Barclays banks on Africa dream
It has cut jobs and reduced its investment arm – now the group is looking south for a lifeline.
British bank Barclays, the major shareholder of South African-based Barclays Africa, has had a turbulent few years – it was awarded a hefty fine in 2012 for its part in the London Interbank Offered Rate (Libor) rigging scandal and then, in the past week, it announced it would be cutting 19 000 jobs after disappointing earnings.
The bank is also facing a probe by the United Kingdom’s Serious Fraud Office into money paid to the Qatar Investment Authority. It is believed the probe is about fees that were paid in 2008 when the bank was raising £7-billion from investors, including the Qataris, to avoid a state bailout.
Barclays reported first-quarter pre-tax profit of £1.69-billion, down 5% on last year’s, and lower than many of its top UK peers by total assets. It also delivered annual pre-tax profits of £5.2-billion, lower than the £5.4-billion expected by analysts.
The banking group is now under pressure from investors and shareholders to deliver.
This led to an announcement last month of an overhaul of the bank, which involved cutting back its previous cash cow – its investment division – and focusing its attention on its African business and its credit card arm, as well as returning to its retail roots.
Not that restructuring will come cheap. It is expected to cost the bank £3-million over three years. If Barclays investors are looking to Africa to offer profits, Old Mutual analyst Tracy Brodziak warns that it is likely to be “more of a long-term story”. She said, although Barclays Group Africa, formed when Absa Bank acquired Barclay’s African operations, has none of the issues of its parent company, “it has not had much growth. The returns are okay but there is a limited risk appetite at Barclays Africa. Share prices have underperformed relative to its peers, but this year saw some catch-up, and a good dividend was paid, but it still has to show that it can grow its market.”
The bank’s decision not to pursue the loan chase paid out, after other South African banks were hit by customers’ inability to repay their debt.
Barclays Africa reported increased headline earnings of R11.84-billion for the year ending December 2013, up 14% on the previous year, with the inclusion of operations in Africa (with South African results).
The eight assets acquired by Barclays Africa from Barclays are Uganda, Zambia, Botswana, Kenya, Ghana, Tanzania, Seychelles and Mauritius, for which Absa paid R18.3-billion.
Barclays Africa said at its results presentation this year that it intends business outside South Africa to account for 20% to 25% of its revenue by 2016. While it sets expansion plans cutbacks to improve revenue, its major shareholder Barclays is grappling with image problems and weaker financial results than expected.
Chief executive Anthony Jenkins, the former head of Barclays’s retail division, replaced Bob Diamond in August 2012, after Diamond was ousted following a £290-million fine for the rigging of the benchmark interest rates in the Libor scandal.
Jenkins set out to turn the bank around, but his plan to drive bank returns above its cost of capital, estimated at about 11%, was hampered by a difficult trading environment and loss of some senior staff. He also blamed the increased regulations that require banks to set aside more money to cover future potential losses for the bank’s results.
In May, Barclays announced a 49% slide in its first-quarter results at its investment banking division, the traditional powerhouse of the bank, largely because of a downturn in the business that trades commodities, bonds and currencies. The division’s poor performance dragged down the group’s profits.
Even though Barclays retained a targeted dividend payout ratio of 40% to 50% of net profit, the bank’s share price dropped 5% on news of the group’s results.
In May Jenkins unveiled the second overhaul: he would cut 19 000 jobs in three years (7 000 in the investment bank), and he announced the formation of a noncore division (or “bad bank”, as it is known).
The noncore division will house about £115-billion of underperforming assets. Among the operations the division will contain is its European retail banking operations in Italy, France, Spain and Portugal and some corporate and Barclaycard assets. Despite the cuts, the investment bank will still remain the largest in Europe.
Jenkins told investors last month: “We will refocus and resize our investment bank to bring balance to Barclays. As currently constituted, it is an unacceptable drag.”
His efforts to win over shareholders and investors were not helped by a decision by Barclays to pay hefty bonuses to staff in 2013.
At what was described as a heated shareholders’ annual general meeting in April, 34% of votes cast failed to back the Barclays remuneration report. Jenkins was accused of going back on his promise to cut back on excesses under Diamond, despite insisting that the bonuses were intended to retain key staff.
Shareholders at Barclays Africa’s first annual meeting last week raised similar concerns, with 18.44% of shareholders voting against approving its remuneration policy for executives. A sizeable amount, considering Barclays owns 62.3% of Barclays Africa.
Barclays Africa’s chief executive Maria Ramos was paid R28-million last year, despite the bank not offering expected returns. Shareholder activist Theo Botha said the present remuneration policy was poorly structured, so it was difficult to determine how increases were calculated for executives.
Botha said he was concerned about Barclays’s share buyback scheme, which could often be considered as a “way for a parent company to take money out of South Africa”. “Barclays would not be the first company with a business in South Africa to do that.”
But several analysts said a buyback scheme was a way for a company to return excess capital to its shareholders.
Barclays Africa said late last week that it would look into the concerns raised by shareholders, particularly with regard to remuneration. It did not respond to further questions.
Botha said although “there was no fireworks at Barclays Africa” he believed they were trying to bring back customers, who number 9.4-million, down from 10.2-million in 2012.
A banking analyst said Barclays job cuts indicated a cost-cutting culture that would filter down to South Africa. Barclays Africa cannot be expected not to feel the pressure of its major shareholder.
Barclays retrenched 450 senior executives in the first quarter of this year, and has since announced that 19 000 jobs would be lost over three years. The bulk of the job losses will occur this year.
Barclays Africa has embarked on cost-cutting measures, announcing this year that it is looking at disposing of assets valued at about R400-million this year as part of its efforts to exit noncore activities such property holdings, and reduce risk to revenue.
It reduced its exposure to crop insurance, sold Absa Mortgage Fund Managers, and invested R3-billion in transforming its corporate banking services and branches.
Ramos, at Barclays Africa’s annual results in February, said the bank had “clear deliverables and was on track to create a truly pan-African franchise”, as well as plans to regain its position in the retail market.