SWOT Analysis Report on Barclays Bank
COMPANY OVERVIEW
Barclays is one of the leading financial services providers globally.The company is engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. The company’s operations are spread across 50 countries spanning over the Europe, the US, and Africa. It is headquartered in London, United Kingdom and employs about 135,000 people.
The company recorded revenues of £23,352 million in the financial year ended December 2008, a decrease of 0.6% over 2007. Operating income in the financial year ended December 2008 amounted to £6,077 million, a decrease of 14.1% over 2007. The net profit fell to £4,382 million in the financial year 2008, a decrease of 0.8% over 2007.
SWOT ANALYSIS of Barclays Bank
Barclays is a major global financial service provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. Barclays was ranked at 70 (based on revenues) in 2008 Fortune’s list of Global 500, an improvement from the 83 rank in 2007Barclays’ customer base exceeds 30 million. Barclays UK banking division provides services to 15 million retail customers and 724,000 businesses in the UK. Barclays has one of the largest branch networks in the UK with 1,733 branches and an extensive network of cash machines. Barclays leverages its leading position in the UK and the world to derive economies of scale benefits. However subprime exposure could affect the flow of new money while consolidation in the financial services sector may lead to Barclays losing its leadership position in the future.
Strengths
Large scale operations insulating business risks
Barclays (Barclays) is a leading global financial services provider operating in over 50 countries in Europe, the US, the Middle East, Latin America, Australia, Asia and Africa. Barclays was ranked at 70 (based on revenues) in 2008 Fortune’s list of Global 500, an improvement from the 83 rank in 2007. Barclays’ customer base exceeds 30 million. Barclays UK banking division provides services to 15 million retail customers and 724,000 businesses in the UK. Barclays has one of the largest branch networks in the UK with 1,733 branches and an extensive network of cash machines. Barclays’ international retail and commercial banking serves its customers through 2,349 distribution points including 1,001 distribution points that of Absa (one of South Africa's largest financial services organizations). At the end of December 2008, Absa alone had 890 points of presence, 9 million customers and 7,690 automated teller machines. Barclaycard is one of the leading credit card businesses in Europe serving 10.1 million UK customers and 8.8 million non-UK customers. Barclays leverages its leading position in the UK and overall large size operations across the world to benefit not only from economies of scale but also from reducing its business risks substantially.
Revenue and profit diversification ensuring business sustenance
Barclay’s operations are spread across diverse markets. It operates in almost 50 countries. The company is not only a leading financial services provider in its domestic market (the UK) but also holds leading positions in most of the markets overseas. Consequently the share of UK in the bank’s revenue declined from 87.6% in 2003 to 57.1% in 2007. Profit diversification of Barclays’ is even more impressive. During 2000-2003, UK contributed 80% of the company’s profits before tax while non-UK contributed 20% of the profits. In 2004, the share of non-UK in the company’s profits before tax rose to 25%.Year 2005 marked a sharp increase in the share of non-UK to 40%. Internationally, Barclays non-UK earnings have been boosted significantly by its acquisition of Banco Zaragozano in Spain, and of its controlling stake in Absa in South Africa. Consequently the share of UK retail banking in the group’s revenue declined to 19.4% in 2008. Revenue and profit diversification by geography and business protect the company from a downturn in specific market or business line, and thus reduces its business volatility.
Ability to grow its strong credit card business enhancing cross selling possibilities
Barclaycard was first launched in the UK in 1966, and has since expanded internationally to issue cards directly in a further eight European counties, as well as the US and across Africa. In 2007, Barclaycard customers had 18.9 million credit cards. In 2007, 3 out of every 4 cards issued by Barclaycard were in markets outside the UK and the bank has 8.8 million international cards in issue. Currently Barclay operates across Europe and the US where it is one of the fastest growing credit card businesses. In Scandinavia the bank operates through Entercard, a joint venture with Swedbank. The UK remains Barclaycard’s most important market in terms of cards in issue. However, the acquisition of Juniper in 2004 made the US Barclaycard’s second most important market by the end of 2006, accounting for nearly a quarter of all cards, significantly higher than 6.7% it accounted for in the year of acquisition. At the end of 2007, Barclaycard had issued 10.1 million cards in the UK, comprising 53% of its total cards in issuance. Barclaycard’s growth continued in 2008 as well. As a result, this division’s revenues grew by an annual increase of 27.2% over 2007. Growth of Barclaycard helps the company increase its loan portfolio and also the scope for cross selling.
Weaknesses
Weakness in trading operations leading to lower trading income and impacting revenue diversity
In 2008, the group’s net trading income declined to £1,329 million from £3,759 million in 2007. The decline is attributable to higher losses in credit related business. Of the total net trading income, a £2,096m net loss (2007: £116m loss, 2006: £1,427m gain) was made on the purchase and sale of securities and the revaluation of both securities and derivatives.This included a £1,272m gain (2007: £640m, 2006: £480m) that was earned in foreign exchange dealings.The net loss on financial assets designated at fair value included within principal transactions was £6,602m (2007: £78m gain, 2006: £489m gain) of which losses of £6,635m (2007: £215m loss, 2006: £42m gain) were included in net trading income and gains of £33m (2007: £293m, 2006: £447m) were included in net investment income. In 2007, net trading income accounted for 16.3% of total revenues while in 2008, the contribution declined to 5.8%. So, weakness in trading operations is leading to lower trading income and it is also impacting revenue diversity of the group.
Failure to execute ABN AMRO deal – hampering emerging markets growth plans
In March 2007, Barclays made an informal takeover offer in a multi billion for ABN Amro Holding, the then largest bank in the Netherlands with complementary presence in Asia and Europe. The company was expected to keep some of the ABN AMRO businesses that made strategic sense especially in emerging markets and dispose the rest to recoup some of its outlay. However, a consortium consisting Royal Bank of Scotland, Fortis and Banco Santander entered the fray and finally won the bid to acquire ABN AMRO. The failure to acquire ABN AMRO slows down Barclays’ plans to grow its business in Asia. The problem is more compounded due to its dividend policy. During 2002-2006, Barclays’ earnings per share rose to $1.29 from $0.63. However, dividend per share declined to $0.37 from $0.50. Unless the company grows its business (mainly through acquisition) the management can’t justify the low dividend payout ratio. However, the opportunities for mergers where significant synergies are available are fast dwindling due to the intense competition in the global financial services industry.
Barclays Capital credit market exposures impacting financial position and performance
Barclays has exposure to US subprime through its own books in Barclays Capital and also through EquiFirst, a mortgage originator that was acquired in March 2007. Barclays Capital had approximately £36 billion of exposure to US subprime and Alt-A mortgages as well as insurers, commercial mortgages, structured investment vehicles and leveraged finance at the end of 2007. Due to this exposure impairment charges and other credit provisions in 2008 rose to £5,419 million, an increase of 94% over 2007. The trend in credit market exposure related losses could continue to affect the group’s balance sheet and P&L statement in 2009 as well.
Opportunities
Retail banking foray in India and the UAE likely to supplement growth
In May 2007, the company announced the launch of its retail banking services in India and the United Arab Emirates (UAE). Barclays has been operating in India since the late 1970s, more recently through Barclays Capital, one of the country’s leading investment banks. Corporate banking was started in November 2006, and it offers leading Indian companies products including deposits, trade finance, and cash management services. Within six months, the bank has launched corporate and retail banking services. Barclays launched its retail services in Mumbai, Kanchipuram, and Nelamangala, near Bangalore. The company is growing its retail and commercial banking business with an initial capital commitment of $70 million.The company is planning to expand its geographical network over time while also utilizing internet, telecommunications and technology such as ATMs.
The retail network would be supported by direct sales agents, increasing customer reach significantly, and Barclays has sought approval to open more branches in India. In May 2007, the retail portfolio of the Indian banking sector was $111.7 billion or around 11% of India’s gross domestic product of $1 trillion. Indian retail banking industry is expected to continue its growth at least till 2040 when India could become the third largest banking hub in the world. To benefit from the growth in Indian retail banking industry, Barclays announced the launch of 'Hello Money', a mobile banking service for its customers. In May 2007, the company announced the launch of its retail banking services in the United Arab Emirates (UAE) also. Barclays has operated in the UAE for over thirty years and is now expanding in the Emirates as part of its strategy to increase its exposure to attractive emerging markets and the reach of its retail banking service. The bank launched its UAE mortgage business in 2006, breaking the mould with its Mini-driving sales team. The launch of these operations will help the company take advantage of growing need for retail banking in these countries.
Positive outlook for buy-to-let market may bring business volumes
Buy-to-let market in the UK has been buoyant in 2007. Buy to let mortgages are designed for people who invest in the property market by purchasing one or more houses and letting them out to tenants. The importance of this market increased sharply over the last few years. Since 1997, buy-to-let has accounted for four-fifths of the total increase in the number of mortgages outstanding and has seen an 11.1% increase in gross mortgage advances in 2006. Buy-to-let accounted for 9% of the total new loans in 2006 up from 9% in 2003.This market continues to be strong, representing approximately 10% of UK gross residential lending in 2006. While the wider mortgage market faltered in 2005, the buy-to-let mortgage market has continued to deliver a resilient performance and reached an impressive £38.4 billion in gross lending in 2006. Buy-to-let gross advances are expected to reach £69.1 billion by 2011. While a sound macro-economic environment has contributed to the expansion of the buy-to-let mortgage sector, a number of factors specific to this sector have further boosted supply of and demand for buy-to-let properties. Buy-to-let ranks high in the popularity stakes for investors. Immigration, greater job mobility, growth in the number of households and the rise in the student population has been driving the growth in the buy-to-let market. The company has presence in this
segment through Its Woolwich subsidiary. Barclays could leverage its market position, brand strength
and distribution capacity to further grow in this market.
Buoyant secured personal loans market in the UK could help the business
The UK secured personal loans market experienced a continued growth from 1997 till 2004, expanding from a mere £916 million to £6,656 million, at a CAGR of 32.8%. However, in 2005 the market contracted to £6,407 million due to greater economic and housing market uncertainty in the UK. After a difficult year in 2005, the UK secured personal loans market turned around in 2006 registering a gross new lending high of £7,453 million, representing a growth of 16.3% over 2005. According to a Data Monitor report, the UK secured personal loans market is expected to enjoy an uninterrupted growth from 2006 to touch £10,160 million by 2011. Growth in the UK secured personal loan market is expected to boost the revenues of major players including FIRSTPLUS, Barclays’ secured leading subsidiary. The secured personal market is small when compared to other lending markets. For example, unsecured personal loan gross advances totaled £49.7 billion in 2006, compared to £7.5 billion for secured personal loans. In contrast to total secured lending (gross advances reached £344.9 billion in 2006), secured personal loans equate to just 2.2% of this total. As a result, other smaller players and potential new entrants could also benefit from the UK secured personal loans market as the market presents a sufficient attractive growth opportunity and more so with the exit of Halifax .
Threats
Bleak outlook for the UK Economy
The UK economy remains in the grips of a downward spiral, caught between a contraction in lending activity and declining economic demand. The latest economic forecasts from the IMF, which come as unemployment today surged through the 2 million mark, show that the UK economy will contract by 3.8% in 2009. The IMF also predicted that the UK will be the only country to keep shrinking through 2010. A bleak outlook for the UK economy implies that there would be less demand for the products and services offered by Barclays.
Regulatory fines may compress margins and financial position
In November 2006, Barclays agreed to pay $144 million to extricate itself from the collapse of Enron, the US energy trading company that went bankrupt in 2001. Barclays said it would pay Enron the sum to settle a lawsuit arising from transactions between Enron and Barclays Capital, its investment banking unit, that were outstanding at the time that Enron sought bankruptcy protection. Enron claimed that it was owed $144 million by Barclays, while Barclays claimed Enron owed it $310 million Barclays said it had agreed to the settlement in a bankruptcy court in New York because it was "preferable to the time, expense and unpredictability of litigation". In May 2007, Barclays agreed to pay $10.9 million to settle an insider-trading probe by the US Securities and Exchange Commission (SEC) into alleged improper trading based on nonpublic information from bankruptcy creditors committees. The SEC also announced that Barclays, without admitting or denying wrongdoing, will pay $3.97 million in disgorgement, $971,825 in prejudgment interest and a civil penalty of $6 million. Such instances of regulatory fines undermine the investors’ confidence and brand value of the company.
Increase in online frauds to impose security concerns
With the advent of automation in the financial service sector the fraud related to internet and credit transaction has seen a surge. There has been increase in security breaches in the UK, threatening the use of sensitive customer data for frauds and hacking. Online banking fraud has increased by 8,000% in the UK in the first half of 2006, according to the UK Financial Services Authority. In the first half of 2006, around 5,059 fraud losses were recorded resulting in around £23.2 million thefts through Internet scams, or phishing. Phishing is a type of e-mail scam designed to steal identity. However, this value has moderated to £7.5 million in the first half of 2007, due to additional implementation of measures to detect and prevent fraud triggered by unusually high level of online banking fraud in 2006. According to figures from payments industry association Apacs, online banking fraud reached £52.5 million ($76.5 million) in 2008, as compared to £22.6 million in 2007. With the increased demand for automation of services, prevention of online fraud would be a major challenge to the bank.
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