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Barclays plc (NYSE:BCS) (LON:BARC) is a leading global money center bank, netting over $46 billion in revenue for 2007.[1] Already number one in debt issuance in Europe, Barclays further expanded into the investment banking industry with its September 2008 acquisition of the North American operations of Lehman Brothers (LEH). London-based Barclays has a strong presence in the U.K. retail and commercial banking industries, though it has also moved to expand its operations to emerging markets such as India, China, and the Middle East.
As an international financial services firm, Barclays has been impacted by the 2008 global financial crisis and deteriorating conditions in credit markets. In the first nine months of 2008, Barclays wrote down the value of its subprime-related assets by over $4.1 billion,[2] taking a bite out of earnings growth. Additionally, a slowdown in the U.K. housing market has led to rough conditions in Barclays' home market, which accounted for 57% of the firm's profit in 2007.[3]
[edit] Business Segments
Barclays is organized in two main divisions: Global Retail and Commercial Banking and Investment Banking and Investment Management, each with its own sub-divisions.
[edit] Global Retail and Commercial Banking
[edit] UK Retail Banking (21.5% of 2008 pre-tax income)
The UK Retail Banking offers traditional banking services to individual and small business customers exclusively within the United Kingdom. Products offered include savings, checking, money market accounts, investment products, Woolrich branded mortgages, and general property and life insurance. From 2007 to 2008, UK Retail Banking pre-tax profit increased 7.4%[4]
[edit] Barclays Commercial Banking (19.8% of 2008 pre-tax income)
The Barclays Commercial Banking segment caters to the financial needs of medium to large organizations within the UK. Some of the products and services Barclays offers to its Commercial Banking clients include business finance, specialist industry information and advice, online banking and savings, investment services, insurance, and mortgage origination and underwriting. Barclays Commercial Banking's pre-tax profit decreased 6.3% from 2007-2008 after several years of double-digit growth.[5]
[edit] Barclaycard (12.0% of 2008 pre-tax income)
As the first credit card issued in the UK, the Barclaycard segment operates domestically, notably providing services to the UK government, as well as internationally. Barclaycard offers consumer loans and processes card payments for retailers and merchants, in addition to issuing credit and charge cards to customers. In response to deteriorating conditions in the credit markets, Barclaycard has taken measures to tighten lending criteria, resulting in a net decrease in new credit card account delinquencies. Also, Barclaycard began issuing Flexi-Rate, a credit card with an adjustable rate that reflects borrowers payment history. From 2007 to 2008, Barclaycard pre-tax profit increased 30.8%.[4]
[edit] International Retail and Commercial Banking (14.5% of 2008 pre-tax income)
The International Retail and Commercial Banking (IRCB) segment offers business banking services to Barclays' corporate customers outside the UK. This segment operates in Africa, Spain, Portugal, Italy, France, and the Middle East, providing services such as retail checking and savings accounts, mortgage origination and underwriting, industry specialist consultations, insurance, and other investment and advisory services. Pre-tax income for IRCB fell 23% in 2007 from 2006 as global economic conditions turned grim. From 2007 to 2008, however, ICRB pre-tax profit increased 5.6%.[4]
[edit] Investment Banking and Investment Management
[edit] Barclays Capital (20.4% of 2008 pre-tax income)
Barclays Capital (BarCap), the firm's investment banking segment, advises clients on transactions such as mergers, acquisitions, and initial public offerings, and offers debt and equity origination services. Within Europe, BarCap is the largest debt issuer, having more than doubled in size since 2003.[6] BarCap had a relatively small presence in the U.S. investment banking market until 2008, when it acquired Lehman Brothers' U.S. operations after Lehman filed for bankruptcy protection.[7] As part of the deal, Barclays got Lehman's Manhattan headquarters and about 10,000 employees, nearly tripling the size of its U.S. workforce. From 2007 to 2008, Barclays Capital pre-tax income decreased 44.2%.[4]
[edit] Barclays Global Investors (8.8% of 2008 pre-tax income)
Barclays Global Investors (BGI) is the group's asset management branch, which manages investments for individual, institutional, and corporate clients. BGI is one of the largest asset managers in the world, with $2.1 trillion in assets under management at the end of 2007. From 2007 to 2008, Barclays Global Investors decreased 19.0%.[4]
[edit] Barclays Wealth (3% of 2008 pre-tax income)
Barclays Wealth provides affluent and high-net-worth individuals with private banking and investment management services. Though Barclays Wealth is the smallest of the group's divisions, with client assets of $266 billion as of year-end 2007,[8] it is growing rapidly; from 2005-2006 and 2006-2007, the division's pre-tax profit jumped 49% and 25%, respectively.[9] Furthermore, from 2007 to 2008, Barclays Wealth pre-tax profit more than doubled to £671 million.[4]
[edit] Trends and Forces
[edit] Global credit crunch still hurting Barclays' earnings
In the first nine months of 2008, Barclays Capital wrote down the value of its debt- and credit-related holdings by over $4.1 billion.[11] In 2007 and 2008, the global market for collateralized debt obligations and mortgage-backed securities all but disappeared, forcing Barclays to hold these securities on its balance sheet and take losses as their market value fell. As of September 30, 2008, Barclays Capital still had over $6 billion and $22 billion of CDOs and commercial mortgages, respectively, on its balance sheet.[11] Further deterioration in the global credit markets would continue to have a negative impact on Barclays.
[edit] Central banks cutting interest rates
In response to worsening conditions in global credit markets and the threat of economic downturns, central banks across the globe have been slashing interest rates from 2007 into 2008. The U.S. Federal Reserve cut its target federal funds rate from 5.25% in August 2007 to 1% in October 2008,[12] while the Bank of England cut rates in the U.K. from 5.75% in December 2007 to 4.5% in October 2008.[13] These rate cuts are generally beneficial for the economy as a whole, as well as for deposit-taking banks like Barclays. The reason is that interest rates represent the cost of borrowing money, meaning that lower rates make it cheaper for people to take out loans and use other credit products offered by financial services firms. Additionally, as short-term interest rates fall faster than long-term rates, banks benefit from a more favorable yield curve; essentially, they pay short-term rates on customers' deposits and charge long-term rates on loans, making the combination of low short-term rates and relatively higher long-term rates very beneficial for their net interest income.
[edit] Pre-tax income from emerging markets up 25% in 2007
Emerging markets have been a strong source of growth for Barclays in recent years, with the International Retail and Commercial Banking divisions' pre-tax income from India, Africa, and the Middle East rising 25% in 2007.[14] Additionally, Barclays Capital established a partnership with the China Development Bank in July 2007, giving it access to the large-and-growing demand for commodities trading and other capital markets services in China. All told, the IRCB division had 13 million clients in 2007 across the world, letting Barclays take advantage of rapid development in emerging economies.
[edit] Barclays continues to raise funds and its Tier 1 Capital Ratio%
Since October of 2008, Barclays has made considerable efforts to raise capital, without help from the government, to minimize its chances of being nationalized. BCS raised £ 7 Billion from investors in Qatar and Abu Dhabi last fall and selling different arms of its business[15] In addition, in April of 2009, Barclay's sold its iShares business, which controls half of the U.S. Exchange Traded Fund (ETF) market, to CVC Capital Partners for approximately $4.4 billion[16][17] And most recently, BCS announced that it is also selling its Global Investors arm. As of June 8, BlackRock (BLK) is in negotiations to acquire the Global Investors arm for $12-13 billion.[18] The Global Investors arm manages more than $3,000 billion in assets and an acquisition by BlackRock would make it the biggest money manager in the world.[18]
BCS passed stress tests and did not need UK government bailout money. At the end of 2008, BCS had a Tier 1 Capital Ratio%, a measurement of the strength of the balance sheet, of 6.4%, which is above the minimum 4%.[15] With continued turmoil in the financial services industry, BCS has been preparing for the U.K. Financial Services Authority to increase the minimum tier one requirements. As of April 2009, its Tier 1 Capital Ratio was 7.2% after the sale of iShares to CVC. Further, its sale of Barclays Global Investors is expected to boost its ratio 1% to a total of approximately 8.2%.[18]
[edit] Competition
Barclays competes against both domestic and international money center banks, or banks that provide services from retail banking products like checking and savings accounts to asset management and investment banking services. Barclays is smaller than some of its competitors, though it is still the largest debt underwriter in Europe.[19]
Barclays' main competitors internationally include:
- Citigroup (C) -- Citigroup offers similar banking products as BCS, and has lost money in five straight quarters.
- Bank of America (BAC) -- BAC is a bank holding company that competes with BCS for U.S. consumers.
- HSBC Holdings (HBC) -- London-based HBC is the top UK bank rival to BCS.
- J P Morgan Chase (JPM) -- Like BAC, JPM also offers credit provision and investment banking products while competing with BCS for U.S. consumers.
[edit] References
- ↑ Barclays PLC Financial Statements - Reuters.com
- ↑ 2008 Q3 Interim Management Statement, page 4 - Barclays plc
- ↑ Barclays PLC Annual Report 2007 - page 11
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 Barclays PLC Annual Report 2008
- ↑ Barclays PLC Annual Report 2007 - page 28
- ↑ Barclays PLC (BCS) - Morningstar
- ↑ Barclays to buy Lehman units - The Boston Globe
- ↑ Barclays PLC Annual Report 2007 - page 4
- ↑ Barclays PLC Annual Report 2007 - page 42-43
- ↑ Data Download Program - Federal Reserve Board
- ↑ 11.0 11.1 2008 Q3 Interim Management Statement, page 4 - Barclays plc
- ↑ Bracing for another rate cut in December - Reuters.com
- ↑ HouseWeb.co.uk
- ↑ Barclays PLC Annual Report 2007 - page 34
- ↑ 15.0 15.1
- ↑ Reuters, "Barclays sells iShares to CVC for $4.4 billion," 04/09/2009
- ↑ Bloomberg, "Barclays Seeks Sale of IShares as ETF Assets Decline," 03/17/09
- ↑ 18.0 18.1 18.2 Financial Times, "BlackRock near $13bn deal for Barclays arm," 06/08/2009
- ↑ Barclays PLC (BCS) - Morningstar
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