Barclays CEO John Varley talks to Karina Robinson about his strategy to maintain the bank’s position as one of the most competitive in the world.
What is committed Roman Catholic John Varley’s view on the new Pope, Benedict XVI, a controversial figure due to his former role as the Vatican’s chief theologian? Unfortunately, that segment of the interview with the chief executive of the 10th largest bank in the world by market capitalisation, was off the record. But just as interesting, if less esoteric, are recent events at Barclays.
The third largest bank in the UK with assets of $992bn is seeing “wondrous growth prospects,” in the words of its leader, a 49-year-old table tennis enthusiast. First-half profits in 2005 grew 9% to £2.69bn over the same period last year, with two units, its investment bank Barclays Capital and its investment management unit Barclays Global Investors (BGI), contributing more than 50% of pre-tax profit growth.
Speaking in his sitting room on the top floor of the bank’s glossy new headquarters in Canary Wharf, Mr Varley takes issue with the view that an add-on acquisition to BGI would make sense. “Look, here is a business – and I feel very proud about this because it was acquired when I was running the asset management business – Wells Fargo Nikko Investment Advisers, [which was] bought for the princely sum of £287m in 1995. That business [now BGI] made pre-tax profits in the first half of this year of £242m. When we acquired it, we were managing about $225bn. Today, it is over $1.4 trillion. All of that has come from organic growth. Do you need to buy businesses to put rocket fuel in the profit growth tank? No, you don’t at all.”
Track record
“It is very interesting to me that exactly the same is true of Barclays Capital. You don’t have to buy to grow. There is a track record that speaks for itself,” says Mr Varley
He has a bee in his bonnet about acquisitions: “We are active in mergers and acquisitions (M&A) and corporate development; we are just not obsessed by it. I say, and I believe strongly, that M&A should be the servant of strategy, not the master... But teams that are dependent on M&A to achieve their goals are dangerous.”
One wonders which of his competitors he is referring to as Barclays says it is the only one of the top 10 banks in the world that has not been involved in a transformational deal in the past five years.
That does not mean that the bank has not been acquiring assets. In 2005, it spent almost £2.6bn for Absa, South Africa’s third largest bank by assets and its largest investment outside the UK. This followed its acquisition of Spain’s Banco Zaragozano in 2004. Both deals are in markets where the bank was already present, throwing up a host of synergies, as well as allowing it to build on its market knowledge.
With Mr Varley intent on increasing foreign earnings from 33% – five years ago the figure was only 20% – to 50%, it is quite possible that the next acquisition will be in a market where it is not present. Barclays’ scouts are rumoured to be on the hunt in India, which Mr Varley visited recently.
Barcap expansion
Barclays Capital, known as Barcap, is also intent on expanding its foreign earnings. Eight years ago it was dominated by UK business. In the first half of 2005, about 39% of its earnings came from the US, 35% from the UK, about 18% from Europe and the rest from Asia. It has also diversified its product offering from fixed income. In the first half of 2005, about one third of earnings came from commodities, currency, equity-related and private equity business.
Two issues dog Barcap. The first consists of market rumours and comments from some staff and former staff members that its risk management is not up to scratch. The other is excessive dependence on Bob Diamond, its legendary American head.
Mr Varley, who is noted for his beautiful turn of phrase, points out that growing risk is part of growing a business. “If you look at the track record of Barclays Capital over the course of the last years, it has driven a formidable delta between earnings growth and risk growth… No point in my giving you hyperbole on the subject. I ask you to judge us by our track record in risk management, which is consummately good.”
As for the valuable Mr Diamond, who is paid more than the CEO, blue-braced Mr Varley insists the American has very good generals in place. They are needed because, in June, Mr Diamond finally agreed to join the board. Earlier in the year, he became responsible for the wealth management business, following on his assumption of executive responsibility for BGI in 2004. The aim is to extract synergies from grouping the two businesses plus investment banking together, and to obtain a superior performance from wealth management’s disappointing record.
The bank has relationships with one third of the adult population of the UK, yet has failed to leverage this into fee income by selling long-term savings and investment products. UK retail banking revenues were flat in the first half of 2005 compared with the same period a year ago, with the rise in profits being due to cost-cutting.
“If you ask me where Barclays has not made the progress that I would like it to have made over the course of the last years, I think it would have been in the area of wealth management,” says Mr Varley. Profits grew a robust 39% in the first half but “first-half profits were £89m and I want them to be a lot bigger than that. I see wealth management as an engine of growth for the industry as a whole in the next 10 years and an engine of growth for Barclays”.
Room to improve
There is certainly plenty of opportunity for Barclays as a group to work its balance sheet harder – its return on assets in 2004 was only 0.9%, according to The Banker.
Mr Diamond, like a number of his colleagues such as Roger Davis and Gary Hoffman, heads of UK Banking (45% of pre-tax profit) and Barclaycard (14% of pre-tax profit) respectively, was reportedly a candidate for CEO of the bank in 2003. They have all stayed on at Barclays, which is an impressive vote of confidence in a man who at first glance encapsulates the epitome of the old-fashioned British banker, complete with the custom-made suit, board membership of Ascot racecourse and a passion for fishing. A former colleague notes: “People are bemused by him and become devoted to him.”
The colleague also notes that “John is so straight it is almost painful”, a comment that the tall, bespectacled banker takes to mean that he is trustworthy and consistent. Mr Varley, a father of two – married to a member of one of the founding families of Barclays – and a former law and history student, also evinces an odd vulnerability: “I hope people don’t say of me that I am moody, because I try to manage the natural moods we all have because the leader of any organisation has to be predictable that way.”
Regulation stoic
Mr Varley is also delightfully grown-up about regulation, a bugbear to most of his peers. “You won’t hear me complain about it. We are big boys; we don’t have to do business in any country of the world where we choose to do business. No point in my sitting here moaning about regulation.”
He dismisses the current obsession with positive jaws, whereby the rate of profit growth should exceed that of cost growth, saying that for shareholders “jaws is a matter of, to many of them, either incomprehension or esoteric interest”. He points out that strong profit growth and investing in the future are what really matter.
With a market capitalisation of $62bn, rumours about the bank’s status abound. Bank of America has been mentioned as a suitor. Although Mr Varley believes that there will be significant banking consolidation in the coming years, he does not envisage Barclays being taken over.
“The right way of looking at this from the point of view of shareholders and customers is to ask ourselves, with ruthless honesty: where we choose to compete – whether in wholesale or personal business – can we compete with the best? If the answer is yes, then size doesn’t matter. And the answer to that is yes,” he asserts.
As for the answer on the new Pope, The Banker’s lips are sealed.
