When Barclays announced its fourth-quarter and full-year 2012 results last month these were entirely overshadowed by the strategy review from new chief executive Antony Jenkins. In the aftermath, analysts and investors bemoaned or applauded, depending on their biases, the decision to retain the investment bank largely unscathed and re-emphasize its importance and particularly that of the FICC division to the group.
The bank’s actual results garnered scant attention. Analysts picked over the £1.1 billion ($1.8 billion) adjusted profit for the fourth quarter of 2012 last year and worried that it was 10% below consensus expectations; they took heart that it was double the 2011 comparable quarter.
There’s a problem here. On a statutory basis Barclays actually delivered a fourth-quarter pre-tax loss of £466 million. Investors’ and analysts’ willingness to be led by the nose by the bank’s press machine to focus on the so-called adjusted number allows Barclays to brush aside what it deems to be unusual one-offs that obscure the true performance of its operating businesses.
All banks do this – Barclays is merely an example in the headlines – and investors and analysts seem happy to play along. They should not be so quick to do so.
Look again at the big adjustments that Barclays feels justified in excluding from the results. Its statutory results show a £560 million loss for own credit value adjustments. Let’s be fair. It’s perfectly sensible to exclude this. It makes no sense to say the bank has taken a loss when its credit fundamentals improve and its debt spreads tighten, just as it also makes no sense to account a profit when a bank’s credit deteriorates and spreads widen. Banks should only make a gain from this if they have actually bought back debt for cash at a discount to face value and cancelled it.
The next two big adjustments look far more questionable. Barclays feels it is within its rights to relegate to the footnotes a £600 million provision for compensation for mis-sold payment protection insurance and a £400 million provision for redress to small business customers that were mis-sold interest rate derivatives products. Should these not rather count as a cost of doing business – the same as paying interest on liabilities or expenses to staff? Fines and compensation for misconduct are hardly exceptional, one-off items at UK banks. They might be unpredictable in scale and timing, but they are a regular feature of their results now.
Maybe a fairer number for the bank’s fourth-quarter adjusted net profit would be £100 million, not £1.1 billion. By allowing the bank to breezily dismiss such charges, investors are losing sight of an important issue. Banks are regularly paying these fines because their fundamental business model is broken. It’s because they can’t make a profit from regular run-of-the-mill retail banking that banks have engaged persistently in mis-selling and all manner of other underhand tactics: sequencing the processing of customers’ payments out of their accounts ahead of receipts to nudge them into temporary overdrafts incurring high charges, for example.
UBS bank analyst John-Paul Crutchley was the only one to even try to raise this on the Barclays strategy call and he got nowhere. It’s not just Barclays of course. Lloyds, which tried to get ahead of its peers on cleaning up payment protection insurance, has now even managed to pick up a fine for delaying the payments of compensation it had already agreed to.
Nor is it an issue confined to the UK. US banks wrote the book on surreptitiously packing expensive and unwanted insurance into retail loans without telling customers. They have also discovered the difficulties of repairing the retail-banking business model by introducing charges for regular accounts or using cash-point machines. Customers rebelled against this last year. UK banks will also struggle to make new charges stick. The problem with free banking is that the quality of service has come to represent value for money.
But the banks must change their retail model so that it does not depend on hidden charges, or gouging from mis-sold products. Changing the business model requires more than pious soundbites about decent behaviour and treating customers well. This should be a given, anyway. It requires running businesses on rational economic terms where banks offer a service that customers value sufficiently for banks to pay for their costs through open rather than hidden charges. If banks don’t face up to this, investors will soon tire of this game of pretending that the latest fine to hit the P&L – Libor last quarter, PPI this quarter, interest rate derivatives mis-selling next – is somehow extraordinary.