RNS No 6728k
BARCLAYS PLC
16th February 1999
PART THREE
BARCLAYS PLC
Balance sheet
Capital resources 1998 1997
#m #m
Shareholders' funds 7,923 7,620
Minority interests 314 326
8,237 7,946
Loan capital and other 3,734 2,927
subordinated liabilities
11,971 10,873
The Group continues to manage actively both its debt and equity capital.
Total capital resources increased in the year by #989m before exchange rate
translation differences of #109m.
Shareholders' funds increased by #271m before favourable exchange
differences of #32m. Profit retentions (excluding goodwill write backs) of
#699m were offset by share buy-backs, including costs, of #501m.
Loan capital and other subordinated liabilities rose by #807m. Capital
raisings of #962m, including #335m of tier 3 capital and exchange movements
of #88m exceeded repayments and redemptions of #243m.
Capital ratios
Weighted risk assets and capital resources, as defined for supervisory
purposes by the Financial Services Authority, comprise:
1998 1997
Weighted risk assets: #m #m
Banking book
on-balance sheet 78,558 72,677
off-balance sheet 14,194 12,691
associated undertakings 2,623 2,624
Total banking book 95,375 87,992
Trading book
market risks 8,060 13,091
counterparty and settlement risks 6,346 7,244
Total trading book 14,406 20,335
Total weighted risk assets 109,781 108,327
Capital resources:
tier 1 capital 8,112 7,873
tier 2 capital 4,154 3,578
tier 3 capital 330 -
Total gross capital resources 12,596 11,451
Less: supervisory deductions (830) (647)
Total net capital resources 11,766 10,804
% %
Tier 1 ratio 7.4 7.3
Risk asset ratio 10.7 10.0
The overall risk asset ratio increased by 0.7% in the year, mainly as a
result of net raisings of tier 2 and 3 capital in the period. Weighted risk
assets were some 1% higher than at 31st December 1997, with increases in
banking book assets in Retail Financial Services and Corporate Banking being
offset by reductions in the Barclays Capital banking and trading books.
Total assets and liabilities
Adjusting for the impact of the disposal of former BZW businesses, assets
decreased by 2% in 1998 compared with growth of 26% in 1997. The decline in
1998 was the result of a reduction in the Barclays Capital balance sheet in
the second half of the year, partly offset by strong growth in both
Corporate Banking and Retail Financial Services.
The Barclays Capital balance sheet contracted by 23% in the second half of
the year following management decisions to reduce risk across the business.
As a result, there were major decreases, particularly in reverse repo
balances and debt securities. At 31st December 1998, weighted risk assets
in Barclays Capital were equally distributed between the Rates and Credit
businesses. In the Credit business, corporate, project finance and other
traditional lending portfolios accounted for #10bn of weighted risk assets
at the year end.
Within Corporate Banking, assets grew by 17% in the year, largely driven by
increased demand for traditional bank-based (as opposed to capital market)
financing. This was especially apparent in large corporate banking, with
growth in debt finance resulting from increased acquisition activity, and in
the international business, which has seen increases in advances as high
quality borrowers turned to banks rather than the capital markets. The
middle market corporate sector increased both volumes and market share
during 1998.
Within Retail Financial Services assets grew by 8% in the second half of
1998 compared with 2% in the first half. Consumer lending volumes benefited
from buoyant demand and the mortgage business was supported by a combination
of new product offerings and a relatively strong housing market. Asset
growth in European Retail Banking was helped by falls in interest rates and
the prevailing stable economic environment. Barclaycard has continued to
achieve strong volume growth partly as a result of product enhancements.
Asset growth has largely been funded by growth in deposits within Corporate
Banking and Retail Financial Services.
Repo transactions
Under a repo (sale and repurchase agreement), an asset is sold to a
counterparty with a commitment to repurchase it at a future date at an
agreed price. The Group engages in repos and also in reverse repos, which
are the same transaction from the opposite viewpoint, the Group buying an
asset with a fixed commitment to resell. The Group aims to earn spread and
trading income from these activities as well as funding its own holdings of
securities.
The following amounts are included in the balance sheet for repos and
reverse repos:
1998 1997
Reverse repos (assets) #m #m
Loans and advances to banks 13,922 13,627
Loans and advances to customers 11,665 23,014
25,587 36,641
Repos (liabilities)
Deposits by banks 6,512 13,453
Customer accounts 11,200 15,227
17,712 28,680
The fall in reverse repo and repo levels at 31st December 1998 reflected
reductions at Barclays Capital (see above).
Analysis of operating profit by business
Retail Financial Services
Retail Financial Services brings together all of the Group's retail
interests around the world. Its purpose is to serve customers by
understanding their needs as individuals and by offering services and
products that anticipate and satisfy their requirements.
1998 1997
#m #m
Net interest income 2,821 2,592
Net fees and commissions 1,777 1,730
Income from long-term assurance 109 61
business
Other operating income 76 62
Total income 4,783 4,445
Total costs (2,874) (2,786)
Provisions for bad and doubtful (391) (387)
debts
1,518 1,272
Problem country debt management 1 15
Operating profit before impact of 1,519 1,287
Finance Act
Life-fund charge - (28)
Operating profit 1,519 1,259
Retail Financial Services performed strongly with an increased operating
profit of #1,519m. This represents growth of 18% before the one-off life
fund charge, or an increase of 21% after this adjustment.
Net interest income grew by #229m, or 9%, to #2,821m primarily as a result
of an improved contribution in home finance and strong volume growth in UK
consumer lending and extended credit balances at Barclaycard. Overall
lending and deposit margins in UK Retail Banking were maintained. Some
competitive pressure in UK consumer lending and Barclaycard margins was
offset by an improvement in the mortgage margin, partly as a result of the
lower cost of incentives.
Fees and commissions grew by 3% to #1,777m, benefiting from volume growth in
the debit and credit card businesses, particularly in the second half of the
year, and good performances in the continental European operations and
Barclays Private Banking.
Customers' funds, which include assets under management and deposits, grew
by 14% to #112bn (31st December 1997: #98bn), of which #10bn was
attributable to net new business and #4bn to market movements. At 31st
December 1998, loans to customers stood at #37bn, up 9% over 1997.
Total costs rose by 3% to #2,874m reflecting the continued investment in
both branch-based and emerging delivery channels (including telephone,
internet and PC banking). By the year end around 850,000 customers were
using our telephone banking service and over 200,000 had subscribed to the
PC and internet banking offering. Technology spend also increased as a
result of Year 2000 compliance and in preparation for the introduction of
the euro. Other initiatives designed to improve customer service, enhance
sales performance and streamline risk assessment were progressed during the
year. Marketing expenditure grew as a result of increased national
television advertising and cinema campaigns in support of new business
development.
Staff costs increased by 4% partly as a result of rationalisation costs of
#15m at Barclaycard. Within UK Retail Banking, staff numbers have remained
broadly unchanged. The cost impact of growth in business volumes and the
expansion of delivery channels was offset by efficiency savings including
further centralisation initiatives.
Provisions rose by 1% to #391m, as a result of volume growth in UK consumer
lending and extended credit within Barclaycard offset by the absence in 1998
of an additional general provision in Barclaycard, which in 1997 was #43m.
When adjusting for this additional general provision in Barclaycard, the
increase in provision is 14%. Provisions in Africa, the Caribbean and
continental Europe remained at low levels.
Retail Financial Services is organised for reporting purposes into four
major business groupings. The operating profit for these groupings is shown
below:
Analysis of Retail Financial Services operating profit
1998 1997
#m #m
UK Retail Banking 757 672
Barclaycard 338 253
International Premier, Private, 317 221
Savings and Investment
Africa and Caribbean* 107 113
Operating profit 1,519 1,259
*includes contribution of problem country debt of #1m (1997: #15m).
UK Retail Banking
This business provides a wide range of services and products to personal and
small business customers through its UK branch network, ATMs, Barclaycall
(the telephone banking service) and internet and PC Banking.
Profit in UK Retail Banking increased by 13% to #757m. Total income rose by
7%, with particularly strong performances from consumer lending and home
finance. Current accounts, retail savings and the insurance businesses also
achieved good income growth.
Consumer lending maintained strong volume growth with average balances
increasing by 15%. At the year end outstanding balances exceeded #5.5bn.
Consumer lending margins reduced slightly, primarily reflecting competitive
pressure. Growth in the centrally managed Barclayloan product was
particularly buoyant, supported by strong advertising and better
understanding of risk.
Home finance benefited from a 4% growth in average balances and achieved a
further reduction in the cost of incentives to #17m (1997: #48m), which are
expensed as incurred. Gross new lending of #3.5bn in the year was another
record level for the business. This reflects the success of ongoing
initiatives which focus on simplifying the mortgage sanctioning process and
creating new value-added features such as the launch of pre-approved mortgage
limits. Home finance continued to generate sales of complementary products,
such as life assurance, pensions and household insurance in other parts of
Retail Financial Services. The proportion of fixed rate mortgages rose
further and accounted for in excess of 65% of new business.
The current account business performed well with recruitment up by 9%. This
was helped by a successful student campaign and the launch of instant
banking, which allows customers to drawdown against uncleared funds and make
immediate transfers between accounts. Fee income benefited from the
continued success of the fee based current account, Barclays Additions, where
the total numbers of accounts rose to around 645,000 by the end of the year
(1997: 490,000).
Average retail savings balances grew by 10%, benefiting from a competitive
product range and a focus on providing the most appropriate portfolio of
products for the customer in order both to retain and grow balances. Net
interest income on savings products increased by 5% despite some
deterioration in margins as a result of a change in the portfolio mix and
strong competitive pressure.
Barclays Insurance increased overall profitability by 8% largely as a result
of high volumes in associated retail lending products.
Small business income was at similar levels to 1997. Current accounts and
deposits grew by 10%, while lending volumes reduced slightly because of lower
demand. Money transmission income remained at similar levels to 1997.
Provisions have grown from the low levels experienced in 1997, largely
reflecting the gradual deterioration in economic conditions and lower levels
of releases and recoveries. However, the strong liquidity levels of our
customers dampened the overall effect.
Barclaycard
Barclaycard is the largest credit card business in Europe. It offers a full
range of credit card services to individual customers, together with card
payment facilities to retailers and other businesses.
Barclaycard profits increased by 34% to #338m or by 14% excluding the
additional #43m general provision in 1997. Net interest income and
commissions were higher, primarily driven by an 18% increase in average
extended credit balances in the card issuing business. This reflected the
good response by nearly 50% of customers to new product packages. These
included the introduction of new pricing strategies incorporating lower
minimum payments, volume based discounts and payment holidays and the
availability of new added value services in association with Cellnet and
Eastern Electricity and Natural Gas. In continental Europe, Barclaycard
continued to develop its German business and launched a new business in
France.
The overall interest margin was maintained reflecting strong growth in
interest earning balances relative to non-interest earning balances. The
interest spread reduced slightly as a result of the impact of the volume
based pricing policy. The weakening in spreads is expected to continue in
1999.
Total costs in Barclaycard increased by 4% predominantly as a result of
restructuring costs of #15m associated with the change programme announced
in September. This will result in the loss of 1,100 jobs during the course
of the next three years and a step reduction in operating costs.
Adjusting for the additional general provision charge of #43m in 1997,
provisions for bad and doubtful debts increased by 13%, which reflected
volume growth in extended credit balances and slight deterioration in the
economic environment. The credit quality of outstanding balances has been
maintained through a combination of robust initial assessment and ongoing
credit management.
International Premier, Private, Savings and Investment
The businesses in Spain, France, Germany, Greece and Portugal serve the
medium and high net worth personal markets. Barclays Private Banking offers
an integrated asset management service from offices around the world to
private clients. Barclays Offshore Services, with offices in the Channel
Islands, Isle of Man and London, provides specialist banking services for
personal customers and companies which are non-UK based but require banking
services in a sterling territory. This business also includes Barclays Life,
Barclays Stockbrokers, Barclays Funds and b2, which provide pensions, life
assurance, retail stockbroking services, and fund management and mutual
funds.
Operating profit in these businesses rose in aggregate by 43% to #317m. When
adjusted for the #28m life-fund charge in the first half of 1997, profits
rose by 27%. There was a #25m provision in 1997 for the possible cost of
redress to personal pension customers for non-priority cases. Strong income
growth in Barclays Offshore Services and Barclays Private Banking was partly
offset by the continued investment in front office customer servicing
capability in these businesses and the costs incurred in the launch of the
new brand, b2.
Sales of Barclays Life investment, life and pensions products grew by 25%
over 1997 with demand for investment products being particularly strong, up
44%. Cumulative provisions totalling #120m for the cost of redress to
personal pension customers were made up to 31st December 1997, of which
approximately 50% has been paid. The requirements for non-priority cases
have been considered and it is not felt necessary to make any further
provisions at this time.
European Retail Banking saw significant growth in assets under management, up
22% reflecting the favourable market conditions in the first half of the year
and the introduction of enhanced customer behaviour analysis. Fees and
commissions increased by 15% as a result of the continued focus on expanding
the high net worth business. Despite increased investment expenditure on the
conversion of the European retail network for the introduction of the euro,
costs were held below 1997 levels.
Barclays Offshore Services increased profits by 13% mainly as a result of
improved sales performance and continued steady growth in deposits throughout
the year. The business continues to invest in improved services to customers
through the development of initiatives such as telephone banking. Assets
under management increased by 13% during the year to #12bn.
Barclays Private Banking performed well with strong growth in business
volumes in respect of both new and existing clients. Customers' funds were
in excess of #20bn at 31st December 1998, an increase of 18% compared to last
year.
Barclays Stockbrokers operating profit grew 25% as a result of high volumes
in retail stockbroking and despite reduced demutualisation activity and
uncertainty in the equity markets. This growth was assisted by an increased
client base following the acquisition of Fidelity Brokerage Service customers
in the first half of 1998 and a strong increase in new investment management
clients.
Africa and Caribbean
The African and Caribbean banking operations serve both the personal and
business markets. In the Caribbean, the business comprises domestic island
operations and a growing offshore business. In Africa, the major businesses
are in Kenya and Zimbabwe.
Excluding the contribution from problem country debt management, Africa and
Caribbean profits increased by 8%, or #8m, to #106m.
The African businesses continued to make good progress with a 3% improvement
in profits as a result of strong income growth and tight cost controls and
despite turbulent conditions in some local markets. Profit for the
Caribbean operations increased by 26%. Both the domestic and offshore
operations benefited from an expanding deposit base and growing lending
portfolio.
Corporate Banking
Corporate Banking provides relationship banking to the Group's medium sized
and large business customers. The business has an extensive network of
specialist business centres in the United Kingdom as well as offices in
continental Europe, the United States and the Middle East serving both
corporate and institutional customers. In addition, an office in Miami
provides trade finance and correspondent banking services to the Group's
Latin America customers. As well as a full range of conventional banking
services, Corporate Banking provides foreign exchange and hedging products,
factoring and invoice discounting, asset backed financing and contract hire.
Corporate Banking began opening euro current and savings accounts for its
customers in July 1998 and is now able to provide a wide range of euro
products such as cash management, factoring, leasing and treasury management.
The emphasis within Corporate Banking is on harnessing this wide product
range to develop bespoke financial solutions for customers, based on their
individual needs. Corporate Banking also works closely with Barclays
Capital to provide customers with integrated access to investment banking
products.
1998 1997
#m #m
Net interest income 1,212 1,132
Net fees and commissions 599 564
Other operating income 24 14
Total income 1,835 1,710
Total costs (866) (832)
Provisions for bad and doubtful (17) 30
debts
952 908
Problem country debt management 20 13
Operating profit before impact of 972 921
Finance Acts
Write-down of leases (40) (77)
Operating profit 932 844
Corporate Banking profits rose by 6%, or #51m, to #972m, before the impact
of a write-down of lease receivables of #40m (1997: #77m).
Net interest income increased by 7% reflecting strong volume growth in both
assets and liabilities.
Total assets increased by 17% to #43bn in 1998. Average UK lendings rose by
7% year on year. There was strong growth in acquisition related finance
together with a high demand for large corporate lending partly as a result
of adverse conditions in the debt capital markets. Given the increased
liquidity within the bond markets towards the end of the year and an
anticipated reduction in acquisition finance and capital project activity,
growth in the large corporate market is not expected to continue at the same
level in 1999. There was good growth in middle market lending throughout
the year. The restructuring of the front line sales teams and streamlining
of the risk management process has been a main factor in this growth, with
increased customer utilisation of agreed lending lines and take up of new or
extended facilities by existing customers.
Total assets in the international business increased by 16% to #7bn during
the year, particularly in respect of short term facilities to banks and
other financial institutions, reflecting the widening of credit spreads in
the corporate bond market. The Latin America operation, which focuses on
providing finance to top tier banks and financial institutions, performed
well reflecting the switch to traditional bank lending from debt capital
raisings.
Stronger overall growth in high quality, low margin business has resulted in
a reduction in the overall lending margin. Risk adjusted lending margins,
which take account of expected credit losses, have been maintained within
each of the businesses.
Average UK deposit volumes rose by 15%, benefiting from increased corporate
liquidity in the first half of the year. Deposit volumes were particularly
buoyant in treasury deposits, although the changing portfolio mix resulted
in a slight reduction in the overall deposit margin.
Net interest income included a #20m realisation from two debts previously
written off, which was in addition to a #31m specific provision recovery in
respect of these customers. In 1997, there was a benefit from a #13m
adjustment to lease charges.
Net fees and commissions improved by 6% to #599m. Higher risk related
commissions reflected increased lending activity. Customer related foreign
exchange income improved strongly benefiting from a new pricing policy.
This competitive product package also resulted in greater transaction
volumes. Overall money transmission income was maintained although it
remains under competitive pressure. It benefited from continued good growth
in electronic based banking products. International payment volumes also
experienced strong growth. This is expected to continue as a result of
opportunities following the introduction of the euro.
Costs grew by 4%, or #34m, to #866m mainly as a result of the preparation
for the introduction of the euro and Year 2000 expenditure and continued
investment in key electronic delivery initiatives. Staff numbers increased
slightly, which together with the pay award, accounted for an increase in
staff costs.
Provisions for bad and doubtful debts of #17m (1997: net credit #30m)
benefited from low levels of new and increased specific provisions and high
levels of releases and recoveries during the first half of the year. New
and increased provisions included a charge of #23m in respect of Russian
counterparty exposure. In 1998 credit risk releases and recoveries remained
at high levels of #155m (1997: #177m including a #44m release in respect of
Imry) although they slowed in the second half of the year and are expected
to continue to reduce in 1999.
Barclays Capital
Barclays Capital conducts the Group's international investment banking
business. The business focuses on areas where it has a competitive
advantage and which are integral to the Group's broader business strategy.
Barclays Capital serves as the Group's principal point of access to the
wholesale markets and also deals in these markets with governments,
supranational organisations, corporates, banks, insurance companies and
other institutional investors.
The activities of Barclays Capital are grouped in two principal areas: Rates
which include sales, trading and research relating to government bonds,
money markets, foreign exchange, commodities, and their related derivative
instruments and Credit which includes origination, sales, trading and
research relating to loans, securitised assets, bonds and their related
derivative instruments and private equity investment and equity derivatives.
Barclays Capital is an important component of the overall Group, providing a
variety of complementary services and products including foreign exchange
and interest rate hedging instruments to all of the Group's businesses and
their customers. It also provides a counterbalance to disintermediation of
the traditional corporate lending businesses.
1998 1997
#m #m
Net fees and commissions 159 148
Dealing profits (29) 349
Net interest income 428 337
Other operating income 44 50
Total income 602 884
Total costs (708) (633)
Provisions for bad and doubtful (159) 1
debts
Operating profit (265) 252
Barclays Capital reported an operating loss of #265m compared to an
operating profit of #252m last year. The loss for the year was a result of
the Russian economic crisis and the associated difficulties within other
emerging markets, which led to an increase in credit risk premia across all
markets and the tightening of liquidity, which in turn led to a search by
investors for higher quality assets. The losses were primarily incurred
between August and October and as market conditions stabilised in November
the overall operating performance returned to profitability. Within these
poor overall results, a number of core businesses, such as structured
capital markets and private equity, achieved record profitability.
Dealing losses were #29m during 1998 (1997: dealing profits of #349m). The
fall in dealing income reflected proprietary trading losses incurred as a
result of the Russian government default on its domestic debt obligations,
together with the consequent widening of spreads in all segments of the
corporate bond market, dislocation in the equity markets and a reduction in
general business volumes. This was partially offset by strong dealing
profits within interest rate derivatives and the government bond business.
Overall dealing losses within non-customer related proprietary trading
businesses (including Russia) for the full year totalled #205m, the bulk of
which were incurred in August. In addition the provisions for bad and
doubtful debts by Russian counterparties on currency forward contracts and
repurchase agreements was #130m out of a total charge of #159m for the year.
The country transfer risk provision charge was #10m.
In response to the deterioration in market conditions experienced during
late summer and early autumn management took a number of steps to improve
business performance. The non-customer related proprietary trading
businesses were closed in October and secondary market corporate bond
inventory was substantially reduced during the last three months of the
year. This overall reduction in risk appetite has resulted in a fall in
weighted risk assets and total assets in the second half of the year of 18%
to #31bn and 23% to #117bn respectively.
Significant progress has been made in the core businesses. Primary market
activity has extended the franchise both in terms of product and currency.
As well as maintaining the number one position in sterling bond issuance,
the business has become a leading player in deutschmarks and euro currency
issues. The business is well positioned to take advantage of the
opportunities the introduction of the euro should offer.
Net interest income increased by 27% to #428m as a result of improved
performances in money markets, structured capital markets and corporate
lending activities. The corporate, project finance and other traditional
lending portfolios accounted for 32% or #10bn of weighted risk assets at the
year end.
Overall fees and commissions increased by 7% to #159m as result of increased
lending activity. This offset a beneficial change in the income composition
of the structured capital markets business in the second half of 1997.
Other operating income was at a similar level to 1997, reflecting a strong
performance from the private equity business as a result of a number of
realisations from investments.
Costs rose by 12%. The increase mainly reflected the transfer and
restructuring of the former BZW equity derivatives business from the
beginning of 1998 to complement the interest rate derivative business.
There was also further investment in upgrading technology, including euro
preparations and Year 2000 compliance, and the absorption of certain fixed
costs previously allocated to the former BZW businesses. This was partly
offset by the absence of one-off costs of #20m incurred in 1997 in respect
of the relocation to Canary Wharf and by a significantly lower level of
performance related pay in 1998.
Barclays Global Investors
Barclays Global Investors (BGI) offers advanced active and indexed asset
management services for institutional clients. The objective of advanced
active management is to outperform market benchmarks by the application of
disciplined investment processes. The objective of indexed management is to
replicate the performance of market benchmarks. In addition, BGI is a major
lender of securities. These activities are carried out from thirteen
offices located in seven countries.
1998 1997
#m #m
Net fees and commissions 277 258
Net interest income 9 7
Other operating income 2 2
Total income 288 267
Total costs (236) (216)
Operating profit 52 51
Underlying operating profit increased by 15% after adjusting for the sales
of MasterWorks and a part of the Hong Kong fund management business. These
businesses were sold in August 1997 and June 1998 respectively. The
operating results of these businesses were a combined profit of #5m in 1997
and a loss of #1m in 1998.
Adjusting for these business disposals, fees and commissions increased 20%
to #275m (1997: #230m), benefiting from favourable market conditions in the
early part of the year and new business growth in assets under management
throughout the year. BGI's funds performed well despite the market turmoil
in the second half of the year, in line with most index funds and as a
result fees and commissions were only partially affected. The overall fee
income margin was maintained as a result of increased asset levels, which
generated increased internal crossing opportunities and securities lending
levels.
Total assets under management grew to #370bn from #308bn at 31st December
1997; #21bn of the increase is attributable to net new business and #41bn is
attributable to market movements. Assets under management consist of #286bn
of indexed funds and #84bn under advanced active management.
BGI's business units continued their strong performance from 1997. North
America, Japan and Europe won a record amount of new business mandates
during the year. The volume of new requests for proposals for investment
management services continues to be robust.
Underlying operating expenses increased 9% in line with total costs. This
increase was as a result of a rise in costs to support the increase in
future growth, product development and growth in assets under management.
BGI has continued the integration and infrastructure investment that
reflects the global development of the business.
The acquisition of the LongView Group, Inc. was successfully completed in
the second half of the year. LongView specialises in the creation of
software to support institutional portfolio management and trading. In
addition, the capital markets group within BGI recently entered the
securities lending market in Japan, becoming the first non-custodial agent
to lend securities in Japan. These activities further strengthen BGI's
position as one of the top global investment management firms in the market
place.
Businesses in Transition
Businesses in Transition comprises lendings and other assets that are
unlikely to be of long-term interest to the Group or that require
significant restructuring. It also included the former BZW businesses
which, following the announcement in October 1997 of the decision to
withdraw from the equities, equity capital markets and mergers and
acquisitions advisory businesses, have now either been sold or closed.
1998 1997
#m #m
France in Transition 18 16
United States Transition 19 62
Other Businesses in Transition 11 15
48 93
Former BZW Businesses (33) (219)
Operating profit 15 (126)
France in Transition principally comprises part of the French corporate
banking operations and an impaired property lending portfolio. The 1998
result reflects continued releases and recoveries of bad debt provisions.
The surplus in United States Transition is attributable to further releases
and recoveries of bad debt provisions.
Other Businesses in Transition are primarily in Europe and Asia. The 1998
result reflects a #16m recovery of amounts previously written off following
the settlement of the Atlantic litigation.
The asset portfolios have now been managed down to low levels and are
unlikely to result in significant releases and recoveries in the future.
The operating loss of the former BZW businesses represents the trading
activities of the European, Australasian and Asian businesses in 1998 prior
to their sale or closure. The operating loss of #219m in 1997 was
attributable to poor trading results caused by market conditions, the
uncertainties surrounding the sale announcement and the impact of the
significant additional costs incurred to retain key staff during the sale
process.
Other operations
Barclays Group Property Services is responsible for the management of the
Group's operational premises and property related services.
Central services includes a variety of activities which support the
operating businesses such as information technology, the central
administration of certain operational property costs and other central Group
costs.
Management of Group capital is the balance of earnings on the Group's
capital remaining after allocations to business groups, based generally on
weighted risk assets. The Group maintains structural hedges with respect
to its capital and its current account balances, which are designed both to
reduce the impact of short-term interest rate fluctuations on profits and to
increase profitability over the interest rate cycle. The hedges depress
profitability when average short-term interest rates are higher than average
medium term interest rates.
1998 1997
#m #m
Barclays Group Property Services 50 62
Central services (136) (94)
Management of Group capital (98) (24)
Operating profit (184) (56)
The decrease in the Barclays Group Property Services result is attributable
to reduced profits on the disposal of properties of #16m (1997: #29m) and
restructuring costs of #11m (1997: nil), offset by a reduction in funding
costs.
The increase in Central services costs reflected continued investment in
upgrading technology (including Year 2000 compliance), restructuring costs
and a number of other one-off items. Operational costs in respect of
surplus properties included #13m of costs arising as a result of vacant
space at Canary Wharf following the disposal of the former BZW businesses.
1997 included #14m of costs associated with the sublease of Ebbgate House,
the previous headquarters of BZW.
The increase in the deficit from the central management of Group capital is
mainly attributable to increased interest allocations to business groups,
reflecting higher short-term interest rates and increased usage of
regulatory capital by individual businesses. This basis of allocation to
the businesses remains in line with previous years. Lower medium-term rates
have also had an adverse effect on the earnings from capital balances as
have the costs of share buy-backs.
Head office functions
Head office functions comprise the Group's central executive, Group finance,
corporate communications, human resources, internal audit operations and the
Group credit policy unit. Group finance includes Group general counsel's
office, the Group secretary's office and the treasury, risk management,
financial control, corporate planning, economics and taxation functions.
1998 1997
#m #m
Operating cost (60) (52)
The increase is primarily the result of our brand building programme, a
comprehensive Group wide initiative designed to improve our customers'
experience with Barclays.
Economic capital
Economic capital, which is distinct from regulatory capital, is a management
tool that estimates risk on the basis of the volatility of earnings around
their predicted level. The higher the volatility, the more capital is
required. Capital is calculated for each business based on its contribution
to the overall risk of the Group. The major factor affecting profit
volatility is credit risk. The calculation also reflects market risk and
business and operational risk.
The Group uses annualised return on economic capital as a key measure of
business performance for capital intensive businesses. In the calculation,
profit reflects the benefit of economic capital, an appropriate allocation
of the Group tax charge and is adjusted for the level of risk tendency.
The Group's stated range of capital is #6.6bn to #7.0bn. The difference
between this range and the sum of the figures below includes capital
allocated to other operations (including the Group owned property portfolio
and Businesses in Transition) and allows for future growth.
Return on Return on
Economic Economic Economic Economic
Capital Capital Capital Capital
31.12.98 31.12.98 31.12.97 31.12.97
% #m % #m
Retail Financial 45 2,550 36 * 2,350
Services
Corporate 27 ** 1,900 26 * 1,800
Banking
Barclays Capital (35) 850 13 800
Barclays Global N/A 50 N/A 50
Investors
* Before the impact of the 1997 Finance Act. Adjusting for this, the
return for Retail Financial Services was 35% and for Corporate
Banking was 24%.
** Before the impact of the 1998 Finance Act. Adjusting for this, the
return for Corporate Banking was 26%.
Risk tendency
The Group uses a corporate grading structure which shows the probability of
future default by the borrower. This, together with similar risk
calibration of categories of personal sector lendings, is used to estimate
levels of annualised future credit losses from the overall lending portfolio
averaged across the economic cycle (termed risk tendency). Risk tendency
estimates assist in portfolio management decisions, such as exposure limits
to any single counterparty or borrower, the desired aggregate exposure
levels to individual sectors and pricing policy and also provide a guide to
changes in the underlying credit quality of the lending portfolio over time.
Based upon the composition of the lending portfolio as at 31st December
1998, the underlying level of risk tendency, averaged across the economic
cycle, is estimated at around #700m (31st December 1997: #670m). Risk
tendency rose by #30m during the year as a result of increased volumes in UK
consumer lending and extended credit balances at Barclaycard. Barclays
Capital's risk tendency increased mainly as a result of higher levels of
traditional bank-based financing resulting from difficult market conditions
in the bond markets but are expected to decrease in 1999 as market
conditions improve and the loan book is reduced. Within Corporate Banking
strong growth in better quality lending has reduced risk tendency.
Risk Risk
Tendency Tendency
31.12.98 31.12.97
#m #m
Retail Financial Services 445 410
Corporate Banking 210 230
Barclays Capital 45 30
700 670
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