MARKET COMMENT
Barclays - A Growth Story

By Bruce Jackson (TMFGoogly)
February 8, 2001

Who said banks were low-growth beasts? Final results from Barclays (LSE: BARC) turned that suggestion on its head. Operating profit jumped 25% to £3,580 million, earnings per share (EPS) based on operating profit were ahead 14% to 163.6p and the total dividend was hiked 16% to 58p.

That is an excellent performance from one on the country's biggest companies. But top line income growth of 13% (excluding the Woolwich acquisition) was the most impressive part of it all. With most UK banks struggling to move their top line, Barclays stands out amongst the crowd.

Pure retail banking is an extremely competitive business. The overall market growth is habitually capped simply because the population is not growing. There is room for only so many current and mortgage accounts. But Barclays is more than just a UK retail bank. Contribution from non-UK businesses exceeds 20%. Almost half (46%) of the bank's operating income is non-interest income, coming from activities such as investment banking (Barclays Capital), corporate banking and institutional asset management (Barclays Global Investors).

That sort of income and profit mix somewhat insulates Barclays from the traditionally cyclical nature of the UK economy. That is just as well, given that the economy is already slowing, as shown by Barclays' total provision for bad debts, up 32% to £817 million.

Chief Executive Matthew Barrett has done an excellent job in turning Barclays into a focused, growing bank. Gone are the days of serial diversification, which destroyed shareholder value. Gone are the spendthrift days – Barclays' "business as usual" costs were flat, with the bank only investing in areas where growth opportunities are the greatest. In short, the company is doing the simple things well.

Costs can and will be further cut. Barclays now expects the Woolwich acquisition to lead to savings of £400m per annum, up from the forecast £240m. There's still ample room for Barclays to reduce its overall cost base – the Lloyds TSB (LSE: LLOY) cost to income ratio is at least 10% below that of Barclays. Cost cutting combined with top line growth is banking Nirvana.

There is little doubt that as the economy slows, 2001 will be more challenging than the past year. But Barclays looks fit for the fight, especially given its attractive profit mix. The shares trade on a forecast 2001 price to earnings (P/E) ratio of about 13, and a forecast dividend yield of about 3%. That's not challenging compared to the rest of the market, but due to their cyclical nature, banks traditionally trade at a discount to the market. Still, Barclays looks a solid bet to modestly outperform the rest of the market over the next five years.

Where Next?

Barclays discussion board
Barclays and the banking sector are discussed in more detail in our Industry Focus 2001.