Barclays 2005 Annual Report Download - page 105

Barclays PLC
Annual Report 2005 103
3.3
Introduction
Barclays is a major global financial services provider engaged in retail and
commercial banking, credit cards, investment banking, wealth management
and investment management services. We are one of the largest financial
services companies in the world by market capitalisation. Operating in over
60 countries and employing 113,300 people, we move, lend, invest and
protect money for over 25 million customers and clients worldwide.
Our business was affected by global economic conditions generally and
particularly by conditions in the UK. The UK economy was weaker in 2005
than 2004, with the economy growing at 1.8%. The US economy sustained
strong growth in 2005, although slightly lower than in 2004, whilst the
Eurozone economy growth remained broadly steady from the level of 2004.
The South African economy maintained its strong economic growth.
As a financial services group domiciled in the UK, the majority of our
earnings currently arise from the UK. Nonetheless, with our global
businesses and our international activities, we believe that our diverse
portfolio provides a broad spread of earnings capabilities and offers greater
resilience against systematic events in any single business or geography.
Currently about 40% of Barclays profits come from outside the UK against
20% five years ago.
The profitability of Barclays businesses could be adversely affected by a
worsening of general economic conditions in the UK 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 on lending and on
borrowing costs.
Continuous focus on improvements in productivity provides the ability to
respond flexibly to any pressure on income growth and helps offset its
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, although it also
includes principal transactions and other operating income.
Net premiums from insurance contracts and claims and benefits paid on
insurance contracts are shown separately in the Income Statement.
The principal drivers of operating expenses are staffing levels and their
associated costs, including performance related expenditure, and the level
of strategic investment spend.
Impairment charges and other credit provisions are largely 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 47 to 49, 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 an operating philosophy, 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 VBM 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.
The primary goal remains 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. In
2004, we announced a new performance cycle TSR goal for the 2004 to
2007 period.
The TSR peer group is reviewed annually to ensure it aligns with our
business mix and the direction and scale of our ambition. The peer group
for 2005 was: ABN Amro, BBVA, BNP Paribas, Citigroup, Deutsche Bank,
HBOS, HSBC, JP Morgan Chase, Lloyds TSB, Royal Bank of Scotland and
UBS. For 2006 the peer group is unchanged.
For the first two years of the new goal period, from 31st December 2003
to 31st December 2005, Barclays was positioned fifth within its peer group,
which is second quartile TSR performance.
In addition, economic profit (EP) is used to support the pursuit of the top
quartile TSR goal. 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 EP as its key internal financial measure, to
support the achievement of our primary top quartile TSR goal. Barclays
uses EP, a non-IFRS measure, as a key indicator 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 302.
We believe that, given current and expected market conditions, a
compound annual growth rate in EP in the range of 10% to 13% p.a.,
which would translate into cumulative EP generation of £6.5bn to £7.0bn,
will be required to deliver top quartile TSR over the 2004 to 2007 goal
period. Economic profit for 2005 was £1.75bn, which, added to the
£1.57bn generated in 2004, delivered a cumulative total of £3.32bn for
the goal period to date. This equates to compound annual growth in
economic profit of 18% per annum for the goal period to date.
We will continue to report progress against goals on a regular basis.
Financial Performance 2005(a)
Barclays applied International Financial Reporting Standards (IFRS) with
effect from 1st January 2004, with the exception of IAS 32, IAS 39 and
IFRS 4, which were applied from 1st January 2005. The effect of these
changes is pervasive throughout these results.
The Group’s profit before tax in 2005 increased 15% (£700m) to £5,280m
(2004: £4,580m). Total income net of insurance claims increased 23%
(£3,225m) to £17,333m (2004: £14,108m) whilst operating expenses
Financial review
Overview
Note
(a) Restated for IFRS.