Barclays 2003 Annual Report Download - page 84

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Introduction
Barclays is an international financial services group engaged primarily in
banking, investment banking and asset management. In terms of market
capitalisation, Barclays is one of the largest financial services groups in
the UK. The Group also operates in many other countries around the
world and is a leading provider of co-ordinated global services to
multinational centres. Worldwide, the Barclays Group has over 2,900
branches and employs 74,800 people.
Our business is affected by global economic conditions generally, and
particularly by conditions in the UK. The UK economy was stronger in
2003 than 2002, with the economy growing at 2.1%. There was a
repositioning away from consumption towards corporate investment,
government spending and a stronger trade balance. The US economy
embarked on a vigorous recovery, with uncertainties about the strength
and durability of the recovery diminishing. There are signs at last that
the Eurozone economy may be stabilising.
As a financial services group domiciled in the UK, the majority of our
earnings arise from the UK. We believe that our diverse portfolio of
businesses provides a broad spread of earnings capabilities and offer
greater resilience against exogenous events in any single geography.
The profitability of Barclays businesses could be adversely affected by
a worsening of general economic conditions in the United Kingdom or
abroad. Factors such as the liquidity of the global financial markets; the
level and volatility of equity prices and interest rates; investor sentiment;
inflation; and the availability and cost of credit could significantly affect
the activity level of customers. A continued market downturn would
likely lead to a decline in the volume of transactions that Barclays
executes for its customers and, therefore, lead to a decline in the income
it receives from fees and commissions. In addition, changes in interest
rate levels, yields curves and spreads may affect the interest rate margin
realised between lending and borrowing costs.
Continuous improvement in productivity provides the ability to respond
flexibly to any pressure to income growth, which would help offset the
impact on overall profitability.
Key drivers underpinning the financial performance are detailed in the
subsequent pages of the ‘Financial Review’ section. These include, for
net interest income, the volume and rate of growth of asset and liability
balances, together with the margin on these balances. Non-interest
income is driven primarily by net fees and commissions and also
comprises dealing profits and other operating income.
The principal drivers of expenses are staffing levels and their associated
costs, performance related expenditure, the level of strategic investment
spend and, in 2003, the move from a pension credit to a pension charge.
Provisions are driven by the quantity and quality of lending and reflect
the condition of the credit environment.
In addition to the risk factors outlined on pages 110 to 111, other
potential impacts on Barclays profitability are the consequences of
potential regulation or legislation.
Goals
Barclays primary focus is to deliver superior value to its shareholders.
To achieve this we use the principles of value-based management (VBM)
to develop strategy, allocate resources and manage performance.
In applying VBM principles, Barclays has developed a disciplined
fact-based approach to strategy development and business planning,
which aims to build sustainable competitive advantage. Individual
businesses generate alternative business strategies to facilitate the
selection of the most appropriate value-maximising option, in order
to achieve profitable growth in all our businesses.
We use performance goals as an integral part of our value-based
management disciplines. These are designed to stretch the thinking and
ambition of our businesses. Goals have been set for four-year periods to
align with the planning processes described above. In 1999, we announced
goals for the 2000 to 2003 period. This performance cycle has concluded
and we commenced a new cycle for the 2004 to 2007 period.
At the end of 1999, Barclays set a series of four-year performance goals
for the period 2000 to 2003 inclusive. The primary goal was to achieve
top quartile total shareholder return (TSR) relative to a peer group of
11 other UK and international financial services institutions. TSR is
defined as the value created for shareholders through share price
appreciation, plus reinvested dividend payments.
For the four year period from 31st December 1999 to 31st December
2003, Barclays was positioned third within its peer group, thereby
achieving its primary goal of top quartile TSR performance.
Barclays announced on 12th February 2004 its performance goals for
the four-year period, 2004 to 2007 inclusive. Our primary goal, to
achieve top quartile total shareholder return, remains unchanged from
the prior goal period. The peer group is reviewed annually to ensure it
aligns with our business mix and the scale of our ambition. The peer
group for 2004 is: ABN Amro, BBVA, BNP Paribas, Citigroup, Deutsche
Bank, HBOS, HSBC, JP Morgan & Chase, Lloyds TSB, Royal Bank of
Scotland and UBS.
In addition, secondary goals are used to support the pursuit of top quartile
TSR, economic profit (EP) and productivity. Barclays operating philosophy
is ‘managing for value’. The strategies we follow and the actions we take
are aligned to value creation for all stakeholders. Since the introduction of
VBM, Barclays has used economic profit as its key internal financial
measure, to support the achievement of our primary goal, to achieve top
quartile total shareholder return. Barclays uses this non-GAAP measure as
a key measure of performance because it believes that it provides
important discipline in decision making. Barclays believes that EP
encourages both profitable growth and the efficient use of capital.
More information on the reconciliation of EP to profit before tax can be
found on page 218.
We believe that, given current and expected market conditions, a
compound annual growth rate in EP in the range of 10% to 13%, which
would translate into cumulative EP generation of £7.3bn to £7.8bn, will
be required to deliver top quartile shareholder returns over the 2004-
2007 goal period.
Another supporting goal relates to improved productivity. World
class productivity is an important contributor to sustaining strong
performance. All businesses are expected to meet or exceed top
quartile productivity performance relative to comparable peers within
their sector. Those already at top quartile cost:income performance
are expected to deliver a 1% per annum improvement.
We will continue to report progress against goals on a regular basis.
Financial Review
Overview