. Barclays voluntarily complied with the FSA's request to cease selling single premium PPI by the end of January 2009. On 21st February, the UK government introduced Banking Act 2009 which provides the Authorities with tools to deal with failing banks and building societies. The Banking Act provides a permanent and appropriate regime for the resolution of failing banks.
It is a major step forward in the Government’s programme to strengthen stability and confidence in the UK banking system, in the wake of the global instability experienced by financial markets. In order to discourage excessive risk taking by large banks, FSA published its new Remuneration Code of Practice in August 2009. The code states that firms should not encourage risk taking to generate short-term profit – the focus should be on long term success. It required firms to give pay details to FSA so that it can monitor compliance. Barclays’ discretionary pay awards for 2009 were fully compliant with the FSA Remuneration Code which resulted in an increase in the deferred awards by approximately 70% and greater use of equity in deferral structures, particularly to senior staff. 100% of the discretionary pay awards for 2009 to its Executive Committee were deferred.
From previous chapters it becomes clear that Barclays bank operates in unpredictable and volatile business environment. In such circumstances, it is highly recommended that it should be clear about its strategic framework for the coming years and should maintain a sound financial and organisational footing that anticipates and adapts to the regulatory changes. It can achieve superior growth by diversifying its profit base by geography and by business line. It should focus intensely on cost reduction and risk management. It is required to create the internal framework, processes and culture to respond rapidly to new opportunities, threats and regulations. It is also required to re-establish trust and relationship with customers by fulfilling their needs with product innovation and customer centric approach.
The global economic slowdown and subsequent recession in UK and in many other countries of the world have changed the business environment in substantial way. Barclays Bank operates in a business environment which is highly influenced by political, economical, sociocultural, technological, environmental and legal factors. In order to compete successfully, it has to adapt to changing business environment. Its performance in last five years shows that it has the ability to run the business profitably even in such deteriorating economic conditions where other players in the market struggled to survive. However, it needs to undertake a balanced set of strategic initiatives in such unpredictable and extreme volatile business environment which is beyond the organisational control.
* Exploring Corporate Strategy, text and cases, sixth edition (2002) by Gerry Johnson and Kevan Scholes * http://en.wikepedia.org
* http://www.thisismoney.co.uk/news/article.html?inarticle_id=469739&in_page_id=2#ixzz0lIhv4NoL * http://news.bbc.co.uk/2/hi/business/8479639.stm
* http://www.myoffshoreaccounts.com/english/offshore_uk-banking-uk-bank-account * http://group.barclays.com/About-us/Barclays-at-a-glance/Key-facts * http://group.barclays.com/Investor-Relations/Shareholder-information/Annual-Reports * http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010) * www.moneyshop.co.uk/.../brc-credit-crunch-leading-to-cash-comeback.html * http://www.gciuk.com/en/news/banking-blues-uk-survey-says-consumers-lose-trust * http://www.hm-treasury.gov.uk/press_16_09.htm
* http://www.telegraph.co.uk/finance/personalfinance/consumertips/banking/6267384/Online-banking * http://econsultancy.com/blog/1065-barclays-uses-chip-and-pin-to-combat-online-fraud
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