Closing post
Time for a recap….
The Bank of England governor has said that Britain is showing signs of recovery from its mild recession and will receive a boost when interest rates start coming down later this year,
Andrew Bailey rejected accusations that Threadneedle Street’s reluctance to cut borrowing costs despite falling inflation meant it was “behind the curve” and made it clear rate cuts were coming.
“We don’t need inflation to come back to target before we cut interest rates,” Bailey said as he came under pressure from Conservative members of the Treasury committee to respond to news that the UK fell into recession in the second half of 2023.
"We don't need, obviously, inflation to come back to target before we cut interest rates"
— Bloomberg UK (@BloombergUK) February 20, 2024
Governor Andrew Bailey tells MPs what the Bank of England wants to see before rates come down https://t.co/jwjNVDeq5w pic.twitter.com/Z7maGC0XxL
“The economy seems to be at full employment and that’s a very good story,” the governor said.
In comparison to previous downturns, the UK was suffering from a “very small recession” and was now showing “distinct signs of recovery”, he added.
The Bank was also told that its 14 interest rate rises had tipped the UK into recession; Bailey, though, pointed out that the weak supply side of the UK was also a factor.
City economists predict the Bank will make its first cut in August.
In other news…
Barclays has announced plans to cut £2bn in costs as part of a strategic shake-up that will see its investment bank shrink.
It is also planning to increase shareholder payouts by £10bn within three years, which has helped to send Barclays’ share up over 9% today.
Britain’s insecure jobs market and high housing costs are creating a precarious middle class struggling to maintain a decent living standard on household incomes as high as £60,000 a year, a report has found.
People living in Notting Hill, west London, received more in capital gains from 2015 to 2019 than the combined population of Liverpool, Manchester and Newcastle according to an analysis of capital gains tax.
Union leaders have warned business groups against pushing Keir Starmer to dilute plans for sweeping reforms of workers’ rights and for a ban on zero-hours contracts.
Administrators running The Body Shop have announced 300 job cuts at its head office, and are planning to close dozens of its 198 stores in the UK.
The cost of infant milk remains at “historically high” levels despite some price falls in recent months, Britain’s competition watchdog has said, as it launched a full-scale investigation into baby and toddler formula.
And…Britain’s flying taxi pioneer, Vertical Aerospace, has been handed another £8m grant from the government, taking its total taxpayer backing to £37m as it tries to get its electric aircraft off the ground.
The Body Shop to cut 300 jobs at head office and dozens of stores could close
Newsflash: The Body Shop is to cut 300 jobs at head office while dozens of its 198 stores in the UK could close with the likely loss of hundreds more jobs as the business battles for survival.
Administrators told staff today that seven stores would close immediately but promised no more than half of its total would close over time, while numbers at its offices in London and Littlehampton in Sussex were being cut by 40% to 400.
It is not clear if jobs at the group’s warehouse, also in Littlehampton, will be affected.
The retailer, which employs more than 2,200 people in the UK, called in administrators last week, less than two months after being taken over by restructuring specialist Aurelius.
Reuters’ poll also found that City economists expect another year of weak growth in the UK.
They forecast that GDP will expand by 0.3% this year, which would be a) very weak, and b) better than 2023’s 0.1% rise.
Growth is expected to strengthen, rising by 1.1% in 2025 and then 1.4% in 2026.
City economists see first UK rate cut in Q3
City economists expect the Bank of England to start cutting interest rates in the third quarter of this year, a Reuters poll has found.
A slim majority expect the first reduction in August.
That is later than forecast a month ago, when the majority expect the first rate cut in the second quarter of this year.
The Bank’s remaining scheduled monetary policy committee meetings in 2024 are in March, May, June, August, September, November and December.
Walmart beats forecasts but flags sales slowdown
US retail giant Walmart has beaten Wall Street expectations, reporting revenue growth of 5.7% in the final quarter of last year.
Walmart posted revenues of $173.4bn for October-December 2023, including a 23% increase in global ecommerce sales, in a sign that the US consumer remained
Doug McMillon, president and CEO at Walmart, says:
Our team delivered a great quarter, finishing off a strong year. We crossed $100 billion in eCommerce sales and drove share gains as our customer experience metrics improved, even during our highest volume days leading up to the holidays.
Shares in Walmart are up 4.2% in pre-market trading.
But the company has also flagged that sales growth will slow this year. It expects net sales to increase by 4.0% to 5.0% in the first quarter of 2024, but only by 3.0% to 4.0% in 2024 as a whole.
As the US’s largest retailer, Walmart can give us a valuable insight into consumer trends.
Kathleen Brooks, research director at XTB, explains:
The number of transactions at Walmart rose by 4.3% in the previous quarter, however, the average ticket value fell by 0.3%. This suggests that consumers in the US are buying more things, but they are spending slightly less. This is not a sign of disinflation, according to Walmart, which suggests that the US consumer is getting slightly cautious and trading down to cheaper brands of goods.
The cautious US consumer may not be a reason to panic, however, it is why Walmart issued softer than expected guidance for the rest of this year. Walmart is forecasting consolidated net sales growth to rise by 4-5% this year, which is slower than recent quarters. Consolidated operating income is forecast to register growth of 3-4.5%, this year’s full year adjusted EPS is expected to be $6.70 to $7.12, which is a wide range, and the lower end of this range is well below the estimate of $7.09. Thus, while the headline earnings for the last quarter are stronger than expected, there are some cracks appearing in Walmart’s future outlook.
Over in Wall Street, shares in credit card issuer Discover Financial Services have jumped almost 13% in pre-market trading after U.S. consumer bank Capital One announced a takeover bid last night.
Capital One, backed by Warren Buffett, plans to acquire Discover in an all-stock transaction valued at $35.3bn.
The deal would give Capital One access to Discover’s network of payments processing and settlement services, and could allow it to lower its reliance on Visa and Mastercard.
It would form the sixth-largest U.S. bank by assets, so could receive intense antitrust scrutiny.
Andrew Bailey and the Bank of England would be taking “a big risk” in cutting rates too soon, despite pressure from MPs today, says Pieter Staelens, portfolio manager at CVC Credit Partners.
Staelens says:
“It’s definitely welcome that the Bank believes inflation is easing, but significant cuts to base rates before the 2% target is reached feels like a big risk.
The Bank was criticised for being too slow to cut rates at the start of this cycle, and they need to be careful not to repeat this mistake in reverse.
Although the immediate inflation picture is improving, there are still a number of pressures on the horizon, including half the world electing new governments, conflict in the Middle East and unemployment in the UK remains very low.”
Investors slightly raised their bets for a first BoE rate cut in June, Reuters reports, as Andrew Bailey and fellow policymakers spoke today.
A quarter-point reduction was fully priced in only for August, they add.
The pound slipped to a one-month low against the euro this morning, suggesting traders were pricing in earlier cuts to UK interest rates (it’s recovered much of its losses since, though).
This may be the key point from Andrew Bailey today:
Andrew Bailey on the UK recession (he’s in front of the Treasury Select Committee today):
— Ed Conway (@EdConwaySky) February 20, 2024
“If you look at recessions going back to the 1970s, this is the weakest by a long way. -0.5% is a very weak recession.”
Today’s session ends with Andrew Bailey hinting that he expects interest rates to be cut this year.
He tells MPs that around 70% of the Bank’s previous interest rate increases have fed through to the economy, meaning 30% is yet to come.
Bailey then explains to the Treasury Committee that he is “comfortable” with a market profile for UK interest rates that has cuts in it.
But, he insists, that is not a commitment to saying when it will happen, or how much easing there will be.
[reminder: the money markets expect three quarter-point cuts this year].
Updated
On that last point… deputy governor Ben Broadbent says some companies are doing ‘labour hoarding’.
They’re holding onto staff, even though activity has fallen, because they expect growth to pick-up so don’t want the hassle of having to rehire staff.
Q: Is the Bank worried that GDP-per-capita has fallen for the last seven quarters? That suggests what little growth we’ve seen has come from migration, which the government is trying to restrict
Bailey says there is strong employment in the economy, but low activity growth – in that set-up, GDP-per-capita is inevitably not going to look good.
Technical note: GDP-per-head either fell or was flat for the last seven quarters, the worst run on record:
Two quarters of contraction of real GDP will get headlines, but maybe this is the real story 👇
— Andy Bruce (@BruceReuters) February 15, 2024
💥 GDP per person dropped every quarter of 2023. It hasn't grown since Q1 2022
💥 That's 7 quarters - longest unbroken run without per capita GDP growth since records began in 1955 pic.twitter.com/bknjT5TlMy
Governor Andrew Bailey goes on to bat aside criticism of the Bank of England from Jacob Rees-Mogg.
Rees-Mogg has recently pronounced that BoE independence is part of the problem, Labour MP Angela Eagle tells Bailey.
Q: To what extent do you think undermining the institutional structures that have been in place since the late-1990s is helpful?
Bailey replies that he is a “very strong advocate and defender” of the central bank’s independence.
Bailey says it has helped in the currrent period of inflation.
Updated
Q: Will UK interest rates have to rise again, if gobal events create persistent inflationary pressure again?
The Bank policymakers explain that such shocks create a trade-off between inflation and activity, so they’d need to judge that balance, when deciding how to react.
The Treasury committee also probe the impact of global shocks on the UK economy
Danny Kruger MP fears that the Bank risks “choking off” the recovery unless it cuts interest rates soon.
Q: Should we be more worried about the Red Sea crisis? And are algorythmic traders distorting the energy market?
Andrew Bailey points out that gas storage levels remain relatively high, as the UK exits winter, which is a good sign for future prices.
The weather has dealt us “an enormous benefit”, Bailey explains.
UK and European gas prices hit eight-month low yesterday, while US natural gas prices have plunged to a near-three-decade low
[That benefit, though, has also brought a worrying number of heat record on land and in oceans, due to human-made global heating and the El Niño effect].
On the Red Sea, Bailey says the Suez Canal is used more for goods transport than for energy, so the rise in shipping costs may not effect oil and gas prices as much as for goods.
And the BoE governor denies being sanguine about the issue of the Middle East. These terrible events are a real risk, he insists.
Bailey: We are not seeking a recession
Q: Does the Bank see a recession as a ‘necessary evil’ in getting inflation down in the long term?
“We’re not seeking a recession, definitely not.” Andrew Bailey insists, adding:
“We don’t target growth, we target inflation”.
Bailey: tax cuts aren't necessarily inflationary
Labour MP Keir Mather turns to fiscal matters…
Q: Is the Bank anticipating tax cuts in the budget?
Andrew Bailey says the Bank never anticipates fiscal changes – it models them after it happens.
Q: But have you a view whether the tax cuts being reported could be inflationary?
Bailey says the Bank’s view is that the tax cuts in the autumn statement will have a positive effect on GDP, but won’t have much effect on inflation at all.
That’s because measures such as lowering national insurance should help the supply side of the economy; by encouraging people into the labour market.
Q: You also don’t know when the election will be….
I was hoping someone would tell us, Bailey jokes.
“Before next February”, someone chips in helpfully.
Q: .. are MPC members holding off cutting rates because of tax cuts in the budget are a ‘known unknown’?
That’s “very definitely not part of our thought process”, governor Bailey insists, saying the Bank doesn’t anticipate fiscal events or the election.
Broadbent: Interest rate risks are both ways....
Ben Broadbent brushes aside the notion that the Bank is being too tardy to cut rates, despite the pain being felt in the economy by households and businesses.
Asked about the risk that interest rates are overly restrictive, Broadbent points to the split at the MPC this month.
Clearly there’s a risk, but there’s also a risk that they’re not sufficiently.
There were two of us who voted for still higher interest rates.
Broadbent also disputes the claim that all the evidence is for a cut now.
In my experience, and I’ve been doing this quite a while now, it is never the case that every lead indicator points in the same direction.
Broadbent does agree that there’s been good progress in easing inflation. But a lot of the disinflation has been the unwinding of pandemic effects, such as on goods prices.
Services inflation and wage inflation, though, are running over 6%, Broadbent adds, which is roughly double where the Bank thinks they should be to achieve price stability.
But… MPC dove Swati Dhingra points out that keeping rates high for too long runs the risk of a hard landing, and the risk of damaging the supply capacity of the economy (which is why she voted to cut rates this month).
Andrew Bailey then denies that the Bank is ‘behind the curve’ on shifting towards cutting interest rates.
He says the Bank’s position has moved; it is now focused on how long rates must stay at their current levels, rather than mulling further rate rises.
MPC member Megan Greene flags the risk of cutting interest rates too early, only to see inflation take off again, forcing the Bank to tighten again.
(This is a lesson she learned growing up in the US in the 1980s, when Paul Volcker forced inflation out by keeping interest rates high, after the volatility of the 1970s).
Updated
MP: The lights are flashing red for rate cuts
John Baron MP demands to know why the Bank aren’t cutting interest rates now, when the economic warning lights are “flashing red”.
Baron cites “very pedestrian growth” in the labour market, CPI inflation trending downwards, an easing in the labour market, and a deceleration of retail goods prices.
BoE governor Andrew Bailey reminds the committee that inflation is not forecast to be as low as 2% (its target) at the end of the year, so the question is how long must policy remain restrictive.
“We’re not there yet,” (able to cut interest rates) Bailey adds.
Thérèse Coffey suggests the Bank is being held back by groupthink on its Monetary Policy Committee.
Q: The internal members of the MPC seem to vote en bloc – would it be better to just have one collective vote from those members?
Currently, each of the nine members gets one vote each – there are five internal members, and four external experts.
Bailey insists the MPC are very independently minded, and points out that around 25% of MPC meetings in the last two years have seen a split among the executive (internal) members.
Updated
Q: What’s an acceptable leeway in the accuracy of your forecasts?
Andrew Bailey explains that the Bank’s forecasts are conditional, so their accuracy depends how conditions move (ie: it’s not fair to set a pass/fail score).
Currently, the BoE provides fan charts which show the likelihood of various outcomes; it could potentially shift to a scenario-based set-up instead (this is something Ben Bernanke’s review could recommend).
He also pushes back against criticism for forecast-failings, pointing out that no economic model can predict wars or pandemics.
Updated
BoE deputy governor Ben Broadbent has also told MPs that interest rate cuts during 2024 are possible, but the timing depends on the inflation outlook.
In an annual report to the Treasury committe, Broadbent says the Bank’s forecasts don’t rule out an easing of policy in 2024, adding:
“In my view that is the more likely direction in which Bank Rate is likely to move.
But even if that proves to be the case, the timing of any adjustment can only depend on the actual evolution of the economic data.”
Broadbent: technical definition of a recession is unhelpful
Bank of England’s deputy governor Ben Broadbent also wades in about the UK recession.
Broadbent says he finds the technical definition of a recession (two quarterly falls in GDP in a row) to be “unhelpful”.
Broadbent tells MPs that in the decade before the financial crisis, the UK’s trend supply growth was 3% per year, or 0.75% per quarter.
We now think trend supply growth is less than 1%, with productivity having actually fallen in the last year.
In that environment, a 0.1% rise or fall in GDP is a tiny difference, Broadbent says.
He points out that in the US, the National Bureau of Economic Research decrees when the country is in recession (and tends not to rush its verdict).
Secondly, the data can be revised – Broadbent reminds the Committee about the days when there was excitement that Britain was falling into a triple-digit recession; in the end, we didn’t even have two dips.
Andrew Bailey says it’s “not unreasonable” for the markets to expect the Bank to cut interest rates this year.
But, the Bank does not endorse the market curve [where investors expect rates to be in future], or say when it will cut rates, or by how much, though, he adds.
Q: Former chief economist Andy Haldane thinks the Bank could be too late to start cutting rates, having been slow to start raising them – what’s your reaction?
Andrew Bailey repeats his point that the UK labour market remains strong, despite the ‘technical recession’.
He says the two quarters of negative growth, in Q3 and Q4 last year, only add up to a 0.5% drop in GDP.
If you look at recessions going back to the 1970s, this is the weakest by a long way.
The range for those recessions is GDP falls of between 2.5% and 22%, for the equivalent two quarters, Bailey says.
Q: But how does the UK economy grow, if you have risks of inflation even when you’re in recession?
Through two ways, Bailey adds – first, you get price stability (which is the Bank’s job) and second you grow the supply side of the economy (which is not).
“It’s one thing to have missed inflation on the way up, which happened, it’s quite another to then have crushed the economy on the way down. That double blow to credibility is one,i n my old job, I would be looking to avoid.” Andy Haldanehttps://t.co/vdNspPLUZE
— Emma Fildes (@emmafildes) February 20, 2024
Updated
MPC member Megan Greene tells MPs that she changed her vote on interest rates – from a ‘hike’ to a ‘hold’ - this month, due to signs that inflationary persistence is easing.
But although the signs are encouraging, Greene wants to see this continue before she changes her vote to a ‘cut’.
There are still “risks”, Greene adds, citing the Bank’s Agents survey which suggests wage growth of 5.4% this year.
Q: When will former Federal Reserve chair Ben Bernanke publish his review of the Bank’s forecasting models?
Andrew Bailey reassures the Treasury Committee that Bernanke is busy writing, and working very hard.
We might get the fruits of Bernanke’s labours in mid-Spring, Bailey suggests.
There’s a lot of interest in Bernanke’s work, which will try to explain why the BoE’s economic forecasts have been so wide of the mark in recent years.
MPs want more detail on the timing; after all “spring’s happening now,” points out Angela Eagle MP.
Bailey is reluctant to be pinned down too tightly, but suggests it may come in April.
Andrew Bailey adds that the Bank is seeing some ‘encouraging signs’ on inflationary pressures, including a slowdown in service sector price rises and in pay growth.
We don’t need inflation to come down to target before we cut interest rates, Bailey insist.
BoE's Bailey: We expect recession will be very small
Q: So, now inflation is down to 4%, and forecast to hit 2%, and the economy is in recession, what would it take for you to cut interest rates now? What indicators do you want to see?
Andrew Bailey tells MPs that the Bank expects inflation to fall to its 2% this spring, but he warns that it won’t stay there – as the inflation rate is being moved by changes in energy prices which won’t be permanent.
The Bank, thus, expects inflation to pick up by the end of this year (as it forecast earlier this month).
Bailey says monetary policy has been restrictive in the run-up to the current recession, but also points out that supply side growth has been unusually weak in the period (a hint that the Bank won’t take all the blame for the recession).
Bailey also points out that Britain is at “full employment”, which is a “very good story”.
And he tells the Treasury committee that the Bank expects it will only be “a very small recession”, adding;
We think the economy is already showing distinct signs of an upturn.
[Reminder, the economy shrank by 0.3% in October-December, after a 0.1% contraction in July-September].
He adds that the Bank wants to see sign that inflation persistence easing. So it will look at services prices, pay rises, and “quantities in the labour market”, when assessing when interest rates could be cut.
Updated
MP: Interest rate rises tipped UK into recession
Treasury Committee chair Harriett Baldwin MP begins the session by reminding the Bank of England that it raised interest rates 14 times in a row to bring down inflation from “intolerably high levels”.
She pins the blame for Britain’s fall into recession on the Bank, saying:
Clearly, by the second half of last year, that had tipped the UK economy into recession.
You can watch this morning’s Treasury Committee hearing here:
MPs start to quiz Bank of England on inflation and interest rates
Over in parliament, the Treasury committee will soon begin a hearing with the Bank of England.
MPs will hear from BoE governor Andrew Bailey, deputy governor Ben Broadbent, and external committee members Swati Dhingra and Megan Greene.
Dhingra was the lone member of the monetary policy tommittee to vote to cut interest rates this month; the other three all voted to leave rates on hold.
The committee say:
Figures released last week show the rate of inflation (CPI) remained steady at 4% in January – despite many economists forecasting an increase. This has led to heightened speculation that the Bank of England may consider cutting interest rates from the summer.
MPs are likely to ask witnesses about the future path of inflation, whether risks of over-tightening monetary policy have increased since the November forecast, and their views on the future of wage growth.
In correspondence with the Committee Chair Harriett Baldwin, the Bank announced an externally led review of its forecasting model led by Ben Bernanke, former US Federal Reserve Chief and Nobel-Prize winner.
Questions are likely to explore the progress of this review, which is due to be published in Spring, and the Bank’s recent forecasting performance.
Members may look at how the higher interest rates have passed through to mortgage rates and savings rates, and how households and businesses are coping with these changes.
Updated
Barclays also says it aims to become “the UK-centred leader in global finance”:
Where Barclays cost cuts will fall:
Barclays have shown investors how it expects to cut £2bn of costs by 2026.
The plan includes cutting £700m from Barclays UK, and £100m from the UK corporate bank, plus £700m from the investment bank.
Updated
Barclays is the latest company to follow a popular playbook of increasing dividends and cutting costs to keep shareholders happy.
It’s an approach that benefits investors rather than employees, explains Russ Mould, investment director at AJ Bell:
Staff might not appreciate this strategy as it means they may have to do additional work for the same pay, but running a leaner machine is the playbook for corporates when there is an uncertain economic outlook.
“The news has gone down well with the market and has helped Barclays’ share price burst back to life after a long period in the doldrums. But will it be enough to protect C. S. Venkatakrishnan’s job? Having a plan is one thing, executing on it is another and so far, the jury is still out on whether he’s capable of turning Barclays around.
Mould also isn’t too impressed by tooday’s reorganisation (see 7.47am for details):
“Like many of its peers, Barclays is a big juggernaut of a company where it is very hard to make changes quickly. The investment banking arm continues to stick out like a sore thumb as it isn’t a natural fit to the rest of the business.
Appointing four people to lead that division suggests the CEO doesn’t know what to do with it. Too many cooks spoil the broth and the head chef is focused too much on sweet talking and not enough action.”
Barclays CEO has said he wants to grow total income to around £30bn, from around £25.4bn today, by 2026. However, he hopes to get there by focusing on “more stable income streams” from its retail and corporate lending divisions.
C. S. Venkatakrishnan told investors this morning:
“We consider these to be more stable income streams and they have grown by about 35% since 2021. And the proportion from these more stable income streams will be about 70% of the bank’s total income by 2026”
Barclays tries to woo investors in lengthy presentation
CS Venkatakrishnan is now presenting Barclays’ first strategy update to investors in a decade.
The event, which is running until around 1:30pm UK time, will see Venkat - as he’s known to colleagues - try to convince investors that his plan will be the one to revive its share price, in ways that its predecessors failed to.
That plan is centred on a plan for a “simpler, better, more balanced” Barclays, he says, which is “dedicated to higher returns for investors” that is driven by “disciplined delivery” and “harnessed to our home here in the UK”, he has said.
While part of that means dividing the group into five divisions - a UK consumer bank, UK Corporate Bank, Private Bank and Wealth Management, Investment Bank, and US consumer Bank – from its current three, it’s supposed to boost transparency and simplify the way it reports returns from each of them.
Barclays shares rose around 5% after the bank slashed costs and said it would pivot toward growing retail and business lending in the U.K. https://t.co/7HIIAv3uMG https://t.co/7HIIAv3uMG
— The Wall Street Journal (@WSJ) February 20, 2024
Despite jumping around 5% this morning, Barclays shares are basically flat over the last five years.
Back on 20 February 2019, Barclays shares were trading around 165p each – today they’re 155p, and that underperformance is why the bank is announcing a new strategic plan today.
In 2019, activist investor Edward Bramson was in the early stages of an ultimately unsuccessful battle to overhaul Barclays.
~5 years after Ed Bramson's open letter to Barclays$BARC share price is back where it was back then pic.twitter.com/Hbm4KrLGW1
— Librarian Capital (@LibrarianCap) February 20, 2024
Bramson was pushing Barclays to scale back its investment bank to focus on its more lucrative consumer operations, but failed to persuade enough fellow shareholders to back him.
Hotel chain InterContinental (+2.5%) are close behind Barclays on the FTSE 100’s top risers this morning, after reporting a jump in profits and announcing an $800m share buyback.
InterContinental Hotels Group reported a 70% jumped in operating profits for 2023, to $1.066bn, with revenue per available room surging over 70% in China following the relaxation of Covid restrictions at the end of 2022.
IHG continues to enjoy the release of post-Covid pent-up demand, particularly from Asia, reports Victoria Scholar, head of investment at interactive investor, adding:
“IHG is planning to return more than $1 billion to shareholders, including a newly launched share buyback programme worth $800 million as well as its dividend.
Meanwhile the owner of Holiday Inn and Crowne Plaza reported global revenue per available room of 16.1% year-on-year, beating analysts’ expectations for 15.7% and 11% ahead of the 2019 pre-covid peak.
A better than expected top and bottom-line performance as well as impressive plans to return cash to shareholders have all been fuelled by a strong performance in 2023 with impressive travel demand across all of its markets. These results are a major win for its new CEO Elie Maalouf, an IHG veteran who took to the top job in July after leading the Americas region for close to a decade.
Updated
XTB: market approves of Barclays big giveaways and ambitious targets
Barclays will need a “laser focus” to hit the targets outlined today, says Kathleen Brooks, research director at XTB:
Barclays strategic review was punchy, and it essentially boils down to two things: cut costs aggressively and boost profits and continue to return capital to shareholders, to the tune of £10bn by 2026. This is exactly the type of message that shareholders love at the moment, and it is why the market has reacted with glee on Tuesday morning.
Barclays is reorganizing into 5 new operating divisions, with more focus on the retail bank and a wealth management arm. Investment banking will still be one of the five divisions, although with less allocation of capital and in future the IB arm will get 50% compared to 63% currently.
Barclays new financial targets set a high bar: a 12% return on tangible equity. The return on equity in the investment bank was 7% last year, so this division will have the furthest to go to reach this target. The $30bn revenue target for 2026, which is 13% above analyst estimates, is a brave move from Barclays, and the bank has only given itself 3 years to do this. It’s not quite a moon shot, but it does require a laser focus on not only the bottom line, but maximizing revenue opportunities, and building a greater institution than what Barclays is today. However, that will require job cuts, although management were not willing to give a specific headcount target.
As expected, the CEO said that the main aim of its three-year plan is to drive higher returns and ‘predictable, attractive, shareholder distributions.’ The main theme of the Q4 earnings season was shareholder sweeteners, and Barclays is right at the top when it comes to sweet talking shareholders.
UK middle classes ‘struggling despite incomes of up to £60,000 a year’
Away from Barclays…Britain’s insecure jobs market and high housing costs are leading to the growth of a precarious middle class struggling to maintain a decent living standard on household incomes as high as £60,000 a year.
A study released by abrdn Financial Fairness Trust, a research body set up by the fund manager, said the uncertain nature of work meant there was a one in three chance that someone earning a middle income today would not be doing so next year.
The report – Caught in the Middle – said that problems of middle-class insecurity were especially acute for single parents, with those in employment more likely than not to be in an insecure job.
Donald Hirsch, a policy adviser at the FFT and one of the report’s authors, said 20% of those in the middle fifth of the income distribution were struggling to pay for food and other essentials.
He said:
“It is people earning between £30,000-£60,000 a year, depending on the type of household, people who you would expect to be doing OK.”
Updated
Barclays CEO's bonus falls 27%
Barclays’ annual report is also out this morning, and it shows that CEO C.S. Venkatakrishnan’s bonus fell by a quarter last year.
Venkatakrishnan’s annual bonus dropped to £1.425m for 2023, down from £1.949m in 2022.
The bonus was calculated against a range of measures, including profits, various strategic non-financial targets, and individual performance. The final bonus was set at 53.3% of the maximum available.
So while his fixed pay rose by 3%, to £2.86m (half in cash, half in shares), Venkatakrishnan’s overall remuneration decreased to £4.641m from £5.197m.
The “median employee of Barclays PLC” only saw their fixed pay rise by 1%, while their annual bonus fell 43%, the annual report shows.
Updated
Barclays shares jump 6%
Barclays’ share price has risen by 6% at the start of trading in London, as traders welcome its plans to cut costs by £2bn and return £10bn to investors in 2024-2026.
Analysts at Jefferies say Barclays has announced “a relatively ambitious set of 2026 targets”, as it aims to lift its return on tangible equity to 12% (up from a statutory RoTE of 9.0% last year).
Updated
Barclays’ plan to cut £2bn of cuts could mean heavy job cuts among its staff.
Max Georgiou, analyst at Third Bridge, says:
Barclays now plans to reduce costs in the CIB by £2b by 2026, our experts believe a 20% reduction in headcount is needed and would not impact day-to-day operations.
Previous cost reduction programmes have not been executed effectively, in some part due to its political culture. A coherent strategy is needed for future success but is an uphill battle.
Barclays has a habit of delivering mixed news – and today’s results are no different – says John Moore, senior investment manager at RBC Brewin Dolphin:
While the bank’s results for last year are more or less in line with expectations, they are still behind 2022.
Plans to make cost reductions and revise its corporate structure should help drive improved profitability in the next few years, underpinning shareholder returns of £10bn.
The acquisition of Tesco Bank [earlier this month] also looks like a good, low-risk deal in terms of overlap, cost savings, and gaining some market share. Barclays is in a reasonable position and appears to be cautiously optimistic about the future, but execution of the plan set out today will be key to its performance.”
Barclays is briefing journalists now about its new strategic plans, and its results for last year.
It says it cut headcount by around 5,000 full-time equivalent roles in 2023.
Going forward, there is no headcount target, they add.
Barclays says the reorganising of its operations into five divisions will provide “an enhanced and more granular disclosure of the performance of each of these operating divisions”.
It will also mean “more accountability from an operational and management standpoint”.
It has appointed leaders for these new divisions:
Vim Maru appointed CEO of Barclays UK;
Matt Hammerstein appointed CEO of Barclays UK Corporate Bank (he’ll also be head of Public Policy and Corporate Responsibility)
Sasha Wiggins appointed CEO of Barclays Private Bank & Wealth Management; and
Denny Nealon will continue in his current role as CEO of Barclays US Consumer Bank and Barclays Bank Delaware.
That leaves the Investment Bank, which will have several co-leaders:
Adeel Khan appointed sole head of Global Markets;
Cathal Deasy and Taylor Wright will continue in their current roles as Co-Heads of Banking; and
Stephen Dainton appointed President of Barclays Bank PLC and Head of Investment Bank Management.
Despite the 6% drop in profits last year, Barclays’ bonus pool only became slightly shallower.
Bonuses for 2023 fell 3% to £1.2bn, down from £1.24bn in 2022.
There was little change in deferred bonuses either, with the total dipping to £543m from £549m a year ago.
Updated
Barclays to return £10bn to shareholders by 2026
Barclays says it plans to return “at least £10bn of capital” to shareholders over the next three years, through today’s plan to boost returns and cut costs.
The Bank says it will do this through dividends and share buybacks, with “a continued preference for buybacks”.
The plan is to maintain its total dividend pot, but lift the payment per share by buying back (and then cancelling) shares.
Updated
Introduction: Barclays announces £2bn cost-cutting drive as profits drop
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK bank Barclays is planning a £2bn cost-cutting drive as it shakes up its operations, and reported a drop in profits for last year.
Pre-tax profits at Barclays fell to £6.6bn in 2023, the bank reports this morning, down from £7bn in 2022 – a slightly larger fall than expected.
Higher interest rates pushed up earnings at Barclays UK, where income rose 5% to £7.6bn thanks to growth in net interest income – the gap between income from loans and payments to savers.
But Barclays’ investment bankers had a tougher year. Income at the Corporate and Investment Bank (CIB) fell by 4% to £12.6bn, driven by lower client activity in both Global Markets and Investment Banking.
Barclays also spent £900m on “structural cost actions” in the final quarter of last year, its latest financial results show, taking the total bill for cost cutting in 2023 to £1.0bn.
And there are more cuts to come, as CEO C. S. Venkatakrishnan unveils Barclays’ first major strategy update in a decade.
Barclays says it is aiming for £1bn of gross efficiency savings in 2024 and total gross efficiency savings of £2bn by 2026.
These cuts are designed to lift Barclays return on tangible equity – a key measure of a bank’s performance.
C. S. Venkatakrishnan says the bank’s new three-year plan will improve performance, with the bank also announcing a new £1bn share buyback.
Venkatakrishnan explains:
“In 2023 Barclays delivered solid performance against a mixed macroeconomic backdrop, meeting its financial targets.
Our strong 13.8% Common Equity Tier 1 (CET1) ratio enables us to deliver increased total capital distributions of £3.0bn to shareholders, up c.37% on 2022, which includes a further share buyback of £1.0bn.
Our new three-year plan, which we will be announcing at the Investor Update today, is designed to further improve Barclays’ operational and financial performance, driving higher returns, and predictable, attractive shareholder distributions”
This shake-up will see Barclays reorganised into five new divisions: Barclays UK; Barclays UK Corporate Bank; Barclays Private Bank and Wealth Management; Barclays Investment Bank; and Barclays US Consumer Bank.
More to follow….
Also coming up today
MPs will grill the Bank of England governor, Andrew Bailey, and members of the Monetary Policy Committee (MPC) about interest rates, the future path of inflation, and how households and businesses are coping with higher borrowing costs.
🗣 On Tuesday, the Governor of the @bankofengland and members of the Monetary Policy Committee (MPC) will appear in front of the committee to discuss inflation, interest rates, and the UK economy.
— Treasury Committee (@CommonsTreasury) February 15, 2024
🔎 Learn more about the session below 👇https://t.co/TYKifN5wsC pic.twitter.com/RAHtfSKMEt
The BoE could feel some heat over Britain’s fall into recession last week too, with former chief economist Andy Haldane warning it risks making the UK’s recession worse unless it cuts interest rates soon.
Yesterday, Conservative MP Sir Jacob Rees-Mogg told parliament that the Bank was “no longer showing itself to be competent” and its independence must be questioned.
Britain’s agricultural industry is gathering in Birmingham today for the National Farmers Union conference
Rishi Sunak will be there, and is expected to announce a package of grant support – including £220m to help farmers access new equipment.
The head of the National Farmers’ Union, Minette Batters, has warned that UK food security risks becoming a “poor relation” to other national priorities.
Today is the first day of NFU conference 2024👏
— National Farmers' Union (@NFUtweets) February 20, 2024
If you are heading to the ICC in Birmingham for #NFU24 today or watching the event online, tag us in your photos & let us know who you are most looking forward to hearing from and why👉https://t.co/nHOOR4hP1l#BackBritishFarming pic.twitter.com/KzEIeWRqA3
The agenda
10am GMT: Eurozone construction output data for December
10.15am GMT: Treasury committee to quiz Bank of England governor and colleagues on inflation and interest rates
10.15am GMT: National Farmers Union annual conference begins
3pm GMT: Conference Board Leading Economic Index of US business cycle
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