Barclays launches £2bn cost-cutting drive after drop in profits – business live - The Guardian

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UK bank Barclays is planning a £2bn cost-cutting drive as it shakes up its operations, and reported a drop in profits for last year.

Pre-tax profits at Barclays fell to £6.6bn in 2023, the bank reports this morning, down from £7bn in 2022 – a slightly larger fall than expected.

Higher interest rates pushed up earnings at Barclays UK, where income rose 5% to £7.6bn thanks to growth in net interest income – the gap between income from loans and payments to savers.

But Barclays’ investment bankers had a tougher year. Income at the Corporate and Investment Bank (CIB) fell by 4% to £12.6bn, driven by lower client activity in both Global Markets and Investment Banking.

Barclays also spent £900m on “structural cost actions” in the final quarter of last year, its latest financial results show, taking the total bill for cost cutting in 2023 to £1.0bn.

And there are more cuts to come, as CEO C. S. Venkatakrishnan unveils Barclays’ first major strategy update in a decade.

Barclays says it is aiming for £1bn of gross efficiency savings in 2024 and total gross efficiency savings of £2bn by 2026.

These cuts are designed to lift Barclays return on tangible equity – a key measure of a bank’s performance.

C. S. Venkatakrishnan says the bank’s new three-year plan will improve performance, with the bank also announcing a new £1bn share buyback.

Venkatakrishnan explains:

“In 2023 Barclays delivered solid performance against a mixed macroeconomic backdrop, meeting its financial targets.

Our strong 13.8% Common Equity Tier 1 (CET1) ratio enables us to deliver increased total capital distributions of £3.0bn to shareholders, up c.37% on 2022, which includes a further share buyback of £1.0bn.

Our new three-year plan, which we will be announcing at the Investor Update today, is designed to further improve Barclays’ operational and financial performance, driving higher returns, and predictable, attractive shareholder distributions”

This shake-up will see Barclays reorganised into five new divisions: Barclays UK; Barclays UK Corporate Bank; Barclays Private Bank and Wealth Management; Barclays Investment Bank; and Barclays US Consumer Bank.

More to follow….

Also coming up today

MPs will grill the Bank of England governor, Andrew Bailey, and members of the Monetary Policy Committee (MPC) about interest rates, the future path of inflation, and how households and businesses are coping with higher borrowing costs.

The BoE could feel some heat over Britain’s fall into recession last week too, with former chief economist Andy Haldane warning it risks making the UK’s recession worse unless it cuts interest rates soon.

Yesterday, Conservative MP Sir Jacob Rees-Mogg told parliament that the Bank was “no longer showing itself to be competent” and its independence must be questioned.

Britain’s agricultural industry is gathering in Birmingham today for the National Farmers Union conference

Rishi Sunak will be there, and is expected to announce a package of grant support – including £220m to help farmers access new equipment.

The head of the National Farmers’ Union, Minette Batters, has warned that UK food security risks becoming a “poor relation” to other national priorities.

The agenda

10am GMT: Eurozone construction output data for December
10.15am GMT: Treasury committee to quiz Bank of England governor and colleagues on inflation and interest rates
10.15am GMT: National Farmers Union annual conference begins
3pm GMT: Conference Board Leading Economic Index of US business cycle

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Barclays is the latest company to follow a popular playbook of increasing dividends and cutting costs to keep shareholders happy.

It’s an approach that benefits investors rather than employees, explains Russ Mould, investment director at AJ Bell:

Staff might not appreciate this strategy as it means they may have to do additional work for the same pay, but running a leaner machine is the playbook for corporates when there is an uncertain economic outlook.

“The news has gone down well with the market and has helped Barclays’ share price burst back to life after a long period in the doldrums. But will it be enough to protect C. S. Venkatakrishnan’s job? Having a plan is one thing, executing on it is another and so far, the jury is still out on whether he’s capable of turning Barclays around.

Mould also isn’t too impressed by tooday’s reorganisation (see 7.47am for details):

“Like many of its peers, Barclays is a big juggernaut of a company where it is very hard to make changes quickly. The investment banking arm continues to stick out like a sore thumb as it isn’t a natural fit to the rest of the business.

Appointing four people to lead that division suggests the CEO doesn’t know what to do with it. Too many cooks spoil the broth and the head chef is focused too much on sweet talking and not enough action.”

Barclays CEO has said he wants to grow total income to around £30bn, from around £25.4bn today, by 2026. However, he hopes to get there by focusing on “more stable income streams” from its retail and corporate lending divisions.

C. S. Venkatakrishnan told investors this morning:

“We consider these to be more stable income streams and they have grown by about 35% since 2021. And the proportion from these more stable income streams will be about 70% of the bank’s total income by 2026”

CS Venkatakrishnan is now presenting Barclays’ first strategy update to investors in a decade.

The event, which is running until around 1:30pm UK time, will see Venkat - as he’s known to colleagues - try to convince investors that his plan will be the one to revive its share price, in ways that its predecessors failed to.

That plan is centred on a plan for a “simpler, better, more balanced” Barclays, he says, which is “dedicated to higher returns for investors” that is driven by “disciplined delivery” and “harnessed to our home here in the UK”, he has said.

While part of that means dividing the group into five divisions - a UK consumer bank, UK Corporate Bank, Private Bank and Wealth Management, Investment Bank, and US consumer Bank – from its current three, it’s supposed to boost transparency and simplify the way it reports returns from each of them.

Despite jumping around 5% this morning, Barclays shares are basically flat over the last five years.

Back on 20 February 2019, Barclays shares were trading around 165p each – today they’re 155p, and that underperformance is why the bank is announcing a new strategic plan today.

In 2019, activist investor Edward Bramson was in the early stages of an ultimately unsuccessful battle to overhaul Barclays.

Bramson was pushing Barclays to scale back its investment bank to focus on its more lucrative consumer operations, but failed to persuade enough fellow shareholders to back him.

Hotel chain InterContinental (+2.5%) are close behind Barclays on the FTSE 100’s top risers this morning, after reporting a jump in profits and announcing an $800m share buyback.

InterContinental Hotels Group reported a 70% jumped in operating profits for 2023, to $1.066bn, with revenue per available room surging over 70% in China following the relaxation of Covid restrictions at the end of 2022.

IHG continues to enjoy the release of post-Covid pent-up demand, particularly from Asia, reports Victoria Scholar, head of investment at interactive investor, adding:

“IHG is planning to return more than $1 billion to shareholders, including a newly launched share buyback programme worth $800 million as well as its dividend.

Meanwhile the owner of Holiday Inn and Crowne Plaza reported global revenue per available room of 16.1% year-on-year, beating analysts’ expectations for 15.7% and 11% ahead of the 2019 pre-covid peak. Adjusted operating profit came in above $1 billion for the first time and the group is targeting profits of about $2 billion over the next five years.

A better than expected top and bottom-line performance as well as impressive plans to return cash to shareholders have all been fuelled by a strong performance in 2023 with impressive travel demand across all of its markets. These results are a major win for its new CEO Elie Maalouf, an IHG veteran who took to the top job in July after leading the Americas region for close to a decade.

Barclays will need a “laser focus” to hit the targets outlined today, says Kathleen Brooks, research director at XTB:

Barclays strategic review was punchy, and it essentially boils down to two things: cut costs aggressively and boost profits and continue to return capital to shareholders, to the tune of £10bn by 2026. This is exactly the type of message that shareholders love at the moment, and it is why the market has reacted with glee on Tuesday morning.

Barclays is reorganizing into 5 new operating divisions, with more focus on the retail bank and a wealth management arm. Investment banking will still be one of the five divisions, although with less allocation of capital and in future the IB arm will get 50% compared to 63% currently.

Barclays new financial targets set a high bar: a 12% return on tangible equity. The return on equity in the investment bank was 7% last year, so this division will have the furthest to go to reach this target. The $30bn revenue target for 2026, which is 13% above analyst estimates, is a brave move from Barclays, and the bank has only given itself 3 years to do this. It’s not quite a moon shot, but it does require a laser focus on not only the bottom line, but maximizing revenue opportunities, and building a greater institution than what Barclays is today. However, that will require job cuts, although management were not willing to give a specific headcount target.

As expected, the CEO said that the main aim of its three-year plan is to drive higher returns and ‘predictable, attractive, shareholder distributions.’ The main theme of the Q4 earnings season was shareholder sweeteners, and Barclays is right at the top when it comes to sweet talking shareholders.

Away from Barclays…Britain’s insecure jobs market and high housing costs are leading to the growth of a precarious middle class struggling to maintain a decent living standard on household incomes as high as £60,000 a year.

A study released by abrdn Financial Fairness Trust, a research body set up by the fund manager, said the uncertain nature of work meant there was a one in three chance that someone earning a middle income today would not be doing so next year.

The report – Caught in the Middle – said that problems of middle-class insecurity were especially acute for single parents, with those in employment more likely than not to be in an insecure job.

Donald Hirsch, a policy adviser at the FFT and one of the report’s authors, said 20% of those in the middle fifth of the income distribution were struggling to pay for food and other essentials.

He said:

“It is people earning between £30,000-£60,000 a year, depending on the type of household, people who you would expect to be doing OK.”

Barclays’ annual report is also out this morning, and it shows that CEO C.S. Venkatakrishnan’s bonus fell by a quarter last year.

Venkatakrishnan’s annual bonus dropped to £1.425m for 2023, down from £1.949m in 2022.

The bonus was calculated against a range of measures, including profits, various strategic non-financial targets, and individual performance. The final bonus was set at 53.3% of the maximum available.

So while his fixed pay rose by 3%, to £2.86m (half in cash, half in shares), Venkatakrishnan’s overall remuneration decreased to £4.641m from £5.197m.

The “median employee of Barclays PLC” only saw their fixed pay rise by 1%, while their annual bonus fell 43%, the annual report shows.

Barclays’ share price has risen by 6% at the start of trading in London, as traders welcome its plans to cut costs by £2bn and return £10bn to investors in 2024-2026.

Analysts at Jefferies say Barclays has announced “a relatively ambitious set of 2026 targets”, as it aims to lift its return on tangible equity to 12% (up from a statutory RoTE of 9.0% last year).

Barclays’ plan to cut £2bn of cuts could mean heavy job cuts among its staff.

Max Georgiou, analyst at Third Bridge, says:

Barclays now plans to reduce costs in the CIB by £2b by 2026, our experts believe a 20% reduction in headcount is needed and would not impact day-to-day operations.

Previous cost reduction programmes have not been executed effectively, in some part due to its political culture. A coherent strategy is needed for future success but is an uphill battle.

Barclays has a habit of delivering mixed news – and today’s results are no different – says John Moore, senior investment manager at RBC Brewin Dolphin:

While the bank’s results for last year are more or less in line with expectations, they are still behind 2022.

Plans to make cost reductions and revise its corporate structure should help drive improved profitability in the next few years, underpinning shareholder returns of £10bn.

The acquisition of Tesco Bank [earlier this month] also looks like a good, low-risk deal in terms of overlap, cost savings, and gaining some market share. Barclays is in a reasonable position and appears to be cautiously optimistic about the future, but execution of the plan set out today will be key to its performance.”

Barclays is briefing journalists now about its new strategic plans, and its results for last year.

It says it cut headcount by around 5,000 full-time equivalent roles in 2023.

Going forward, there is no headcount target, they add.

Barclays says the reorganising of its operations into five divisions will provide “an enhanced and more granular disclosure of the performance of each of these operating divisions”.

It will also mean “more accountability from an operational and management standpoint”.

It has appointed leaders for these new divisions:

Vim Maru appointed CEO of Barclays UK;
Matt Hammerstein appointed CEO of Barclays UK Corporate Bank (he’ll also be head of Public Policy and Corporate Responsibility)
Sasha Wiggins appointed CEO of Barclays Private Bank & Wealth Management; and
Denny Nealon will continue in his current role as CEO of Barclays US Consumer Bank and Barclays Bank Delaware.

That leaves the Investment Bank, which will have several co-leaders:

Adeel Khan appointed sole head of Global Markets;
Cathal Deasy and Taylor Wright will continue in their current roles as Co-Heads of Banking; and
Stephen Dainton appointed President of Barclays Bank PLC and Head of Investment Bank Management.

Despite the 6% drop in profits last year, Barclays’ bonus pool only became slightly shallower.

Bonuses for 2023 fell 3% to £1.2bn, down from £1.24bn in 2022.

There was little change in deferred bonuses either, with the total dipping to £543m from £549m a year ago.

Barclays says it plans to return “at least £10bn of capital” to shareholders over the next three years, through today’s plan to boost returns and cut costs.

The Bank says it will do this through dividends and share buybacks, with “a continued preference for buybacks”.

The plan is to maintain its total dividend pot, but lift the payment per share by buying back (and then cancelling) shares.