Business Week International Finance: BANKS
CAN BARCLAYS REALLY MAKE MORE BY LENDING LESS? (int'l edition)
The pin-striped bankers at Barclays Bank PLC knew Martin Taylor was going to be a bit different. When he was hired in January, 1994, as chief executive of Britain's largest bank, Taylor hadn't a lick of banking experience--he had been a Mandarin scholar at Oxford, then a journalist, then head of a textile manufacturer. But colleagues could hardly believe their ears at management meetings last spring. Here was Taylor proposing that Barclays stop lending money to major property developers and corporations, give up market share to archrival National Westminster Bank PLC, and sell most of its U.S. assets. Taylor wanted Barclays voluntarily to shrink--at a time when Britain's other banks were expanding.
At first glance, it looks as if the contrarian tactic has paid off. Barclays' 1994 pretax profits tripled, from $1 billion to $3 billion. And Taylor, at 42 the youngest CEO in British banking history, is shaking up the crusty institution. In 15 months, he has given it a badly needed new strategy and rammed through a reorganization. But even he admits that the bank's spectacular turnaround had a lot to do with Britain's improved economy. That has allowed Barclays to reduce bad-debt provisions from $3 billion to $960 million--the difference going into profits. Taylor's next act will be a lot trickier: figuring out how to replace lost interest income to keep Barclays profitable.
Taylor knows how to please a crowd. When profits improved, shareholders got a 39% dividend increase, and two weeks ago, workers received 7.5% salary bonuses so they would feel they were sharing in the bank's improved fortune. Taylor hints that later in the year, stockholders--especially institutions--will get a further boost from a share buyback. Now trading at about $10, Barclays stock has outperformed the London market by 18% in the past 12 months. Says Joe Scott Plummer, investment director at Edinburgh fund manager Martin Currie Ltd.: "What's so refreshing about Martin is his commitment to creating value for shareholders, even if it means shrinking the loan book."
It's a big change from 1992, when Barclays reported its first-ever loss. It had a pile of bad debt from real estate lending during the high-flying 1980s that went sour in the early-'90s recession. Disgruntled institutional investors forced Chairman and CEO Andrew R.F. Buxton, descended from one of the bank's founding Quaker families, to give up the CEO role and bring in new blood. After a worldwide search, the bank found Taylor just a few miles away, cutting costs as chairman and CEO of Courtaulds Textiles PLC.
Taylor's mentor is industrialist Sir Christopher A. Hogg, former Courtaulds chairman and now chairman of Reuters Holdings PLC. In 1982, Hogg persuaded Taylor to leave the Financial Times for Courtaulds. Hogg now says he "pushed Martin forward pretty hard" to Buxton. "It was a huge risk to hire him," he adds. "Barclays is a very, very big job."
GRIM CHALLENGE. How big? Banking experts compare cleaning up Barclays to turning around a supertanker. It has $275 billion in assets, 95,000 employees worldwide, and offices in 75 countries. When he arrived, Taylor found $10 billion worth of nonperforming loans on the books and bad-debt provisions totaling $6.6 billion. An ill-conceived expansion spree in the U.S. had resulted in a $1.2 billion write-off. And everyone was unhappy, from bank tellers to loan officers. For an outsider, the challenge was grim. "I had to decide pretty quickly what I could and couldn't do. I had to pretend to know the culture of this place from the first day," says Taylor.
His lucky break was that Britain's economy started to recover. But Barclays also needed a hatchet man--and Taylor had the credentials for the job. Courtaulds, a chemical and textile maker that expanded wildly in the 1970s, got into financial trouble when it could not compete with cheap imports from the Far East. It was Taylor's task to lay off employees and close plants. He handled the job with such aplomb that when the chemical and textile operations split in 1990, he was made CEO of the textile company and two years later its chairman as well. "He learned it's better to be small, sound, and good than big, bad, and ugly," says Hogg.
"COLLECTIVELY INSANE." After Barclays chose him, many observers predicted that powerful interests inside the bank would slow Taylor's progress--notably Alistair L. Robinson, who ran retail banking, and Sir Peter Middleton, who chairs the wholly owned investment bank Barclays de Zoete Wedd Ltd. Instead, Taylor turned potential enemies into allies. He made Robinson his deputy, then broke up the monolithic retail-banking unit. He turned large corporate lending over to Middleton's BZW. In return, Taylor expects BZW to employ the new corporate portfolio to bring in considerably more fee-based revenue--from corporate advisory work, project finance, asset management, and equity underwriting.
Meanwhile, Taylor sold off 15 businesses, including three in the U.S., that didn't fit in with his vision. He continued a campaign to shut retail branches, reduce staff, and cut overhead costs. And he is pushing for faster introduction of electronic banking services.
But shrinking the lending business has been Taylor's most controversial move. He found that corporate lending by British banks since 1983 had yielded a net return of zero. And yet they've continued to lend more money to ever riskier ventures. "History bears out the view that we're collectively insane," he says, laughing. He suggested paring back corporate lending drastically by introducing strict credit-risk criteria. Property loans would be the first to get carved. And a small amount to protect against loss would be put aside on every loan at the time it's made, not just when it becomes a bad debt.
Barclays management initially reacted with horror, but Taylor prevailed. The result: He now takes pride in a set of just released annual figures that would make most chief executives blanch. Net interest income, down 7%. Operating profit, down 9%. Total assets, down 2%. And loan capital, down 15%. "What we're proving is that we can run a business at half the size and make more money doing it," he asserts.
NO MORE MACHISMO. Taylor hasn't really proved that yet. The boost in earnings when bad-debt provisions shrank was a one-time gain that will be hard to replicate in true operating earnings. John Aitken, an analyst with Union Bank of Switzerland, has his doubts whether Taylor can wring more profits out of fewer assets. He thinks investors have been fooled by the steep plunge in bad-debt provisions. Of Taylor's bank-shrinking strategy, Aitken says: "They're missing out on a lot of business." Fund manager Currie agrees: "Eventually, he's going to have to grow the loan book again."
Taylor faces other challenges. Despite the recent bonus, unions representing two-thirds of Barclays' 65,000 British employees say morale among members has fallen to an all-time low, since layoffs, branch closures, and automation still loom. And in Europe, Barclays must deal with its retail network in France, which took a loss of $160 million last year, mostly on property loans.
Taylor says one day he hopes to take credit for Barclays' finally shedding its expansionist machismo. Soon, however, the business cycle will catch up with him--possibly as early as 1996, when Europe's economies could enter another downturn. If that happens before he finishes reengineering the bank, Taylor's strategy may be remembered as more outrageous than successful.
TAYLOR'S BALANCE SHEET
-- Reorganized Barclays into more successful lending and investment banking divisions
-- Shrank the loan book to avoid big losses in the next turndown
-- Tripled profits in 1994, partly through cost-cutting
-- Some of Barclays' Continental properties bleed money, especially in France
-- New growth areas will be tough to find without more lending
-- Staff morale is lousy, and work stoppages could be ahead
DATA: BUSINESS WEEKBy Paula Dwyer in London