Our strategy is to deliver strong returns, by building on our strengths as a transatlantic consumer and wholesale bank, with global reach. This strategy is designed to ensure that we are resilient across the economic cycle, by being well diversified both in our business, and in our geographic footprint.
Response to Sherborne Investors Management LP Letter to Shareholders of Barclays PLC
Barclays’ roots as a retail bank and a business lender go back 328 years. Over the last 50 years, with the creation and development of Barclaycard, we have built a market-leading payments business. And in the last 20 years, we have developed a strong UK, European and US investment banking franchise.
In March 2016 we set out our strategy for the next phase of Barclays’ growth: to build on our strength as a diversified transatlantic consumer and wholesale bank, anchored in our two home markets of the UK and US, with global reach. This is how we will meet the needs of our customers and clients, compete in a changing environment, and deliver for shareholders.
When Barclays’ management team developed that strategy, they considered four major changes that are transforming the banking landscape.
• First – the programme of regulatory reform following the financial crisis of 2008, which has increased the minimum levels of capital which banks are required to hold against assets on balance sheets, and reduced the maximum leverage banks can use. New UK regulation also requires that retail banking (individual and small business banking) is “ring-fenced” from wholesale banking.
• Second - as a consequence of changing regulation, the increased cost of borrowing from bank balance sheets has led to a shift of corporate lending towards capital markets. As a result, the role and size of capital markets in supporting economic growth has grown significantly in the last decade and that growth is set to continue. Supporting our corporate clients effectively therefore requires us to maintain the scale, breadth and market share necessary to successfully access those capital markets, which are centred in New York and London (where our investment banking operations are focused).
• Third – the rapid digitisation of banking is fundamentally transforming how we serve every customer and client, from individual personal banking customers right through to the largest institutions. To succeed in this new digital world requires extensive investment, strategic partnerships with technology providers, and protection of intellectual property to maintain and gain a competitive advantage.
• Fourth – the acceleration in payments technology has made it possible to move money for businesses and people faster, with less friction, and at lower cost. As more forms of transaction become digitised, the technology that enables those transactions is becoming an increasingly critical part of a bank’s capability.
In March 2016, after detailed consideration of this context and the options for Barclays, we set out our strategy: to build on our strengths as a diversified transatlantic consumer and wholesale bank, anchored in our two home markets of the UK and US, with global reach.
Our diversification gives us significant strength and resilience. Our two operating divisions, Barclays UK and Barclays International, service the needs of retail customers and business clients from the newest start-ups to global institutions and governments. They operate across business lines and geographies, which reduces the risk of operating in just one country or just one customer segment. Through economic cycles, wholesale and consumer banks are subject to stress and recovery at different points. Operating both wholesale and retail banks reduces the volatility of our income and earnings, helping to deliver consistent and sustainable returns through the economic cycle.
Within this framework, we retain the flexibility to align our resources to maximise opportunities and support growth in different parts of our business at any given point in the cycle.
In addition, Barclays Execution Services (BX), the service company which supports both operating companies, allows us to run Barclays with lower costs, greater efficiency and increased investment in technology, security and controls.
Barclays’ Board and management team continue to review, test and evolve our strategy to ensure that it remains right for the times, and is executed effectively.
At the same time as setting out our new strategy in 2016, our management team also took a number of decisions to accelerate the transformation of Barclays and ensure that the new strategy would deliver distributable returns as soon as possible, at the same time as positioning Barclays strongly for future growth.
To achieve our new strategic shape, and deliver increased stability and improved performance, we accelerated the restructuring process, setting stretching targets to complete the run-down of Barclays Non-Core to less than £25bn of risk-weighted assets (RWAs) by the end of 2017, funded by a reduction in the dividend in 2016/17.
As a result of new regulation requiring us to hold capital against 100% of the assets of Barclays Africa Group Limited, we set a target to reduce our shareholding to a non-controlling, deconsolidated minority position within three years, to allow us to release that capital for use in other parts of our business.
Strategic actions completed
Between 2017 and 2018, we made considerable progress with our strategic restructuring of Barclays, including the following:
|Africa sell down completed from 66% to 14.9%||Continued to reduce costs, down £6bn|
|Reduced headcount by 56,000||Created new ring-fenced bank in UK|
|Non-Core unit closed, June 2017||Resolved material legacy conduct issues|
|30% reduction in headcount in Investment Bank||Barclays Execution Services (BX) launched|
|Reduced RWAs by £95bn – 80% from IB||Created new Intermediate Holding Company in US and received FRB non-objection to CCAR capital plan|
|Combined Corporate and Investment Banks||Exited investment banking in nine countries|
|Sold > 20 businesses in continental Europe||Reduced our end-state CET 1 Capital range|
Now focused on profitability and returning capital to shareholders
These actions have significantly simplified the group and reduced drag from Non-Core assets on Group profitability. This allowed us to reach our regulatory capital target range without raising more capital from shareholders. The actions have laid the foundation for Barclays to deliver greater, sustainable, returns in our businesses and return a greater proportion of earnings to shareholders, starting with restoring the 2018 dividend to 6.5p.
In 2017 we set the following Group targets:
>9% in 2019
CET 1 ratio
£13.6-13.9bn in 20192
1 Excluding litigation and conduct and based on a CET1 ratio of c.13%
2 Excluding litigation and conduct
Our position today
Barclays is now through the period of necessary restructuring and the significant associated costs. Our diversified business is stable and well positioned for current and future market conditions, and we have a seasoned management team delivering improving performance and returns. With the costs of restructuring behind us, we are beginning to generate improved and sustainable returns and distribute excess capital to shareholders. The quality of our earnings is the result of a deliberate choice to maintain diversity in our revenue streams, based on an understanding of structural changes in our sector, and the need to weather cyclical economic forces.
Today, we are on track to reach our RoTE, Capital and Cost targets for 2019 and beyond. Excluding litigation and conduct, in 2018 our Group RoTE was 8.5% and our earnings per share (EPS) have grown from 3.8p in 2014 to 21.9p in 2018. Our 2018 at 13.2% our CET1 ratio was at our target of around 13%. Costs were within our guidance range of £13.6-13.9bn.
Through our creation of Barclays Execution Services (BX) with its lower operating costs, we are able to increase our investment in key areas including technology, security and controls, while simultaneously reducing our costs and our cost to income ratio. As our overriding priority for 2019 and 2020 is the attainment of our returns targets, we are also able to flex our investment to a degree to support our RoTE targets if the environment requires us to do so.
Returning capital to shareholders continues to be a priority for us and we will pay a dividend for 2018 of 6.5p, which is more than double the amount paid in 2016 and 2017.
It is our firm intent to return a greater proportion of our earnings to shareholders over time, and we believe that the effective application of our strategy is critical to achieving this.
For more information on how we're preparing for Brexit click through to our Barclays Brexit Strategy page.