UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 20549
FORM 20-F
(Mark One)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) |
OR
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, |
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto |
OR
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto.
Date of event requiring this shell company report |
Commission file | Barclays PLC | 1-09246 | ||||||||
Barclays Bank PLC | 1-10257 |
BARCLAYS PLC
BARCLAYS BANK PLC
(Exact namesNames of registrantsRegistrants as specifiedSpecified in their charters)Charters)
ENGLAND
(JurisdictionsJurisdiction of Incorporation)Incorporation or Organization)
1 CHURCHILL PLACE, LONDON E14 5HP, ENGLAND
(Address of principal executive offices)Principal Executive Offices)
PATRICK GONSALVES, +44 (0)20 7116 2901, PATRICK.GONSALVES@BARCLAYS.COM
1 CHURCHILL PLACE, LONDON E14 5HP, ENGLAND
*(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Barclays PLC
Title of | Name of | |||
New York Stock Exchange* | ||||
American representing four 25p ordinary shares | New York Stock Exchange |
* | Not for trading, but in connection with the registration of American Depository Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Barclays Bank PLC
Title of Each Class |
| |||
7.4% Subordinated Notes 2009 | New York Stock Exchange | |||
Callable Floating Rate Notes 2035 | New York Stock Exchange | |||
Non-Cumulative Callable Dollar | ||||
Preference Shares, Series 2 | New York Stock Exchange* | |||
American | ||||
2, each representing one | ||||
Preference Share, Series 2 | New York Stock Exchange | |||
Non-Cumulative Callable Dollar | ||||
Preference Shares, Series 3 | New York Stock Exchange* | |||
American | ||||
Preference Share, Series 3 | New York Stock Exchange | |||
Non-Cumulative Callable Dollar | ||||
Preference Shares, Series 4 | New York Stock Exchange* | |||
American | ||||
Preference Share, Series 4 | New York Stock Exchange | |||
Non-Cumulative Callable Dollar Preference Shares, Series 5 | ||||
American Depository Shares, Series 5, each representing one Non-Cumulative Callable Dollar Preference Share, Series 5 | ||||
iPath® Dow Jones – AIG Grains | ||||
total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Livestock | ||||
Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Nickel | ||||
Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Copper Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Energy Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Agriculture Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Natural Gas total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Industrial | ||||
Metals Total Return Sub-IndexSM | ||||
ETN | NYSE Arca | |||
iPath® | ||||
SMETN | NYSE Arca | |||
iPath® Dow Jones-AIG Tin Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Coffee Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Cotton Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Sugar Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Precious Metals Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Platinum Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Cocoa Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Lead Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Dow Jones-AIG Aluminum Total Return Sub-IndexSM ETN | NYSE Arca | |||
iPath® Global Carbon ETN | NYSE Arca | |||
iPath® Dow Jones – AIG Commodity | ||||
Index Total ReturnSM ETN | NYSE Arca | |||
iPath® | ||||
TM Crude Oil Total Return Index ETN | NYSE Arca | |||
iPath® S&P | ||||
Index ETN | NYSE Arca | |||
iPath® MSCI India IndexSM ETN | NYSE Arca | |||
iPath® | ||||
NYSE Arca | ||||
iPath® GBP/USD Exchange Rate ETN | NYSE Arca | |||
iPath® JPY/USD Exchange Rate ETN | NYSE Arca | |||
iPath® S&P500 VIX Short-Term FuturesTM ETN | NYSE Arca | |||
iPath® S&P 500 VIX Mid-Term FuturesTM ETN | NYSE Arca | |||
iPath® CBOE S&P 500 BuyWrite IndexSM ETN | NYSE Arca | |||
iPath® Optimized Currency Carry ETN | NYSE Arca | |||
Barclays GEMS IndexTM ETN | NYSE Arca | |||
Barclays GEMS Asia 8 ETN | NYSE Arca | |||
Barclays Asian and Gulf Currency Revaluation ETN | NYSE Arca | |||
Barclays GEMS IndexTM ETN | American Stock Exchange |
* | Not for trading, but |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuers’ classes of capital or common stock as of the close of the period covered by the annual report.
Barclays PLC | 25p ordinary shares | |||
Barclays Bank PLC | £1 ordinary shares | |||
£1 preference shares | 1,000 | |||
£100 preference shares | 75,000 | |||
€100 preference shares | 240,000 | |||
$0.25 preference shares | ||||
$100 preference shares | 100,000 |
Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yesþ No¨
If this report is an annual or transition report, indicate by check mark if each registrant isthe registrants are not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes¨ Noþ
Note — Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrantsregistrants: (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants wereregistrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yesþ No¨
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Barclays PLC:
Barclays PLC | ||||||||||||
Large Accelerated Filer þ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ | ||||||||||
Barclays Bank PLC | ||||||||||||
Large Accelerated Filer ¨ | Accelerated Filer ¨ | Non-Accelerated Filer þ |
* | Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: |
Large accelerated filerþ Accelerated filer¨ Non-accelerated flierU.S. GAAP ¨
Barclays Bank PLC:
Large accelerated filer¨ Accelerated filer¨ Non-accelerated filerþ
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP¨International Financial Reporting Standards as issued by the International Accounting Standards Boardþ
Other¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
* | If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: |
Item 17¨ Item 18¨
If this is an annual report, indicatedindicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Noþ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)YEARS.)
Indicate by check mark whether the registrants have fifedregistrant has filed all documents and reports required to be filed by Section 12,1312, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes¨ No¨
Certain non-IFRS measures
In this document certain non-IFRS (International Financial Reporting Standards) measures such as profit before business disposals, are reported. Barclays management believes that these non-IFRS measures provide valuable information to readers of its financalfinancial statements because they enable the reader to focus more directly on the underlying day-to-day performance of its businesses and provide more detail concerning the elements of performance which the managers of these businesses are most directly able to influence. They also reflect an important aspect of the way in which operating targets are defined and performance is monitored by Barclays management. However, any non-IFRS measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as well.
Market and other data
This document contains information, including statistical data, about certain of Barclays markets and its competitive position. Except as otherwise indicated, this information is taken or derived from Datastream, Dealogic, Euroweek, Thompson Reuters, AMEX/NYSE weekly reports, European ETF reports and other external sources. Barclays cannot guarantee the accuracy of information taken from external sources, or that, in respect of internal estimates, a third party using different methods would obtain the same estimates as Barclays.
Forward-looking statements
This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and Section 27A of the US Securities Act of 1933, as amended, with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition and performance. Barclays cautions readers that no forward-looking statement is a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statements. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements sometimes use words such as “aim”‘may’, “anticipate”‘will’, “target”‘seek’, ‘expect”‘continue’, “estimate”‘aim’, “intend”‘anticipate’, “plan”‘target’, “goal”‘expect’, “believe”‘estimate’, ‘intend’, ‘plan’, ‘goal’, ‘believe’ or other words of similar meaning. Examples of forward-looking statements include, among others, statements regarding the Group’s future financial position, income growth, assets, impairment charges, business strategy, capital ratios, leverage, payment of dividends, projected levels of growth in the banking and financial markets, projected costs, estimates of capital expenditures, and plans and objectives for future operations.operations and other statements that are not historical fact. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, including, but not limited to, UK domestic and global economic and business conditions, the effects of continued volatility in credit markets, market related risks such as changes in interest rates and exchange rates, effects of changes in valuation of credit market exposures, changes in valuation of issued notes, the policies and actions of governmental and regulatory authorities, changes in legislation, the further development of standards and interpretations under IFRS applicable to past, current and future periods, evolving practices with regard to the interpretation and application of standards under IFRS, progress in the integration of Absathe Lehman Brothers North American businesses into the Group’s business and the achievementquantification of synergy targets related to Absa,the benefits resulting from such acquisition, the outcome of pending and future litigation, the success of future acquisitions and other strategic transactions and the impact of competition – a number of which factors are beyond the Group’s control. As a result, the Group’s actual future results may differ materially from the plans, goals, and expectations set forth in the Group’s forward-looking statements.
Any forward-looking statements made by or on behalf of Barclaysherein speak only as of the date they are made. Except as required by the UK Financial Services Authority (FSA), the London Stock Exchange or applicable law, Barclays does not undertakeexpressly disclaims any obligation or undertaking to updaterelease publicly any updates or revisions to any forward-looking statements contained in this announcement to reflect any changeschange in Barclays expectations with regard thereto or any changeschange in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Barclays has made or may make in documents it has filed or may file with the Securities and Exchange Commission including the discussion of risk management in the document.(SEC).
SEC FormFORM 20-F cross reference information
SEC Form 20-F Cross Reference InformationCROSS REFERENCE INFORMATION
Form 20-F
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1 | Identity of Directors, Senior Management and Advisers | |||
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2 | Offer Statistics and Expected Timetable | |||
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3 | Key Information | |||
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4 | Information on the Company | |||
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4A | Unresolved staff comments | |||
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5 | Operating and Financial Review and Prospects | |||
2-52, 135-136, 202-204(Note 14), 232(Note 36), 267(Note 48) | ||||
B. Liquidity and capital resources | 17, 91-92, 111-116, 193, 202-204(Note 14), 214-218(Note 27), 219(Note 29), 226-228(Note 31), 230-231(Note 34), 268-272(Note 49), 278(Note 52) | |||
C. Research and development, patents and licenses, etc. |
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7 | Major Shareholders and Related Party Transactions | |||
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8 | Financial Information | |||
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9 | The Offer and Listing | |||
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B. Plan of distribution | Not applicable | |||
| C. Markets | 302 | ||
D. Selling shareholders | Not applicable | |||
E. Dilution | Not applicable | |||
F. Expenses of the issue | Not applicable | |||
10 | Additional Information | |||
A. Share capital | Not applicable | |||
B. Memorandum and Articles of Association |
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D. Exchange controls |
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307-309 | ||||
F. Dividends and paying agents | Not applicable | |||
G. Statement by experts | Not applicable | |||
H. Documents on display | 309 | |||
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11 | Quantitative and | |||
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12 | Description of Securities Other than Equity Securities | |||
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13 | Defaults, | |||
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14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | |||
Not applicable | ||||
15 | Controls and Procedures | |||
A. Disclosure controls and procedures |
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B. Management’s annual report on internal control over financial reporting |
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D. Changes in internal control over financial reporting |
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15T | Controls and Procedures | 173-174, 177 | ||
16A | Audit Committee Financial Expert |
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16B | Code of Ethics |
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16C | Principal Accountant Fees and Services |
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16D | Exemptions from the Listing Standards for Audit Committees | |||
Not applicable | ||||
16E | 227(Share repurchase) | |||
Change in Registrant’s Certifying Accountant | Not applicable | |||
16G | Corporate Governance | 143, 155 | ||
17 | Financial Statements | |||
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18 | Financial Statements | |||
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19 | Exhibits | |||
Exhibit Index |
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Absa definitions
“Absa Group Limited” refers to the consolidated results of the South African group of which the parent company is listed on the Johannesburg Stock Exchange (JSE Limited) in which Barclays owns a controlling stake.
“Absa” refers to the results for Absa Group Limited as consolidated into the results of Barclays PLC; translated into Sterling with adjustments for amortisation of intangible assets, certain head office adjustments, transfer pricing and minority interests.
“International Retail and Commercial Banking-Absa” is the portion of Absa’s results that is reported by Barclays within the International Retail and Commercial Banking business.
“Absa Capital” is the portion of Absa’s results that is reported by Barclays within the Barclays Capital business.
Other definitionsFinancial review
“Income” refers to total income net of insurance claims, unless otherwise specified.
“Profit before business disposals” represents profit before tax and disposal of subsidiaries, associates and joint ventures.
“Cost:income ratio” is defined as operating expenses compared to total income net of insurance claims.
“Risk Tendency” is a statistical estimate of the average loss for each loan portfolio for a 12-month period, taking into account the size of the portfolio and its risk characteristics under current economic conditions, and is used to track the change in risk as the portfolio of loans changes over time. Further information on Risk Tendency is included under “Risk Management — Credit Risk Management”
“Daily Value at Risk (DVaR)” is an estimate of the potential loss which might arise from unfavourable market movements, if the current positions were to be held unchanged for one business day, measured to a confidence level of 98%.
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Financial reviewConsolidated income statement
Barclays delivered profit before tax of £7,076m. Earnings per share were 68.9p and we increased the full year dividend payout to 34p, a rise of 10%.
Income grew 7% to £23,000m. Growth was well spread by business, with strong contributions from International Retail and Commercial Banking, Barclays Global Investors and Barclays Wealth. Net income, after impairment charges, grew 4% and included net losses of £1,635m relating to credit market turbulence, net of £658m of gains arising from the fair valuation of notes issued by Barclays Capital and settlements on overdraft fees in relation to prior years of £116m in UK Retail Banking.
Impairment charges and other credit provisions rose 30% to £2,795m. Impairment charges relating to US sub-prime mortgages and other credit market exposures were £782m. Excluding these sub-prime related charges, impairment charges improved 7% to £2,013m. In UK Retail Banking and Barclaycard, impairment charges improved significantly, as a consequence of reductions in flows into delinquency and arrears balances in UK cards and unsecured loans. UK mortgage impairment charges remained negligible, with low levels of defaults, and the wholesale and corporate sector remained stable. The significant increase in impairment charges in International Retail and Commercial Banking was driven by very strong book growth.
Operating expenses increased 4% to £13,199m. We invested in growing the branch network and distribution channels in International Retail and Commercial Banking and in infrastructure development in Barclays Global Investors. Costs were lower in UK Banking and broadly flat in Barclays Capital. Gains from property disposals were £267m (2006: £432m). The Group cost:income ratio improved two percentage points to 57%.
Business Performance – Global Retail and Commercial Banking
In UK Bankingwe improved the cost:income ratio a further two percentage points to 48%, excluding settlements on overdraft fees in relation to prior years of £116m. On this basis we have delivered a cumulative eight percentage point improvement in the past three years, well ahead of our target of six percentage points.
UK Retail Bankingprofit before tax grew 9% to £1,282m. Income grew 2% excluding settlements on overdraft fees in relation to prior years of £116m, reflecting a very strong performance in Personal Customer Retail Savings and good performances in Current Accounts, Local Business and Home Finance, partially offset by lower income from loan protection insurance. Enhancements in product offering and continued improvements in processing capacity enabled a strong performance in mortgage origination, with a share of net new lending of 8%. Operating expenses were well controlled and improved 3%. Impairment charges improved 12% reflecting lower charges in unsecured consumer lending and Local Business. This was driven by improvements in the collection process which led to reduced flows into delinquency, lower levels of arrears and stable charge-offs. Mortgage impairment charges remained negligible.
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Barclays Commercial Bankdelivered profit before tax of £1,371m. Profit before business disposals improved 5%. Income improved 7% driven by very strong growth in fees and commissions and steady growth in net interest income. Non-interest income increased to 32% of total income reflecting continuing focus on cross sales and efficient balance sheet utilisation. Operating expenses rose 6%, reflecting increased investment in product development and support, sales force capability and operational efficiency. Impairment charges increased £38m as a result of asset growth and higher charges in Larger Business.
Barclaycardprofit before tax increased to £540m, 18% ahead of the prior year. Steady income relative to 2006 reflected strong growth in Barclaycard International offset by a reduction in UK card extended credit balances as we re-positioned the UK business and reduced lower credit quality exposures including the sale of the Monument card portfolio. As a result, impairment charges improved 21%, reflecting more selective customer recruitment, client management and improved collections. Operating expenses increased 12%, driven by continued investment in Barclaycard International and the non-recurrence of a property gain included in the 2006 results. Barclaycard US continued to make good progress, and for the first time made a profit for the year.
International Retail and Commercial Bankingprofits declined 23% to £935m. Results in 2006 included a £247m profit on disposals and £41m post tax profit share from FirstCaribbean International Bank. 2007 results reflected a 12% decline in the average value of the Rand.
International Retail and Commercial Banking – excluding Absadelivered a profit before tax of £246m. Income rose 28% as we significantly increased the pace of organic growth across the business, with especially strong growth in Emerging Markets and Spain. Operating expenses grew 32% as we expanded the distribution footprint, opening 324 new branches and 157 new sales centres and also invested in rolling out a common technology platform and processes across the business. Impairment increased to £79m including very strong balance sheet growth and lower releases.
International Retail and Commercial Banking – AbsaSterling profit fell £9m to £689m after absorbing the 12% decline in the average value of the Rand. Retail loans and advances grew 22% and retail deposits grew 20%.
Business Performance – Investment Banking and Investment Management
Barclays Capitaldelivered a 5% increase in profit before tax to £2,335m. Net income was ahead of last year, reflecting very strong performances in most asset classes including interest rates, currencies, equity products and commodities. Results also included net losses arising from credit market turbulence of £1,635m net of gains from the fair valuation of issued notes of £658m. All geographies outside the US enjoyed significant growth in income and profits. Strong cost control led to operating expenses declining slightly year on year.
Barclays Global Investors(BGI) profit before tax increased 3% to £734m. Income grew 16%, driven by very strong growth in management fees and in securities lending revenues. Profit and income growth were both affected by the 8% depreciation in the average value of the US Dollar. BGI costs increased 25% as we continued to build our infrastructure across multiple products and platforms to support future growth.
The cost:income ratio rose to 62%. Assets under management grew US$265bn to US$2.1 trillion, including net new assets of US$86bn.
Barclays Wealthprofit before tax rose 25% to £307m. Income growth of 11% was driven by increased client funds and greater transaction volumes. Costs were well controlled as business volumes rose and the cost:income ratio improved three percentage points to 76%. We continued to invest in client facing staff and infrastructure. Redress costs declined. Total client assets increased 14% to £133bn.
Head office functions and other operations
Head Office functions and other operationsloss before tax increased 65% to £428m reflecting higher inter-segment adjustments and lower gains from hedging activities.
Capital management
At 31st December 2007, our Basel I Tier 1 Capital ratio was 7.8% (2006: 7.7%). We started managing capital ratios under Basel II from 1st January 2008. Our Basel II Tier 1 Capital ratio was 7.6%. Our Equity Tier 1 ratio was 5.0% under Basel I (2006: 5.3%) and 5.1% under Basel II.
We have increased the proposed dividend payable to shareholders in respect of 2007 by 10%. We maintain our progressive approach to dividends, expecting dividend growth broadly to match earnings growth over time.
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Consolidated income statement summary
For the year ended 31st December
For the year ended 31st December | |||||||||||||||||||||||||||
2007
£m | 2006
£m | 2005
£m | 2004 £ma | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004 £ma | |||||||||||||||||||
Net interest income | 9,610 | 9,143 | 8,075 | 6,833 | 11,469 | 9,610 | 9,143 | 8,075 | 6,833 | ||||||||||||||||||
Net fee and commission income | 7,708 | 7,177 | 5,705 | 4,847 | 8,407 | 7,708 | 7,177 | 5,705 | 4,847 | ||||||||||||||||||
Principal transactions | 4,975 | 4,576 | 3,179 | 2,514 | 2,009 | 4,975 | 4,576 | 3,179 | 2,514 | ||||||||||||||||||
Net premiums from insurance contracts | 1,011 | 1,060 | 872 | 1,042 | 1,090 | 1,011 | 1,060 | 872 | 1,042 | ||||||||||||||||||
Other income | 188 | 214 | 147 | 131 | 377 | 188 | 214 | 147 | 131 | ||||||||||||||||||
Total income | 23,492 | 22,170 | 17,978 | 15,367 | 23,352 | 23,492 | 22,170 | 17,978 | 15,367 | ||||||||||||||||||
Net claims and benefits incurred on insurance contracts | (492 | ) | (575 | ) | (645 | ) | (1,259 | ) | (237 | ) | (492 | ) | (575 | ) | (645 | ) | (1,259 | ) | |||||||||
Total income net of insurance claims | 23,000 | 21,595 | 17,333 | 14,108 | 23,115 | 23,000 | 21,595 | 17,333 | 14,108 | ||||||||||||||||||
Impairment charges and other credit provisions | (2,795 | ) | (2,154 | ) | (1,571 | ) | (1,093 | ) | (5,419 | ) | (2,795 | ) | (2,154 | ) | (1,571 | ) | (1,093 | ) | |||||||||
Net income | 20,205 | 19,441 | �� | 15,762 | 13,015 | 17,696 | 20,205 | 19,441 | 15,762 | 13,015 | |||||||||||||||||
Operating expenses | (13,199 | ) | (12,674 | ) | (10,527 | ) | (8,536 | ) | (14,366 | ) | (13,199 | ) | (12,674 | ) | (10,527 | ) | (8,536 | ) | |||||||||
Share of post-tax results of associates and joint ventures | 42 | 46 | 45 | 56 | 14 | 42 | 46 | 45 | 56 | ||||||||||||||||||
Profit before business disposals | 7,048 | 6,813 | 5,280 | 4,535 | |||||||||||||||||||||||
Profit before business acquisitions and disposals | 3,344 | 7,048 | 6,813 | 5,280 | 4,535 | ||||||||||||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 28 | 323 | – | 45 | 327 | 28 | 323 | – | 45 | ||||||||||||||||||
Gains on acquisitions | 2,406 | – | – | – | – | ||||||||||||||||||||||
Profit before tax | 7,076 | 7,136 | 5,280 | 4,580 | 6,077 | 7,076 | 7,136 | 5,280 | 4,580 | ||||||||||||||||||
Tax | (1,981 | ) | (1,941 | ) | (1,439 | ) | (1,279 | ) | (790 | ) | (1,981 | ) | (1,941 | ) | (1,439 | ) | (1,279 | ) | |||||||||
Profit after tax | 5,095 | 5,195 | 3,841 | 3,301 | 5,287 | 5,095 | 5,195 | 3,841 | 3,301 | ||||||||||||||||||
Profit attributable to minority interests | 678 | 624 | 394 | 47 | 905 | 678 | 624 | 394 | 47 | ||||||||||||||||||
Profit attributable to equity holders of the parent | 4,417 | 4,571 | 3,447 | 3,254 | 4,382 | 4,417 | 4,571 | 3,447 | 3,254 | ||||||||||||||||||
5,095 | 5,195 | 3,841 | 3,301 | ||||||||||||||||||||||||
5,287 | 5,095 | 5,195 | 3,841 | 3,301 | |||||||||||||||||||||||
Selected financial statistics | |||||||||||||||||||||||||||
Basic earnings per share | 68.9p | 71.9p | 54.4p | 51.0p | 59.3p | 68.9p | 71.9p | 54.4p | 51.0p | ||||||||||||||||||
Diluted earnings per share | 66.7p | 69.8p | 52.6p | 49.8p | 57.5p | 66.7p | 69.8p | 52.6p | 49.8p | ||||||||||||||||||
Dividends per ordinary share | 34.0p | 31.0p | 26.6p | 24.0p | 11.5p | 34.0p | 31.0p | 26.6p | 24.0p | ||||||||||||||||||
Dividend payout ratio | 49.3% | 43.1% | 48.9% | 47.1% | 19.4% | 49.3% | 43.1% | 48.9% | 47.1% | ||||||||||||||||||
Profit attributable to the equity holders of the parent as a percentage of: | |||||||||||||||||||||||||||
average shareholders’ equity | 20.3% | 24.7% | 21.1% | 21.7% | 16.5% | 20.3% | 24.7% | 21.1% | 21.7% | ||||||||||||||||||
average total assets | 0.3% | 0.4% | 0.4% | 0.5% | 0.2% | 0.3% | 0.4% | 0.4% | 0.5% | ||||||||||||||||||
Selected statistical measures | |||||||||||||||||||||||||||
Cost:income ratiob | 57% | 59% | 61% | 61% | |||||||||||||||||||||||
Cost: income ratio | 62% | 57% | 59% | 61% | 61% | ||||||||||||||||||||||
Average United States Dollar exchange rate used in preparing the accounts | 2.00 | 1.84 | 1.82 | 1.83 | 1.86 | 2.00 | 1.84 | 1.82 | 1.83 | ||||||||||||||||||
Average Euro exchange rate used in preparing the accounts | 1.46 | 1.47 | 1.46 | 1.47 | 1.26 | 1.46 | 1.47 | 1.46 | 1.47 | ||||||||||||||||||
Average Rand exchange rate used in preparing the accounts | 14.11 | 12.47 | 11.57 | 11.83 | 15.17 | 14.11 | 12.47 | 11.57 | 11.83 |
The financial information above is extracted from the published accounts for the last three years. This information should be read together with, and is qualified by reference to, the accounts and notes included in this report.
Note
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
2 | Barclays Annual Report 2008 |
Income statement
Barclays delivered profit before tax of £6,077m in 2008, a decline of 14% on 2007. The results included the following significant items:
– | gains on |
– | profit on disposal of Barclays Closed UK Life assurance business of £326m |
– | gains on Visa IPO and sales of shares in MasterCard of £291m, distributed widely across the Group |
– | gross credit market losses and impairment of £8,053m, or £4,957m net of related income and hedges of £1,433m and gains on own credit of £1,663m |
Profit after tax increased 4% to £5,287m. This reflected an effective tax rate of 13% (2007: 28%) primarily due to the gain on the acquisition of Lehman Brothers North American businesses of £2,262m in part being offset by carried forward US tax losses attributable to Barclays businesses. Earnings per share were 59.3p (2007: 68.9p), a decline of 14% from 2007, reflecting the impact of share issuance during 2008 on the weighted average number of shares in issue.
Income grew 1% to £23,115m. Income in Global Retail and Commercial Banking increased 17% and was particularly strong in businesses outside of the UK to which we have directed significant resource. Income in Investment Banking and Investment Management was down 19%. Barclays Capital was affected by very challenging market conditions in 2008, with income falling by £1,888m (27%) on 2007, reflecting gross losses of £6,290m relating to credit market assets, partially offset by gains of £1,663m on the fair valuation of notes issued by Barclays
Capital due to widening of credit spreads and £1,433m in related income and hedges. Excluding credit market related losses, gains on own credit and related income and hedges, income in Barclays Capital increased 6%.
Impairment charges and other credit provisions of £5,419m increased 94% on the prior year. Impairment charges included £1,763m arising from US sub-prime mortgages and other credit market exposures. Other wholesale impairment charges increased significantly as corporate credit conditions turned sharply worse. In Barclays Capital increased charges also arose in prime services, corporate lending and private equity. In Barclays Commercial Bank, increased impairment charges reflected the UK economy moving into recession. In the UK there was a moderate increase in impairment in UK Retail Banking as a result of book growth and a deteriorating economic environment. UK mortgage impairment charges remained low. There was a lower charge in UK cards as net flows into delinquency and arrears levels reduced. Significant impairment growth in our Global Retail and Commercial Banking businesses outside the UK reflected very strong book growth in recent years, and maturation of those portfolios, together with deteriorating credit conditions and rising delinquency rates in the US, South Africa and Spain.
Operating expenses increased 9% to £14,366m. We continued to invest in our distribution network in the Global Retail and Commercial Banking businesses. Expenses fell in Barclays Capital due to lower performance related costs. Expenses in Barclays Global Investors included selective support of liquidity products of £263m (2007: £80m). Group gains from property disposals were £148m (2007: £267m). Head office reflects £101m due to the cost of the contribution to the UK Financial Services Compensation Scheme. Underlying cost growth was well controlled. The Group cost:income ratio deteriorated by five percentage points to 62%.
Barclays Annual Report 2008 | 3 |
Financial review
Income statement commentary
Net interest income
2008/07
Group net interest income increased 19% (£1,859m) to £11,469m (2007: £9,610m) reflecting balance sheet growth across the Global Retail and Commercial Banking businesses and in particular very strong growth internationally driven by expansion of the distribution network and entrance into new markets. An increase in net interest income was also seen in Barclays Capital due to strong results from global loans and money markets.
Group net interest income includes the impact of structural hedges which function to reduce the impact of the volatility of short-term interest rate movements on equity and customer balances that do not re-price with market rates. The contribution of structural hedges relative to average base rates increased income by £117m (2007: £351m expense), largely due to the effect of the structural hedge on changes in interest rates.
2007/06
Group net interest income increased 5% (£467m) to £9,610m (2006: £9,143m) reflecting balance sheet growth across a number of businesses. The contribution of structural hedges relative to average base rates decreased to £351m expense (2006: £26m income), largely due to the effect of the structural hedge on changes in interest rates. Other interest expense principally includes interest on repurchase agreements and hedging activity.
Net interest income |
| ||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Cash and balances with central banks | 174 | 145 | 91 | ||||||
Available for sale investments | 2,355 | 2,580 | 2,811 | ||||||
Loans and advances to banks | 1,267 | 1,416 | 903 | ||||||
Loans and advances to customers | 23,754 | 19,559 | 16,290 | ||||||
Other | 460 | 1,608 | 1,710 | ||||||
Interest income | 28,010 | 25,308 | 21,805 | ||||||
Deposits from banks | (2,189 | ) | (2,720 | ) | (2,819 | ) | |||
Customer accounts | (6,697 | ) | (4,110 | ) | (3,076 | ) | |||
Debt securities in issue | (5,910 | ) | (6,651 | ) | (5,282 | ) | |||
Subordinated liabilities | (1,349 | ) | (878 | ) | (777 | ) | |||
Other | (396 | ) | (1,339 | ) | (708 | ) | |||
Interest expense | (16,541 | ) | (15,698 | ) | (12,662 | ) | |||
Net interest income | 11,469 | 9,610 | 9,143 |
4 | Barclays Annual Report 2008 |
Net fee and commission income
2008/07
Net fee and commission income increased 9% (£699m) to £8,407m (2007: £7,708m). Banking and credit related fees and commissions increased 13% (£845m) to £7,208m (2007: £6,363m), reflecting growth in Barclaycard International, increased fees from advisory and origination activities in Barclays Capital and increased foreign exchange, derivative and debt fees in Barclays Commercial Bank.
2007/06
Net fee and commission income increased 7% (£531m) to £7,708m (2006: £7,177m). Fee and commission income rose 8% (£673m) to £8,678m (2006: £8,005m) reflecting increased management and securities lending fees in Barclays Global Investors, increased client assets and higher transactional income in Barclays Wealth and higher income generated from lending fees in Barclays Commercial Bank. Fee income in Barclays Capital increased primarily due to the acquisition of HomEq.
Net fee and commission income |
| ||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Brokerage fees | 87 | 109 | 70 | ||||||
Investment management fees | 1,616 | 1,787 | 1,535 | ||||||
Securities lending | 389 | 241 | 185 | ||||||
Banking and credit related fees and commissions | 7,208 | 6,363 | 6,031 | ||||||
Foreign exchange commission | 189 | 178 | 184 | ||||||
Fee and commission income | 9,489 | 8,678 | 8,005 | ||||||
Fee and commission expense | (1,082 | ) | (970 | ) | (828 | ) | |||
Net fee and commission income | 8,407 | 7,708 | 7,177 |
Barclays Annual Report 2008 | 5 |
Financial review
Income statement commentary
Principal transactions
2008/07
Principal transactions decreased 60% (£2,966m) to £2,009m (2007: £4,975m).
Net trading income decreased 65% (£2,430m) to £1,329m (2007: £3,759m). The majority of the Group’s net trading income arises in Barclays Capital. Growth in the Rates related business reflected growth in fixed income, prime services, foreign exchange, commodities and emerging markets. The Credit related business included net losses from credit market dislocation partially offset by the benefits of widening credit spreads on structured notes issued by Barclays Capital.
Net investment income decreased 44% (£536m) to £680m (2007: £1,216m). The cumulative gain from disposal of available for sale assets decreased 62% (£348m) to £212m (2007: £560m) reflecting the lower profits realised on the sale of investments. The £212m gain in 2008 included the £47m gain from sale of shares in MasterCard.
The dividend income increased £170m to £196m (2007: £26m) reflecting the Visa IPO dividend received by GRCB – Western Europe, GRCB – Emerging Markets and Barclaycard in the current year. The GRCB – Absa gain on the Visa IPO of £47m has been recognised in other income.
Net gain from financial instruments designated at fair value decreased 89% (£260m) to £33m (2007: £293m), driven by the continued decrease in value of assets backing customer liabilities in Barclays Life Assurance; and fair value decreases of a number of investments reflecting the current market condition.
Other investment income decreased 29% (£98m) to £239m (2007: £337m) due to a number of non-recurring disposals in the prior year.
2007/06
Principal transactions increased 9% (£399m) to £4,975m (2006: £4,576m).
Net trading income increased 4% (£145m) to £3,759m (2006: £3,614m). The majority of the Group’s net trading income arose from Barclays Capital. Growth in the Rates related business reflected very strong performances in fixed income, commodities, foreign exchange, equity and prime services. The Credit related business included net losses from credit market turbulence and the benefits of widening credit spreads on structured notes issued by Barclays Capital.
Net investment income increased 26% (£254m) to £1,216m (2006: £962m). The cumulative gain from disposal of available for sale assets increased 82% (£253m) to £560m (2006: £307m) largely as a result of a number of private equity realisations and divestments. Net income from financial instruments designated at fair value decreased by 34% (£154m) largely due to lower growth in the value of linked insurance assets within Barclays Wealth.
Fair value movements on insurance assets included within net investment income contributed £113m (2006: £205m).
Net premiums from insurance contracts
2008/07
Net premiums from insurance contracts increased 8% (£79m) to £1,090m (2007: £1,011m), primarily due to expansion in GRCB – Western Europe reflecting a full year’s impact of a range of insurance products launched in late 2007, partially offset by lower net premiums following the sale of the closed life assurance book.
2007/06
Net premiums from insurance contracts decreased 5% (£49m) to £1,011m (2006: £1,060m), primarily due to lower customer take up of loan protection insurance.
Other income
2008/07
Certain asset management products offered to institutional clients by Barclays Global Investors are recognised as investment contracts. Accordingly, the invested assets and the related liabilities to investors are held at fair value and changes in those fair values are reported within other income. Other income in 2008 includes a £47m gain from the Visa IPO.
2007/06
Certain asset management products offered to institutional clients by Barclays Global Investors are recognised as investment contracts. Accordingly, the invested assets and the related liabilities to investors are held at fair value and changes in those fair values are reported within other income. Other income in 2007 includes a loss on the part disposal of Monument credit card portfolio and gains on reinsurance transactions in 2007 and 2006.
Principal transactions | ||||||||
2008 £m | 2007 £m | 2006 £m | ||||||
Rates related business | 4,751 | 4,162 | 2,848 | |||||
Credit related business | (3,422 | ) | (403 | ) | 766 | |||
Net trading income | 1,329 | 3,759 | 3,614 | |||||
Net gain from disposal of available for sale assets | 212 | 560 | 307 | |||||
Dividend income | 196 | 26 | 15 | |||||
Net gain from financial instruments designated at fair value | 33 | 293 | 447 | |||||
Other investment income | 239 | 337 | 193 | |||||
Net investment income | 680 | 1,216 | 962 | |||||
Principal transactions | 2,009 | 4,975 | 4,576 |
Net premiums from insurance contracts | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Gross premiums from insurance contracts | 1,138 | 1,062 | 1,108 | ||||||
Premiums ceded to reinsurers | (48 | ) | (51 | ) | (48 | ) | |||
Net premiums from insurance contracts | 1,090 | 1,011 | 1,060 |
Other income | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
(Decrease)/increase in fair value of assets held in respect of linked liabilities to customers under investment contracts | (10,422 | ) | 5,592 | 7,417 | |||||
Decrease/(increase) in liabilities to customers under investment contracts | 10,422 | (5,592 | ) | (7,417 | ) | ||||
Property rentals | 73 | 53 | 55 | ||||||
Loss on part disposal of Monument credit card portfolio | – | (27 | ) | – | |||||
Other | 304 | 162 | 159 | ||||||
Other income | 377 | 188 | 214 |
Net claims and benefits incurred on insurance contracts | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Gross claims and benefits incurred on insurance contracts | 263 | 520 | 588 | ||||||
Reinsurers’ share of claims incurred | (26 | ) | (28 | ) | (13 | ) | |||
Net claims and benefits incurred on insurance contracts | 237 | 492 | 575 |
6 | Barclays Annual Report | |||
Net claims and benefits incurred on insurance contracts
2008/07
Net claims and benefits incurred under insurance contracts decreased 52% (£255m) to £237m (2007: £492m), principally due to a decrease in the value of unit linked insurance contracts in Barclays Wealth; explained by falls in equity markets and disposal of closed life business in October 2008. Partially offsetting these trends is the increase in contract liabilities associated with increased net premiums driven by the growth in GRCB – Western Europe.
2007/06
Net claims and benefits incurred under insurance contracts decreased 14% (£83m) to £492m (2006: £575m), principally reflecting lower investment gains attributable to customers in Barclays Wealth.
Impairment charges and other credit provisions
2008/07
Impairment charges in UK Retail Banking increased £43m to £602m (2007: £559m), reflecting growth in the book and deteriorating economic conditions. In UK Home Finance, whilst three month arrears increased from 0.63% to 0.91%, the quality of the book and conservative loan to value ratios meant that the impairment charges and amounts charged off remained low at £24m (2007: £3m release). Impairment charges in Consumer Lending increased 3%, reflecting the current economic environment and loan growth.
The impairment charge in Barclays Commercial Bank increased £122m to £414m (2007: £292m), primarily reflecting higher impairment losses in Larger Business, particularly in the final quarter as the UK corporate credit environment deteriorated.
The impairment charge in Barclaycard increased £270m to £1,097m (2007: £827m), reflecting higher charges in Barclaycard International portfolios, particularly Barclaycard US which was driven by loan growth, rising delinquency due to deteriorating economic conditions and exchange rate movements; and £68m from the inclusion of Goldfish. These factors were partially offset by lower charges in UK Cards and secured consumer lending.
Impairment charges in GRCB – Western Europe increased £220m to £296m (2007: £76m), principally due to deteriorating economic trends and asset growth in Spain, where there were higher charges in the commercial portfolios as a consequence of the slowdown in the property and construction sectors. In addition, higher household indebtedness and rising unemployment has driven up delinquency and charge-offs in the personal sector.
Impairment charges in GRCB – Emerging Markets increased £127m to £166m (2007: £39m), reflecting: weakening credit conditions which adversely impacted delinquency trends in the majority of the retail portfolios; asset growth, particularly in India; and increased wholesale impairment in Africa.
Impairment charges in GRCB – Absa increased £201m to £347m (2007: £146m) as a result of rising delinquency levels in the retail portfolios, which have been impacted by rising interest and inflation rates and increasing consumer indebtedness.
Barclays Capital impairment charges of £2,423m (2007: £846m) included a charge of £1,763m (2007: £782m) against ABS CDO Super Senior and other credit market positions. Further impairment charges of £241m were incurred in respect of available for sale assets and reverse repurchase agreements (2007: nil). Other impairment charges increased £355m to £419m (2007: £64m) and primarily related to charges in the private equity and other loans business.
The impairment charge in Barclays Wealth increased £37m to £44m (2007: £7m) from a very low base. This increase reflected both the substantial increase in the loan book over the last three years and the impact of the current economic environment on client liquidity and collateral values.
The impairment charge In Head office functions and other operations increased £8m to £11m (2007: £3m), mainly reflecting losses on Floating Rate Notes held for hedging purposes. An additional £19m (2007: nil) of impairment charges were incurred on available for sale assets.
Impairment charges and other credit provisions | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Impairment charges on loans and advances | |||||||||
– New and increased impairment allowances | 5,116 | 2,871 | 2,722 | ||||||
– Releases | (358 | ) | (338 | ) | (389 | ) | |||
– Recoveries | (174 | ) | (227 | ) | (259 | ) | |||
Impairment charges on loans and advances | 4,584 | 2,306 | 2,074 | ||||||
Charge/(release) in respect of provision for undrawn contractually committed facilities and guarantees provided | 329 | 476 | (6 | ) | |||||
Impairment charges on loans and advances and other credit provisions | 4,913 | 2,782 | 2,068 | ||||||
Impairment charges on reverse repurchase agreements | 124 | – | – | ||||||
Impairment on available for sale assets | 382 | 13 | 86 | ||||||
Impairment charges and other credit provisions | 5,419 | 2,795 | 2,154 | ||||||
Impairment charges and other credit provisions on ABS CDO Super Senior and other credit market exposures included above: | |||||||||
Impairment charges on loans and advances | 1,218 | 300 | – | ||||||
Charges in respect of undrawn facilities and guarantees | 299 | 469 | – | ||||||
Impairment charges on loans and advances and other credit provisions on ABS CDO Super Senior and other credit market exposures | 1,517 | 769 | – | ||||||
Impairment charges on reverse repurchase agreements | 54 | – | – | ||||||
Impairment charges on available for sale assets | 192 | 13 | – | ||||||
Impairment charges and other credit provisions on ABS CDO Super Senior and other credit market exposures | 1,763 | 782 | – |
Barclays Annual Report 2008 | 7 |
Financial review
Income statement commentary
2007/06
Impairment charges in UK Retail Banking decreased by £76m to £559m (2006: £635m), reflecting lower charges in unsecured Consumer Lending and Local Business driven by improved collection processes, reduced flows into delinquency, lower arrears trends and stable charge-offs. In UK Home Finance, asset quality remained strong and mortgage charges remained negligible. Mortgage delinquencies as a percentage of outstandings remained stable and amounts charged off were low.
The impairment charge in Barclays Commercial Bank increased £39m to £292m (2006: £253m), primarily due to higher impairment charges in Larger Business, partially offset by a lower charge in Medium Business due to a tightening of the lending criteria.
Impairment charges in Barclaycard decreased £226m to £827m (2006: £1,053m), reflecting reduced flows into delinquency, lower levels of arrears and lower charge-offs in UK Cards. Changes were made to impairment methodologies to standardise the approach and in anticipation of Basel II. The net positive impact of these changes in methodology was offset by the increase in impairment charges in Barclaycard International and secured consumer lending.
Impairment charges in GRCB – Western Europe and GRCB – Emerging Markets rose by £47m to £115m (2006: £68m), reflecting very strong balance sheet growth in 2006 and 2007 and the impact of lower releases in 2007. Arrears in some of GRCB – Absa’s retail portfolios deteriorated in 2007, driven by interest rate increases in 2006 and 2007 resulting in pressure on collections.
Barclays Capital impairment charges and other credit provisions of £846m included a charge of £782m against ABS CDO Super Senior and other credit market exposures and £58m net of fees relating to drawn leveraged finance positions.
Operating expenses
2008/07
Operating expenses increased 9% (£1,167m) to £14,366m (2007: £13,199m).
Administrative expenses grew 30% (£1,175m) to £5,153m (2007: £3,978m), reflecting the impact of acquisitions (in particular Lehman Brothers North American businesses and Goldfish), fees associated with Group capital raisings, the cost of the Financial Services Compensation Scheme as well as continued investment in the Global Retail and Commercial Banking distribution network. In addition, Barclays Global Investors’ selective support of liquidity products increased to £263m in the year (2007: £80m).
Operating expenses were reduced by gains from the sale of property of £148m (2007: £267m) as the Group continued the sale and leaseback of some of its freehold portfolio, principally in UK Retail Banking, Barclays Commercial Bank and GRCB – Western Europe.
Amortisation of intangible assets increased 56% (£105m) to £291m (2007: £186m), primarily related to intangible assets arising from the acquisition of Lehman Brothers North American businesses.
Goodwill impairment of £111m reflects the full write-down of £74m relating to EquiFirst, a US non-prime mortgage originator and a partial write-down of £37m relating to FirstPlus following its closure to new business in August 2008.
2007/06
Operating expenses grew 4% (£525m) to £13,199m (2006: £12,674m). The increase was driven by growth of 3% (£236m) in staff costs to £8,405m (2006: £8,169m) and lower gains on property disposals.
Administrative expenses remained flat at £3,978m (2006: £3,980m), reflecting good cost control across all businesses.
Operating lease rentals increased 20% (£69m) to £414m (2006: £345m), primarily due to increased property held under operating leases.
Operating expenses | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Staff costs | 7,779 | 8,405 | 8,169 | ||||||
Administrative expenses | 5,153 | 3,978 | 3,980 | ||||||
Depreciation | 630 | 467 | 455 | ||||||
Impairment charges/(releases) | |||||||||
– property and equipment | 33 | 2 | 14 | ||||||
– intangible assets | (3 | ) | 14 | 7 | |||||
– goodwill | 111 | – | – | ||||||
Operating lease rentals | 520 | 414 | 345 | ||||||
Gain on property disposals | (148 | ) | (267 | ) | (432 | ) | |||
Amortisation of intangible assets | 291 | 186 | 136 | ||||||
Operating expenses | 14,366 | 13,199 | 12,674 |
8 | Barclays Annual Report 2008 |
Operating expenses were reduced by gains from the sale of property of £267m (2006: £432m) as the Group continued the sale and leaseback of some of its freehold portfolio, principally in UK Retail Banking.
Amortisation of intangible assets increased 37% (£50m) to £186m (2006: £136m), primarily reflecting the amortisation of mortgage servicing rights relating to the acquisition of HomEq in November 2006.
Staff costs
2008/07
Staff costs decreased 7% (£626m) to £7,779m (2007: £8,405m). Salaries and accrued incentive payments fell overall by 10% (£720m) to £6,273m (2007: £6,993m), after absorbing increases of £718m relating to in year hiring and staff from acquisitions. Performance related costs were 48% lower, driven mainly by Barclays Capital.
Defined benefit plans pension costs decreased 41% (£61m) to £89m (2007: £150m). This was due to recognition of actuarial gains, higher expected return on assets and reduction in past service costs partially offset by higher interest costs and reduction in curtailment credit.
2007/06
Staff costs increased 3% (£236m) to £8,405m (2006: £8,169m). Salaries and accrued incentive payments rose 5% (£358m) to £6,993m (2006: £6,635m), reflecting increased permanent and fixed term staff worldwide. Defined benefit plans pension costs decreased 47% (£132m) to £150m (2006: £282m). This was mainly due to lower service costs.
Staff numbers
2008/07
Staff numbers are shown on a full-time equivalent basis. Total Group permanent and fixed-term contract staff comprised 60,700 (2007: 61,900) in the UK and 95,600 (2007: 73,000) internationally.
UK Retail Banking staff numbers decreased 300 to 30,400 (2007: 30,700). Barclays Commercial Bank staff numbers increased 600 to 9,800 (2007: 9,200), reflecting investment in product expertise, sales and risk capability and associated support areas. Barclaycard staff numbers increased 700 to 9,600 (2007: 8,900), primarily due to the transfer of staff into Absacard as a result of the acquisition of a majority stake in the South African Woolworth Financial Services business in October 2008. GRCB – Western Europe staff numbers increased 2,100 to 10,900 (2007: 8,800), reflecting expansion of the retail distribution network. GRCB – Emerging Markets staff numbers increased 8,800 to 22,700 (2007: 13,900), driven by expansion into new markets and continued investment in distribution in existing countries. GRCB – Absa staff numbers increased 1,000 to 36,800 (2007: 35,800), reflecting continued growth in the business and investment in collections capacity.
Barclays Capital staff numbers increased 6,900 to 23,100 (2007: 16,200), due principally to the acquisition of Lehman Brothers North American businesses. Barclays Global Investors staff numbers increased 300 to 3,700 (2007: 3,400). Staff numbers increased primarily in the iShares business due to continued expansion in the global ETF franchise. Barclays Wealth staff numbers increased 1,000 to 7,900 (2007: 6,900), principally due to the acquisition of the Lehman Brothers North American businesses.
2007/06
Total Group permanent and fixed term contract staff comprised 61,900 (2006: 62,400) in the UK and 73,000 (2006: 60,200) internationally.
Staff costs | ||||||
2008 £m | 2007 £m | 2006 £m | ||||
Salaries and accrued incentive payments | 6,273 | 6,993 | 6,635 | |||
Social security costs | 464 | 508 | 502 | |||
Pension costs | ||||||
– defined contribution plans | 237 | 141 | 128 | |||
– defined benefit plans | 89 | 150 | 282 | |||
Other post retirement benefits | 1 | 10 | 30 | |||
Other | 715 | 603 | 592 | |||
Staff costs | 7,779 | 8,405 | 8,169 |
Staff numbers | ||||||
2008 | 2007 | 2006 | ||||
UK Retail Banking | 30,400 | 30,700 | 34,500 | |||
Barclays Commercial Bank | 9,800 | 9,200 | 8,100 | |||
Barclaycard | 9,600 | 8,900 | 9,100 | |||
GRCB – Western Europe | 10,900 | 8,800 | 6,600 | |||
GRCB – Emerging Markets | 22,700 | 13,900 | 7,600 | |||
GRCB – Absa | 36,800 | 35,800 | 33,000 | |||
Barclays Capital | 23,100 | 16,200 | 13,200 | |||
Barclays Global Investors | 3,700 | 3,400 | 2,700 | |||
Barclays Wealth | 7,900 | 6,900 | 6,600 | |||
Head office functions and other operations | 1,400 | 1,100 | 1,200 | |||
Total Group permanent and fixed-term contract staff worldwide | 156,300 | 134,900 | 122,600 |
Barclays Annual Report 2008 | 9 |
Financial datareview
Income statement commentary
UK Retail Banking headcount decreased 3,800 to 30,700 (2006: 34,500), due to efficiency initiatives in back-office operations and the transfer of operations personnel to Barclays Commercial Bank. Barclays Commercial Bank headcount increased 1,100 to 9,200 (2006: 8,100) due to the transfer of operations personnel from UK Retail Banking and additional investment in front line staff to drive improved geographical coverage. Barclaycard staff numbers decreased 200 to 8,900 (2006: 9,100), due to efficiency initiatives implemented across the UK operation and the sale of part of the Monument card portfolio, partially offset by an increase in the International cards businesses. GRCB – Western Europe staff numbers increased 2,200 to 8,800 (2006: 6,600) and GRCB – Emerging Markets staff numbers increased 6,300 to 13,900 (2006: 7,600) due to growth in the distribution network. GRCB – Absa staff numbers increased 2,800 to 35,800 (2006: 33,000) reflecting growth in the business and distribution network.
Barclays Capital staff numbers increased 3,000 to 16,200 (2006: 13,200) including 800 from the acquisition of EquiFirst. This reflected further investment in the front office, systems development and control functions to support continued business expansion. The majority of organic growth was in Asia Pacific. Barclays Global Investors staff numbers increased 700 to 3,400 (2006: 2,700). Headcount increased in all geographical regions and across product groups and the support functions, reflecting continued investment to support further growth. Barclays Wealth staff numbers increased 300 to 6,900 (2006: 6,600) principally due to the acquisition of Walbrook and increased client- facing professionals.
Share of post-tax results of associates and joint ventures
2008/07
The overall share of post-tax results of associates and joint ventures decreased £28m to £14m (2007: £42m).The share of results from associates decreased £11m mainly due to reduced contribution from private equity associates. The share of results from joint ventures decreased £17m mainly due to reduced contribution from Barclays Capital joint ventures.
2007/06
The overall share of post-tax results of associates and joint ventures decreased £4m to £42m (2006: £46m). The share of results from associates decreased £20m mainly due to the sale of FirstCaribbean International Bank (2006: £41m) at the end of 2006, partially offset by an increased contribution from private equity associates. The share of results from joint ventures increased by £16m mainly due to the contribution from private equity entities.
Profit on disposal of subsidiaries, associates and joint ventures
2008/07
On 31st October 2008 Barclays completed the sale of Barclays Life Assurance Company Ltd to Swiss Reinsurance Company for a net consideration of £729m leading to a net profit on disposal of £326m.
2007/06
The profit on disposal in 2007 related mainly to the disposal of the Group’s shareholdings in Gabetti Property Solutions (£8m) and Intelenet Global Services (£13m).
Share of post-tax results of associates and joint ventures | ||||||||
2008 £m | 2007 £m | 2006 £m | ||||||
Profit from associates | 22 | 33 | 53 | |||||
(Loss)/profit from joint ventures | (8 | ) | 9 | (7 | ) | |||
Share of post-tax results of associates and joint ventures | 14 | 42 | 46 | |||||
Profit on disposal of subsidiaries, associates and joint ventures | ||||||||
2008 £m | 2007 £m | 2006 £m | ||||||
Profit on disposal of subsidiaries, associates and joint ventures | 327 | 28 | 323 |
10 | Barclays Annual Report 2008 |
Gains on acquisitions
2008/07
The gains on acquisitions in 2008 relate to the acquisition of Lehman Brothers North American businesses (£2,262m) on 22nd September 2008, Goldfish credit card UK business (£92m) on 31st March 2008 and Macquarie Bank Limited Italian residential mortgage business (£52m) on 6th November 2008.
Tax
The overall tax charge is explained in the table below.
2008/07
The effective rate of tax for 2008, based on profit before tax, was 13% (2007: 28%). The effective tax rate differs from the 2007 effective rate and the UK corporation tax rate of 28.5% principally due to the Lehman Brothers North American businesses acquisition. Under IFRS the gain on acquisition of £2,262m is calculated net of deferred tax liabilities included in the acquisition balance sheet and is thus not subject to further tax in calculating the tax charge for the year. Furthermore, Barclays has tax losses previously unrecognised as a deferred tax asset but capable of sheltering part of this deferred tax liability. This gives rise to a tax benefit of £492m which, in accordance with IAS 12, is included as a credit within the tax charge for the year. The effective rate has been adversely impacted by the effect of the fall in the Barclays share price on the deferred tax asset recognised on share awards. In common with prior years there have been offsetting adjustments relating to different overseas tax rates, disallowable expenditure and non-taxable gains and income.
2007/06
The tax charge for the period was based on a UK corporation tax rate of 30% (2006: 30%). The effective rate of tax for 2007, based on profit before tax, was 28% (2006: 27%). The effective tax rate differed from 30% as it took account of the different tax rates applied to profits earned outside the UK, non-taxable gains and income and adjustments to prior year tax provisions. The forthcoming change in the UK rate of corporation tax from 30% to 28% on 1st April 2008 led to an additional tax charge in 2007 as a result of its effect on the Group’s net deferred tax asset. The effective tax rate for 2007 was higher than the 2006 rate, principally because there was a higher level of profit on disposals of subsidiaries, associates and joint ventures offset by losses or exemptions in 2006.
Gains on acquisitions | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Gains on acquisitions | 2,406 | – | – | ||||||
Tax | |||||||||
2008 £m | 2007 £m | 2006 £m | |||||||
Profit before tax | 6,077 | 7,076 | 7,136 | ||||||
Tax charge at average UK corporation tax rate of 28.5% (2007: 30%, 2006: 30%) | 1,732 | 2,123 | 2,141 | ||||||
Prior year adjustments | (176 | ) | (37 | ) | 24 | ||||
Differing overseas tax rates | 215 | (77 | ) | (17 | ) | ||||
Non-taxable gains and income (including amounts offset by unrecognised tax losses) | (833 | ) | (136 | ) | (393 | ) | |||
Share-based payments | 229 | 72 | 27 | ||||||
Deferred tax assets not previously recognised | (514 | ) | (158 | ) | (4 | ) | |||
Change in tax rates | (1 | ) | 24 | 4 | |||||
Other non-allowable expenses | 138 | 170 | 159 | ||||||
Overall tax charge | 790 | 1,981 | 1,941 | ||||||
Effective tax rate | 13% | 28% | 27% |
2009 Strategic Framework
Our framework for moving the strategy forward in 2009 has the following features:
– | Responsible corporate citizenship. Governments in the UK and elsewhere have taken significant steps to address the impacts of the financial crisis and recession, and we must work with the authorities and, of course, with our customers, to deal with the crisis in a way which is consistent with our obligations to shareholders. |
– | We have committed to recommencingdividend payments during the second half of 2009. Thereafter, and as previously announced, dividend payments will be made on a quarterly basis. We will set out our dividend policy at the Annual General Meeting in April. |
– | We must ensure that ourcapital position is robust and ourbalance sheet well-managed. We set out within the Financial Review our approach to managing leverage in the balance sheet, and our expectations for capital ratios. For 2009, returns will rank ahead of growth. |
– | To create good returns at this time, we must preservestrategic and operational choice. As conditions remain very difficult in 2009, we expect that there will be considerable value at stake for our shareholders in decisions that we take relating to resource utilisation, capital allocation and risk management. Our objective over time is to ensure that the cost of the capital we raised last November is covered many times over by the benefits of pursuing our strategy. |
– | We must deliversolid profitability notwithstanding the global downturn. Our diversified income streams have served us well in recent years and have enabled us to absorb substantial costs from the financial crisis. We expect them to continue to do so. |
– | We will seek to managethe composition of our profits, and capital allocation, to ensure that we optimise returns from our universal banking business model. What does this mean? It is clear to us that in the future there will be more capital in the banking system, and less leverage, particularly in capital markets businesses. This will be true at Barclays too, and will govern our approach to capital allocation and expected returns. We expect to see balance sheet utilisation by Barclays Capital fall over time, which will help us to deliver strengthening returns. We believe that the businesses that we have built from the integration of Lehman Brothers North American businesses and Barclays Capital will help in this regard, since the capital intensity of the advisory businesses in M&A and of the flow businesses in fixed income, currencies, equities and credit will be lower, once we have managed down our credit market exposures. |
Outlook
We expect 2009 to be another challenging year with continuing downturns or recessions in many of the economies in which we are represented. In 2008 our profits were reduced by the impacts of substantial gross credit market losses. In 2009, we expect the impact of such credit market losses to be lower. Whilst we are confident in the relative quality of our major books of assets, we also expect the recessionary environments in the UK, Spain, South Africa and the US to increase the loan loss rates on our loans and advances.
Governments in the UK and elsewhere have taken significant measures to assist borrowers and lenders in response to the emerging recession, including reducing official interest rates. The low interest rate environment will have the impact of substantially reducing the spread generated on our retail and commercial banking deposits, particularly in the UK, but we expect the combined impact of these government measures to be positive for the economy in time.
2009 Trading
Customer and client activity levels were high in the first month of 2009, and we have had a good start to the year. In particular, the operating performance of Barclays Capital, benefiting from the now complete integration of the Lehman Brothers North American businesses, was extremely strong. The trends that lie behind the strong operating performance in Global Retail and Commercial Banking in 2008 were again observable in its performance in January.
Recent Developments
As reported in note 35 of the financial statements, in March 2007 the United States Court of Appeals for the Fifth Circuit issued a decision that the Newby litigation relating to Enron could not proceed against Barclays as a class action because the plaintiffs had not alleged a proper claim against Barclays. On 5th March 2009, the District Court granted summary judgment in Barclays favour on plaintiffs’ claims against Barclays. The District Court also denied plaintiffs’ request to amend the complaint to assert revised claims against Barclays on behalf of the putative class. Plaintiffs’ time in which to file an appeal regarding the District Court’s 5th March 2009 decision has not yet expired. For further information on the Newby litigation, see note 35 of the financial statements.
Barclays Annual Report 2008 | 11 |
Financial review
Consolidated balance sheet summary
As at 31st December
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||
2007
£m | 2006
£m | 2005
£m | 2004 £ma | £m | £m | £m | £m | £ma | ||||||||||
Assets | ||||||||||||||||||
Cash and other short-term funds | 7,637 | 9,753 | 5,807 | 3,525 | 31,714 | 7,637 | 9,753 | 5,807 | 3,525 | |||||||||
Treasury bills and other eligible bills | n/a | n/a | n/a | 6,658 | n/a | n/a | n/a | n/a | 6,658 | |||||||||
Trading portfolio and financial assets designated at fair value | 341,171 | 292,464 | 251,820 | n/a | 306,836 | 341,171 | 292,464 | 251,820 | n/a | |||||||||
Derivative financial instruments | 248,088 | 138,353 | 136,823 | n/a | 984,802 | 248,088 | 138,353 | 136,823 | n/a | |||||||||
Debt securities and equity shares | n/a | n/a | n/a | 141,710 | ||||||||||||||
Debt securities and equity securities | n/a | n/a | n/a | n/a | 141,710 | |||||||||||||
Loans and advances to banks | 40,120 | 30,926 | 31,105 | 80,632 | 47,707 | 40,120 | 30,926 | 31,105 | 80,632 | |||||||||
Loans and advances to customers | 345,398 | 282,300 | 268,896 | 262,409 | 461,815 | 345,398 | 282,300 | 268,896 | 262,409 | |||||||||
Available for sale financial investments | 43,072 | 51,703 | 53,497 | n/a | 64,976 | 43,072 | 51,703 | 53,497 | n/a | |||||||||
Reverse repurchase agreements and cash collateral on securities borrowed | 183,075 | 174,090 | 160,398 | n/a | 130,354 | 183,075 | 174,090 | 160,398 | n/a | |||||||||
Other assets | 18,800 | 17,198 | 16,011 | 43,247 | 24,776 | 18,800 | 17,198 | 16,011 | 43,247 | |||||||||
Total assets | 1,227,361 | 996,787 | 924,357 | 538,181 | 2,052,980 | 1,227,361 | 996,787 | 924,357 | 538,181 | |||||||||
Liabilities | ||||||||||||||||||
Deposits and items in the course of collection due to banks | 92,338 | 81,783 | 77,468 | 112,229 | 116,545 | 92,338 | 81,783 | 77,468 | 112,229 | |||||||||
Customer accounts | 294,987 | 256,754 | 238,684 | 217,492 | 335,505 | 294,987 | 256,754 | 238,684 | 217,492 | |||||||||
Trading portfolio and financial liabilities designated at fair value | 139,891 | 125,861 | 104,949 | n/a | 136,366 | 139,891 | 125,861 | 104,949 | n/a | |||||||||
Liabilities to customers under investment contracts | 92,639 | 84,637 | 85,201 | n/a | 69,183 | 92,639 | 84,637 | 85,201 | n/a | |||||||||
Derivative financial instruments | 248,288 | 140,697 | 137,971 | n/a | 968,072 | 248,288 | 140,697 | 137,971 | n/a | |||||||||
Debt securities in issue | 120,228 | 111,137 | 103,328 | 83,842 | 149,567 | 120,228 | 111,137 | 103,328 | 83,842 | |||||||||
Repurchase agreements and cash collateral on securities lent | 169,429 | 136,956 | 121,178 | n/a | 182,285 | 169,429 | 136,956 | 121,178 | n/a | |||||||||
Insurance contract liabilities, including unit-linked liabilities | 3,903 | 3,878 | 3,767 | 8,377 | 2,152 | 3,903 | 3,878 | 3,767 | 8,377 | |||||||||
Subordinated liabilities | 18,150 | 13,786 | 12,463 | 12,277 | 29,842 | 18,150 | 13,786 | 12,463 | 12,277 | |||||||||
Other liabilities | 15,032 | 13,908 | 14,918 | 87,200 | 16,052 | 15,032 | 13,908 | 14,918 | 87,200 | |||||||||
Total liabilities | 1,194,885 | 969,397 | 899,927 | 521,417 | 2,005,569 | 1,194,885 | 969,397 | 899,927 | 521,417 | |||||||||
Shareholders’ equity | ||||||||||||||||||
Shareholders’ equity excluding minority interests | 23,291 | 19,799 | 17,426 | 15,870 | 36,618 | 23,291 | 19,799 | 17,426 | 15,870 | |||||||||
Minority interests | 9,185 | 7,591 | 7,004 | 894 | 10,793 | 9,185 | 7,591 | 7,004 | 894 | |||||||||
Total shareholders’ equity | 32,476 | 27,390 | 24,430 | 16,764 | 47,411 | 32,476 | 27,390 | 24,430 | 16,764 | |||||||||
Total liabilities and shareholders’ equity | 1,227,361 | 996,787 | 924,357 | 538,181 | 2,052,980 | 1,227,361 | 996,787 | 924,357 | 538,181 | |||||||||
Risk weighted assets and capital ratiosb | ||||||||||||||||||
Risk weighted assets | 353,476 | 297,833 | 269,148 | 433,302 | 353,878 | 297,833 | 269,148 | 218,601 | ||||||||||
Tier 1 ratio | 7.8% | 7.7% | 7.0% | 8.6% | 7.6% | 7.7% | 7.0% | 7.6% | ||||||||||
Risk asset ratio | 12.1% | 11.7% | 11.3% | 13.6% | 11.2% | 11.7% | 11.3% | 11.5% | ||||||||||
Selected financial statistics | ||||||||||||||||||
Selected financial and other statistics | ||||||||||||||||||
Net asset value per ordinary share | 353p | 303p | 269p | 246p | 437p | 353p | 303p | 269p | 246p | |||||||||
Number of ordinary shares of Barclays PLC (in millions) | 8,372 | 6,601 | 6,535 | 6,490 | 6,454 | |||||||||||||
Year-end United States Dollar exchange rate used in preparing the accounts | 2.00 | 1.96 | 1.72 | 1.92 | 1.46 | 2.00 | 1.96 | 1.72 | 1.92 | |||||||||
Year-end Euro exchange rate used in preparing the accounts | 1.36 | 1.49 | 1.46 | 1.41 | 1.04 | 1.36 | 1.49 | 1.46 | 1.41 | |||||||||
Year-end Rand exchange rate used in preparing the accounts | 13.64 | 13.71 | 10.87 | 10.86 | 13.74 | 13.64 | 13.71 | 10.87 | 10.86 |
The financial information above is extracted from the published accounts for the last three years. This information should be read together with, and is qualified by reference to, the accounts and Notes included in this report.
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
b | Risk weighted assets and capital ratios for 2006, 2005 and 2004 are calculated on a Basel I basis. Risk weighted assets and capital ratios for 2008 and 2007 are calculated on a Basel II basis. Capital ratios for 2004 are based on |
12 | Barclays Annual Report | |||||
Financial review
Balance sheet
Total assets increased £826bn to £2,053bn in 2008. Of this increase, £737bn was attributable to an increase in derivative assets and £124bn was attributable to increased loans and advances. All other assets declined by £35bn.
Shareholders’ equity
Shareholders’ equity, excluding minority interests increased, nearly 57% from £23bn at the end of 2007 to £37bn at the end of 2008. The main drivers for this were: equity issuances in July and September of £5.0bn; equity impact of issuing Mandatorily Convertible Notes and Warrants of £4.4bn; and after-tax profits of £5.3bn. Other reserves increased £1.6bn and we paid dividends of £2.3bn.
Capital management
At 31st December 2008, on a Basel II basis the equity Tier 1 ratio was 6.7% and the Tier 1 ratio was 9.7%, both stated on a basis to reflect conversion into ordinary shares of the Mandatorily Convertible Notes and inclusion of all innovative Tier 1 capital. Capital ratios reflect a 22% increase in risk weighted assets to £433bn during the year. This was driven by the combined impacts on risk weighted assets of the weakening of Sterling and the pro-cyclical effects of the International Basel Accord as well as lending growth in 2008. The capital ratios reflect this risk weighted asset growth and benefited from the significant increases in our capital over the course of 2008. The pro forma ratios significantly exceed the minimum levels established by the UK Financial Services Authority.
On 19th January 2009 the UK government announced, amongst other measures, an asset protection scheme under which banks may insure certain assets on their balance sheet. We are working with the Tripartite Authorities (Her Majesty’s Treasury, Bank of England and the
UK Financial Services Authority) to determine the terms on which, and the extent to which, we would wish to participate in the scheme. The procuring of such insurance could have the effect of reducing risk weighted assets. The UK Financial Services Authority also announced on 19th January 2009 a programme of work to reduce significantly the requirement for additional capital raising from the pro-cyclical effects of the International Basel Accord.
We expect a single digit percentage rate of risk weighted asset growth in 2009.
We expect to maintain the equity Tier 1 ratio and Tier 1 ratio at levels which significantly exceed the minimum requirements of the UK Financial Services Authority for the duration of the current period of financial and economic stress.
Foreign Currency Translation
Assets and risk weighted assets were affected by the decline in value of Sterling relative to other currencies during 2008, particularly in the last two months of the year. Over the course of the year, Sterling depreciated by 37% relative to the US Dollar and 31% relative to the Euro. We estimate that currency movements contributed £60bn to risk weighted assets.
Our hedging strategy in respect of net investments in foreign currencies is designed to mitigate against the impact of such movements on our capital ratios. In this regard, equity and Tier 1 capital ratios are hedged to approximately 75%, 30% and 100% of the movements in US Dollar, Euro and South African Rand respectively against Sterling.
The currency translation reserve increased by £3.1bn year on year. This reflected foreign exchange movements in foreign currency net investments which are largely economically hedged through preference share capital (denominated in US Dollars and Euros) that is not revalued for accounting purposes.
Barclays Annual Report 2008 | 13 |
Financial review
Balance sheet commentary
Total assets and risk weighted assetsa
2008/07
Total assets increased 67% to £2,053.0bn (2007: £1,227.4bn). Risk weighted assets increased 22% to £433.3bn (2007: £353.9bn).
UK Retail Banking total assets increased 15% to £101.4bn (31st December 2007: £88.5bn) driven by growth in mortgage balances. Risk weighted assets decreased 3% to £30.5bn (31st December 2007: £31.5bn) as lending growth mainly in high quality, low risk mortgages was more than offset in capital terms by active risk management.
Barclays Commercial Bank total assets grew 13% to £84.0bn (31st December 2007: £74.6bn) driven by higher loans and advances. Risk weighted assets increased 11% to £63.1bn (31st December 2007: £57.0bn). This was slightly lower than asset growth, reflecting a relative increase in lower risk portfolios.
Barclaycard total assets increased 40% to £30.9bn (31st December 2007: £22.1bn) reflecting increases in International assets, the acquisition of Goldfish and the appreciation of the Euro and US Dollar against Sterling. Risk weighted assets increased 35% to £27.3bn (31st December 2007: £20.2bn), driven by acquisitions, the redemption of securitisation deals and exposure growth predominantly in the US.
GRCB – Western Europe total assets grew 48% to £64.7bn (31st December 2007: £43.7bn) reflecting growth in retail mortgages, unsecured lending, commercial lending and a 31% appreciation over the year in the value of the Euro against Sterling. Risk weighted assets increased 46% to £36.5bn (31st December 2007: £25.0bn), primarily reflecting underlying lending growth and the appreciation of the Euro.
GRCB – Emerging Markets total assets grew 60% to £14.7bn (31st December 2007: £9.2bn) reflecting increases in retail and commercial lending combined with the impact of Sterling depreciation. Risk weighted assets increased 44% to £15.1bn (31st December 2007: £10.5bn), reflecting portfolio growth.
GRCB – Absa total assets increased 11% to £40.4bn (31st December 2007: £36.4bn) reflecting broad based asset growth. Risk weighted assets increased 6% to £18.8bn (31st December 2007: £17.8bn), reflecting balance sheet growth.
Barclays Capital total assets increased 94% (£789.2bn) to £1,629.1bn (31st December 2007: £839.9bn) due to an increase in derivative assets of £736.7bn, predominantly driven by significant volatility and movements in yield curves during the year, together with a substantial depreciation in Sterling against most major currencies. Risk weighted assets increased 28% to £227.4bn (31st December 2007: £178.2bn). This was driven by the depreciation in Sterling against the US Dollar and Euro, and an increase in market volatility.
Barclays Global Investors total assets decreased 20% to £71.3bn (31st December 2007: £89.2bn), mainly attributable to adverse market movements in certain asset management products recognised as investment contracts. Risk weighted assets decreased 11% to £3.9bn (31st December 2007: £4.4bn) mainly attributed to changes in the asset class mix, partially offset by the weakening of Sterling against other currencies.
Barclays Wealth total assets decreased 27% to £13.3bn (31st December 2007: £18.2bn) reflecting the sale of the closed life assurance business partially offset by strong growth in lending to high net worth and intermediary clients. Risk weighted assets increased 26% to £10.3bn (31st December 2007: £8.2bn) reflecting strong growth in lending.
Head office functions and other operations total assets decreased 46% to £3.1bn (31st December 2007: £5.7bn). Risk weighted assets decreased 64% to £0.4bn (31st December 2007: £1.1bn). The decrease in the year was mainly attributable to the increased netting of Group deferred tax assets and liabilities.
Total assets by business
2008 | 2007 | 2006 | ||||
£m | £m | £m | ||||
UK Retail Banking | 101,384 | 88,477 | 81,693 | |||
Barclays Commercial Bank | 84,029 | 74,566 | 66,224 | |||
Barclaycard | 30,925 | 22,121 | 20,033 | |||
GRCB – Western Europe | 64,732 | 43,702 | 33,487 | |||
GRCB – Emerging Markets | 14,653 | 9,188 | 5,219 | |||
GRCB – Absa | 40,391 | 36,368 | 29,575 | |||
Barclays Capital | 1,629,117 | 839,850 | 657,922 | |||
Barclays Global Investors | 71,340 | 89,218 | 80,515 | |||
Barclays Wealth | 13,263 | 18,188 | 15,023 | |||
Head office functions and other operations | 3,146 | 5,683 | 7,096 | |||
Total assets | 2,052,980 | 1,227,361 | 996,787 |
Risk weighted assets by business
2008b | 2007b | 2007 | 2006 | |||||
Basel II | Basel II | Basel I | Basel I | |||||
£m | £m | £m | £m | |||||
UK Retail Banking | 30,491 | 31,463 | 46,059 | 43,020 | ||||
Barclays Commercial | ||||||||
Bank | 63,081 | 57,040 | 54,325 | 50,302 | ||||
Barclaycard | 27,316 | 20,199 | 19,690 | 16,873 | ||||
GRCB | ||||||||
– Western Europe | 36,480 | 24,971 | 24,462 | 17,567 | ||||
GRCB | ||||||||
– Emerging Markets | 15,080 | 10,484 | 6,050 | 3,255 | ||||
GRCB – Absa | 18,846 | 17,829 | 22,448 | 19,809 | ||||
Barclays Capital | 227,448 | 178,206 | 169,124 | 137,635 | ||||
Barclays Global Investors | 3,910 | 4,369 | 1,994 | 1,375 | ||||
Barclays Wealth | 10,300 | 8,216 | 7,692 | 6,077 | ||||
Head office functions and other operations | 350 | 1,101 | 1,632 | 1,920 | ||||
Total risk weighted assets | 433,302 | 353,878 | 353,476 | 297,833 |
Notes
a | The 2008/07 commentary on risk weighted assets is on a Basel II basis. The 2007/06 commentary is on a Basel I basis. |
b | Under the Group’s securitisation programme, certain portfolios subject to securitisation or similar risk transfer transaction are adjusted in calculating the Group’s risk weighted assets. Previously, for pre-2008 transactions, regulatory capital adjustments were allocated to the business in proportion to their RWAs. From 1st January 2008, the regulatory capital adjustments for all transactions are allocated to the business undertaking the securitisation unless the transaction has been undertaken for the benefit of a cluster of businesses, in which case the regulatory capital adjustments are shared. |
14 | Barclays Annual Report 2008 |
2007/06
Total assets increased 23% to £1,227.4bn (2006: £996.8bn). Risk weighted assets increased 19% to £353.5bn (2006: £297.8bn). Loans and advances to customers that have been securitised increased £4.3bn to £28.7bn (2006: £24.4bn).
UK Retail Banking total assets increased 8% to £88.5bn (2006: £81.7bn). This was mainly attributable to growth in mortgage balances. Risk weighted assets increased by 7% to £46.1bn (2006: £43.0bn) with growth in mortgages partially offset by an increase in securitised balances and other reductions.
Barclays Commercial Bank total assets grew 13% to £74.6bn (2006: £66.2bn) driven by good growth across lending products. Risk weighted assets increased 8% to £54.3bn (2006: £50.3bn), reflecting asset growth partially offset by increased regulatory netting and an increase in securitised balances.
Barclaycard total assets increased 11% to £22.1bn (2006: £20.0bn). Risk weighted assets increased 17% to £19.7bn (2006: £16.9bn), primarily reflecting the increase in total assets, redemption of securitisation transactions, partially offset by changes to the treatment of regulatory associates and the sale of part of the Monument card portfolio.
GRCB – Western Europe total assets grew 31% to £43.7bn (2006: £33.5bn). This growth was mainly driven by increases in retail mortgages and unsecured lending. Risk weighted assets increased 39% to £24.5bn (2006: £17.6bn), reflecting asset growth.
GRCB – Emerging Markets total assets grew by 76% to £9.2bn (2006: £5.2bn). This growth was driven by increases in unsecured lending. Risk weighted assets increased 86% to £6.1bn (2006: £3.3bn), reflecting asset growth.
GRCB – Absa total assets increased 23% to £36.4bn (2006: £29.6bn), primarily driven by increases in mortgages, credit cards and commercial property finance. Risk weighted assets increased 13% to £22.4bn (2006: £19.8bn), reflecting balance sheet growth.
Barclays Capital total assets rose 28% to £839.9bn (2006: £657.9bn). Derivative assets increased £109.7bn primarily due to movements across a range of market indices. This was accompanied by a corresponding increase in derivative liabilities. The increase in non-derivative assets reflects an expansion of the business across a number of asset classes, combined with an increase in drawn leveraged loan positions and mortgage-related assets. Risk weighted assets increased 23% to £169.1bn (2006: £137.6bn) reflecting growth in fixed income, equities and credit derivatives.
Barclays Global Investors total assets increased 11% to £89.2bn (2006: £80.5bn), mainly attributable to growth in certain asset management products recognised as investment contracts. The majority of total assets relates to asset management products with equal and offsetting balances reflected within liabilities to customers. Risk weighted assets increased 45% to £2.0bn (2006: £1.4bn) mainly attributable to overall growth in the balance sheet and the mix of securities lending activity.
Barclays Wealth total assets increased 21% to £18.2bn (2006: £15.0bn) reflecting strong growth in lending to high net worth, affluent and intermediary clients. Risk weighted assets increased 27% to £7.7bn (2006: £6.1bn) reflecting the increase in lending.
Head office functions and other operations total assets decreased 20% to £5.7bn (2006: £7.1bn). Risk weighted assets decreased 15% to £1.6bn (2006: £1.9bn).
Adjusted gross leverage
The adjusted gross leverage ratio is defined as the multiple of adjusted total tangible assets over total qualifying Tier 1 capital. Adjusted total tangible assets are total assets less derivative counterparty netting, assets under management on the balance sheet, settlement balances, goodwill and tangible assets. Tier 1 capital is defined by the UK FSA. Adjusted gross leverage is a non-IFRS measure. However, Barclays management believes that this measure provides valuable information to readers of Barclays financial statements because there will be more capital and less leverage in the banking system, as a key measure of stability, which is consistent with the views of regulators and investors. However, this measure is not a substitute for IFRS measures and readers should consider IFRS measures as well.
Volatility in reference rates and yield curves used for pricing have led to significantly higher values for derivative assets and liabilities. Limited netting is permitted under IFRS, even for receivables and payables with the same counterparty where there are contractually agreed netting arrangements. Derivative assets and liabilities would be £917bn (2007: £215bn) lower than reported under IFRS if netting were permitted for assets and liabilities with the same counterparty or for which we hold cash collateral.
Assets and liabilities also include amounts held under investment contracts with third parties of a further £69bn as at 31st December 2008 (2007: £93bn). These constitute asset management products offered to institutional pension funds which are required to be recognised as financial instruments. Changes in value in these assets are entirely to the account of the beneficial owner of the asset.
Excluding these items, settlement balances, goodwill and intangible assets, our adjusted total tangible assets were £1,026bn at 31st December 2008 (2007: £888bn). On this basis we define adjusted gross leverage, being the multiple of adjusted total tangible assets over total qualifying Tier 1 capital. At 31st December 2008 adjusted gross leverage was 28x (2007: 33x).
We expect adjusted gross leverage to improve further over time.
Adjusted gross leverage | ||||||
2008 £m | 2007 £m | |||||
Total assets | 2,052,980 | 1,227,361 | ||||
Counterparty net/ collateralised derivatives | (917,074 | ) | (215,485 | ) | ||
Financial assets designated at fair value and associated cash balances – held in respect of linked liabilities to customers under investment contracts | (69,183 | ) | (92,639 | ) | ||
Net settlement balances | (29,786 | ) | (22,459 | ) | ||
Goodwill and intangible assets | (10,402 | ) | (8,296 | ) | ||
Adjusted total tangible assets | 1,026,535 | 888,482 | ||||
Total qualifying Tier 1 capital | 37,250 | 26,743 | ||||
Adjusted gross leverage | 28 | 33 |
Barclays Annual Report 2008 | 15 |
Financial review
Balance sheet commentary
Total shareholders’ equity
2008/07
Total shareholders’ equity increased £14,935m to £47,411m (2007: £32,476m).
Called up share capital comprises 8,372 million ordinary shares of 25p each (2007: 6,600 million ordinary shares of 25p each and 1 million staff shares of £1 each).
Retained earnings increased £3,238m to £24,208m (2007: £20,970m). Profit attributable to the equity holders of the parent of £4,382m and the proceeds of capital raising of £1,410m were partially offset by dividends paid to shareholders of £2,344m. Other equity of £3,652m represents the issue of Mandatorily Convertible Notes, which will convert into ordinary shares by June 2009.
Movements in other reserves, except the capital redemption reserve, reflect the relevant amounts recorded in the consolidated statement of recognised income and expense on page 206.
Minority interests increased £1,608m to £10,793m (2007: £9,185m). The increase primarily reflects a preference share issuance by Barclays Bank PLC of £1,345m.
The Group’s authority to buy-back equity shares was renewed at the 2008 AGM.
2007/06
Total shareholders’ equity increased £5,086m to £32,476m (2006: £27,390m).
Called up share capital comprises 6,600 million (2006: 6,535 million) ordinary shares of 25p each and 1 million (2006: 1 million) staff shares of £1 each. Called up share capital increased by £17m representing the nominal value of shares issued to Temasek Holdings, China Development Bank (CDB) and employees under share option plans largely offset by a reduction in nominal value arising from share buy-backs. Share premium
reduced by £5,762m; the reclassification of £7,223m to retained earnings resulting from the High Court approved cancellation of share premium was partly offset by additional premium arising on the issuance to CDB and on employee options. The capital redemption reserve increased by £75m representing the nominal value of the share buy-backs.
Retained earnings increased by £8,801m. Increases primarily arose from profit attributable to equity holders of the parent of £4,417m, the reclassification of share premium of £7,223m and the proceeds of the Temasek issuance in excess of nominal value of £941m. Reductions primarily arose from external dividends paid of £2,079m and the total cost of share repurchases of £1,802m.
Movements in other reserves, except the capital redemption reserve, reflect the relevant amounts recorded in the consolidated statement of recognised income and expense on page 206.
Minority interests increased £1,594m to £9,185m (2006: £7,591m). The increase was primarily driven by preference share issuances of £1,322m and an increase in the minority interest in Absa of £225m.
The Group’s authority to buy-back equity shares was renewed at the 2007 AGM.
Barclays Bank PLC
Preference shares issued by Barclays Bank PLC are included within share capital and share premium in the Barclays Bank PLC Group but represent minority interests in the Barclays PLC Group. Certain issuances of reserve capital instruments and capital notes by Barclays Bank PLC are included within other shareholders’ equity in the Barclays Bank PLC Group but represent minority interests in Barclays PLC Group. The Mandatorily Convertible Notes issued pursuant to the equity issuances by Barclays PLC represent financial liabilities in the financial statements of Barclays Bank PLC and have not been included in shareholders’ equity.
Total shareholders’ equity |
| ||||||||||||
2008 £m | 2007 £m | 2006 £m | |||||||||||
Barclays PLC Group | |||||||||||||
Called up share capital | 2,093 | 1,651 | 1,634 | ||||||||||
Share premium account | 4,045 | 56 | 5,818 | ||||||||||
Other equity | 3,652 | – | – | ||||||||||
Available for sale reserve | (1,190 | ) | 132 | ||||||||||
Cash flow hedging reserve | 132 | 26 | (230 | ) | |||||||||
Capital redemption reserve | 394 | 384 | 309 | ||||||||||
Other capital reserve | 617 | 617 | 617 | ||||||||||
Currency translation reserve | 2,840 | (307 | ) | (438 | ) | ||||||||
Other reserves | 2,793 | 874 | 390 | ||||||||||
Retained earnings | 24,208 | 20,970 | 12,169 | ||||||||||
Less: Treasury shares | (173 | ) | (260 | ) | (212 | ) | |||||||
Shareholders’ equity excluding minority interests | 36,618 | 23,291 | 19,799 | ||||||||||
Minority interests | 10,793 | 9,185 | 7,591 | ||||||||||
Total shareholders’ equity | 47,411 | 32,476 | 27,390 |
Total shareholders’ equity |
| ||||||||||||
2008 £m | 2007 £m | 2006 £m | |||||||||||
Barclays Bank PLC Group | |||||||||||||
Called up share capital | 2,398 | 2,382 | 2,363 | ||||||||||
Share premium account | 12,060 | 10,751 | 9,452 | ||||||||||
Available for sale reserve | (1,249 | ) | 111 | 184 | |||||||||
Cash flow hedging reserve | 132 | 26 | (230 | ) | |||||||||
Currency translation reserve | 2,840 | (307 | ) | (438 | ) | ||||||||
Other reserves | 1,723 | (170 | ) | (484 | ) | ||||||||
Other shareholders’ equity | 2,564 | 2,687 | 2,534 | ||||||||||
Retained earnings | 22,457 | 14,222 | 11,556 | ||||||||||
Shareholders’ equity excluding minority interests | 41,202 | 29,872 | 25,421 | ||||||||||
Minority interests | 2,372 | 1,949 | 1,685 | ||||||||||
Total shareholders’ equity | 43,574 | 31,821 | 27,106 |
16 | Barclays Annual Report 2008 |
Financial review
Capital resources
Tier 1 capital increased by £10.5bn during the year, driven by issues of ordinary shares (£5.2bn), other capital issuances (£4.3bn), retained profits (£2.0bn) and exchange rate movements (£3.2bn). These movements were partially offset by an increase in intangible assets (£1.3bn), innovative Tier 1 capital in excess of regulatory limits being reclassified as Tier 2 capital (£1.3bn) and the reversal of gains on own credit, net of tax (£1.2bn).
Tier 2 capital increased by £8.5bn due to issuance of loan capital (£3.6bn) net of redemptions (£1.1bn), inclusion of innovative capital in excess of the Tier 1 limits (£1.3bn), increases in collective impairment (£1.2bn) and exchange rate movements (£3.9bn).
The Mandatorily Convertible Notes (MCNs) issued during the year (£4.1bn) will qualify as equity capital from the date of their conversion, on or before 30th June 2009.
All capital issuance referred to above is stated gross of issue costs.
Basel I transitional floor
Barclays commenced calculating capital requirements under the Basel II capital framework from 1st January 2008. The Group manages its businesses and reports capital requirements on a Basel II basis. During the transition period for the adoption of Basel II, banks’ capital requirements may not fall below a transitional floor. In 2008 this floor was 90% of adjusted Basel I capital requirements. As at 31st December 2008, the Group had additional capital requirements under the transitional floor rules of £1.5bn. The Group’s total capital resources of £58.7bn exceeded its capital requirements taking into account the transitional floor by £22.5bn. On 1st January 2009, the transitional floor reduced to 80% of adjusted Basel I capital requirements and there were no additional capital requirements resulting from its application.
Capital ratios
Basel II | Basel II | Basel I | Basel I | |||||||||||||||||||||
2008 | 2007 | 2007 | 2006 | |||||||||||||||||||||
Barclays PLC Group |
| Barclays Bank PLC Group |
| Barclays PLC Group |
| Barclays Bank PLC Group |
| Barclays PLC Group |
| Barclays Bank PLC Group |
| Barclays PLC Group |
| Barclays Bank PLC Group |
| |||||||||
Capital ratios | % | % | % | % | % | % | % | % | ||||||||||||||||
Tier 1 ratio | 8.6 | 8.6 | 7.6 | 7.3 | 7.8 | 7.5 | 7.7 | 7.5 | ||||||||||||||||
Risk asset ratio | 13.6 | 13.5 | 11.2 | 11.0 | 12.1 | 11.8 | 11.7 | 11.5 | ||||||||||||||||
Risk weighted assets | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
Credit risk | 266,912 | 266,912 | 244,474 | 244,469 | 265,264 | 265,259 | 233,630 | 233,630 | ||||||||||||||||
Counterparty risk | 70,902 | 70,902 | 41,203 | 41,203 | 51,947 | 51,947 | 33,912 | 33,912 | ||||||||||||||||
Market risk | 65,372 | 65,372 | 39,812 | 39,812 | 36,265 | 36,265 | 30,291 | 30,291 | ||||||||||||||||
Operational risk | 30,116 | 30,116 | 28,389 | 28,389 | n/a | n/a | n/a | n/a | ||||||||||||||||
Total risk weighted assets | 433,302 | 433,302 | 353,878 | 353,873 | 353,476 | 353,471 | 297,833 | 297,833 | ||||||||||||||||
Total net capital resources
| ||||||||||||||||||||||||
Capital resources (as defined for regulatory purposes) | ||||||||||||||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||
Tier 1 | ||||||||||||||||||||||||
Called up share capital | 2,093 | 2,338 | 1,651 | 2,382 | 1,651 | 2,382 | 1,634 | 2,363 | ||||||||||||||||
Eligible reserves | 31,156 | 36,639 | 22,939 | 26,028 | 22,526 | 25,615 | 19,608 | 21,700 | ||||||||||||||||
Minority interests | 13,915 | 8,038 | 10,551 | 5,857 | 10,551 | 5,857 | 7,899 | 4,528 | ||||||||||||||||
Tier One Notes | 1,086 | 1,086 | 899 | 899 | 899 | 899 | 909 | 909 | ||||||||||||||||
Less: Intangible assets | (9,964 | ) | (9,964 | ) | (8,191 | ) | (8,191 | ) | (8,191 | ) | (8,191 | ) | (7,045 | ) | (7,045 | ) | ||||||||
Less: Deductions from Tier 1 capital | (1,036 | ) | (1,036 | ) | (1,106 | ) | (1,106 | ) | (28 | ) | (28 | ) | – | – | ||||||||||
Total qualifying Tier 1 capital | 37,250 | 37,101 | 26,743 | 25,869 | 27,408 | 26,534 | 23,005 | 22,455 | ||||||||||||||||
Tier 2 | ||||||||||||||||||||||||
Revaluation reserves | 26 | 26 | 26 | 26 | 26 | 26 | 25 | 25 | ||||||||||||||||
Available for sale equity | 122 | 122 | 295 | 295 | 295 | 295 | 221 | 221 | ||||||||||||||||
Collectively assessed impairment allowances | 1,654 | 1,654 | 440 | 440 | 2,619 | 2,619 | 2,556 | 2,556 | ||||||||||||||||
Minority interests | 607 | 607 | 442 | 442 | 442 | 442 | 451 | 451 | ||||||||||||||||
Qualifying subordinated liabilities | ||||||||||||||||||||||||
Undated loan capital | 6,745 | 6,768 | 3,191 | 3,191 | 3,191 | 3,191 | 3,180 | 3,180 | ||||||||||||||||
Dated loan capital | 14,215 | 14,215 | 10,578 | 10,578 | 10,578 | 10,578 | 7,603 | 7,603 | ||||||||||||||||
Less: Deductions from Tier 2 capital | (1,036 | ) | (1,036 | ) | (1,106 | ) | (1,106 | ) | (28 | ) | (28 | ) | – | – | ||||||||||
Total qualifying Tier 2 capital | 22,333 | 22,356 | 13,866 | 13,866 | 17,123 | 17,123 | 14,036 | 14,036 | ||||||||||||||||
Less: Regulatory deductions | ||||||||||||||||||||||||
Investments not consolidated for supervisory purposes | (403 | ) | (403 | ) | (633 | ) | (633 | ) | (633 | ) | (633 | ) | (982 | ) | (982 | ) | ||||||||
Other deductions | (453 | ) | (561 | ) | (193 | ) | (193 | ) | (1,256 | ) | (1,256 | ) | (1,348 | ) | (1,348 | ) | ||||||||
Total deductions | (856 | ) | (964 | ) | (826 | ) | (826 | ) | (1,889 | ) | (1,889 | ) | (2,330 | ) | (2,330 | ) | ||||||||
Total net capital resources | 58,727 | 58,493 | 39,783 | 38,909 | 42,642 | 41,768 | 34,711 | 34,161 |
Barclays Annual Report 2008 | 17 |
Financial review
Additional financial disclosure
Deposits and short-term borrowings
Deposits
Deposits include deposits from banks and customers accounts.
Average: year ended 31st December | ||||||
2008 £m | 2007 £m | 2006 £m | ||||
Deposits from banks | ||||||
Customers in the United Kingdom | 14,003 | 15,321 | 12,832 | |||
Customers outside the | ||||||
United Kingdom: | ||||||
Other European Union | 38,210 | 33,162 | 30,116 | |||
United States | 15,925 | 6,656 | 7,352 | |||
Africa | 3,110 | 4,452 | 4,140 | |||
Rest of the World | 36,599 | 36,626 | 35,013 | |||
Total deposits from banks | 107,847 | 96,217 | 89,453 | |||
Customer accounts | ||||||
Customers in the United Kingdom | 206,020 | 187,249 | 173,767 | |||
Customers outside the | ||||||
United Kingdom: | ||||||
Other European Union | 30,909 | 23,696 | 22,448 | |||
United States | 31,719 | 21,908 | 17,661 | |||
Africa | 35,692 | 29,855 | 23,560 | |||
Rest of the World | 27,653 | 23,032 | 19,992 | |||
Customer accounts | 331,993 | 285,740 | 257,428 |
Deposits from banks in offices in the United Kingdom received from non- residents amounted to £63,284m (2007: £45,162m).
Year ended 31st December | ||||||
2008 £m | 2007 £m | 2006 £m | ||||
Customer accounts | 335,505 | 294,987 | 256,754 | |||
In offices in the United Kingdom: | ||||||
Current and Demand accounts | ||||||
– interest free | 41,351 | 33,400 | 25,650 | |||
Current and Demand accounts | ||||||
– interest bearing | 20,898 | 32,047 | 31,769 | |||
Savings accounts | 68,335 | 70,682 | 62,745 | |||
Other time deposits – retail | 33,785 | 36,123 | 36,110 | |||
Other time deposits – wholesale | 74,417 | 65,726 | 53,733 | |||
Total repayable in offices in the United Kingdom | 238,786 | 237,978 | 210,007 | |||
In offices outside the United Kingdom: | ||||||
Current and Demand accounts | ||||||
– interest free | 4,803 | 2,990 | 2,169 | |||
Current and Demand accounts | ||||||
– interest bearing | 15,463 | 11,570 | 17,626 | |||
Savings accounts | 7,673 | 3,917 | 3,041 | |||
Other time deposits | 68,780 | 38,532 | 23,911 | |||
Total repayable in offices outside the United Kingdom | 96,719 | 57,009 | 46,747 |
Customer accounts deposits in offices in the United Kingdom received from non-residents amounted to £61,714m (2007: £49,179m).
Short-term borrowings
Short-term borrowings include deposits from banks, commercial paper and negotiable certificates of deposit.
Deposits from banks
Deposits from banks are taken from a wide range of counterparties and generally have maturities of less than one year.
2008 £m | 2007 £m | 2006 £m | ||||
Year-end balance | 114,910 | 90,546 | 79,562 | |||
Average balance | 107,847 | 96,217 | 89,453 | |||
Maximum balance | 139,836 | 109,586 | 97,165 | |||
Average interest rate during year | 3.6% | 4.1% | 4.2% | |||
Year-end interest rate | 2.3% | 4.0% | 4.3% |
Commercial paper
Commercial paper is issued by the Group, mainly in the United States, generally in denominations of not less than US$100,000, with maturities of up to 270 days.
2008 £m | 2007 £m | 2006 £m | ||||
Year-end balance | 27,692 | 23,451 | 26,546 | |||
Average balance | 24,668 | 26,229 | 29,740 | |||
Maximum balance | 27,792 | 30,736 | 31,859 | |||
Average interest rate during year | 4.4% | 5.4% | 4.4% | |||
Year-end interest rate | 4.2% | 5.2% | 5.0% |
Negotiable certificates of deposit
Negotiable certificates of deposits are issued mainly in the United Kingdom and United States, generally in denominations of not less than US$100,000.
2008 £m | 2007 £m | 2006 £m | ||||
Year-end balance | 61,332 | 58,401 | 52,800 | |||
Average balance | 55,122 | 55,394 | 49,327 | |||
Maximum balance | 67,715 | 62,436 | 60,914 | |||
Average interest rate during year | 4.4% | 5.1% | 5.3% | |||
Year-end interest rate | 4.1% | 5.0% | 5.1% |
18 | Barclays Annual Report 2008 |
Financial review
Additional financial disclosure
Commitments and contractual obligations
Commercial commitments include guarantees, contingent liabilities and standby facilities.
Commercial commitments
2008 Amount of commitment expiration per period | ||||||||||
Less than one year £m | Between one to £m | Between three to £m | After £m | Total £m | ||||||
Acceptances and endorsements | 576 | 6 | 3 | – | 585 | |||||
Guarantees and letters of credit pledged as collateral security | 7,272 | 2,529 | 1,781 | 4,070 | 15,652 | |||||
Securities lending arrangements | 38,290 | – | – | – | 38,290 | |||||
Other contingent liabilities | 7,989 | 1,604 | 372 | 1,818 | 11,783 | |||||
Documentary credits and other short-term trade related transactions | 770 | 88 | 1 | – | 859 | |||||
Forward asset purchases and forward deposits placed | 50 | 241 | – | – | 291 | |||||
Standby facilities, credit lines and other | 195,035 | 29,666 | 26,150 | 8,815 | 259,666 | |||||
2007 Amount of commitment expiration per period | ||||||||||
Less than £m | Between one to £m | Between three to five years £m | After five years £m | Total £m | ||||||
Acceptances and endorsements | 365 | – | – | – | 365 | |||||
Guarantees and letters of credit pledged as collateral security | 6,417 | 2,711 | 1,971 | 1,874 | 12,973 | |||||
Securities lending arrangements | 22,719 | – | – | – | 22,719 | |||||
Other contingent liabilities | 6,594 | 1,556 | 416 | 1,151 | 9,717 | |||||
Documentary credits and other short-term trade related transactions | 401 | 121 | – | – | 522 | |||||
Forward asset purchases and forward deposits placed | 283 | – | – | – | 283 | |||||
Standby facilities, credit lines and other | 136,457 | 17,039 | 28,127 | 10,211 | 191,834 | |||||
Contractual obligations include debt securities, operating lease and purchase obligations.
Contractual obligations | ||||||||||
2008 Payments due by period | ||||||||||
Less than £m | Between one to three years £m | Between five years £m | After five years £m | Total £m | ||||||
Long-term debt | 108,172 | 24,701 | 10,855 | 22,008 | 165,736 | |||||
Operating lease obligations | 280 | 690 | 785 | 2,745 | 4,500 | |||||
Purchase obligations | 214 | 225 | 61 | 20 | 520 | |||||
Total | 108,666 | 25,616 | 11,701 | 24,773 | 170,756 | |||||
2007 Payments due by period | ||||||||||
Less than one year £m | Between one to three years £m | Between three to five years £m | After five years £m | Total £m | ||||||
Long-term debt | 90,201 | 13,558 | 8,630 | 19,358 | 131,747 | |||||
Operating lease obligations | 197 | 755 | 610 | 2,225 | 3,787 | |||||
Purchase obligations | 141 | 186 | 27 | 6 | 360 | |||||
Total | 90,539 | 14,499 | 9,267 | 21,589 | 135,894 |
The long-term debt does not include undated loan capital of £13,673m (2007: £6,631m).
Further information on the contractual maturity of the Group’s assets and liabilities is given in Note 49.
Barclays Annual Report 2008 | 19 |
Financial review
Additional financial disclosure
The following table analyses the book value of securities which are carried at fair value.
2008 | 2007 | 2006 | ||||||||||
Book value £m | Amortised £m | Book value £m | Amortised £m | Book value £m | Amortised £m | |||||||
Investment securities – available for sale | ||||||||||||
Debt securities: | ||||||||||||
United Kingdom government | 1,238 | 1,240 | 78 | 81 | 758 | 761 | ||||||
Other government | 11,456 | 11,338 | 7,383 | 7,434 | 12,587 | 12,735 | ||||||
Other public bodies | 2,373 | 2,379 | 634 | 632 | 280 | 277 | ||||||
Mortgage and asset backed securities | 3,510 | 4,126 | 1,367 | 1,429 | 1,706 | 1,706 | ||||||
Bank and building society certificates of deposit | 10,478 | 10,535 | 3,028 | 3,029 | 6,686 | 6,693 | ||||||
Corporate and other issuers | 29,776 | 30,363 | 26,183 | 26,219 | 25,895 | 25,857 | ||||||
Equity securities | 2,142 | 1,814 | 1,676 | 1,418 | 1,371 | 1,047 | ||||||
Investment securities – available for sale | 60,973 | 61,795 | 40,349 | 40,242 | 49,283 | 49,076 | ||||||
Other securities – held for trading | ||||||||||||
Debt securities: | ||||||||||||
United Kingdom government | 6,955 | n/a | 3,832 | n/a | 4,986 | n/a | ||||||
Other government | 50,727 | n/a | 51,104 | n/a | 46,845 | n/a | ||||||
Mortgage and asset backed securities | 30,748 | n/a | 37,038 | n/a | 29,606 | n/a | ||||||
Bank and building society certificates of deposit | 7,518 | n/a | 17,751 | n/a | 14,159 | n/a | ||||||
Corporate and other issuers | 52,738 | n/a | 43,053 | n/a | 44,980 | n/a | ||||||
Equity securities | 30,535 | n/a | 36,307 | n/a | 31,548 | n/a | ||||||
Other securities – held for trading | 179,221 | n/a | 189,085 | n/a | 172,124 | n/a |
Investment debt securities include government securities held as part of the Group’s treasury management portfolio for asset and liability, liquidity and regulatory purposes and are for use on a continuing basis in the activities of the Group. In addition, the Group holds as investments listed and unlisted corporate securities.
Bank and building society certificates of deposit are freely negotiable and have original maturities of up to five years, but are typically held for shorter periods.
In addition to UK government securities shown above, at 31st December 2008, 2007 and 2006, the Group held the following government securities which exceeded 10% of shareholders’ equity.
Government securities
2008 | 2007 | 2006 | ||||
Book value £m | Book value £m | Book value £m | ||||
United States | 17,165 | 15,156 | 18,343 | |||
Japan | 9,092 | 9,124 | 15,505 | |||
Germany | 5,832 | 5,136 | 4,741 | |||
France | 4,091 | 3,538 | 4,336 | |||
Italy | 6,091 | 5,090 | 3,419 | |||
Spain | 3,647 | 3,674 | 2,859 |
Maturities and yield of available for sale debt securities
Maturing within one year | Maturing after one but within five years | Maturing after five but within ten years | Maturing after ten years | Total | ||||||||||||||||
Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | |||||||||||
Government | 3,096 | 6.0 | 5,410 | 5.1 | 1,694 | 1.1 | 2,493 | 0.9 | 12,693 | 4.0 | ||||||||||
Other public bodies | 832 | 1.9 | 1,526 | 0.9 | 1 | – | 14 | 4.7 | 2,373 | 1.3 | ||||||||||
Other issuers | 21,749 | 4.3 | 9,692 | �� | 3.8 | 7,702 | 4.4 | 4,622 | 5.7 | 43,765 | 4.3 | |||||||||
Total book value | 25,677 | 4.4 | 16,628 | 3.9 | 9,397 | 3.8 | 7,129 | 4.0 | 58,831 | 4.1 |
The yield for each range of maturities is calculated by dividing the annualised interest income prevailing at 31st December 2008 by the fair value of securities held at that date.
20 | Barclays Annual Report 2008 |
Financial review
Additional financial disclosure
Average balance sheet and net interest income (year ended 31st December)
2008 | 2007 | 2006 | ||||||||||||||||||||||
Average balance a £m | | Interest £m | | Average rate % | Average balance a £m |
| Interest £m | | Average rate % | Average balance a £m |
| Interest £m | | Average rate % | ||||||||||
Assets | ||||||||||||||||||||||||
Loans and advances to banksb: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 38,913 | 1,453 | 3.7 | 29,431 | 1,074 | 3.6 | 18,401 | 647 | 3.5 | |||||||||||||||
– in offices outside the United Kingdom | 14,379 | 419 | 2.9 | 12,262 | 779 | 6.4 | 12,278 | 488 | 4.0 | |||||||||||||||
Loans and advances to customersb: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 249,081 | 13,714 | 5.5 | 205,707 | 13,027 | 6.3 | 184,392 | 11,247 | 6.1 | |||||||||||||||
– in offices outside the United Kingdom | 116,284 | 9,208 | 7.9 | 88,212 | 6,733 | 7.6 | 77,615 | 4,931 | 6.4 | |||||||||||||||
Lease receivables: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 4,827 | 281 | 5.8 | 4,822 | 283 | 5.9 | 5,266 | 300 | 5.7 | |||||||||||||||
– in offices outside the United Kingdom | 6,543 | 752 | 11.5 | 5,861 | 691 | 11.8 | 6,162 | 595 | 9.7 | |||||||||||||||
Financial investments: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 35,844 | 1,654 | 4.6 | 37,803 | 2,039 | 5.4 | 41,125 | 1,936 | 4.7 | |||||||||||||||
– in offices outside the United Kingdom | 10,450 | 697 | 6.7 | 14,750 | 452 | 3.1 | 14,191 | 830 | 5.8 | |||||||||||||||
Reverse repurchase agreements and cash collateral on securities borrowed: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 207,521 | 8,768 | 4.2 | 211,709 | 9,644 | 4.6 | 166,713 | 6,136 | 3.7 | |||||||||||||||
– in offices outside the United Kingdom | 128,250 | 4,450 | 3.5 | 109,012 | 5,454 | 5.0 | 100,416 | 5,040 | 5.0 | |||||||||||||||
Trading portfolio assets: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 107,626 | 4,948 | 4.6 | 120,691 | 5,926 | 4.9 | 106,148 | 4,166 | 3.9 | |||||||||||||||
– in offices outside the United Kingdom | 128,287 | 5,577 | 4.3 | 57,535 | 3,489 | 6.1 | 61,370 | 2,608 | 4.2 | |||||||||||||||
Total average interest earning assets | 1,048,005 | 51,921 | 5.0 | 897,795 | 49,591 | 5.5 | 794,077 | 38,924 | 4.9 | |||||||||||||||
Impairment allowances/provisions | (5,749 | ) | (4,435 | ) | (3,565 | ) | ||||||||||||||||||
Non-interest earning assets | 711,856 | 422,834 | 310,949 | |||||||||||||||||||||
Total average assets and interest income | 1,754,112 | 51,921 | 3.0 | 1,316,194 | 49,591 | 3.8 | 1,101,461 | 38,924 | 3.5 | |||||||||||||||
Percentage of total average interest earning assets in offices outside the United Kingdom | 38.6% | 32.0% | 34.3% | |||||||||||||||||||||
Total average interest earning assets related to: | ||||||||||||||||||||||||
Interest income | 51,921 | 5.0 | 49,591 | 5.5 | 38,924 | 4.9 | ||||||||||||||||||
Interest expense | (38,181 | ) | 3.6 | (37,892 | ) | 4.2 | (30,385 | ) | 3.8 | |||||||||||||||
13,740 | 1.4 | 11,699 | 1.3 | 8,539 | 1.1 |
Notes
a | Average balances are based upon daily averages for most UK banking operations and monthly averages elsewhere. |
b | Loans and advances to customers and banks include all doubtful lendings, including non-accrual lendings. Interest receivable on such lendings has been included to the extent to which either cash payments have been received or interest has been accrued in accordance with the income recognition policy of the Group. |
Barclays Annual Report 2008 | 21 |
Financial review
Additional financial disclosure
Average balance sheet
Average balance sheet and net interest income (year ended 31st December)
2008 | 2007 | 2006 | ||||||||||||||||
Average balance a £m | Interest £m | Average rate % | Average balance a £m | Interest £m | Average rate % | Average balance a £m | Interest £m | Average rate % | ||||||||||
Liabilities and shareholders’ equity | ||||||||||||||||||
Deposits by banks: | ||||||||||||||||||
– in offices in the United Kingdom | 70,272 | 2,780 | 4.0 | 63,902 | 2,511 | 3.9 | 62,236 | 2, 464 | 4.0 | |||||||||
– in offices outside the United Kingdom | 32,172 | 956 | 3.0 | 27,596 | 1,225 | 4.4 | 23,438 | 1,137 | 4.9 | |||||||||
Customer accounts: | ||||||||||||||||||
demand deposits: | ||||||||||||||||||
– in offices in the United Kingdom | 24,333 | 910 | 3.7 | 29,110 | 858 | 2.9 | 25,397 | 680 | 2.7 | |||||||||
– in offices outside the United Kingdom | 14,902 | 572 | 3.8 | 13,799 | 404 | 2.9 | 10,351 | 254 | 2.5 | |||||||||
Customer accounts: | ||||||||||||||||||
savings deposits: | ||||||||||||||||||
– in offices in the United Kingdom | 71,062 | 2,143 | 3.0 | 55,064 | 2,048 | 3.7 | 57,734 | 1,691 | 2.9 | |||||||||
– in offices outside the United Kingdom | 7,033 | 413 | 5.9 | 4,848 | 128 | 2.6 | 3,124 | 74 | 2.4 | |||||||||
Customer accounts: | ||||||||||||||||||
other time deposits – retail: | ||||||||||||||||||
– in offices in the United Kingdom | 32,283 | 1,523 | 4.7 | 30,578 | 1,601 | 5.2 | 34,865 | 1,548 | 4.4 | |||||||||
– in offices outside the United Kingdom | 20,055 | 1,350 | 6.7 | 12,425 | 724 | 5.8 | 8,946 | 482 | 5.4 | |||||||||
Customer accounts: | ||||||||||||||||||
other time deposits – wholesale: | ||||||||||||||||||
– in offices in the United Kingdom | 60,574 | 2,362 | 3.9 | 52,147 | 2,482 | 4.8 | 45,930 | 1,794 | 3.9 | |||||||||
– in offices outside the United Kingdom | 31,300 | 2,094 | 6.7 | 24,298 | 1,661 | 6.8 | 23,442 | 1,191 | 5.1 | |||||||||
Debt securities in issue: | ||||||||||||||||||
– in offices in the United Kingdom | 41,014 | 1,920 | 4.7 | 41,552 | 2,053 | 4.9 | 47,216 | 1,850 | 3.9 | |||||||||
– in offices outside the United Kingdom | 80,768 | 3,734 | 4.6 | 94,271 | 5,055 | 5.4 | 74,125 | 3,686 | 5.0 | |||||||||
Dated and undated loan capital and other subordinated liabilities principally: | ||||||||||||||||||
– in offices in the United Kingdom | 22,912 | 1,435 | 6.3 | 12,972 | 763 | 5.9 | 13,686 | 777 | 5.7 | |||||||||
Repurchase agreements and cash collateral on securities lent: | ||||||||||||||||||
– in offices in the United Kingdom | 203,967 | 8,445 | 4.1 | 169,272 | 7,616 | 4.5 | 141,862 | 5,080 | 3.6 | |||||||||
– in offices outside the United Kingdom | 177,883 | 2,800 | 1.6 | 118,050 | 5,051 | 4.3 | 86,693 | 4,311 | 5.0 | |||||||||
Trading portfolio liabilities: | ||||||||||||||||||
– in offices in the United Kingdom | 56,675 | 2,657 | 4.7 | 47,971 | 2,277 | 4.7 | 49,892 | 2,014 | 4.0 | |||||||||
– in offices outside the United Kingdom | 62,239 | 2,087 | 3.4 | 29,838 | 1,435 | 4.8 | 39,064 | 1,352 | 3.5 | |||||||||
Total average interest bearing liabilities | 1,009,444 | 38,181 | 3.8 | 827,693 | 37,892 | 4.6 | 748,001 | 30,385 | 4.1 | |||||||||
Interest free customer deposits: | ||||||||||||||||||
– in offices in the United Kingdom | 40,439 | 34,109 | 27,549 | |||||||||||||||
– in offices outside the United Kingdom | 3,089 | 3,092 | 2,228 | |||||||||||||||
Other non-interest bearing liabilities | 664,458 | 421,473 | 297,816 | |||||||||||||||
Minority and other interests and shareholders’ equity | 36,682 | 29,827 | 25,867 | |||||||||||||||
Total average liabilities, shareholders’ equity and interest expense | 1,754,112 | 38,181 | 2.2 | 1,316,194 | 37,892 | 2.9 | 1,101,461 | 30,385 | 2.8 | |||||||||
Percentage of total average interest bearing non-capital liabilities in offices outside the United Kingdom | 42.2% | 39.4% | 36.1% |
Note
a | Average balances are based upon daily averages for most UK banking operations and monthly averages elsewhere. |
22 | Barclays Annual Report 2008 |
Changes in net interest income – volume and rate analysis
The following tables allocate changes in net interest income between changes in volume and changes in interest rates for the last two years. Volume and rate variances have been calculated on the movement in the
average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities. Where variances have arisen from changes in both volumes and interest rates, these have been allocated proportionately between the two.
2008/2007 Change due to increase/ (decrease) in: | 2007/2006 Change due to increase/ (decrease) in: | 2006/2005 Change due to increase/ (decrease) in: | ||||||||||||||||||||||||
Total change £m | Volume £m | Rate £m | Total change £m | Volume £m | Rate £m | Total change £m | Volume £m | Rate £m | ||||||||||||||||||
Interest receivable | ||||||||||||||||||||||||||
Loans and advances to banks: | ||||||||||||||||||||||||||
– in offices in the UK | 379 | 354 | 25 | 427 | 402 | 25 | 193 | 121 | 72 | |||||||||||||||||
– in offices outside the UK | (360 | ) | 117 | (477 | ) | 291 | (1 | ) | 292 | 85 | 46 | 39 | ||||||||||||||
19 | 471 | (452 | ) | 718 | 401 | 317 | 278 | 167 | 111 | |||||||||||||||||
Loans and advances to customers: | ||||||||||||||||||||||||||
– in offices in the UK | 687 | 2,525 | (1,838 | ) | 1,780 | 1,337 | 443 | 1,018 | 726 | 292 | ||||||||||||||||
– in offices outside the UK | 2,475 | 2,214 | 261 | 1,802 | 728 | 1,074 | 1,956 | 1,695 | 261 | |||||||||||||||||
3,162 | 4,739 | (1,577 | ) | 3,582 | 2,065 | 1,517 | 2,974 | 2,421 | 553 | |||||||||||||||||
Lease receivables: | ||||||||||||||||||||||||||
– in offices in the UK | (2 | ) | – | (2 | ) | (17 | ) | (26 | ) | 9 | (48 | ) | (70 | ) | 22 | |||||||||||
– in offices outside the UK | 61 | 79 | (18 | ) | 96 | (30 | ) | 126 | 478 | 413 | 65 | |||||||||||||||
59 | 79 | (20 | ) | 79 | (56 | ) | 135 | 430 | 343 | 87 | ||||||||||||||||
Financial investments: | ||||||||||||||||||||||||||
– in offices in the UK | (385 | ) | (102 | ) | (283 | ) | 103 | (165 | ) | 268 | 181 | (85 | ) | 266 | ||||||||||||
– in offices outside the UK | 245 | (163 | ) | 408 | (378 | ) | 32 | (410 | ) | 363 | 202 | 161 | ||||||||||||||
(140 | ) | (265 | ) | 125 | (275 | ) | (133 | ) | (142 | ) | 544 | 117 | 427 | |||||||||||||
Reverse repurchase agreements and cash collateral on securities borrowed: | ||||||||||||||||||||||||||
– in offices in the UK | (876 | ) | (188 | ) | (688 | ) | 3,508 | 1,865 | 1,643 | 1,519 | 324 | 1,195 | ||||||||||||||
– in offices outside the UK | (1,004 | ) | 855 | (1,859 | ) | 414 | 430 | (16 | ) | 2,316 | 254 | 2,062 | ||||||||||||||
(1,880 | ) | 667 | (2,547 | ) | 3,922 | 2,295 | 1,627 | 3,835 | 578 | 3,257 | ||||||||||||||||
Trading portfolio assets: | ||||||||||||||||||||||||||
– in offices in the UK | (978 | ) | (616 | ) | (362 | ) | 1,760 | 621 | 1,139 | 1,456 | 907 | 549 | ||||||||||||||
– in offices outside the UK | 2,088 | 3,303 | (1,215 | ) | 881 | (172 | ) | 1,053 | 492 | 151 | 341 | |||||||||||||||
1,110 | 2,687 | (1,577 | ) | 2,641 | 449 | 2,192 | 1,948 | 1,058 | 890 | |||||||||||||||||
Total interest receivable: | ||||||||||||||||||||||||||
– in offices in the UK | (1,175 | ) | 1,973 | (3,148 | ) | 7,561 | 4,034 | 3,527 | 4,319 | 1,923 | 2,396 | |||||||||||||||
– in offices outside the UK | 3,505 | 6,405 | (2,900 | ) | 3,106 | 987 | 2,119 | 5,690 | 2,761 | 2,929 | ||||||||||||||||
2,330 | 8,378 | (6,048 | ) | 10,667 | 5,021 | 5,646 | 10,009 | 4,684 | 5,325 |
Barclays Annual Report 2008 | 23 |
Financial review
Additional financial disclosure
Average balance sheet
Changes in net interest income – volume and rate analysis
2008/2007 Change due to increase/ (decrease) in: | 2007/2006 Change due to increase/ (decrease) in: | 2006/2005 Change due to increase/ (decrease) in: | |||||||||||||||||||||||||
Total change £m | Volume £m | Rate £m | Total change £m | Volume £m | Rate £m | Total change £m | Volume £m | Rate £m | |||||||||||||||||||
Interest payable | |||||||||||||||||||||||||||
Deposits by banks: | |||||||||||||||||||||||||||
– in offices in the UK | 269 | 252 | 17 | 47 | 66 | (19 | ) | 799 | 247 | 552 | |||||||||||||||||
– in offices outside the UK | (269 | ) | 181 | (450 | ) | 88 | 190 | (102 | ) | 432 | 52 | 380 | |||||||||||||||
– | 433 | (433 | ) | 135 | 256 | (121 | ) | 1,231 | 299 | 932 | |||||||||||||||||
Customer accounts – demand deposits: | |||||||||||||||||||||||||||
– in offices in the UK | 52 | (155 | ) | 207 | 178 | 105 | 73 | 170 | 68 | 102 | |||||||||||||||||
– in offices outside the UK | 168 | 34 | 134 | 150 | 95 | 55 | 166 | 80 | 86 | ||||||||||||||||||
220 | (121 | ) | 341 | 328 | 200 | 128 | 336 | 148 | 188 | ||||||||||||||||||
Customer accounts – savings deposits: | |||||||||||||||||||||||||||
– in offices in the UK | 95 | 527 | (432 | ) | 357 | (81 | ) | 438 | 121 | 152 | (31 | ) | |||||||||||||||
– in offices outside the UK | 285 | 77 | 208 | 54 | 45 | 9 | 35 | 28 | 7 | ||||||||||||||||||
380 | 604 | (224 | ) | 411 | (36 | ) | 447 | 156 | 180 | (24 | ) | ||||||||||||||||
Customer accounts – other time deposits – retail: | |||||||||||||||||||||||||||
– in offices in the UK | (78 | ) | 86 | (164 | ) | 53 | (204 | ) | 257 | 78 | 41 | 37 | |||||||||||||||
– in offices outside the UK | 626 | 500 | 126 | 242 | 200 | 42 | 222 | 125 | 97 | ||||||||||||||||||
548 | 586 | (38 | ) | 295 | (4 | ) | 299 | 300 | 166 | 134 | |||||||||||||||||
Customer accounts – other time deposits – wholesale: | |||||||||||||||||||||||||||
– in offices in the UK | (120 | ) | 367 | (487 | ) | 688 | 263 | 425 | 603 | 129 | 474 | ||||||||||||||||
– in offices outside the UK | 433 | 469 | (36 | ) | 470 | 45 | 425 | 601 | 550 | 51 | |||||||||||||||||
313 | 836 | (523 | ) | 1,158 | 308 | 850 | 1,204 | 679 | 525 | ||||||||||||||||||
Debt securities in issue: | |||||||||||||||||||||||||||
– in offices in the UK | (133 | ) | (26 | ) | (107 | ) | 203 | (240 | ) | 443 | 219 | 22 | 197 | ||||||||||||||
– in offices outside the UK | (1,321 | ) | (673 | ) | (648 | ) | 1,369 | 1,063 | 306 | 1,991 | 850 | 1,141 | |||||||||||||||
(1,454 | ) | (699 | ) | (755 | ) | 1,572 | 823 | 749 | 2,210 | 872 | 1,338 | ||||||||||||||||
Dated and undated loan capital and other subordinated liabilities principally in offices in the UK | 672 | 620 | 52 | (14 | ) | (41 | ) | 27 | 172 | 135 | 37 | ||||||||||||||||
Repurchase agreements and cash collateral on securities lent: | |||||||||||||||||||||||||||
– in offices in the UK | 829 | 1,471 | (642 | ) | 2,536 | 1,090 | 1,446 | 1,446 | 329 | 1,117 | |||||||||||||||||
– in offices outside the UK | (2,251 | ) | 1,840 | (4,091 | ) | 740 | 1,402 | (662 | ) | 1,932 | 200 | 1,732 | |||||||||||||||
(1,422 | ) | 3,311 | (4,733 | ) | 3,276 | 2,492 | 784 | 3,378 | 529 | 2,849 | |||||||||||||||||
Trading portfolio liabilities: | |||||||||||||||||||||||||||
– in offices in the UK | 380 | 408 | (28 | ) | 263 | (80 | ) | 343 | 277 | 222 | 55 | ||||||||||||||||
– in offices outside the UK | 652 | 1,189 | (537 | ) | 83 | (366 | ) | 449 | 156 | 85 | 71 | ||||||||||||||||
1,032 | 1,597 | (565 | ) | 346 | (446 | ) | 792 | 433 | 307 | 126 | |||||||||||||||||
Total interest payable: | |||||||||||||||||||||||||||
– in offices in the UK | 1,966 | 3,550 | (1,584 | ) | 4,311 | 878 | 3,433 | 3,885 | 1,345 | 2,540 | |||||||||||||||||
– in offices outside the UK | (1,677 | ) | 3,617 | (5,294 | ) | 3,196 | 2,674 | 522 | 5,535 | 1,970 | 3,565 | ||||||||||||||||
289 | 7,167 | (6,878 | ) | 7,507 | 3,552 | 3,955 | 9,420 | 3,315 | 6,105 | ||||||||||||||||||
Movement in net interest income Increase/(decrease) in interest receivable | 2,330 | 8,378 | (6,048 | ) | 10,667 | 5,021 | 5,646 | 10,009 | 4,684 | 5,325 | |||||||||||||||||
(Increase)/decrease in interest payable | (289 | ) | (7,167 | ) | 6,878 | (7,507 | ) | (3,552 | ) | (3,955 | ) | (9,420 | ) | (3,315 | ) | (6,105 | ) | ||||||||||
2,041 | 1,211 | 830 | 3,160 | 1,469 | 1,691 | 589 | 1,369 | (780 | ) |
24 | Barclays Annual Report 2008 |
Financial review
Additional financial disclosure
Off-balance sheet arrangements
In the ordinary course of business and primarily to facilitate client transactions, the Group enters into transactions which may involve the use of off-balance sheet arrangements and special purpose entities (SPEs). These arrangements include the provision of guarantees, loan commitments, retained interests in assets which have been transferred to an unconsolidated SPE or obligations arising from the Group’s involvements with such SPEs.
Guarantees
The Group issues guarantees on behalf of its customers. In the majority of cases, the Group will hold collateral against the exposure, have a right of recourse to the customer or both. In addition, the Group issues guarantees on its own behalf. The main types of guarantees provided are: financial guarantees given to banks and financial institutions on behalf of customers to secure loans; overdrafts; and other banking facilities, including stock borrowing indemnities and standby letters of credit. Other guarantees provided include performance guarantees, advance payment guarantees, tender guarantees, guarantees to Her Majesty’s Revenue and Customs and retention guarantees. The nominal principal amount of contingent liabilities with off-balance sheet risk is set out in Note 34 and in the table on page 33.
Loan commitments
The Group enters into commitments to lend to its customers subject to certain conditions. Such loan commitments are made either for a fixed period or are cancellable by the Group subject to notice conditions. Information on loan commitments and similar facilities is set out in Note 34 and in the table on page 33.
Special purpose entities
Transactions entered into by the Group may involve the use of SPEs.
SPEs are entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their on-going activities.
Transactions with SPEs take a number of forms, including:
– | The provision of financing to fund asset purchases, or commitments to provide finance for future purchases. |
– | Derivative transactions to provide investors in the SPE with a specified exposure. |
– | The provision of liquidity or backstop facilities which may be drawn upon if the SPE experiences future funding difficulties. |
– | Direct investment in the notes issued by SPEs. |
Depending on the nature of the Group’s resulting exposure, it may consolidate the SPE on to the Group’s balance sheet. The consolidation of SPEs is considered at inception, based on the arrangements in place and the assessed risk exposures at that time. In accordance with IFRS, SPEs are consolidated when the substance of the relationship between the Group and the entity indicates control. Potential indicators of control include, amongst others, an assessment of the Group’s exposure to the risks and benefits of the SPE. The initial consolidation analysis is revisited at a later date if:
(i) | the Group acquires additional interests in the entity; |
(ii) | the contractual arrangements of the entity are amended such that the relative exposures to risks and rewards change; or if |
(iii) | the Group acquires control over the main operating and financial decisions of the entity. |
A number of the Group’s transactions have recourse only to the assets of unconsolidated SPEs. Typically, the majority of the exposure to these assets is borne by third parties and the Group’s risk is mitigated through over-collateralisation, unwind features and other protective measures. The Group’s involvement with unconsolidated third party conduits, collateralised debt obligations and structured investment vehicles is described further below.
Collateralised debt obligations (CDOs)
The Group has structured and underwritten CDOs. At inception, the Group’s exposure principally takes the form of a liquidity facility provided to support future funding difficulties or cash shortfalls in the vehicles. If required by the vehicle, the facility is drawn with the amount advanced included within loans and advances in the balance sheet. Upon an event of default or other triggering event, the Group may acquire control of a CDO and, therefore, be required to fully consolidate the vehicle for accounting purposes. The potential for transactions to hit default triggers before the end of 2009 has been assessed and is included in the determination of £1,763m impairment charges and other credit provisions in relation to ABS CDO Super Senior and other credit market exposures for the year ended 31st December 2008.
The Group’s exposure to ABS CDO Super Senior positions before hedging was £3,104m as at 31st December 2008. This represents the Group’s exposure to High Grade CDOs, stated net of write-downs and charges. These facilities are fully drawn and included within loans and advances on the balance sheet. The undrawn mezzanine facilities that were in place as at 31st December 2007 relate to CDOs that have been consolidated during the period.
Collateral
The collateral underlying unconsolidated CDOs comprised 78% residential mortgage backed securities, 3% non-residential asset backed securities and 19% in other categories (a proportion of which will be backed by residential mortgage collateral).
The remaining Weighted Average Life (WAL) of all collateral is 5.1 years. The combined Net Asset Value (NAV) for all of the CDOs was £2.2bn below the nominal amount, equivalent to an aggregate 41.3% decline in value on average for all investors.
Funding
The CDOs were funded with senior unrated notes and rated notes up to AAA. The capital structure senior to the AAA notes on cash CDOs was supported by a liquidity facility provided by the Group. The senior portion covered by liquidity facilities is on average 85% of the capital structure.
The initial WAL of the notes in issue averaged 6.7 years. The full contractual maturity is 38 years.
Interests in third party CDOs
The Group has purchased securities in and entered into derivative instruments with third party CDOs. These interests are held as trading assets or liabilities on the Group’s balance sheet and measured at fair value. The Group has not provided liquidity facilities or similar agreements to third party CDOs.
Barclays Annual Report 2008 | 25 |
Financial review
Additional financial disclosure
Off-balance sheet arrangements
Structured investment vehicles (SIVs)
The Group has not structured or managed SIVs. Group exposure to third party SIVs comprised:
– | £41m of senior liquidity facilities. |
– | Derivative exposures included on the balance sheet at their net fair value of £273m. |
– | Bonds issued by the SIVs included within trading portfolio assets at their fair value of £11m. |
SIV-Lites
The Group has exposure to two SIV-Lite transactions. The Group is not involved in their ongoing management. Exposures have increased by £531m relating to a SIV-Lite which had previously been hedged with Lehman Brothers. Following the Lehman Brothers bankruptcy this facility was reflected as a new exposure to the underlying assets. The other SIV-Lite of £107m represents drawn liquidity facilities supporting a CP programme.
During 2008 exposure to a third SIV-Lite through bond holdings was written down to zero.
Commercial paper and medium-term note conduits
The Group provided £22bn in undrawn backstop liquidity facilities to its own sponsored CP conduits. The Group fully consolidates these entities such that the underlying assets are reflected on the Group balance sheet.
These consolidated entities in turn provide facilities of £899m to third party conduits containing prime UK buy-to-let RMBS. As at 31st December 2008, the entire facility had been drawn and is included in available for sale financial investments.
The Group provided backstop facilities to support the paper issued by four third party conduits. These facilities totalled £866m, with underlying collateral comprising 100% auto loans. Drawings on these facilities were £25m as at 31st December 2008 and are included within loans and advances to customers.
The Group provided backstop facilities to six third party SPEs that fund themselves with medium-term notes. These notes are sold to investors as a series of 12 month securities and remarketed to investors annually. If investors decline to renew their holdings at a price below a pre-agreed spread, the backstop facility requires the Group to purchase the outstanding notes at scheduled maturity. The Group has provided facilities of £2.6bn to SPEs holding prime UK and Australian owner-occupied Residential Mortgage Back Securities (RMBS) assets. As at the balance sheet date these facilities had been drawn and were included in loans and advances.
Asset securitisations
The Group has assisted companies with the formation of asset securitisations, some of which are effected through the use of SPEs. These entities have minimal equity and rely on funding in the form of notes to purchase the assets for securitisation. As these SPEs are created for other companies, the Group does not usually control these entities and therefore does not consolidate them. The Group may provide financing in the form of senior notes or junior notes and may also provide derivatives to the SPE. These transactions are included on the balance sheet.
The Group has used SPEs to securitise part of its originated and purchased retail and commercial lending portfolios and credit card receivables. These SPEs are usually consolidated and de-recognition only occurs when the Group transfers its contractual right to receive cash flows from the financial assets, or retains the contractual rights to receive the cash flows, but assumes a contractual obligation to pay the cash flows to another party without material delay or reinvestment, and also transfers substantially all the risks and rewards of ownership, including credit risk, prepayment risk and interest rate risk. The carrying amount of securitised assets together with the associated liabilities are set out in Note 29.
Client intermediation
The Group has structured transactions as a financial intermediary to meet investor and client needs. These transactions involve entities structured by either the Group or the client and they are used to modify cash flows of third party assets to create investments with specific risk or return profiles or to assist clients in the efficient management of other risks. Such transactions will typically result in a derivative being shown on the balance sheet, representing the Group’s exposure to the relevant asset.
The Group also invests in lessor entities specifically to acquire assets for leasing. Client intermediation also includes arrangements to fund the purchase or construction of specific assets (most common in the property industry).
Fund management
The Group provides asset management services to a large number of investment entities on an arm’s length basis and at market terms and prices. The majority of these entities are investment funds that are owned by a large and diversified number of investors. These funds are not consolidated because the Group does not own either a significant portion of the equity or the risks and rewards inherent in the assets.
During 2008, Group operating expenses included charges of £263m related to selective support of liquidity products managed by Barclays Global Investors and not consolidated by the Group. The Group have not provided any additional selective support subsequent to 31st December 2008.
26 | Barclays Annual Report 2008 |
Financial review
Additional financial disclosure
The Group’s accounting policies are set out on pages 193 to 203. Certain of these policies, as well as estimates made by management, are considered to be important to an understanding of the Group’s financial condition since they require management to make difficult, complex or subjective judgements and estimates, some of which may relate to matters that are inherently uncertain. The following accounting policies include estimates which are particularly sensitive in terms of judgements and the extent to which estimates are used. Other accounting policies involve significant amounts of judgements and estimates, but the total amounts involved are not significant to the financial statements. Management has discussed the accounting policies and critical accounting estimates with the Board Audit Committee.
Fair value of financial instruments
Some of the Group’s financial instruments are carried at fair value through profit or loss such as those held for trading, designated by management under the fair value option and non-cash flow hedging derivatives.
Other non-derivative financial assets may be designated as available for sale. Available for sale financial investments are initially recognised at fair value and are subsequently held at fair value. Gains and losses arising from changes in fair value of such assets are included as a separate component of equity. Financial instruments entered into as trading transactions, together with any associated hedging, are measured at fair value and the resultant profits and losses are included in net trading income, along with interest and dividends arising from long and short positions and funding costs relating to trading activities. Assets and liabilities resulting from gains and losses on financial instruments held for trading are reported gross in trading portfolio assets and liabilities or derivative financial instruments, reduced by the effects of netting agreements where there is an intention to settle net with counterparties.
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Where a valuation model is used to determine fair value, it makes maximum use of market inputs. Financial instruments with a fair value based on observable inputs include valuations determined by unadjusted quoted prices in an active market and market standard pricing models that use observable inputs.
Financial instruments whose fair value is determined, at least in part, using unobservable inputs are further categorised into Vanilla and Exotic products as follows:
– | Vanilla products are valued using simple models such as discounted cash flow or Black Scholes models however, some of the inputs are not observable. |
– | Exotic products are over-the-counter products that are relatively bespoke, not commonly traded in the markets, and their valuation comes from sophisticated mathematical models where some of the inputs are not observable. |
An analysis of financial instruments carried at fair value by valuation technique, including the extent of valuations based on unobservable inputs, together with a sensitivity analysis of valuations using unobservable inputs is included in Note 50.
Allowances for loan impairment and other credit risk provisions
Allowances for loan impairment represent management’s estimate of the losses incurred in the loan portfolios as at the balance sheet date. Changes to the allowances for loan impairment and changes to the provisions for undrawn contractually committed facilities and guarantees provided are reported in the consolidated income statement as part of the impairment charge. Provision is made for undrawn loan commitments and similar facilities if it is probable that the facility will be drawn and result in recognition of an asset at an amount less than the amount advanced.
Within the retail and small businesses portfolios, which comprise large numbers of small homogeneous assets with similar risk characteristics where credit scoring techniques are generally used, statistical techniques are used to calculate impairment allowances on a portfolio basis, based on historical recovery rates and assumed emergence periods. These statistical analyses use as primary inputs the extent to which accounts in the portfolio are in arrears and historical information on the eventual losses encountered from such delinquent portfolios. There are many such models in use, each tailored to a product, line of business or customer category. Judgement and knowledge is needed in selecting the statistical methods to use when the models are developed or revised. The impairment allowance reflected in the financial statements for these portfolios is therefore considered to be reasonable and supportable. The impairment charge reflected in the income statement for these portfolios is £2,333m (2007: £1,605m) and amounts to 51% (2007: 70%) of the total impairment charge on loans and advances in 2008.
For larger accounts, impairment allowances are calculated on an individual basis and all relevant considerations that have a bearing on the expected future cash flows are taken into account, for example, the business prospects for the customer, the realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. The level of the impairment allowance is the difference between the value of the discounted expected future cash flows (discounted at the loan’s original effective interest rate), and its carrying amount. Subjective
Barclays Annual Report 2008 | 27 |
Financial review
Additional financial disclosure
Critical accounting estimates
judgements are made in the calculation of future cash flows. Furthermore, judgements change with time as new information becomes available or as work-out strategies evolve, resulting in frequent revisions to the impairment allowance as individual decisions are taken. Changes in these estimates would result in a change in the allowances and have a direct impact on the impairment charge. The impairment charge reflected in the financial statements in relation to larger accounts is £2,251m (2007: £701m) or 49% (2007: 30%) of the total impairment charge on loans and advances in 2007. Further information on impairment allowances is set out in Note 47 on pages 257 and 260.
Goodwill
Management have to consider at least annually whether the current carrying value of goodwill is impaired. The first step of the impairment review process requires the identification of independent cash generating units, by dividing the Group business into as many largely independent income streams as is reasonably practicable. The goodwill is then allocated to these independent units. The first element of this allocation is based on the areas of the business expected to benefit from the synergies derived from the acquisition. The second element reflects the allocation of the net assets acquired and the difference between the consideration paid for those net assets and their fair value. This allocation is reviewed following business reorganisation. The carrying value of the unit, including the allocated goodwill, is compared to its fair value to determine whether any impairment exists. If the fair value of a unit is less than its carrying value, goodwill will be impaired. Detailed calculations may need to be carried out taking into consideration changes in the market in which a business operates (e.g. competitive activity, regulatory change). In the absence of readily available market price data this calculation is based
upon discounting expected pre-tax cash flows at a risk adjusted interest rate appropriate to the operating unit, the determination of both of which requires the exercise of judgement. The estimation of pre-tax cash flows is sensitive to the periods for which detailed forecasts are available and to assumptions regarding the long-term sustainable cash flows. While forecasts are compared with actual performance and external economic data, expected cash flows naturally reflect management’s view of future performance. The most significant amounts of goodwill relate to UK Retail Banking, GRCB – Absa and Barclays Global Investors, where goodwill impairment testing performed in 2008 indicated that this goodwill was not impaired. Goodwill impairment of £111m relating to FirstPlus and EquiFirst was recognised in 2008 (2007: nil). An analysis of goodwill by cluster, together with key assumptions underlying the impairment testing, is included in Note 21 on page 208.
Intangible assets
Intangible assets that derive their value from contractual customer relationships or that can be separated and sold and have a finite useful life are amortised over their estimated useful life. Determining the estimated useful life of these finite life intangible assets requires an analysis of circumstances, and judgement by the Bank’s management. At each balance sheet date, or more frequently when events or changes in circumstances dictate, intangible assets are assessed for indications of impairment. If indications are present, these assets are subject to an impairment review. The impairment review comprises a comparison of the carrying amount of the asset with its recoverable amount: the higher of the asset’s or the cash-generating unit’s net selling price and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm’s length
28 | Barclays Annual Report 2008 |
transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market-based discount rate on a pre-tax basis. The most significant amounts of intangible assets relate to the GRCB – Absa and Lehman Brothers North American businesses.
Retirement benefit obligations
The Group provides pension plans for employees in most parts of the world. Arrangements for staff retirement benefits vary from country to country and are made in accordance with local regulations and customs. For defined contribution schemes, the pension cost recognised in the profit and loss account represents the contributions payable to the scheme. For defined benefit schemes, actuarial valuation of each of the scheme’s obligations using the projected unit credit method and the fair valuation of each of the scheme’s assets are performed annually in accordance with the requirements of IAS 19.
The actuarial valuation is dependent upon a series of assumptions, the key ones being interest rates, mortality, investment returns and inflation. Mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the Group’s own experience. The returns on fixed interest investments are set to market yields at the valuation date (less an allowance for risk) to ensure consistency with the asset valuation. The returns on UK and overseas equities are based on the long-term outlook for global equities at the calculation date having regard to current market yields and dividend growth expectations. The inflation assumption reflects long-term expectations of both earnings and retail price inflation.
The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognised actuarial gains or losses and past service cost, is recognised as a liability in the balance sheet. An asset arising, for example, as a result of past over-funding or the performance of the plan investments, is recognised to the extent that it does not exceed the present value of future contribution holidays or refunds of contributions. To the extent that any unrecognised gains or losses at the start of the measurement year in relation to any individual defined benefit scheme exceed 10% of the greater of the fair value of the scheme assets and the defined benefit obligation for that scheme, a proportion of the excess is recognised in the income statement.
The Group’s IAS 19 pension deficit across all schemes as at 31st December 2008 was £1,287m (2007: surplus of £393m). There are net recognised liabilities of £1,292m (2007: £1,501m) and unrecognised actuarial gains of £5m (2007: £1,894m). The net recognised liabilities comprised retirement benefit liabilities of £1,357m (2007: £1,537m) and assets of £65m (2007: £36m).
The Group’s IAS 19 pension deficit in respect of the main UK scheme as at 31st December 2008 was £858m (2007: surplus of £668m). Among the reasons for this change were the large loss in value of the assets over the year, and to a lesser extent the strengthening of the allowance made for future improvement in mortality. Offsetting these were the increase in the AA long-term corporate bond yields which resulted in a higher discount rate of 6.75% (2007: 5.82%), a decrease in the inflation assumption to 3.16% (2007: 3.45%) and contributions paid. Further information on retirement benefit obligations, including assumptions, is set out in Note 30 to the accounts on page 220.
Barclays Annual Report 2008 | 29 |
Business descriptionDescription
Barclays Overview
Listed in London and New York, Barclays is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services with an extensive international presence in Europe, United States, Africa and Asia. With a strong long-term credit rating and over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs 156,000 people. Barclays moves, lends and invests money for 48 million customers and clients worldwide.
The following section analyses the Group’s performance by business. For management and reporting purposes, Barclays is organised into the following business groupings:
Global Retail and Commercial Banking
UK Retail Banking |
– |
Barclays Commercial Bank |
|
|
– | Barclaycard |
– | GRCB –Western Europe |
– | GRCB – Emerging Markets |
– | GRCB – Absa |
Investment Banking and Investment Management
Barclays Capital |
Barclays Global Investors |
|
Head office functionsOffice Functions and other operationsOther Operations
UK Banking
UK Banking delivers banking solutions to Barclays UK retail and business banking customers. It offers a range of integrated products and services and access to the expertise of other Group businesses. Customers are served through a variety of channels comprising the branch network, automated teller machines, telephone banking, online banking and relationship managers. UK Banking is managed through two business areas, UK Retail Banking and Barclays Commercial Bank.
UK Retail Banking
UK Retail Banking, one of the largest retail banks in the UK with over 1,700 branches, comprises Personal Customers, Home Finance, Local Business, Consumer Lending and Barclays Financial Planning. This cluster of businesses aims to build broader and deeper relationships with its Personal and Local Business customers through providing a wide range of products and financial services. Personal Customers and Home Finance provide access to current account and savings products, Woolwich branded mortgages and general insurance. Consumer Lending provides unsecured loan and protection products and Barclays Financial Planning provides investment advice and products. Local Business provides banking services, including money transmission, to small businesses.
Barclays Commercial Bank
Barclays Commercial Bank provides banking services to organisationsover 81,000 business clients with an annual turnover of more than £1m. Customers are served via a network of relationship and industry sector specialists, which provides solutions constructed from a comprehensive suite of banking products, support, expertise and services, including specialist asset financing and leasing facilities. Customers are also offered access to the products and expertise of other businesses in the Barclays Group, particularly Barclays Capital, Barclaycard and Barclays Wealth.
Barclaycard
Barclaycard is a multi-brand credit card and consumer lending business which also processes card payments for retailers and merchants and issues credit and charge cards to corporate customers and the UK Government. ItWith 23 million customers in the UK, Europe and the United States, it is one of Europe’s leading credit card businesses and has an increasing presence in the United States.
States and South Africa. In the UK, Barclaycard comprises Barclaycard UK Cards, Barclaycard Partnerships, (SkyCard, Thomas Cook, Argos and Solution Personal Finance), Barclays Partner Finance (formerly CFS) and FirstPlus.
Outside the UK, Barclaycard provides credit cards in the United States, Germany, Spain, ItalySouth Africa (through management of the Absa credit card portfolio) and Portugal. Inin the NordicScandinavian region, where Barclaycard operates through Entercard, a joint venture with Swedbank.
Barclaycard works closely with other parts of the Group, including UK Retail Banking, Barclays Commercial Bank and International RetailGRCB –Western Europe and Commercial Banking,GRCB – Emerging Markets, to leverage their distribution capabilities.
InternationalGlobal Retail and Commercial Banking –Western Europe
InternationalGRCB –Western Europe encompasses Barclays Global Retail and Commercial Banking provides banking services to Barclays personalas well as Barclaycard operations in Spain, Italy, Portugal and France. GRCB –Western Europe serves two million retail, premier, card, SME and corporate customers outsidethrough a variety of distribution channels from nearly 1,200 distribution points. GRCB –Western Europe provides a variety of products including Retail mortgages, current and deposit accounts, commercial lending, unsecured lending, credit cards, investments and insurance, serving the UK. The productsneeds of Barclays retail, mass affluent, and services offered to customers are tailored to meet the customer needs and the regulatory and commercial environments within each country. For reporting purposes, the operations are grouped into two components: International Retail and Commercial Banking-excluding Absa and International Retail and Commercial Banking-Absa. Internationalcorporate customers.
Global Retail and Commercial Banking works closely with all other parts of the Group to leverage synergies from product and service propositions.
International Retail and Commercial Banking-excluding Absa– Emerging Markets
InternationalGRCB – Emerging Markets encompasses Barclays Global Retail and Commercial Banking, - excluding Absaas well as Barclaycard operations, in 14 countries organised in six geographic areas: India and Indian Ocean (India, Mauritius and Seychelles); Middle East and North Africa (UAE and Egypt); East and West Africa (Ghana, Tanzania, Uganda and Kenya); Southern Africa (Botswana, Zambia and Zimbabwe); Russia; and Pakistan (from 23rd July 2008). GRCB – Emerging Markets serves over four million customers through a variety of distribution channels, opening over 280 distribution points in 2008. GRCB – Emerging Markets provides a rangevariety of banking services totraditional retail and corporate customers in Western Europecommercial products including retail mortgages, current and Emerging Markets, including currentdeposit accounts, savings, investments, mortgagescommercial lending, unsecured lending, credit cards, treasury and loans. Barclays Western Europe business includes Spain, Italy, Franceinvestments. In addition to this, it provides specialist services such as Sharia-compliant products and Portugal. Emerging Markets includes operations in Africa, India and the Middle East.mobile banking.
InternationalGlobal Retail and Commercial Banking-AbsaBanking – Absa
International Retail and Commercial Banking-AbsaGRCB – Absa represents Barclays consolidation of Absa, excluding Absa Capital and Absa Card which is included as part of Barclays Capital.Capital and Barclaycard respectively. Absa Group Limited is one ofa South Africa’s largestAfrican financial services organisationsorganisation serving over 10 million personal, commercial and corporate customers predominantly in South Africa. International Retail and Commercial Banking-AbsaAfrica, from over 1,100 distribution points. GRCB – Absa serves retail customers through a variety of distribution channels and offers a full range of banking services, including current and deposit accounts, mortgages, instalment finance, credit cards, bancassurance products and wealth management services. It also offers customised business solutions for commercial and large corporate customers.
| ||
Barclays Capital
Barclays Capital is a leading globalthe investment bank whichbanking division of Barclays that provides large corporate, institutional and government clients with solutions to their financing and risk management needs.
Barclays Capital services a wide variety of client needs, fromcovering strategic advisory and Mergers and Acquisitions; equity and fixed income capital raising and managingcorporate lending; and risk management across foreign exchange, interest rate, equityrates, equities and commodity risks, through to providing technical advice and expertise.commodities. Activities are organised into three principal areas: Rates,Global Markets, which includes fixed income,commodities, credit products, equities, foreign exchange, commodities, emerging markets, money markets, prime services and equityinterest rate products; Credit,Investment Banking, which includes primarycorporate advisory, Mergers and secondary activities for loansAcquisitions, equity and bonds for investment grade, high yieldfixed-income capital raising and emerging market credit, as well as hybrid capital products, asset based finance, mortgage backed securities, credit derivatives, structured capital markets and large asset leasing;corporate lending; and Private Equity.Equity and Principal Investments. Barclays Capital includes Absa Capital, the investment banking business of Absa. Barclays Capital works closely with all other parts of the Group to leverage synergies from client relationships and product capabilities.
Barclays Global Investors
Barclays Global Investors (BGI)BGI is one of the world’s largestan asset managersmanager and a leading global provider of investment management products and services.
services, with US$1.5 trillion assets under management. BGI offers structured investment strategies such as indexing, global asset allocation and risk controlled active products including hedge funds and provides related investment services such as securities lending, cash management and portfolio transition services. In addition, BGI is the global leader in assets and products in the exchange traded funds business, with over 320 funds for institutions and individuals trading globally. BGI’s investment philosophy is founded on managing all dimensions of performance: a consistent focus on controlling risk, return and cost. BGI collaborates with the other Barclays businesses, particularly Barclays Capital and Barclays Wealth, to develop and market products and leverage capabilities to better serve the client base.
Barclays Wealth
Barclays Wealth serves high net worth, affluent and intermediary clients worldwide, providing private banking, asset management, stockbroking, offshore banking, wealth structuring and financial planning services and managesmanaged the closed life assurance activities of Barclays and Woolwich in the UK.
Barclays Wealth works closely with all other parts of the Group to leverage synergies from client relationships and product capabilities.
Head office functionsOffice Functions and other operationsOther Operations
Head Office Functions and Other Operations comprises head office and central support functions, businesses in transition and other operations comprise:
inter-segment adjustments. Head office and central support functions comprises the following areas: Executive Management, Finance, Treasury, Corporate Affairs, Human Resources, Strategy and Planning, Internal Audit, Legal, Corporate Secretariat, Property, Tax, Compliance and Risk. Costs incurred wholly on behalf of the businesses are recharged to them.
Businesses in transition principally relate to certain lending portfolios that are centrally managed with the objective of maximising recovery from the assets.
Consolidation adjustments largely reflect the elimination of inter-segment transactions.
| ||
Financial review
Analysis of results by business
Note
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Global Retail and Commercial Banking
UK Banking
Who we are
UK Banking comprises UK Retail Banking and Barclays Commercial Bank (formerly UK Business Banking).
What we do
UK Banking delivers banking solutions to Barclays retail and business banking customers in the United Kingdom. We offer a range of integrated products and services and access to the expertise of other Group businesses. Customers are served through a variety of channels comprising the branch network, automated teller machines, telephone banking, online banking and relationship managers.
Highlights
Performance
2007/06
UK Banking profit before tax increasedgrew 7% to £1,369m. Income grew 4% (£107m) to £2,653m (2006: £2,546m)£4,482m, reflecting strong growth in Home Finance and minimal settlements on overdraft fees. Loans and advances grew 15% driven principally by solid income growth. Results includeda market share of net new mortgage lending of 36%. Operating expenses showed a modest increase of 2% reflecting active management of the cost base and reduced gains from the sale and leaseback of properties and property sales of £232m (2006: £313m).
property. The cost:income ratio improved one percentage pointpoint. Impairment charges increased 8% reflecting strong growth in assets and a deteriorating economic environment.
Barclays Commercial Bank profit before tax decreased 7% to 49%. Excluding£1,266m. Income growth of 7% principally reflected increased sales of treasury products. Loans and advances to customers increased 14% to £80.5bn. Costs increased 14% driven by lower gains on the impactsale of settlementsproperty, further investment in new payments capability, and growth in the operating lease business. Impairment charges increased 42% as the deteriorating economic environment caused higher delinquency and lower recovery rates on overdraft fees in relation to prior years (£116m), the cost:income ratio improved two percentage points to 48%, making eight percentage points of improvement from 2004 to 2007 compared to the target of six percentage points.corporate credit.
2006/05
UK BankingBarclaycard profit before tax increased 14% (£310m)31% to £2,546m (2005: £2,236m)£789m, including £260m from Barclaycard International. Income growth of 27% reflected strong growth in Barclaycard International, the income related to Goldfish since acquisition, and gains relating to the Visa IPO and the sale of MasterCard shares. Costs increased 30% reflecting continued international growth, increased marketing expenditure and the impact of Goldfish. Impairment charges increased 33% reflecting growth in charges in the international businesses and the acquisition of Goldfish, partly offset by lower impairment in the other UK businesses.
GRCB – Western Europe profit before tax grew 31% to £257m. Income grew 53%, driven principallyby very strong growth in deposits, mortgages
and commercial lending across the expanded franchise, as well as gains of £82m relating to the Visa IPO and the sale of MasterCard shares. Costs increased 38% reflecting the expansion of the network by 347 distribution points to 1,145 and continued strategic investment in the Premier and core retail businesses. Impairment charges increased £220m to £296m, largely driven by deteriorating trends in Spain which led to losses in property-related commercial banking exposures and credit cards.
GRCB – Emerging Markets profit before tax increased 34% to £134m. Income increased 91%, driven by retail expansion in India, entry into new markets in Russia and Pakistan and strong performances in Africa, as well as gains of £82m relating to the Visa IPO and sale of MasterCard shares. Operating expense growth of 82% reflected continued investment in business infrastructure, distribution and new markets. Distribution points increased 286 to 836. Impairment charges increased £127m to £166m reflecting asset growth, and increased wholesale impairment in Africa.
GRCB – Absa profit before tax decreased 8% to £552m. Income growth of 10% was driven by higher fees and commissions, balance sheet growth as well as a gain relating to the Visa IPO. Operating expenses increased 3%, well below the rate of inflation, reflecting investment in new distribution points, which increased 176 to 1,177, offset by good cost control. This led to a four percentage point improvement in the cost:income growth. Profit before business disposals grew 10% (£234m)ratio to £2,470m (2005: £2,236m)59%. Impairment charges rose £201m to £347m, mainly due to prolonged high interest rates and inflation rates and increased customer indebtedness resulting in higher delinquency levels in the retail portfolios.
Analysis of results by business
For the year ended 31st December 2008
UK £m | Barclays Commercial £m | Barclaycard £m | GRCB – Western Europe £m | GRCB – Emerging Markets £m | GRCB – Absa £m | |||||||||||||
Net interest income | 2,996 | 1,757 | 1,786 | 856 | 616 | 1,104 | ||||||||||||
Net fee and commission income | 1,299 | 861 | 1,299 | 383 | 223 | 762 | ||||||||||||
Principal transactions | – | 22 | 82 | 165 | 169 | 111 | ||||||||||||
Net premiums from insurance contracts | 205 | – | 44 | 352 | – | 234 | ||||||||||||
Other income | 17 | 105 | 19 | 39 | 11 | 113 | ||||||||||||
Total income | 4,517 | 2,745 | 3,230 | 1,795 | 1,019 | 2,324 | ||||||||||||
Net claims and benefits incurred on insurance contracts | (35 | ) | – | (11 | ) | (365 | ) | – | (126 | ) | ||||||||
Total income, net of insurance claims | 4,482 | 2,745 | 3,219 | 1,430 | 1,019 | 2,198 | ||||||||||||
Impairment charges and other credit provisions | (602 | ) | (414 | ) | (1,097 | ) | (296 | ) | (166 | ) | (347 | ) | ||||||
Net income | 3,880 | 2,331 | 2,122 | 1,134 | 853 | 1,851 | ||||||||||||
Operating expenses | (2,519 | ) | (1,063 | ) | (1,422 | ) | (929 | ) | (719 | ) | (1,305 | ) | ||||||
Share of post-tax results of associates and joint ventures | 8 | (2 | ) | (3 | ) | – | – | 5 | ||||||||||
Profit on disposal of subsidiaries | – | – | – | – | – | 1 | ||||||||||||
Gains on acquisitions | – | – | 92 | 52 | – | – | ||||||||||||
Profit before tax | 1,369 | 1,266 | 789 | 257 | 134 | 552 | ||||||||||||
As at 31st December 2008 | ||||||||||||||||||
Total assets | 101,384 | 84,029 | 30,925 | 64,732 | 14,653 | 40,391 | ||||||||||||
Total liabilities | 104,640 | 64,997 | 3,004 | 37,250 | 10,517 | 20,720 |
| ||
2007 £m | 2006 £m | 2005 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 4,596 | 4,467 | 4,213 | |||||||||||||
Net fee and commission income | 1,932 | 1,874 | 1,728 | |||||||||||||
Net trading income | 9 | 2 | – | |||||||||||||
Net investment income | 47 | 28 | 26 | |||||||||||||
Principal transactions | 56 | 30 | 26 | |||||||||||||
Net premiums from insurance contracts | 252 | 342 | 298 | |||||||||||||
Other income | 58 | 63 | 32 | |||||||||||||
Total income | 6,894 | 6,776 | 6,297 | |||||||||||||
Net claims and benefits incurred on insurance contracts | (43 | ) | (35 | ) | (61 | ) | ||||||||||
Total income, net of insurance claims | 6,851 | 6,741 | 6,236 | |||||||||||||
Impairment charges | (849 | ) | (887 | ) | (671 | ) | ||||||||||
Net income | 6,002 | 5,854 | 5,565 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (3,358 | ) | (3,387 | ) | (3,323 | ) | ||||||||||
Amortisation of intangible assets | (12 | ) | (2 | ) | (3 | ) | ||||||||||
Operating expenses | (3,370 | ) | (3,389 | ) | (3,326 | ) �� | ||||||||||
Share of post-tax results of associates and joint ventures | 7 | 5 | (3 | ) | ||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 14 | 76 | – | |||||||||||||
Profit before tax | 2,653 | 2,546 | 2,236 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 145.3bn | £ | 131.0bn | £ | 125.5bn | ||||||||||
Customer accounts | £ | 147.9bn | £ | 139.7bn | £ | 127.2bn | ||||||||||
Total assets | £ | 161.8bn | £ | 147.6bn | £ | 138.0bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 49 | % | 50 | % | 53 | % | ||||||||||
Risk Tendencya | £ | 775m | £ | 790m | £ | 665m | ||||||||||
Risk weighted assets | £ | 99.8bn | £ | 93.0bn | £ | 87.9bn |
Barclays Annual Report | |||
31 |
Investment Banking and Investment Management
Barclays Capital profit before tax was £1,302m in a very challenging market, down 44%, and included a gain on the acquisition of Lehman Brothers North American businesses of £2,262m. Net income of £2,808m was down 55% as the impact of market dislocation continued and included gross losses of £8,053m, partially offset by related income and hedges of £1,433m and gains of £1,663m from the general widening of credit spreads on structured notes issued by Barclays Capital. There were record performances in interest rate products, currency products, emerging markets, prime services and commodities. Equities, credit products, mortgages and asset backed securities and private equity were significantly impacted by market dislocation and recorded lower income than in 2007. Operating expenses, after absorbing Lehman Brothers North American businesses, were 5% lower than in 2007 due to lower performance related pay.
Barclays Global Investors profit before tax decreased 19% to £595m. Income fell 4% to £1,844m due to lower incentive fees. Operating expenses increased 5% and included charges of £263m (2007: £80m) related to selective support of liquidity products. Total assets under management were US$1,495bn, reflecting net new assets of US$99bn, negative market moves of US$553bn and adverse exchange rate movements of US$130bn.
Barclays Wealth profit before tax grew 119% to £671m, including a £326m profit on disposal of the closed life business, which contributed profit before tax of £104m before disposal. Income growth of 3% to £1,324m reflected strong growth in customer deposits and lending, partially offset by the impact of lower equity markets on fee income. Operating expenses decreased 4% reflecting strong cost control. Total client assets increased 10% (£12.6bn) to £145.1bn, with net new asset inflows and the acquisition of Lehman Brothers North American businesses offsetting the impact of negative market movements and the sale of the closed life business.
Analysis of results by business For the year ended 31st December 2008 | |||||||||
Barclays £m | Barclays £m | Barclays Wealth £m | |||||||
Net interest income | 1,724 | (38 | ) | 486 | |||||
Net fee and commission income | 1,429 | 1,917 | 720 | ||||||
Principal transactions | 2,065 | (43 | ) | (344 | ) | ||||
Net premiums from insurance contracts | – | – | 136 | ||||||
Other income | 13 | 8 | 26 | ||||||
Total income | 5,231 | 1,844 | 1,024 | ||||||
Net claims and benefits incurred on insurance contracts | – | – | 300 | ||||||
Total income, net of insurance claims | 5,231 | 1,844 | 1,324 | ||||||
Impairment charges and other credit provisions | (2,423 | ) | – | (44 | ) | ||||
Net income | 2,808 | 1,844 | 1,280 | ||||||
Operating expenses | (3,774 | ) | (1,249 | ) | (935 | ) | |||
Share of post-tax results of associates and joint ventures | 6 | – | – | ||||||
Profit on disposal of subsidiaries | – | – | 326 | ||||||
Gain on acquisition | 2,262 | – | – | ||||||
Profit before tax | 1,302 | 595 | 671 | ||||||
As at 31st December 2008 | |||||||||
Total assets | 1,629,117 | 71,340 | 13,263 | ||||||
Total liabilities | 1,603,093 | 68,372 | 45,846 |
32 | Barclays Annual Report 2008 |
Financial review
Analysis of results by business
Global Retail and Commercial Banking
UK Retail Banking
Who we are
UK Retail Banking comprises Personal Customers, Home Finance, Local Business, Consumer Lending and Barclays Financial Planning. We have one of the largest branch networks in the UK with around 1,700 branches and an extensive network of cash machines.
What we do
Our cluster of businesses aims to build broader and deeper relationships with customers. Personal Customers and Home Finance provide a wide range of products and services to retail customers, including current accounts, savings and investment products, mortgages branded Woolwich and general insurance. Barclays Financial Planning provides banking, investment products and advice to affluent customers.
Local Business provides banking services to small businesses. UK Retail Banking is also a gateway to more specialised services from other parts of Barclays such as Barclays Stockbrokers.
Our business serves 1515.2 million UK customers.
Performance
2008/07
UK Retail Banking profit before tax increased 7% (£94m) to £1,369m (2007: £1,275m) through solid income growth and continued good control of impairment and costs. The launch of new products and propositions supported a significant increase in customer accounts, with Current Accounts increasing 4% (0.4m) to 11.7m (2007: 11.3m), Savings
Accounts increasing 8% (0.9m) to 12.0m (2007: 11.1m) and Mortgage Accounts increasing 8% (62,000) to 816,000 (2007: 754,000).
Income grew 4% (£185m) to £4,482m (2007: £4,297m) reflecting strong growth in Home Finance and solid growth in Consumer Lending and Local Business, partially offset by reduced income from Personal Customer Savings Accounts due to the impact of the reductions in the UK base rates in the second half of 2008.
Net interest income increased 5% (£138m) to £2,996m (2007: £2,858m) driven by strong growth in loans and advances. Total average customer deposit balances increased 5% to £85.9bn (2007: £81.8bn), reflecting solid growth in Personal Customer and Local Business balances.
Mortgage balances grew 18%, driven by increased share of new lending and higher levels of balance retention. Mortgage balances were £82.3bn at the end of the period (31st December 2007: £69.8bn), a market share of 7% (2007: 6%). Gross advances were stable at £22.9bn, with redemptions of £10.4bn (2007: £15.0bn). Net new lending was £12.5bn (2007: £8.0bn), a market shareb of 36% (2007: 8%). The average loan to value ratio of the mortgage book (including buy-to-let) on a current valuation basis was 40% (2007: 34%). The average loan to value ratio of new mortgage lending was 47% (2007: 49%).
Net fee and commission income increased 10% (£116m) to £1,299m (2007: £1,183m) reflecting £116m settlements on overdraft fees in 2007. Excluding this, net fees and commissions were stable.
Impairment charges increased 8% (£43m) to £602m (2007: £559m), reflecting growth in customer assets of 15% and the impact of the current economic environment. Mortgage impairment charges were £24m (2007: release of £3m). Impairment charges within Consumer Lending increased 3%.
Highlights | ||
Performance indicators | ||
Key facts
| |||||||||
2008
| 2007
| 2006
| |||||||
Personal Customers | |||||||||
Number of UK current accountsa | 11.7m | 11.3m | 11.5m | ||||||
Number of UK savings accounts | 12.0m | 11.1m | 11.0m | ||||||
Total UK mortgage balances | £ | 82.3bn | £ | 69.8bn | £ | 61.7bn | |||
Local Business | |||||||||
Number of Local Business customers | 660,000 | 643,000 | 630,000 |
Notes
a | Decrease in 2007 reflects the consolidation of Woolwich and Barclays current accounts. |
b | Excludes Housing Associations. |
BarclaysAnnual Report 2008 | 33 |
Performance indicators
PerformanceOperating expenses increased 2% (£49m) to £2,519m (2007: £2,470m) reflecting reduced gains from the sale of property of £75m (2007: £193m). Continued strong and active management of expense lines, including back-office consolidation and process efficiencies, funded increased investment in product development and distribution channels.
The cost:income ratio improved one percentage point to 56% (2007: 57%).
2007/06
UK Retail Banking profit excludingbefore tax increased 9%8% (£101m)94m) to £1,282m£1,275m (2006: £1,181m) due to reduced costs and a strong improvement in impairment.
Including the impact of settlements on overdraft fees from prior years (£116m), income decreased 1% (£49m) to £4,297m (2006: £4,346m). Income grew 2% (£67m) excludingbefore the impact of settlements on overdraft fees in relation to prior years (£116m). This was driven by very strong growth in Personal Customer retail savings and good growth in Personal Customer current accounts, Home Finance and Local Business. Including the impact of settlements on overdraft fees, income decreased £49m to £4,297m (2006: £4,346m).
Net interest income increased 3% (£93m) to £2,858m (2006: £2,765m). Growth was driven by a higher contribution from deposits, through a combination of good balance sheet growth and an increased liability margin. Total average customer deposit balances increased 7% to £81.9bn (2006: £76.5bn), supported by the launch of new products.
Mortgage volumes increased significantly, driven by an improved mix of longer term value products for customers, higher levels of retention and continuing improvements in processing capability. Mortgage balances were £69.8bn at the end of the period (2006: £61.7bn), an approximate market share of 6% (2006: 6%). Gross advances were 25% higher at £23.0bn (2006: £18.4bn). Net lending was £8.0bn (2006: £2.4bn), representing market share of 8% (2006: 2%). The average loan to value
ratio of the residential mortgage book on a current valuation basis was 33%. The average loan to value ratio of new residential mortgage lending in 2007 was 54%. Consumer Lending balances decreased 4% to £7.9bn (2006: £8.2bn), reflecting the impact of tighter lending criteria.
Overall asset margins decreased as a result of the increased proportion of mortgages and contraction in unsecured loans.
Net fee and commission income reduced 4% (£49m) to £1,183m (2006: £1,232m). There was strong Current Account income growth in Personal Customers and good growth within Local Business. This was more than offset by settlements on overdraft fees.
Net premiums from insurance underwriting activities reduced 26% (£90m) to £252m (2006: £342m), as there continued to be lower customer take-up of loan protection insurance. Net claims and benefits on insurance contracts increased to £43m (2006: £35m).
Impairment charges decreased 12% (£76m) to £559m (2006: £635m) reflecting lower charges in unsecured Consumer Lending and Local Business. This was driven by improvements in the collection process which led to reduced flows into delinquency, lower levels of arrears and stable charge-offs. Mortgage impairment charges remained negligible.
Operating expenses reduced 3%2% (£69m)62m) to £2,463m£2,470m (2006: £2,532m), reflecting strong and active management of all expense lines, targeted processing improvements and back officeback-office consolidation. Gains from the sale of property were £193m (2006: £253m). Increased investment was focused on improving the overall customer experience through converting and improving the branch network; revitalising the product offering; increasing operational and process efficiency; and meeting regulatory requirements.
The cost:income ratio improved one percentage point to 57%. Excluding the impact of settlements on overdraft fees, from prior years (£116m), the cost:income ratio improved two percentage points to 56%.
| ||
2007 £m | 2006 £m | 2005 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 2,858 | 2,765 | 2,677 | |||||||||||||
Net fee and commission income | 1,183 | �� | 1,232 | 1,065 | ||||||||||||
Net premiums from insurance contracts | 252 | 342 | 372 | |||||||||||||
Other income | 47 | 42 | 24 | |||||||||||||
Total income | 4,340 | 4,381 | 4,138 | |||||||||||||
Net claims and benefits on insurance contracts | (43 | ) | (35 | ) | (61 | ) | ||||||||||
Total income net of insurance claims | 4,297 | 4,346 | 4,077 | |||||||||||||
Impairment charges | (559 | ) | (635 | ) | (494 | ) | ||||||||||
Net income | 3,738 | 3,711 | 3,583 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (2,455 | ) | (2,531 | ) | (2,501 | ) | ||||||||||
Amortisation of intangible assets | (8 | ) | (1 | ) | – | |||||||||||
Operating expenses | (2,463 | ) | (2,532 | ) | (2,501 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 7 | 2 | (6 | ) | ||||||||||||
Profit before tax | 1,282 | 1,181 | 1,076 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 82.0bn | £ | 74.7bn | £ | 72.1bn | ||||||||||
Customer accounts | £ | 87.1bn | £ | 82.3bn | £ | 76.3bn | ||||||||||
Total assets | £ | 87.8bn | £ | 81.7bn | £ | 78.1bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 57 | % | 58 | % | 61 | % | ||||||||||
Risk Tendencya | £ | 470m | £ | 500m | £ | 415m | ||||||||||
Risk weighted assets | £ | 46.0bn | £ | 43.0bn | £ | 40.8bn |
UK Retail Banking
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 2,996 | 2,858 | 2,765 | |||||||||||||
Net fee and commission income | 1,299 | 1,183 | 1,232 | |||||||||||||
Net premiums from insurance contracts | 205 | 252 | 342 | |||||||||||||
Other income | 17 | 47 | 42 | |||||||||||||
Total income | 4,517 | 4,340 | 4,381 | |||||||||||||
Net claims and benefits on insurance contracts | (35 | ) | (43 | ) | (35 | ) | ||||||||||
Total income net of insurance claims | 4,482 | 4,297 | 4,346 | |||||||||||||
Impairment charges | (602 | ) | (559 | ) | (635 | ) | ||||||||||
Net income | 3,880 | 3,738 | 3,711 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (2,499 | ) | (2,461 | ) | (2,531 | ) | ||||||||||
Amortisation of intangible assets | (20 | ) | (9 | ) | (1 | ) | ||||||||||
Operating expenses | (2,519 | ) | (2,470 | ) | (2,532 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 8 | 7 | 2 | |||||||||||||
Profit before tax | 1,369 | 1,275 | 1,181 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 94.4bn | £ | 82.0bn | £ | 74.7bn | ||||||||||
Customer accounts | £ | 89.6bn | £ | 87.1bn | £ | 82.3bn | ||||||||||
Total assets | £ | 101.4bn | £ | 88.5bn | £ | 81.7bn | ||||||||||
Performance ratios | ||||||||||||||||
Cost:income ratio | 56% | 57% | 58% | |||||||||||||
Other financial measures | ||||||||||||||||
Risk tendency | £ | 520m | £ | 470m | £ | 500m | ||||||||||
Risk weighted assetsa | £ | 30.5bn | £ | 31.5bn | £ | 43.0bn |
Note
a |
2006/05
UK Retail Banking profit before tax increased 10% (£105m) to £1,181m (2005: £1,076m), driven by good income growth and well controlled costs. There has been substantial additional investment to transform the business.
Income increased 7% (£269m) to £4,346m (2005: £4,077m). Income growth was broadly based. There was strong income growth in Personal Customers retail savings, Local Business and UK Premier and good growth in Personal Customers current account income. Sales volumes increased, with a particularly strong performance from direct channels.
Net interest income increased 3% (£88m) to £2,765m (2005: £2,677m). Growth was driven by a higher contribution from deposits, through a combination of good balance sheet growth and a stable liability margin. Total average customer deposit balances increased 8% to £76.5bn (2005: £71.0bn), supported by new products. Growth of personal savings was above that of the market.
Mortgage volumes improved significantly, driven by a focus on improving capacity, customer service, value and promotion. UK residential mortgage balances ended the year at £61.7bn (2005: £59.6bn). Gross advances were 60% higher at £18.4bn (2005: £11.5bn), with a market share of 5% (2005: 4%). Net lending was £2.4bn, with performance improving during the year, leading to a market share of 4% in the second half of the year. The mortgage margin was reduced by changed assumptions used in the calculation of effective interest rates, a higher proportion of new mortgages and base rate changes. The new business spread was in line with the industry. The loan to value ratio within the residential mortgage book on a current valuation basis was 34% (2005: 35%).
There was good balance growth in non-mortgage loans, where Local Business average balances increased 9% and UK Premier average balances increased 25%.
Net fee and commission income increased 16% (£167m) to £1,232m (2005: £1,065m). There was strong current account income growth in Personal Customers and Local Business. UK Premier delivered strong growth reflecting higher income from banking services, mortgage sales and investment advice.
Net premiums from insurance underwriting activities decreased 8% (£30m) to £342m (2005: £372m). There continued to be lower customer take-up of loan protection insurance. Net claims and benefits on insurance contracts improved to £35m (2005: £61m).
Impairment charges increased 29% (£141m) to £635m (2005: £494m). The increase principally reflected balance growth and some deterioration in delinquency rates in the Local Business loan book. Losses from the mortgage portfolio remained negligible, with arrears at low levels.
Operating expenses were steady at £2,532m (2005: £2,501m). Gains from the sale and leaseback of property amounted to £253m (2005: nil). Investment in the business to improve customer service and deliver sustainable performance improvements was directed at upgrading distribution capabilities, including restructuring and improving the branch network. Further investment was focused on upgrading the contact centres, transforming the performance of the mortgage business, revitalising the retail product range to meet customers’ needs, improving core operations and processes and rationalising the number of operating sites. The level of investment reflected in operating expenses in 2006 was approximately double the level of 2005.
The cost:income ratio improved three percentage points to 58% (2005: 61%).
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Global Retail and Commercial Banking
Barclays Commercial Bank
Who we are
Barclays Commercial Bank comprises 8,400 colleagues who serve 81,000 customers.
Earlier this year, we launched our new brand – Barclays Commercial Bank –is one of the UK’s leading providers of banking solutions to replace UK Business Banking. This new identity is muchbusiness customers and clients with an annual turnover of more than just a name change. Instead, it more accurately reflects our current capabilities and future aspirations, and it is scalable across markets. To complement the new identity, we also launched a clear customer proposition. It comprises three elements:£1m.
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|
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These encapsulate our capability to deliver distinctive service and solutions that meet our customers’ needs.
What we do
Barclays Commercial Bank provides banking services to organisations with an annual turnover of more than £1m. Customers are served81,000 customers in the UK via a network of relationship, regional, industry-sector and industry sector specialists, which providesproduct specialists.
Working closely with our clients to understand their needs, we deliver financing, risk management, trade and cash management solutions constructed from a comprehensive suite of banking products, support, expertise and services, includingservices. This includes specialist asset financing and leasing facilities.
We are a key component of the Barclays universal banking model, delivering income in partnership with all the constituent business units of the Barclays Group.
Highlights
Performance indicators
Performance
2007/062008/07
Barclays Commercial Bank profit before tax decreased 7% (£91m) to £1,266m (2007: £1,357m) reflecting a resilient performance in challenging market conditions. The impact of growth in net fee and commission income and continued strong growth in customer lending was offset by increased £6mimpairment charges and higher operating expenses.
Income increased 7%(£181m)to£2,745m (2007:£2,564m).
Net interest income improved 1% (£10m) to £1,371m£1,757m (2007: £1,747m). There was strong growth in average customer assets, particularly term loans, which increased 14% to £61.7bn (2007: £53.9bn) reflecting the continued commitment to lend to viable businesses. Average customer accounts grew 3% to £47.6bn (2007: £46.4bn).
Non-interest income increased to 36% of total income (2007: 32%) partly reflecting continued focus on cross sales and efficient balance sheet utilisation. Net fee and commission income increased 15% (£111m) to £861m (2007: £750m) due to increased income from foreign exchange, derivative sales and debt fee income.
Income from principal transactions fell to £22m (2007: £56m) due to lower equity realisations.
Other income of £105m (2007: £11m) included a £39m gain arising from the restructuring of Barclays interest in a third party finance operation. This gain was offset by a broadly similar tax charge. Other income also included £29m (2007: £7m) rental income from operating leases.
Highlights | ||
Key facts | ||||||
2008
| 2007
| 2006
| ||||
Number of customers | 81,200 | 83,800 | 77,100 | |||
Number of colleagues | 9,800 | 9,200 | 8,100 |
BarclaysAnnual Report 2008 | 35 |
Impairment charges increased 42% (£122m) to £414m (2007: £292m) primarily reflecting higher impairment losses in Larger Business, particularly in the final quarter as the UK corporate credit environment deteriorated. Impairment as a percentage of period-end loans and advances to customers and banks increased to 0.60% (2007: 0.45%).
Operating expenses increased 14% (£134m) to £1,063m (2007: £929m) reflecting lower gains on the sale of property of £10m (2007: £40m), investment in a new payments capability (2008: £69m, 2007: £42m), growth in the operating lease business (2008: £31m, 2007: £7m) and investment in risk and operations infrastructure, sales force capability and product specialists.
2007/06
Barclays Commercial Bank profit before tax decreased £5m to £1,357m (2006: £1,365m)£1,362m) due to continued good income growth partially offset by lower gains from business disposals. Profit excluding profit onbefore business disposals of £14mincreased 4% to £1,343m (2006: £76m) increased 5% to £1,357m (2006: £1,289m)£1,286m).
Income increased 7% (£159m)160m) to £2,554m£2,564m (2006: £2,395m)£2,404m). Non-interest income increased to 32% of total income (2006: 29%), reflecting continuing focus on cross sales and efficient balance sheet utilisation. There was very strong growth in net fee and commission income, which increased 17% (£107m) to £749m£750m (2006: £642m)£643m) due to very strong performance in lending fees. There was also good growth in transaction
related income, foreign exchange and derivatives transactions undertaken on behalf of clients.
Net interest income improved 2% (£36m)37m) to £1,738m£1,747m (2006: £1,702m)£1,710m). Average customer lendings increased 3% to £53.6bn£53.9bn (2006: £52.0bn)£52.3bn). Average customer accounts grew 4% to £46.4bn (2006: £44.8bn).
Income from principal transactions primarily reflecting venture capital and other equity realisations increased 87% (£26m) to £56m (2006: £30m).
Impairment charges increased 15% (£38m)39m) to £290m£292m (2006: £252m)£253m), mainly due to a higher level of impairment losses in Larger Business as impairment trended towards risk tendency. There was a reduction in impairment levels in Medium Business due to a tightening of the lending criteria.
Operating expenses increased 6%7% (£50m)61m) to £907m£929m (2006: £857m)£868m). Operating expenses are net of gains of £39m (2006: £60m) on the sale of property. Growth in operating expenses was focused on continuing investment in operations, infrastructure, and new initiatives in product development and sales capability.
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Barclays Commercial Bank
2007 £m | 2006 £m | 2005 £m | ||||||||||||||||||||||||||||||
2008 £m
| 2007 £m
| 2006 £m
| ||||||||||||||||||||||||||||||
Income statement information | ||||||||||||||||||||||||||||||||
Net interest income | 1,738 | 1,702 | 1,536 | 1,757 | 1,747 | 1,710 | ||||||||||||||||||||||||||
Net fee and commission income | 749 | 642 | 589 | 861 | 750 | 643 | ||||||||||||||||||||||||||
Net trading income | 9 | 2 | – | 3 | 9 | 2 | ||||||||||||||||||||||||||
Net investment income | 47 | 28 | 17 | 19 | 47 | 28 | ||||||||||||||||||||||||||
Principal transactions | 56 | 30 | 17 | 22 | 56 | 30 | ||||||||||||||||||||||||||
Other income | 11 | 21 | 17 | 105 | 11 | 21 | ||||||||||||||||||||||||||
Total income | 2,554 | 2,395 | 2,159 | 2,745 | 2,564 | 2,404 | ||||||||||||||||||||||||||
Impairment charges | (290 | ) | (252 | ) | (177 | ) | ||||||||||||||||||||||||||
Impairment charges and other credit provisions | (414 | ) | (292 | ) | (253 | ) | ||||||||||||||||||||||||||
Net income | 2,264 | 2,143 | 1,982 | 2,331 | 2,272 | 2,151 | ||||||||||||||||||||||||||
Operating expenses excluding amortisation of intangible assets | (903 | ) | (856 | ) | (822 | ) | (1,048 | ) | (924 | ) | (867 | ) | ||||||||||||||||||||
Amortisation of intangible assets | (4 | ) | (1 | ) | (3 | ) | (15 | ) | (5 | ) | (1 | ) | ||||||||||||||||||||
Operating expenses | (907 | ) | (857 | ) | (825 | ) | (1,063 | ) | (929 | ) | (868 | ) | ||||||||||||||||||||
Share of post-tax results of associates and joint ventures | – | 3 | 3 | (2 | ) | – | 3 | |||||||||||||||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 14 | 76 | – | – | 14 | 76 | ||||||||||||||||||||||||||
Profit before tax | 1,371 | 1,365 | 1,160 | 1,266 | 1,357 | 1,362 | ||||||||||||||||||||||||||
Balance sheet information | ||||||||||||||||||||||||||||||||
Loans and advances to customers | £ | 63.3bn | £ | 56.3bn | £ | 53.4bn | £ | 67.5bn | £ | 63.7bn | £ | 56.6bn | ||||||||||||||||||||
Loans and advances to customers including those designated at fair value | £ | 80.5bn | £ | 70.7bn | £ | 62.1bn | ||||||||||||||||||||||||||
Customer accounts | £ | 60.8bn | £ | 57.4bn | £ | 50.9bn | £ | 60.6bn | £ | 60.8bn | £ | 57.4bn | ||||||||||||||||||||
Total assets | £ | 73.9bn | £ | 65.9bn | £ | 59.9bn | £ | 84.0bn | £ | 74.6bn | £ | 66.2bn | ||||||||||||||||||||
Selected statistical measures | ||||||||||||||||||||||||||||||||
Cost:income ratioa | 36 | % | 36 | % | 38 | % | ||||||||||||||||||||||||||
Risk Tendencya | £ | 305m | £ | 290m | £ | 250m | ||||||||||||||||||||||||||
Risk weighted assets | £ | 53.8bn | £ | 50.0bn | £ | 47.1bn | ||||||||||||||||||||||||||
Performance ratios | ||||||||||||||||||||||||||||||||
Cost:income ratio | 39% | 36% | 36% | |||||||||||||||||||||||||||||
Other financial measures | ||||||||||||||||||||||||||||||||
Risk Tendency | £ | 400m | £ | 305m | £ | 300m | ||||||||||||||||||||||||||
Risk weighted assetsa | £ | 63.1bn | £ | 57.0bn | £ | 50.3bn |
Note
a |
2006/05
Barclays Commercial Bank profit before tax increased 18% (£205m) to £1,365m (2005: £1,160m), driven by continued strong income growth. Barclays Commercial Bank maintained its market share of primary customer relationships. The 2006 result included a £23m (2005: £13m) contribution from the full year consolidation of Iveco Finance, in which a 51% stake was acquired on 1st June 2005. Profit before business disposals increased 11% to £1,289m (2005: £1,160m).
Income increased 11% (£236m) to £2,395m (2005: £2,159m), driven by strong balance sheet growth. The uplift in income was broadly based across income categories.
Net interest income increased 11% (£166m) to £1,702m (2005: £1,536m) driven by strong balance sheet growth. There was strong growth in all business areas and in particular Larger Business. The lending margin improved slightly. Average customer accounts increased 11% to £44.8bn (2005: £40.5bn) with good growth across product categories. The deposit margin was stable.
Net fee and commission income increased 9% (£53m) to £642m
(2005: £589m). There was a strong rise in income from foreign exchange and derivatives business transacted through Barclays Capital on behalf of Barclays Commercial Bank customers.
Income from principal transactions was £30m (2005: £17m), primarily reflecting the profit realised on a number of equity investments.
As expected, impairment rates trended upwards during the year towards a more normalised level. Impairment increased 42% (£75m) to £252m (2005: £177m), with the increase mainly reflecting higher charges from Medium Business and balance growth. Impairment charges in Larger Business were stable.
Operating expenses increased 4% (£32m) to £857m (2005: £825m). Cost growth reflected higher volumes, increased expenditure on front line staff and the costs of Iveco Finance for a full year. Operating expenses included a credit of £60m on the sale and leaseback of property. Increased investment was focused on the acceleration of the rationalisation of operating sites and technology infrastructure.
The cost:income ratio improved two percentage points to 36% (2005: 38%).
Profit on disposals of subsidiaries, associates and joint ventures of £76m (2005: £nil) arose from the sales of interests in vehicle leasing and European vendor finance businesses.
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Global Retail and Commercial Banking
Barclaycard
Who we are
We areBarclaycard is a multi-brand international credit card, and consumer lending and payment processing business. Our credit card was the first to be launched in the UK in 1966 and is now one of the leading credit card businesses in Europe, with a fast growing business in the US.United States and South Africa.
What we do
In the UK
Our our activities include all Barclaycard branded credit cards, the FirstPlus secured lending business and theBarclays Partner Finance, our retail finance business Barclays Partner Finance.business. In addition to these activities, Barclaycard also operates partnership cards with leading brands including SkyCard and the Thomas Cook Credit Card.such as SkyCard. We continue to lead the UK market and we strengthened our position in 2008 with the launch in 2007purchase of Barclaycard OnePulse, the UK’s first contactless card, and Barclaycard Breathe, the first cardGoldfish portfolio, adding more than 1m customers to donate a percentage of its profits to carbon reduction projects around the world.
Internationalour growing customer base.
Barclaycard’s international presence is extensive. In 2007, 3 out of every 4 cards issued by Barclaycard werecontinues to grow very strongly, with international customers now almost equalling the number in markets outside the UK and we have 8.8m international cards in issue.UK. We currently operate across Europein Germany, South Africa and the United States, where we are one of the fastest growingfastest-growing credit card business.businesses. In Scandinavia, we operate through Entercard, a joint venture with Swedbank.
Barclaycard Business
Our payment processing business, Barclaycard Business, processes card payments for 93,00089,000 retailers and merchants, and issues credit and charge cards to corporate customers and the UK Government. It is Europe’s number one issuer of Visa Commercial Cards with over 137,000132,000 corporate customers.
Highlights
Performance
2008/07
Barclaycard profit before tax increased 31% (£186m) to £789m (2007: £603m), driven by strong international income growth and lower UK impairment charges. 2008 profit included £40m from the acquisition of, and contribution from, Goldfish, Discover’s UK credit card business, acquired on 31st March 2008. The scale of the UK and international businesses increased substantially with total customer numbers up 31% to 23.3m.
Income increased 27% (£689m) to £3,219m (2007: £2,530m), reflecting strong growth in Barclaycard International and £156m from the inclusion of Goldfish, partially offset by a decline in FirstPlus following its closure to new business.
Net interest income increased 30% (£412m) to £1,786m (2007: £1,374m), driven by 58% growth in international average extended credit card balances to £5.2bn.
Net fee and commission income increased 14% (£156m) to £1,299m (2007: £1,143m), driven by growth in Barclaycard International.
Investment income increased £69m to £80m (2007: £11m), reflecting a £64m gain from the Visa IPO and a £16m gain from the sale of shares in MasterCard.
Other income increased £44m to £19m (2007: £25m loss), reflecting a gain from a portfolio sale in the United States. 2007 results reflected a £27m loss on disposal of part of the Monument card portfolio.
Impairment charges increased 33% (£270m) to £1,097m (2007: £827m), reflecting £252m growth in charges in the international businesses and £68m from the inclusion of Goldfish. These factors were partially offset by £50m lower impairment in the other UK businesses with reduced flows into delinquency and lower levels of arrears.
Highlights | ||
Performance indicators | ||
Key facts | |||||||||
2008
| 2007
| 2006
| |||||||
Number of Barclaycard UK customers | 11.7m | 10.1m | 9.8m | ||||||
UK credit cards – average outstanding balances | £ | 9.9bn | £ | 8.4bn | £ | 9.4bn | |||
UK credit cards – average extended credit balances | £ | 8.0bn | £ | 6.9bn | £ | 8.0bn | |||
Number of Barclaycard | |||||||||
International customers | 11.6m | 7.7m | 6.0m | ||||||
International – average outstanding balance | £ | 6.5bn | £ | 4.1bn | £ | 3.1bn | |||
International – average extended credit balances | £ | 5.2bn | £ | 3.3bn | £ | 2.5bn | |||
Secured lending – average outstanding balance | £ | 4.7bn | £ | 4.3bn | £ | 3.4bn | |||
Number of retailer relationships | 89,000 | 93,000 | 93,000 |
BarclaysAnnual Report 2008 | 37 |
Performance indicatorsOperating expenses increased 30% (£329m) to £1,422m (2007: £1,093m), reflecting continued international growth and increased marketing investment. Operating expenses reflected Goldfish expenses of £140m, including restructuring costs of £64m.
The acquisition of Goldfish resulted in a gain on acquisition of £92m.
PerformanceBarclaycard International maintained its strong growth momentum, delivering a 71% (£108m) increase in profit before tax to £260m (2007: £152m). Barclaycard US profit before tax was US$249m which exceeded delivery of the financial plan of US$150m set out at the time of acquisition. Strong balance sheet growth in Barclaycard US included US$1.9bn of credit card receivables acquired from FIA Card Services in August 2008, furthering the existing partnership agreement with US Airways. The acquisition of a majority stake in Woolworths Financial Services in October 2008, added 1.6 million customers to the existing Absa credit card business in South Africa. The Entercard joint venture with Swedbank continued to build presence in Norway, Sweden and Denmark.
2007/06
Barclaycard profit before tax increased 18%16% (£82m)81m) to £540m£603m (2006: £458m)£522m), driven by strong international growth coupled with a significant improvement in UK impairment charges. Other income included a £27m loss on disposal of part of the Monument card portfolio. 2006 results reflected a property gain of £38m.
Income decreased 1%2% (£28m)46m) to £2,486m£2,530m (2006: £2,514m)£2,576m), reflecting strong growth in Barclaycard International, offset by a decline in UK Cards revenue resulting from a more cautious approach to lending in the UK and a £27m loss on disposal of part of the Monument card portfolio.
Net interest income increased 1% (£11m) to £1,394m£1,374m (2006: £1,383m)£1,363m), due to strong organic growth in international average
extended credit card balances, up 32% to £3.3bn and average secured consumer lending balances up 26% to £4.3bn, partially offset by lower UK average extended credit card balances which fell 14% to £6.9bn. Margins fell to 6.59% (2006: 7.13%) due to higher average base rates across core operating markets and a change in the product mix with an increased weighting to secured lending.
Net fee and commission income fell 2%3% (£26m)40m) to £1,080m£1,143m (2006: £1,106m)£1,183m), with growth in Barclaycard International offset by our actions in response to the Office of Fair Trading’s findings on late and overlimit fees in the UK which were implemented in August 2006.
Impairment charges improved 21% (£229m)226m) to £838m£827m (2006: £1,067m)£1,053m), reflecting reduced flows into delinquency, lower levels of arrears and lower charge-offs in UK Cards. We made changes to our impairment methodologies to standardise our approach and in anticipation of Basel II. The net positive impact of these changes in methodology was offset by an increase in impairment charges in Barclaycard International and secured consumer lending.
Operating expenses increased 12%10% (£120m)100m) to £1,101m£1,093m (2006: £981m)£993m). Excluding a property gain of £38m in 2006, operating expenses increased 8%6% (£82m)62m), reflecting continued investment in expanding our businesses in Europe and the US.United States. Costs in the UK businesses were broadly flat, with investment in new UK product innovations such as Barclaycard OnePulse being funded out of operating efficiencies.
Barclaycard International continued to gain momentum, delivering a profit before tax of £77m£152m against a lossprofit before tax of £36m£8m in 2006. We concluded seven new credit card partnership deals across Western Europe. The Entercard joint venture continued to perform ahead of plan and entered the Danish market, extending its reach across the Scandinavian region. Barclaycard US was profitable, with very strong average balance growth and a number of new card partnerships, including Lufthansa Airlines and Princess Cruise Lines.
| ||
Barclaycard
2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||
2007 £m | 2006 £m | 2005 £m | £m | £m | £m | |||||||||||||||||||||||||||
Income statement information | ||||||||||||||||||||||||||||||||
Net interest income | 1,394 | 1,383 | 1,231 | 1,786 | 1,374 | 1,363 | ||||||||||||||||||||||||||
Net fee and commission income | 1,080 | 1,106 | 1,065 | 1,299 | 1,143 | 1,183 | ||||||||||||||||||||||||||
Net tracking income | 2 | – | – | |||||||||||||||||||||||||||||
Net investment income | 11 | 15 | – | 80 | 11 | 20 | ||||||||||||||||||||||||||
Principal transactions | 82 | 11 | 20 | |||||||||||||||||||||||||||||
Net premiums from insurance contracts | 40 | 18 | 6 | 44 | 40 | 18 | ||||||||||||||||||||||||||
Other income | (26 | ) | – | – | 19 | (25 | ) | – | ||||||||||||||||||||||||
Total income | 2,499 | 2,522 | 2,302 | 3,230 | 2,543 | 2,584 | ||||||||||||||||||||||||||
Net claims and benefits incurred on insurance contracts | (13 | ) | (8 | ) | (3 | ) | (11 | ) | (13 | ) | (8 | ) | ||||||||||||||||||||
Total income net of insurance claims | 2,486 | 2,514 | 2,299 | 3,219 | 2,530 | 2,576 | ||||||||||||||||||||||||||
Impairment charges | (838 | ) | (1,067 | ) | (753 | ) | ||||||||||||||||||||||||||
Impairment charges and other credit provisions | (1,097 | ) | (827 | ) | (1,053 | ) | ||||||||||||||||||||||||||
Net income | 1,648 | 1,447 | 1,546 | 2,122 | 1,703 | 1,523 | ||||||||||||||||||||||||||
Operating expenses excluding amortisation of intangible assets | (1,073 | ) | (964 | ) | (891 | ) | (1,361 | ) | (1,057 | ) | (969 | ) | ||||||||||||||||||||
Amortisation of intangible assets | (28 | ) | (17 | ) | (17 | ) | (61 | ) | (36 | ) | (24 | ) | ||||||||||||||||||||
Operating expenses | (1,101 | ) | (981 | ) | (908 | ) | (1,422 | ) | (1,093 | ) | (993 | ) | ||||||||||||||||||||
Share of post-tax results of associates and joint ventures | (7 | ) | (8 | ) | 1 | (3 | ) | (7 | ) | (8 | ) | |||||||||||||||||||||
Gain on acquisition | 92 | – | – | |||||||||||||||||||||||||||||
Profit before tax | 540 | 458 | 639 | 789 | 603 | 522 | ||||||||||||||||||||||||||
Balance sheet information | ||||||||||||||||||||||||||||||||
Loans and advances to customers | £ | 20.1bn | £ | 18.2bn | £ | 16.5bn | £ | 27.4bn | £ | 19.7bn | £ | 18.1bn | ||||||||||||||||||||
Total assets | £ | 22.2bn | £ | 20.1bn | £ | 18.2bn | £ | 30.9bn | £ | 22.1bn | £ | 20.0bn | ||||||||||||||||||||
Selected statistical measures | ||||||||||||||||||||||||||||||||
Cost:income ratioa | 44 | % | 39 | % | 39 | % | ||||||||||||||||||||||||||
Risk Tendencya | £ | 945m | £ | 1,135m | £ | 865m | ||||||||||||||||||||||||||
Risk weighted assets | £ | 19.9bn | £ | 17.0bn | £ | 13.6bn | ||||||||||||||||||||||||||
Performance ratios | ||||||||||||||||||||||||||||||||
Cost: income ratio | 44% | 43% | 39% | |||||||||||||||||||||||||||||
Other financial measures | ||||||||||||||||||||||||||||||||
Risk Tendency | £ | 1,475m | £ | 955m | £ | 1,090m | ||||||||||||||||||||||||||
Risk weighted assetsa | £ | 27.3bn | £ | 20.2bn | £ | 16.9bn |
Note
a |
2006/05
Barclaycard profit before tax decreased 28% (£181m) to £458m (2005: £639m) as good income growth was more than offset by higher impairment charges and increased costs from the continued development of international businesses.
Income increased 9% (£215m) to £2,514m (2005: £2,299m) reflecting very strong momentum in Barclaycard US and strong performances in Barclaycard Business, FirstPlus, SkyCard and continental European markets.
Net interest income increased 12% (£152m) to £1,383m (2005: £1,231m) due to strong growth in International average extended credit card balances up 39% to £2.5bn (2005: £1.8bn) and average secured consumer lending balances up 55% to £3.4bn (2005: £2.2bn), partly offset by UK average extended credit card balances down 7% to £8.0bn (2005: £8.6bn), reflecting the impact of tighter lending criteria.
Net fee and commission income increased 4% (£41m) to £1,106m (2005: £1,065m) as a result of increased contributions from Barclaycard International, SkyCard, FirstPlus and Barclaycard Business. Barclaycard reduced its late and overlimit fee charges in the UK on 1st August 2006 in response to the Office of Fair Trading’s findings.
Investment income of £15m (2005: £nil) represents the gain arising from the sale of part of the stake in MasterCard Inc, following its flotation.
Impairment charges increased 42% (£314m) to £1,067m (2005: £753m). The increase was driven by a rise in delinquent balances and increased numbers of bankruptcies and Individual Voluntary Arrangements. As a result of management action in 2005 and 2006 to tighten lending criteria and improve collection processes, the flows of new delinquencies reduced, and levels of arrears balances declined in the second half of 2006 in UK cards.
Operating expenses increased 8% (£73m) to £981m (2005: £908m). This included a £38m gain from the sale and leaseback of property. Excluding this item, underlying operating expenses increased 12% (£111m) to £1,019m. This was largely as a result of continued investment in Barclaycard International, particularly Barclaycard US, and the development of UK partnerships.
Barclaycard International continued its growth strategy in the continental European business delivering solid results. The Entercard joint venture, which is based in Scandinavia, performed ahead of plan. Barclaycard International loss before tax reduced to £36m (2005: loss £44m), including the loss before tax for Barclaycard US of £57m (2005: loss £60m). Barclaycard US continued to perform ahead of expectations, delivering very strong growth in balances and customer numbers and creating a number of new partnerships including US Airways, Barnes & Noble, Travelocity and Jo-Ann Stores.
Barclaycard UK customer numbers declined 1.4 million to 9.8 million (2005: 11.2 million). This reflected the closure of 1.5 million accounts that had been inactive.
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Global Retail and Commercial Banking
Western Europe
GRCB – Western Europe comprises our retail and commercial banking operations as well as our Barclaycard businesses in Spain, Portugal, France and Italy.
International Retail and Commercial Banking
Who we are
Our business comprises: International Retail and Commercial Banking – excluding Absa and International Retail and Commercial Banking – Absa.
What we do
International RetailGRCB – Western Europe serves more than 2m retail and Commercial Bankingcommercial banking customers in France, Italy, Portugal and Spain through a variety of distribution channels including 961 branches, 184 sales centres and 988 ATMs.
GRCB – Western Europe provides banking services to Barclays personal and corporate customers outside the UK. Thea variety of products and services offeredincluding retail mortgages, current and deposit accounts, commercial lending, unsecured lending, credit cards, investments and insurance products, serving the needs of Barclays retail, mass affluent and corporate customers.
Performance
2008/07
GRCB – Western Europe profit before tax grew 31% (£61m) to customers are tailored£257m (2007: £196m), despite challenging market conditions in Spain and accelerated investment in the expansion of the franchise. Distribution points increased 347 to meet customer needs1,145 (2007: 798), including 149 in Italy. Strong income growth including gains of £82m from the Visa IPO and the regulatorysale of shares in MasterCard was partially offset by increased impairment and higher operating costs. Profit before tax was favourably impacted by the 16% appreciation in the average value of the Euro against Sterling.
Income increased 53% (£493m) to £1,430m (2007: £937m), reflecting growth in both net interest income and net fee and commission income.
Net interest income increased 62% (£329m) to £856m (2007: £527m), driven by a 63% increase in customer liabilities to £15.3bn (2007: £9.4bn) and a 53% increase in customer assets to £53.5bn (2007: £35.0bn).
Net fee and commission income increased 19% (£61m) to £383m (2007: £322m). Increased fees in retail and in the life insurance businesses were offset by lower market-related investment revenue.
Principal transactions grew £59m to £165m (2007: £106m) including
gains from the Visa IPO (£65m) and the sale of shares in MasterCard (£17m) which enabled GRCB – Western Europe to invest in the expansion of the business.
Impairment charges increased £220m to £296m (2007: £76m). This increase was principally due to higher charges in Spanish commercial environments within each country.property (£82m) and deterioration of the Spanish credit card portfolio (£66m) as a consequence of the rapid slowdown in the Spanish economy.
Operating expenses increased 38% (£256m) to £929m (2007: £673m), reflecting the rapid expansion of the retail distribution network and the strengthening of the Premier segment. Operating expenses also included £55m (2007: £22m) gains from the sale of property.
Gain on acquisition of £52m (2007: £nil) arose from the purchase of the Italian residential mortgage business of Macquarie Bank Limited in November 2008.
2007/06
GRCB – Western Europe profit before tax increased 21% (£34m) to £196m (2006: £162m). The performance reflected strong income growth driven by an increase in distribution points of 145 to 798 (2006: 653).
Income increased 25% (£186m) to £937m (2006: £751m), reflecting strong growth in net fee and commission income and principal transactions.
Net interest income increased 21% (£91m) to £527m (2006: £436m), driven by a 38% increase in customer liabilities to £9.4bn (2006: £6.8bn) and a 30% increase in customer assets to £35.0bn (2006: £26.9bn).
Net fee and commission income increased 30% (£74m) to £322m (2006: £248m), driven by the expansion of the customer base.
Principal transactions grew 34% (£27m) to £106m (2006: £79m), reflecting gains on equity investments.
Impairment charges grew 100% (£38m) to £76m (2006: £38m), reflecting very strong balance sheet growth.
Operating expenses grew 22% (£123m) to £673m (2006: £550m), driven by the expansion of the distribution network. Operating expenses included property sales in Spain of £22m (2006: £55m).
Highlights | ||
Performance indicators | ||
Performance 2007/06
International Retail and Commercial Banking profit before tax decreased £281m to £935m (2006: £1,216m). International Retail and Commercial Banking – excluding Absa profit before tax in 2006 included a £247m gain on the sale of associate FirstCaribbean International Bank and a £41m share of its post-tax results. Profit before tax in 2007 included gains from the sale and leaseback of property of £23m (2006: £55m). Very strong profit growth in Rand terms in International Retail and Commercial Banking – Absa was offset by a 12% decline in the average value of the Rand.
A significant investment was made in infrastructure and distribution, including the opening of 644 new branches and sales centres across Western Europe, Emerging Markets and Absa.
2006/05
International Retail and Commercial Banking profit before tax increased £623m to £1,216m (2005: £593m). The increase reflected the inclusion of a full year’s profit before tax from International Retail and Commercial Banking – Absa of £698m (2005a: £298m) and a profit of £247m on the disposal of Barclays interest in FirstCaribbean International Bank.
Key facts | ||||||
2008 | 2007 | 2006 | ||||
Number of distribution points | 1,145 | 798 | 653 | |||
| ||
2007 £m | 2006 £m | 2005 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 1,890 | 1,653 | 1,045 | |||||||||||||
Net fee and commission income | 1,210 | 1,221 | 644 | |||||||||||||
Net trading income | 69 | 6 | 3 | |||||||||||||
Net investment income | 179 | 188 | 143 | |||||||||||||
Principal transactions | 248 | 194 | 146 | |||||||||||||
Net premiums from insurance contracts | 372 | 351 | 227 | |||||||||||||
Other income | 87 | 74 | 60 | |||||||||||||
Total income | 3,807 | 3,493 | 2,122 | |||||||||||||
Net claims and benefits incurred under insurance contracts | (284 | ) | (244 | ) | (206 | ) | ||||||||||
Total income net of insurance claims | 3,523 | 3,249 | 1,916 | |||||||||||||
Impairment charges | (252 | ) | (167 | ) | (33 | ) | ||||||||||
Net income | 3,271 | 3,082 | 1,883 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (2,279 | ) | (2,077 | ) | (1,289 | ) | ||||||||||
Amortisation of intangible assets | (77 | ) | (85 | ) | (47 | ) | ||||||||||
Operating expenses | (2,356 | ) | (2,162 | ) | (1,336 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 7 | 49 | 46 | |||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 13 | 247 | – | |||||||||||||
Profit before tax | 935 | 1,216 | 593 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 70.1bn | £ | 53.2bn | £ | 49.2bn | ||||||||||
Customer accounts | £ | 28.8bn | £ | 22.1bn | £ | 22.4bn | ||||||||||
Total assets | £ | 89.5bn | £ | 68.6bn | £ | 63.4bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 67 | % | 67 | % | 70 | % | ||||||||||
Risk Tendencya | £ | 475m | £ | 220m | £ | 175m | ||||||||||
Risk weighted assets | £ | 53.3bn | £ | 40.8bn | £ | 41.0bn |
Barclays Annual Report | |||
39 |
GRCB – Western Europe
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 856 | 527 | 436 | |||||||||||||
Net fee and commission income | 383 | 322 | 248 | |||||||||||||
Net trading income | 4 | 13 | 14 | |||||||||||||
Net investment income | 161 | 93 | 65 | |||||||||||||
Principal transactions | 165 | 106 | 79 | |||||||||||||
Net premiums from insurance contracts | 352 | 145 | 110 | |||||||||||||
Other income | 39 | 7 | 16 | |||||||||||||
Total income | 1,795 | 1,107 | 889 | |||||||||||||
Net claims and benefits incurred under insurance contracts | (365 | ) | (170 | ) | (138 | ) | ||||||||||
Total income net of insurance claims | 1,430 | 937 | 751 | |||||||||||||
Impairment charges | (296 | ) | (76 | ) | (38 | ) | ||||||||||
Net income | 1,134 | 861 | 713 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (915 | ) | (665 | ) | (542 | ) | ||||||||||
Amortisation of intangible assets | (14 | ) | (8 | ) | (8 | ) | ||||||||||
Operating expenses | (929 | ) | (673 | ) | (550 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | – | – | (1 | ) | ||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | – | 8 | – | |||||||||||||
Gain on acquisition | 52 | – | – | |||||||||||||
Profit before tax | 257 | 196 | 162 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 53.5bn | £ | 35.0bn | £ | 26.9bn | ||||||||||
Customer accounts | £ | 15.3bn | £ | 9.4bn | £ | 6.8bn | ||||||||||
Total assets | £ | 64.7bn | £ | 43.7bn | £ | 33.5bn | ||||||||||
Performance ratios | ||||||||||||||||
Cost: income ratio | 65% | 72% | 73% | |||||||||||||
Other financial measures | ||||||||||||||||
Risk Tendency | £ | 270m | £ | 135m | £ | 90m | ||||||||||
Risk weighted assetsa | £ | 36.5bn | £ | 25.0bn | £ | 17.6bn |
Note
a | Risk weighted assets for 2008 and 2007 are calculated under Basel II. 2006 is calculated under Basel I. |
40 | Barclays Annual Report 2008 |
Financial review
Analysis of results by business
Global Retail and Commercial Banking
International Retail and Commercial Banking – excluding Absa
Who we are
Western Europe
This business area includes our retail and commercial banking operations in Spain, Portugal, France and Italy. Barclays has operated in Spain for over 30 years, and is the leading foreign bank and the sixth largest banking group overall. We have tripled the branch network in Portugal over the last two years, becoming the largest non-Iberian bank. Barclays is a leading affluent banking brand and a recognised product innovator in France. We are one of the leading mortgage providers in Italy and in 2007 established full retail and commercial banking operations.
Emerging Markets
TheGRCB – Emerging Markets team is responsible for Barclays businesses in the growing markets of Africa, India and the Middle East. Barclays has long-standing commercial banking operations in the UAE and in 2007 launched retail banking operations in India and the UAE. In Africa, Barclays operates in Botswana, Egypt, Ghana, Kenya, Mauritius, Seychelles, Tanzania, Uganda, Zambia and Zimbabwe offering a range ofcomprises our retail and commercial banking products.operations, as well as our Barclaycard businesses, in 14 countries across Africa, the Middle East and South East Asia.
What we do
WeGRCB – Emerging Markets serves retail and commercial banking customers in Botswana, Egypt, Ghana, India, Kenya, Mauritius, Pakistan, Russia, Seychelles, Tanzania, Uganda, the UAE, Zambia and Zimbabwe.
Through a network of more than 830 distribution points and 1,440 ATMs, we provide 4.2m customers and clients with a full range of banking services, includingproducts and services. This includes current accounts, savings, investments, mortgages and secured and unsecured lending.
Performance
2008/07
GRCB – Emerging Markets profit before tax increased 34% (£34m) to £134m (2007: £100m). Very strong income growth, including £82m from the Visa IPO and the sale of shares in MasterCard, absorbed the increased investment across existing and new markets and higher impairment charges. The number of distribution points increased 286 to 836 (2007: 550). New market entries in 2008 comprised the acquisition of Expobank in Russia, the launch of a new business in Pakistan and the announced acquisition of Bank Akita in Indonesia.
Income increased 91% (£486m) to £1,019m (2007: £533m), reflecting growth in lending, deposit taking and fee-driven transactional revenues.
Net interest income increased 93% (£297m) to £616m (2007: £319m), loans and advances to our international personal and corporate customers.customers increased 98% to £10.1bn (2007: £5.1bn). Customer accounts increased 55% to £9.6bn (2007: £6.2bn).
International Retail and Commercial Banking works closely with all other parts of the group to leverage synergies from product and service propositions.
Highlights | ||
| ||
Performance indicators
Performance
Key facts
| ||||||
2008 | 2007 | 2006 | ||||
Number of distribution points | 836 | 550 | 214 |
BarclaysAnnual Report 2008 | 41 |
Net fee and commission income increased 59% (£83m) to £223m (2007: £140m), primarily driven by very strong growth in commercial banking and treasury fee income.
Principal transactions increased £97m to £169m (2007: £72m), reflecting higher foreign exchange income, a gain of £68m relating to the Visa IPO and a gain of £14m from the sale of shares in MasterCard.
Impairment charges increased £127m to £166m (2007: £39m), reflecting higher assets and delinquencies, particularly in India and increased wholesale impairment in Africa.
Operating expenses increased 82% (£324m) to £719m (2007: £395m), reflecting continued investment in new markets and expansion of the business in existing markets, with investment in infrastructure and the roll-out of global platforms.
2007/06
International Retail and Commercial BankingGRCB – excluding AbsaEmerging Markets profit before tax decreased 53% (£272m)74% to £246m£100m (2006: £518m)£384m). Profit before taxThe performance in 2006 included a £247m gain onreflected the sale of associate FirstCaribbeanFirst Carribean International Bank andwhich resulted in a profit of £247m in December 2006. In addition, profits of £41m sharewere generated by the First Carribean business up to date of its post-tax results. Profit before tax in 2007 included gains fromsale. Excluding First Carribean, the sale and leaseback of property in 2007 of £23m (2006: £55m). The performance reflected very strong income growth driven by a rapid growth
in distribution points to 1,348550 (2006: 867)214), as well as the launch of new businesses in India and UAE and a full retail and commercial banking offering in Italy.UAE.
Income increased 28%35% (£293m)137m) to £1,339m£533m (2006: £1,046m)£396m) driven by new business in India and UAE and excellent performances in Western EuropeEgypt, Kenya and Emerging Markets.Ghana.
Net interest income increased 25%30% (£149m)73m) to £753m£319m (2006: £604m)£246m). Total average customer loans increased 22%89% (£6.1bn)2.4bn) to £33.3bn£5.1bn (2006: £27.2bn)£2.7bn) with lending margins broadly stable. Mortgage balance growth in Western Europe was very strong,improving with average Euro balances up 16% (€4.2bn) to €30.1bn (2006: €25.9bn). Average customerchanging product mix. Customer deposits increased 20%47% (£2.1bn)2.0bn) to £12.5bn£6.2bn (2006: £10.4bn)£4.2bn), driven by growth in Western Europe and Emerging Markets.across the markets.
Net fee and commission income grew 16%declined marginally (£59m)1m) to £425m£140m (2006: £366m), reflecting strong performances in Western Europe driven by the expansion of the customer base.£141m).
Principal transactions increased £94m£68m to £177m£72m (2006: £83m)£4m), reflecting gains on equity investments and higher foreign exchange income across Emerging Markets.markets.
Impairment charges rose 93%30% (£38m)9m) to £79m£39m (2006: £41m)£30m). The increase reflected very strong balance sheet growth in 2006 and 2007 and the impact of lower releases in 2007.
Operating expenses grew 32%46% (£249m)125m) to £1,023m£395m (2006: £774m)£270m), driven by the rapid expansion of the distribution network across all regionsmarkets and investment in people and infrastructure to support future growth across the franchise. Operating expenses included property sales in Spain of £23m (2006: £55m).
Western Europe continued to perform strongly. Profit before tax increased 30% (£56m) to £245m (2006: £189m). Barclays Spain profit before tax increased 53% (£72m) to £207m (2006: £135m) driven by increased customer lending, higher service commissions and equity investment realisations. France also performed well driven by good growth in the balance sheet, higher fees and commissions and good cost control. Income grew very strongly in Italy as a result of the opening of new branches and the roll-out of a complete retail and commercial banking offering but this was more than offset by higher investment costs. Profit before tax decreased in Portugal, with very strong income growth offset by increased investment in the expansion of the business.
GRCB – Emerging Markets profit before tax increased 25% (£28m) to £142m (2006: £114m) reflecting a very strong rise in income across a broad range of markets, with particularly strong growth in Egypt, UAE, Kenya, Ghana, Tanzania, Uganda and India. The income growth benefited from increased investment in the business across all geographies, including branch openings and the launch of retail banking services in India and the UAE.
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 616 | 319 | 246 | |||||||||||||
Net fee and commission income | 223 | 140 | 141 | |||||||||||||
Net trading income | 78 | 56 | 3 | |||||||||||||
Net investment income | 91 | 16 | 1 | |||||||||||||
Principal transactions | 169 | 72 | 4 | |||||||||||||
Net premiums from insurance contracts | – | – | 1 | |||||||||||||
Other income | 11 | 2 | 4 | |||||||||||||
Total income | 1,019 | 533 | 396 | |||||||||||||
Impairment charges | (166 | ) | (39 | ) | (30 | ) | ||||||||||
Net income | 853 | 494 | 366 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (711 | ) | (391 | ) | (269 | ) | ||||||||||
Amortisation of intangible assets | (8 | ) | (4 | ) | (1 | ) | ||||||||||
Operating expenses | (719 | ) | (395 | ) | (270 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | – | 1 | 41 | |||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | – | – | 247 | |||||||||||||
Profit before tax | 134 | 100 | 384 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 10.1bn | £ | 5.1bn | £ | 2.7bn | ||||||||||
Customer accounts | £ | 9.6bn | £ | 6.2bn | £ | 4.2bn | ||||||||||
Total assets | £ | 14.7bn | £ | 9.2bn | £ | 5.2bn | ||||||||||
Performance ratios | ||||||||||||||||
Cost: income ratio | 71% | 74% | 68% | |||||||||||||
Other financial measures | ||||||||||||||||
Risk Tendency | £ | 350m | £ | 140m | £ | 35m | ||||||||||
Risk weighted assetsa | £ | 15.1bn | £ | 10.5bn | £ | 3.3bn |
Note |
a | Risk weighted assets for 2008 and 2007 are calculated under Basel II. 2006 is calculated under Basel I. |
| ||
| 2007 £m | | | 2006 £m | | | 2005 £m | | ||||||||
Income statement information | ||||||||||||||||
Net interest income | 753 | 604 | 557 | |||||||||||||
Net fee and commission income | 425 | 366 | 316 | |||||||||||||
Net trading income | 68 | 17 | 31 | |||||||||||||
Net investment income | 109 | 66 | 88 | |||||||||||||
Principal transactions | 177 | 83 | 119 | |||||||||||||
Net premiums from insurance contracts | 145 | 111 | 129 | |||||||||||||
Other income | 9 | 20 | 23 | |||||||||||||
Total income | 1,509 | 1,184 | 1,144 | |||||||||||||
Net claims and benefits incurred under insurance contracts | (170 | ) | (138 | ) | (162 | ) | ||||||||||
Total income net of insurance claims | 1,339 | 1,046 | 982 | |||||||||||||
Impairment charges | (79 | ) | (41 | ) | (14 | ) | ||||||||||
Net income | 1,260 | 1,005 | 968 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (1,007 | ) | (765 | ) | (706 | ) | ||||||||||
Amortisation of intangible assets | (16 | ) | (9 | ) | (6 | ) | ||||||||||
Operating expenses | (1,023 | ) | (774 | ) | (712 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 1 | 40 | 39 | |||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 8 | 247 | – | |||||||||||||
Profit before tax | 246 | 518 | 295 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 39.3bn | £ | 29.0bn | £ | 25.3bn | ||||||||||
Customer accounts | £ | 15.7bn | £ | 11.0bn | £ | 10.2bn | ||||||||||
Total assets | £ | 52.2bn | £ | 38.2bn | £ | 34.0bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 76% | 74% | 73% | |||||||||||||
Risk Tendencya | £220m | £75m | £75m | |||||||||||||
Risk weighted assets | £ | 29.7bn | £ | 20.1bn | £ | 20.2bn |
2006/05
International Retail and Commercial Banking – excluding Absa profit before tax increased 76% (£223m) to £518m (2005: £295m), including a gain on the disposal of the interest in FirstCaribbean International Bank of £247m. This reflected good growth in continental Europe offset by a decline in profits in Africa caused by higher impairment, and increased costs reflecting a step change in the rate of organic investment in the business.
Income increased 7% (£64m) to £1,046m (2005: £982m).
Net interest income increased 8% (£47m) to £604m (2005: £557m), reflecting strong balance sheet growth in continental Europe, Africa and the Middle East, and the development of the corporate business in Spain.
Total average customer loans increased 20% to £27.2bn (2005: £22.7bn). Mortgage balance growth in continental Europe was particularly strong, with average Euro balances up 22%. There was a modest decline in lending margins partly driven by a greater share of mortgage assets as a proportion of the total book in continental Europe. Average customer deposits increased 16% to £10.4bn (2005: £9.0bn), with deposit margins stable.
Net fee and commission income increased 16% (£50m) to £366m (2005: £316m). This reflected a strong performance from the Spanish funds business, where average assets under management increased 11%, together with very strong growth in France, including the first full year contribution of the ING Ferri business which was acquired on 1st July 2005. Net fee and commission income showed solid growth in Africa and the Middle East.
Principal transactions decreased £36m to £83m (2005: £119m). 2005 included £23m from the redemption of preference shares in FirstCaribbean International Bank.
Impairment charges increased £27m to £41m (2005: £14m). This reflected the absence of one-off recoveries of £12m which arose in 2005 in Africa and the Middle East, and strong balance sheet growth across the businesses.
Operating expenses increased 9% (£62m) to £774m (2005: £712m). This included gains from the sale and leaseback of property in Spain of £55m. Operating expenses also included incremental investment expenditure of £25m to expand the distribution network and enhance IT and operational capabilities.
Barclays Spain continued to perform strongly. Profit before tax increased 21% (£30m) to £171m (2005: £141m), excluding net one-off gains on asset sales of £32m (2005: £8m) and integration costs of £43m (2005: £57m). This was driven by the continued realisation of benefits from Banco Zaragozano, together with strong growth in assets under management and solid growth in mortgages.
Africa and the Middle East profit before tax decreased 9% (£12m) to £126m (2005: £138m) driven by higher impairment charges reflecting one-off recoveries of £12m that arose in 2005 and an increase in investment expenditure.
Profit before tax increased strongly in Portugal reflecting good flows of new customers and increased business volumes. France also performed well as a result of good organic growth and the acquisition of ING Ferri.
The profit on disposal of subsidiaries, associate and joint ventures of £247m (2005: £nil) comprised the gain on the sale of Barclays interest in FirstCaribbean International Bank. The share of post-tax results of FirstCaribbean International Bank included in 2006 was £41m (2005: £37m).
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Global Retail and Commercial Banking
Absa
International Retail and Commercial Banking – Absa
Who we are
This business represents Barclays consolidation of Absa, excluding Absa Capital which is included in Barclays Capital.
International Retail and Commercial BankingGRCB – Absa comprises fourthree operating divisions: Retail Banking, Commercial Banking African operations and a Bancassurance division. (Barclays Bank PLC owns 59%The Absa Group’s other businesses are Absa Capital and Absa Card, which are included in Barclays Capital and Barclaycard respectively.
What we do
GRCB – Absa forms part of Absa Group Limited).
What we do
International Retail and Commercial BankingLimited, one of South Africa’s largest financial services groups, listed on the Johannesburg Stock Exchange Limited. GRCB – Absa serves retail customers through a variety of distribution channels and offers a fullcomplete range of banking products and services, including current and deposit accounts, savings products, bancassurance, mortgages, instalment finance credit cards, bancassurance products and wealth management services.management. It also offers customised business solutions for commercial and large corporate customers.
HighlightsAbsa’s business is conducted primarily in South Africa. In addition to this, the Group has equity holdings in banks in Mozambique, Angola and Tanzania.
Absa serves more than 10m customers through a range of physical channels that include 1,177 distribution points and 8,719 ATMs, as well as electronic channels such as telephone and online banking.
Performance indicators
2008/07
Performance
2007/06
InternationalGlobal Retail and Commercial Banking -– Absa
GRCB – Absa profit before tax decreased 8% (£45m) to £689m (2006: £698m)£552m (2007: £597m), owing to challenging market conditions and the 7% depreciation in the average value of the Rand against Sterling. Profit before tax included a gain of £47m relating to the Visa IPO. Very strong Rand income growth was partially offset by increased impairment and investment in the expansion of the franchise by 176 distribution points to 1,177 (2007: 1,001).
Total income increased 10% (£211m) to £2,324m (2007: £2,113m).
Net interest income improved 5% (£49m) to £1,104m (2007: £1,055m) reflecting strong balance sheet growth. Average customer assets increased 9% to £27.7bn (2007: £25.3bn), primarily driven by retail and commercial mortgages and commercial cheque accounts. Average customer liabilities increased 17% to £13.5bn (2007: £11.5bn), primarily driven by retail savings.
Net fee and commission income increased 11% (£78m) to £762m (2007: £684m), underpinned by retail transaction volume growth.
Highlights |
Performance indicators |
Key facts
| ||||||
2008 | 2007 | 2006 | ||||
Number of ATMs | 8,719 | 8,162 | 7,411 | |||
Number of corporate customers | 107,000 | 100,000 | 84,000 |
| ||||||
43 |
2007 £m | 2006 £m | 2005 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 1,137 | 1,049 | 488 | |||||||||||||
Net fee and commission income | 785 | 855 | 328 | |||||||||||||
Net trading income/(expense) | 1 | (11 | ) | (28 | ) | |||||||||||
Net investment income | 70 | 122 | 55 | |||||||||||||
Principal transactions | 71 | 111 | 27 | |||||||||||||
Net premiums from insurance contracts | 227 | 240 | 98 | |||||||||||||
Other income | 78 | 54 | 37 | |||||||||||||
Total income | 2,298 | 2,309 | 978 | |||||||||||||
Net claims and benefits incurred under insurance contracts | (114 | ) | (106 | ) | (44 | ) | ||||||||||
Total income net of insurance claims | 2,184 | 2,203 | 934 | |||||||||||||
Impairment charges | (173 | ) | (126 | ) | (19 | ) | ||||||||||
Net income | 2,011 | 2,077 | 915 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (1,272 | ) | (1,312 | ) | (583 | ) | ||||||||||
Amortisation of intangible assets | (61 | ) | (76 | ) | (41 | ) | ||||||||||
Operating expenses | (1,333 | ) | (1,388 | ) | (624 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 6 | 9 | 7 | |||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 5 | – | – | |||||||||||||
Profit before tax | 689 | 698 | 298 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 30.8bn | £ | 24.2bn | £ | 23.9bn | ||||||||||
Customer accounts | £ | 13.1bn | £ | 11.1bn | £ | 12.2bn | ||||||||||
Total assets | £ | 37.3bn | £ | 30.4bn | £ | 29.4bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 61% | 63% | 67% | |||||||||||||
Risk Tendencya | £255m | £145m | £100m | |||||||||||||
Risk weighted assets | £ | 23.6bn | £ | 20.7bn | £ | 20.8bn |
2006/05Principal transactions increased £41m to £111m (2007: £70m) reflecting gains on economic hedges relating to the commercial property finance and liquid asset portfolios.
InternationalOther income increased £36m to £113m (2007: £77m), reflecting a gain of £47m from the Visa IPO.
Impairment charges increased £201m to £347m (2007: £146m) as a result of rising delinquency levels in the retail portfolios, which have been impacted by rising interest and inflation rates and increasing consumer indebtedness.
Operating expenses increased 3% (£38m) to £1,305m (2007: £1,267m). The cost:income ratio improved from 63% to 59%.
2007/06
Global Retail and Commercial Banking – Absa
GRCB – Absa profit before tax decreased 2% (£12m) to £597m (2006: £609m) mainly owing to the weaker currency. The impact of the weaker currency was offset by very good performances from Retail Banking and Absa Corporate and Business Bank. Key factors impacting the results included: very strong asset and income growth; the diversification of earnings in favour of investment banking and commercial banking; an increased 134%retail credit impairment charge, and the achievement of the Absa – Barclays synergy target 18 months ahead of schedule.
Income decreased 2% (£32m) to £698m (2005: £298m) reflecting the full year£1,999m (2006: £2,031m).
Net interest income increased by 7% (£72m) to £1,055m (2006: £983m), driven by growth in loans and advances and deposits at improved margins. Loans and advances to customers increased 27% from 31st December 2006 compared with the five months ended 31st December 2005. Barclays acquired a controlling stakemainly driven by growth of 23% in Absa Group Limited on 27th July 2005.mortgages.
Net fee and commission income decreased by 9% (£70m) to £684m (2006: £754m) mainly owing to the weaker currency. The increase in local currency reflects a growth of 3% underpinned by increased transaction volumes in Retail Banking and Absa Corporate and Business Bank.
Principal transactions decreased £36m to £70m (2006: £106m) reflecting losses on economic hedges relating to the commercial property finance and liquid asset portfolios.
Other income increased £23m to £77m (2006: £54m).
Impairment charges increased £34m to £146m (2006: £112m) from the cyclically low levels of recent years, Arrears in retail portfolios increased driven by interest rate increases in 2006 and 2007. Impairment charges as a percentage of loans and advances to customers was 0.49%, ahead of the 0.48% charge in 2006 but within long-term industry averages.
Operating expenses decreased 4% (£52m) to £1,267m (2006: £1,319m), resulting from the realisation of synergy benefits of R1,428m (£100m) thus achieving the synergy target of R1.4bn 18 months ahead of schedule. This was partially offset by the increased investment in new distribution outlets and staff in order to support continued growth in volumes and customers.
GRCB – Absa
| ||||||||||||||||
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 1,104 | 1,055 | 983 | |||||||||||||
Net fee and commission income | 762 | 684 | 754 | |||||||||||||
Net trading income/(expense) | 6 | – | (11 | ) | ||||||||||||
Net investment income | 105 | 70 | 117 | |||||||||||||
Principal transactions | 111 | 70 | 106 | |||||||||||||
Net premiums from insurance contracts | 234 | 227 | 240 | |||||||||||||
Other income | 113 | 77 | 54 | |||||||||||||
Total income | 2,324 | 2,113 | 2,137 | |||||||||||||
Net claims and benefits incurred under insurance contracts | (126 | ) | (114 | ) | (106 | ) | ||||||||||
Total income net of insurance claims | 2,198 | 1,999 | 2,031 | |||||||||||||
Impairment charges | (347 | ) | (146 | ) | (112 | ) | ||||||||||
Net income | 1,851 | 1,853 | 1,919 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (1,255 | ) | (1,212 | ) | (1,250 | ) | ||||||||||
Amortisation of intangible assets | (50 | ) | (55 | ) | (69 | ) | ||||||||||
Operating expenses | (1,305 | ) | (1,267 | ) | (1,319 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 5 | 6 | 9 | |||||||||||||
Profit on disposal of subsidiaries, associates and joint ventures | 1 | 5 | – | |||||||||||||
Profit before tax | 552 | 597 | 609 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 32.7bn | £ | 29.9bn | £ | 23.5bn | ||||||||||
Customer accounts | £ | 17.0bn | £ | 13.0bn | £ | 10.9bn | ||||||||||
Total assets | £ | 40.4bn | £ | 36.4bn | £ | 29.6bn | ||||||||||
Performance ratios | ||||||||||||||||
Cost:income ratio | 59% | 63% | 65% | |||||||||||||
Other financial measures | ||||||||||||||||
Risk Tendency | £ | 255m | £ | 190m | £ | 130m | ||||||||||
Risk weighted assetsa | £ | 18.8bn | £ | 17.8bn | £ | 19.8bn |
Note
a | Risk weighted assets for 2008 and 2007 are calculated under Basel II. 2006 is calculated under Basel I. |
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Investment Banking and Investment Management
Barclays Capital
Barclays Capital
Who we are
Barclays Capital is a leading global investment bank providing large corporate, institutionalgovernment and governmentinstitutional clients with a full spectrum of solutions to their strategic advisory, financing and risk management requirements.needs.
What we do
Barclays Capital serviceis a wide varietyglobal investment bank, which offers clients the full range of client needs, fromservices covering strategic advisory and M&A; equity and fixed income capital raising and managingcorporate lending; and risk management across foreign exchange, interest rate, equityrates, equities and commodity risks, through to providing technical advice and expertise.commodities.
Activities are organised into three principal areas: Rates,Global Markets, which includes fixed income,commodities, credit products, equities, foreign exchange, commodities, emerging markets, money markets, prime services and equityinterest rate products; Credit,Investment Banking, which includes primarycorporate advisory, Mergers and secondary activities for loansAcquisitions, equity and bonds for investment grade, high yieldfixed-income capital raising and emerging market credit, as well as hybrid capital products, asset based finance, mortgage backed securities, credit derivatives, structured capital markets and large asset leasing;corporate lending; and Private Equity.Equity and Principal Investments. Barclays Capital includes Absa Capital, the investment banking business of Absa.
Barclays Capital works closely with all other parts of the Group to leverage synergies from client relationships and product capabilities.
HighlightsPerformance
2008/07
In an exceptionally challenging market environment Barclays Capital profit before tax decreased 44% (£1,033m) to £1,302m (2007: £2,335m). Profit before tax included a gain on the acquisition of Lehman Brothers North American businesses of £2,262m. Absa Capital profit before tax grew 13% to £175m (2007: £155m).
Net income included gross losses of £8,053m (2007: £2,999m) due to continuing dislocation in the credit markets. These losses were partially offset by income and hedges of £1,433m (2007: £706m), and gains of £1,663m (2007: £658m) from the general widening of credit spreads on structured notes issued by Barclays Capital. The gross losses, comprised £6,290m (2007: £2,217m) against income and £1,763m (2007: £782m) in impairment charges. Further detail is provided on page 94.
The integration of the Lehman Brothers North American businesses is complete and the acquired businesses made a positive contribution, with
good results in equities, fixed income and advisory. There was a gain on acquisition of £2,262m. Not included in this gain is expenditure relating to integration of the acquired business.
Income was down 27% at £5,231m (2007: £7,119m) driven by the impact of the market dislocation. There was very strong underlying growth in the US driven by fixed income, prime services and the acquired businesses. In other regions income fell driven by the challenging environment.
Net trading income decreased 60% (£2,233m) to £1,506m (2007: £3,739m) reflecting losses from the credit market dislocation and weaker performance in credit products and equities. This was partially offset by significant growth in interest rates, foreign exchange, emerging markets and prime services. Average DVaR at 95% increased by 64% to £53.4m driven by higher credit spread and interest rate risk.
Net investment income decreased 41% (£394m) to £559m reflecting the market conditions. Net interest income increased 46% (£545m) to £1,724m (2007: £1,179m), driven by strong results in global loans and money markets. Net fee and commission income from advisory and origination activities increased 16% (£194m) to £1,429m. The corporate lending portfolio, including leveraged finance, increased 46% to £76.6bn (31st December 2007: £52.3bn) driven by the decline in the value of Sterling relative to other currencies as well as draw downs on existing loan facilities and the extension of new loans at current terms to financial and manufacturing institutions.
Impairment charges and other credit provisions of £2,423m (2007: £846m) included £1,763m (2007: £782m) due to the credit market dislocation. Other impairment charges of £660m (2007: £64m) principally related to private equity, prime services and the loan book.
Operating expenses fell 5% (£199m) to £3,774m (2007: £3,973m) due to lower performance related pay, partially offset by operating costs of the acquired businesses.
Total headcount increased 6,900 to 23,100 (31st December 2007: 16,200). Prior to the acquisition of Lehman Brothers North American businesses, headcount during 2008 was materially unchanged except for hiring associated with the annual global graduate programme. The acquisition initially added 10,000 to the headcount but there were reductions in the fourth quarter as the US businesses were integrated.
Highlights |
Key facts
| ||||||
League table rankings | 2008 | 2007 | 2006 | |||
Rankings: | ||||||
Global All Bonds | 1 | 2 | 1 | |||
US Investment Grade | 3 | 10 | 7 | |||
US Government Securities Survey | 1 | 1 | 8 | |||
Foreign Exchange Survey | 3 | 5 | 4 | |||
US M&A | 4 | – | – |
BarclaysAnnual Report 2008 | 45 |
Performance indicators
Performance
2007/06
Barclays Capital delivered profits ahead of the record results achieved in 2006 despite challenging trading conditions in the second half of the year. Profit before tax increased 5% (£119m) to £2,335m (2006: £2,216m). There was strong income growth across the Rates businesses and excellent results in Continental Europe, Asia and Africa demonstrating the breadth of the client franchise. Net income was slightly ahead at £6,273m (2006: £6,225m) and costs were tightly managed, declining slightly year on year. Absa Capital delivered very strong growth in profit before tax to £155m (2006: £71m).
The US sub-prime driven market dislocation affected performance in the second half of 2007. Exposures relating to US sub-prime were actively managed and declined over the period. Barclays Capital’s 2007 results reflected netgross losses relatedof £2,999m (2006: £nil) due to the dislocation of credit market turbulencemarkets. These losses were partially offset by income and hedges of £1,635m, of which £795m was included in income, net£706m (2006: £nil) and gains of £658m gains arising(2006: £nil) from the fair valuationgeneral widening of credit spreads on structured notes issued by Barclays Capital. Impairment charges included £840mThe gross losses comprised £2,217m (2006: £nil) against ABS CDO Super Senior exposures, other credit market exposuresincome and drawn leveraged finance underwriting positions.£782m (2006: £nil) in impairment charges.
Income increased 14% (£852m) to £7,119m (2006: £6,267m) as a result of very strong growth in interest rate, currency, equity, commodity and emerging market asset classes. There was excellent income growth in continental Europe, Asia, and Africa. Average DVaR increased 13% to £42m (2006: £37.1m) in line with income.
Secondary income, comprising principal transactions (net trading income and net investment income), is mainly generated from providing client financing and risk management solutions. Secondary income increased 11% (£578m) to £5,871m (2006: £5,293m).
Net trading income increased 5% (£177m) to £3,739m (2006: £3,562m) with strong contributions from fixed income, commodities, equities, foreign exchange and prime services businesses. These were largely offset by net losses in the business affected by sub-prime
mortgage related write downs.write-downs. The general widening of credit spreads that occurred over the course of the second half of 2007 also reduced the carrying value of the £57bn£40.7bn of structured notes issued notesby Barclays Capital held at fair value on the balance sheet, resulting in gains of £658m.£658m (2006: £nil). Net investment income increased 66% (£380m) to £953m (2006: £573m) as a result of a number of private equity realisations, investment disposals in Asia and structured capital markets transactions. Net interest income increased 2% (£21m) to £1,179m (2006: £1,158m), driven by higher contributions from money markets. The corporate lending portfolio increased 29% to £52.3bn (2006: £40.6bn), largely due to an increase in drawn leveraged finance positions and a rise in drawn corporate loan balances.
Primary income, which comprises net fee and commission income from advisory and origination activities, grew 30% (£283m) to £1,235m (2006: £952m), with good contributions from bonds and loans.
Impairment charges and other credit provisions of £846m included £722m against ABS CDO Super Senior exposures, £60m from other credit market exposures and £58m relating to drawn leveraged finance underwriting positions. Other impairment charges on loans and advances amounted to a release of £7m (2006: £44m release) before impairment charges on available for sale assets of £13m (2006: £86m).
| ||
2007 £m | 2006 £m | 2005 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 1,179 | 1,158 | 1,065 | |||||||||||||
Net fee and commission income | 1,235 | 952 | 776 | |||||||||||||
Net trading income | 3,739 | 3,562 | 2,231 | |||||||||||||
Net investment income | 953 | 573 | 413 | |||||||||||||
Principal transactions | 4,692 | 4,135 | 2,644 | |||||||||||||
Other income | 13 | 22 | 20 | |||||||||||||
Total income | 7,119 | 6,267 | 4,505 | |||||||||||||
Impairment charges and other credit provisions | (846 | ) | (42 | ) | (111 | ) | ||||||||||
Net income | 6,273 | 6,225 | 4,394 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (3,919 | ) | (3,996 | ) | (2,961 | ) | ||||||||||
Amortisation of intangible assets | (54 | ) | (13 | ) | (2 | ) | ||||||||||
Operating expenses | (3,973 | ) | (4,009 | ) | (2,963 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 35 | – | – | |||||||||||||
Profit before tax | 2,335 | 2,216 | 1,431 | |||||||||||||
Balance sheet information | ||||||||||||||||
Total assets | £ | 839.7bn | £ | 657.9bn | £ | 601.2bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 56% | 64% | 66% | |||||||||||||
Risk Tendencya | £ | 140m | £ | 95m | £ | 110m | ||||||||||
Risk weighted assets | £ | 169.1bn | £ | 137.6bn | £ | 116.7bn | ||||||||||
Average DVaR | £ | 42.0m | £ | 37.1m | £ | 32.0m | ||||||||||
Corporate lending portfolio | £ | 52.3bn | £ | 40.6bn | £ | 40.1bn |
Operating expenses decreased 1% (£36m) to £3,973m (2006: £4,009m). Performance related pay, discretionary investment spend and short term contractor resources represented 42% (2006: 50%) of the cost base. Amortisation of intangible assets of £54m (2006: £13m) principally related to mortgage service rights.
Total headcount increased 3,000 during 2007 to 16,200 (2006: 13,200) including 800 from the acquisition of EquiFirst. The majority of organic growth was in Asia Pacific.
Barclays Capital
| ||||||||||||||||
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 1,724 | 1,179 | 1,158 | |||||||||||||
Net fee and commission income | 1,429 | 1,235 | 952 | |||||||||||||
Net trading income | 1,506 | 3,739 | 3,562 | |||||||||||||
Net investment income | 559 | 953 | 573 | |||||||||||||
Principal transactions | 2,065 | 4,692 | 4,135 | |||||||||||||
Other income | 13 | 13 | 22 | |||||||||||||
Total income | 5,231 | 7,119 | 6,267 | |||||||||||||
Impairment charges and other credit provisions | (2,423 | ) | (846 | ) | (42 | ) | ||||||||||
Net income | 2,808 | 6,273 | 6,225 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (3,682 | ) | (3,919 | ) | (3,996 | ) | ||||||||||
Amortisation of intangible assets | (92 | ) | (54 | ) | (13 | ) | ||||||||||
Operating expenses | (3,774 | ) | (3,973 | ) | (4,009 | ) | ||||||||||
Share of post-tax results of associates and joint ventures | 6 | 35 | – | |||||||||||||
Gain on acquisition | 2,262 | – | – | |||||||||||||
Profit before tax | 1,302 | 2,335 | 2,216 | |||||||||||||
Balance sheet information | ||||||||||||||||
Total assets | £ | 1,629.1bn | £ | 839.9bn | £ | 657.9bn | ||||||||||
Performance ratios | ||||||||||||||||
Cost:income ratio | 72% | 56% | 64% | |||||||||||||
Other financial measures | ||||||||||||||||
Risk Tendency | £ | 415m | £ | 140m | £ | 95m | ||||||||||
Risk weighted assetsa | £ | 227.4bn | £ | 178.2bn | £ | 137.6bn | ||||||||||
Average DVaR (95%)b | £ | 53.4m | £ | 32.5m | £ | 37.1m |
2006/05Notes
Profit before tax increased 55% (£785m) to £2,216m (2005: £1,431m). This was the result of a very strong income performance, driven by higher business volumes, continued growth in client activity and favourable market conditions. Net income increased 42% (£1,831m) to £6,225m (2005: £4,394m). Profit before tax for Absa Capital was £71m (2005: £39m).
a | Risk weighted assets for 2008 and 2007 are calculated under Basel II. 2006 is calculated under Basel I. |
Income increased 39% (£1,762m) to £6,267m (2005: £4,505m) as a result of very strong growth across the Rates, Credit and Private Equity businesses. Income increased in all geographic regions. Average DVaR increased 16% to £37.1m (2005: £32.0m) significantly below the rate of income growth.
Secondary income increased 43% (£1,584m) to £5,293m (2005: £3,709m).
Net trading income increased 60% (£1,331m) to £3,562m (2005: £2,231m) with very strong contributions across the Rates and Credit businesses, in particular, commodities, fixed income, equities, credit derivatives and emerging markets.
The performance was driven by higher volumes of client led activity and favourable market conditions. Net investment income increased 39% (£160m) to £573m (2005: £413m) driven by investment realisations, primarily in Private Equity, offset by reduced contributions from credit products. Net interest income increased 9% (£93m) to £1,158m (2005: £1,065m) driven by a full year contribution from Absa Capital.
Primary income grew 23% (£176m) to £952m (2005: £776m). This reflected higher volumes and continued market share gains in a number of key markets, with strong contributions from issuances in bonds, European leveraged loans and convertibles.
Impairment charges of £42m (2005: £111m), including impairment on available for sale assets of £86m (2005: £nil), were 62% lower than prior year reflecting recoveries and the continued benign wholesale credit environment.
Operating expenses increased 35% (£1,046m) to £4,009m (2005: £2,963m), reflecting higher performance related costs, increased levels of activity and continued investment across the business. Performance related pay, discretionary investment spend and short-term contractor resource costs represented 50% of operating expenses (2005: 46%). Amortisation of intangible assets principally relates to mortgage service rights obtained as part of the purchase of HomEq.
Total headcount increased 3,300 during 2006 to 13,200 (2005: 9,900) and included 1,300 from the acquisition of HomEq. Organic growth was broadly based across all regions and reflected further investments in the front office, systems development and control functions to support continued business expansion.
b | Average DVaR for 2007 and 2006 are calculated with a 98% confidence level. |
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Investment Banking and
Investment Management
Barclays Global Investors
Who we are
Barclays Global Investors (BGI) is one of the world’s largest asset managers and a leading global provider of investment management products and services. We are the global leader in assets and products in the exchange traded funds business, with over 320360 funds for institutions and individuals trading globally. BGI’s investment philosophy is founded on managing all dimensions of performance: a consistent focus on controlling risk, return and cost.
With a 3,000-plus strong workforce, we currently have over £1trn in assets under management, for 3,000 clients around the world.
What we do
BGI offers structured investment strategies such as indexing, global asset allocation and risk controlled active products including hedge funds and provides related investment services such as securities lending, cash management and portfolio transition services.
BGI collaborates with the other Barclays businesses, particularly Barclays Capital and Barclays Wealth, to develop and market products and leverage capabilities to better serve the client base.
HighlightsPerformance
2008/07
Barclays Global Investors profit before tax decreased 19% (£139m) to £595m (2007: £734m). Profit was impacted by the cost of provision of selective support of liquidity products of £263m (2007: £80m) and an 8% appreciation in the average value of the US Dollar against Sterling.
Income declined 4% (£82m) to £1,844m (2007: £1,926m).
Net fee and commission income declined 1% (£19m) to £1,917m (2007: £1,936m). This was primarily attributable to reduced incentive fees of £49m (2007: £198m), partially offset by increased securities lending revenue.
Operating expenses increased 5% (£57m) to £1,249m (2007: £1,192m). Operating expenses included charges of £263m (2007: £80m) related to selective support of liquidity products, partially offset by a reduction in performance related costs. The cost:income ratio increased to 68% (2007: 62%).
Highlights | ||
Performance indicators |
Performance indicators
Performance
Key facts
2008 | 2007 | 2006 | ||||||||
Assets under management | ||||||||||
(£): | 1,040bn | 1,044bn | 927bn | |||||||
– indexed | 653bn | 615bn | 566bn | |||||||
– iShares | 226bn | 205bn | 147bn | |||||||
– active | 161bn | 224bn | 214bn | |||||||
Net new assets in period (£) | 61bn | 42bn | 37bn | |||||||
Assets under management | ||||||||||
(US$): | 1,495bn | 2,079bn | 1,814bn | |||||||
– indexed | 939bn | 1,225bn | 1,108bn | |||||||
– iShares | 325bn | 408bn | 287bn | |||||||
– active | 231bn | 446bn | 419bn | |||||||
Net new assets in period (US$) | 99bn | 86bn | 68bn | |||||||
Number of iShares products | 360 | 324 | 191 | |||||||
Number of institutional clients | 3,000 | 3,000 | 2,900 |
Barclays Annual Report 2008 | 47 |
Total assets under management remained flat at £1,040bn (2007: £1,044bn) comprising £61bn of net new assets, £234bn of favourable exchange movements and £299bn of adverse market movements. In US Dollar terms assets under management decreased 28% (US$584bn) to US$1,495bn (2007: US$2,079bn), comprising US$99bn of net new assets, US$130bn of negative exchange rate movements and US$553bn of negative market movements.
2007/06
Barclays Global Investors delivered solid growth in profit before tax, which increased 3% (£20m) to £734m (2006: £714m). Very strong US Dollar income and strong profit growth was partially offset by the 8% depreciation in the average value of the US Dollar against Sterling.
Income grew 16% (£261m) to £1,926m (2006: £1,665m).
Net fee and commission income grew 17% (£285m) to £1,936m (2006: £1,651m). This was primarily attributable to increased management fees and securities lending. Incentive fees increased 6% (£12m) to £198m (2006: £186m). Higher asset values, driven by higher market levels and good net new inflows, contributed to the growth in income.
Operating expenses increased 25% (£241m) to £1,192m (2006: £951m) as a result of significant investment in key product and channel growth initiatives and in infrastructure as well as growth in the underlying business. Operating expenses included charges of £80m (2006: £nil) related to selective support of liquidity products managed in the US. The cost:income ratio rose five percentage points to 62% (2006: 57%).
Headcount increased 700 to 3,400 (2006: 2,700). Headcount increased in all geographical regions and across product groups and the support functions, reflecting continued investment to support further growth.
Total assets under management increased 13% (£117bn) to £1,044bn (2006: £927bn) comprising £42bn of net new assets, £12bn attributable to the acquisition of Indexchange Investment AG (Indexchange), £66bn of favourable market movements and £3bn of adverse exchange movements. In US$US Dollar terms assets under management increased 15% US$265bn(US$265bn) to US$2,079bn (2006: US$1,814bn), comprising US$86bn of net new assets, US$23bn attributable to acquisition of Indexchange, US$127bn of favourable market movements and US$29bn of positive exchange rate movements.
| ||
Barclays Global Investors
2007 £m | 2006 £m | 2005 £m | 2008 £m | 2007 £m | 2006 £m | |||||||||||||||||||||||||||
Income statement information | ||||||||||||||||||||||||||||||||
Net interest (expense)/income | (8 | ) | 10 | 15 | (38 | ) | (8 | ) | 10 | |||||||||||||||||||||||
Net fee and commission income | 1,936 | 1,651 | 1,297 | 1,917 | 1,936 | 1,651 | ||||||||||||||||||||||||||
Net trading income | 5 | 2 | 2 | (14 | ) | 5 | 2 | |||||||||||||||||||||||||
Net investment (expense)/income | (9 | ) | 2 | 4 | (29 | ) | (9 | ) | 2 | |||||||||||||||||||||||
Principal transactions | (4 | ) | 4 | 6 | (43 | ) | (4 | ) | 4 | |||||||||||||||||||||||
Other income | 2 | – | – | 8 | 2 | – | ||||||||||||||||||||||||||
Total income | 1,926 | 1,665 | 1,318 | 1,844 | 1,926 | 1,665 | ||||||||||||||||||||||||||
Operating expenses excluding amortisation of intangible assets | (1,184 | ) | (946 | ) | (775 | ) | (1,234 | ) | (1,184 | ) | (946 | ) | ||||||||||||||||||||
Amortisation of intangible assets | (8 | ) | (5 | ) | (4 | ) | (15 | ) | (8 | ) | (5 | ) | ||||||||||||||||||||
Operating expenses | (1,192 | ) | (951 | ) | (779 | ) | (1,249 | ) | (1,192 | ) | (951 | ) | ||||||||||||||||||||
Profit before tax | 734 | 714 | 540 | 595 | 734 | 714 | ||||||||||||||||||||||||||
Balance sheet information | ||||||||||||||||||||||||||||||||
Total assets | £ | 89.2bn | £ | 80.5bn | £ | 80.9bn | £ | 71.3bn | £ | 89.2bn | £ | 80.5bn | ||||||||||||||||||||
Selected statistical measures | ||||||||||||||||||||||||||||||||
Cost:income ratioa | 62% | 57% | 59% | |||||||||||||||||||||||||||||
Risk weighted assets | £ | 2.0bn | £ | 1.4bn | £ | 1.5bn | ||||||||||||||||||||||||||
Performance ratios | ||||||||||||||||||||||||||||||||
Cost:income ratio | 68% | 62% | 57% | |||||||||||||||||||||||||||||
Other financial measures | ||||||||||||||||||||||||||||||||
Risk weighted assetsa | £ | 3.9bn | £ | 4.4bn | £ | 1.4bn |
Note
a |
2006/05
Barclays Global Investors delivered another year of outstanding results. Profit before tax increased 32% (£174m) to £714m (2005: £540m), reflecting very strong income growth and higher operating margins. The performance was broadly based across products, distribution channels and geographies.
Net fee and commission income increased 27% (£354m) to £1,651m (2005: £1,297m). This growth was attributable to increased management fees, particularly in the iShares and active businesses, and securities lending, offset by lower incentive fees. Incentive fees decreased 9% (£18m) to £186m (2005: £204m). Higher asset values, driven by higher market levels and good net new inflows, contributed to the growth in income.
Operating expenses increased 22% (£172m) to £951m (2005: £779m) as a result of significant investment in key growth initiatives, ongoing investment in product development and infrastructure and higher performance-based expenses. The cost:income ratio improved two percentage points to 57% (2005: 59%).
Total headcount rose 400 to 2,700 (2005: 2,300). Headcount increased in all regions, across product groups and the support functions, reflecting continued investment to support strategic initiatives.
Total assets under management increased 5% (£46bn) to £927bn (2005: £881bn) primarily due to net new inflows of £37bn. The positive market move impact of £98bn was largely offset by £89bn of adverse exchange rate movements. In US$ terms assets under management increased by US$301bn to US$1,814bn (2005: US$1,513bn), comprising US$68bn of net new assets, US$177bn of favourable market movements and US$56bn of positive exchange rate movements.
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Investment Banking and Investment Management
Barclays Wealth
Who we are
Barclays Wealth focuses on high net worth, affluent and intermediary clients worldwide. We are the UK’s leading wealth manager by client assets. We have over 6,9007,900 staff in over 20 countries and have total client assets of £133bn. Barclays Wealth includes£145bn. We have offices across the closed life assurance activitiesAmericas following the acquisition of Barclays and Woolwich, and Walbrook, an independent fiduciary services company acquiredLehman Brothers Private Investment Management in 2007.2008.
What we do
Barclays Wealth provides international and private banking, asset andfiduciary services, investment management, stockbroking, offshore banking, wealth structuring and financial planning services.brokerage.
We work closely with all other parts of the Group to leverage synergies from client relationships and product capabilities, for example, offering world-class investment solutions with institutional quality products and services from Barclays Capital and Barclays Global Investors.
HighlightsPerformance
2008/07
Barclays Wealth profit before tax grew 119% (£364m) to £671m (2007: £307m). Profit before gains on disposal increased 12% (£38m) driven by solid income growth and tight cost control, offset by an increase in impairment charges. The closed life assurance business contributed profit before tax of £104m (2007: £110m) prior to its sale in October 2008, which generated a profit on disposal of £326m.
Income increased 3% (£37m) to £1,324m (2007: £1,287m).
Net interest income increased 13% (£55m) to £486m (2007: £431m) reflecting strong growth in both customer deposits and lending. Average deposits grew 19% to £37.2bn (2007: £31.2bn). Average lending grew 31% to £9.7bn (2007: £7.4bn).
Net fee and commission income decreased 3% (£19m) to £720m (2007: £739m) driven by falling equity markets partially offset by increased client assets.
Net investment income, net premiums from insurance contracts and net claims and benefits paid on insurance contracts related wholly to the closed life assurance business. Their overall net impact on income increased marginally to £103m (2007: £95m). The decrease in net investment income, driven by a fall in the value of unit linked contracts and reduced premium income, were offset by reduced net claims and benefits as a result of a fall in the value of linked and non-linked liabilities.
Impairment charges increased £37m to £44m (2007: £7m) from a very low base. This increase reflected both the substantial increase in the loan book over the last three years and the impact of the current economic environment on client liquidity and collateral values.
Operating expenses decreased 4% to £935m (2007: £973m) with significant cost savings including a reduction in performance related costs partially offset by increased expenditure in upgrading technology and operating platforms and continued hiring of client-facing staff.
Performance indicators |
Performance indicators
Performance
Key facts
2008 | 2007 | 2006 | |||||||
Total client assets | £ | 145.1bn | £ | 132.5bn | £ | 116.1bn |
BarclaysAnnual Report 2008 | 49 |
Total client assets, comprising customer deposits and client investments, increased 10% (£12.6bn) to £145.1bn (2007: £132.5bn) with underlying net new asset inflows of £3.2bn and the acquisition of the Lehman Brothers North American businesses offsetting the impact of market and foreign exchange movements and the sale of the closed life assurance book.
2007/06
Barclays Wealth profit before tax showed very strong growth of 25% (£62m) to £307m (2006: £245m). Performance was driven by broadly based income growth, reduced redress costs and tight cost control, partially offset by additional volume relatedvolume-related costs and increased investment in people and infrastructure to support future growth.
Income increased 11% (£127m) to £1,287m (2006: £1,160m).
Net interest income increased 10% (£39m) to £431m (2006: £392m), reflecting strong growth in both customer deposits and lending. Average deposits grew 13% to £31.2bn (2006: £27.7bn). Average lending grew 35% to £7.4bn (2006: £5.5bn), driven by increased lending to high net worth, affluent and intermediary clients.
Net fee and commission income grew 10% (£65m) to £739m (2006: £674m). This reflected growth in client assets and higher transactional income from increased sales of investment products and solutions.
Principal transactions decreased £101m to £55m (2006: £156m) as a result of lower growth in the value of unit linked insurance contracts. Net premiums from insurance contracts reduced £15m to £195m (2006: £210m). These reductions were offset by a lower charge for net claims and benefits incurred under insurance contracts of £152m (2006: £288m).
Operating expenses increased 7% to £973m (2006: £913m) with greater volume relatedvolume-related costs and a significant increase in investment partially offset by efficiency gains and lower customer redress costs of £19m (2006: £67m). Ongoing investment programmes included increased hiring of client facingclient-facing staff and improvements to infrastructure with the upgrade of technology and operations platforms. The cost:income ratio improved three percentage points to 76% (2006: 79%).
Total client assets, comprising customer deposits and client investments, increased 14% (£16.4bn) to £132.5bn (2006: £116.1bn), reflecting strong net new asset inflows and the acquisition of Walbrook, an independent fiduciary services company, which completed on 18th May 2007.
| ||
2007 £m | 2006 £m | 2005 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 431 | 392 | 346 | |||||||||||||
Net fee and commission income | 739 | 674 | 593 | |||||||||||||
Net trading income | 3 | 2 | – | |||||||||||||
Net investment income | 52 | 154 | 264 | |||||||||||||
Principal transactions | 55 | 156 | 264 | |||||||||||||
Net premiums from insurance contracts | 195 | 210 | 195 | |||||||||||||
Other income | 19 | 16 | 11 | |||||||||||||
Total income | 1,439 | 1,448 | 1,409 | |||||||||||||
Net claims and benefits incurred on insurance contracts | (152 | ) | (288 | ) | (375 | ) | ||||||||||
Total income net of insurance claims | 1,287 | 1,160 | 1,034 | |||||||||||||
Impairment charges | (7 | ) | (2 | ) | (2 | ) | ||||||||||
Net income | 1,280 | 1,158 | 1,032 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (967 | ) | (909 | ) | (866 | ) | ||||||||||
Amortisation of intangible assets | (6 | ) | (4 | ) | (2 | ) | ||||||||||
Operating expenses
| (973 | ) | (913 | ) | (868 | ) | ||||||||||
Profit before tax | 307 | 245 | 164 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 9.0bn | £ | 6.2bn | £ | 5.0bn | ||||||||||
Customer accounts | £ | 34.4bn | £ | 28.3bn | £ | 25.8bn | ||||||||||
Total assets | £ | 18.0bn | £ | 15.0bn | £ | 13.4bn | ||||||||||
Selected statistical measures | ||||||||||||||||
Cost:income ratioa | 76% | 79% | 84% | |||||||||||||
Risk Tendencya | £ | 10m | £ | 10m | £ | 5m | ||||||||||
Risk weighted assets | £ | 7.7bn | £ | 6.1bn | £ | 4.3bn |
Barclays Wealth
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 486 | 431 | 392 | |||||||||||||
Net fee and commission income | 720 | 739 | 674 | |||||||||||||
Net trading income | (11 | ) | 3 | 2 | ||||||||||||
Net investment income | (333 | ) | 52 | 154 | ||||||||||||
Principal transactions | (344 | ) | 55 | 156 | ||||||||||||
Net premiums from insurance contracts | 136 | 195 | 210 | |||||||||||||
Other income | 26 | 19 | 16 | |||||||||||||
Total income | 1,024 | 1,439 | 1,448 | |||||||||||||
Net claims and benefits incurred on insurance contracts | 300 | (152 | ) | (288 | ) | |||||||||||
Total income net of insurance claims | 1,324 | 1,287 | 1,160 | |||||||||||||
Impairment charges | (44 | ) | (7 | ) | (2 | ) | ||||||||||
Net income | 1,280 | 1,280 | 1,158 | |||||||||||||
Operating expenses excluding amortisation of intangible assets | (919 | ) | (967 | ) | (909 | ) | ||||||||||
Amortisation of intangible assets | (16 | ) | (6 | ) | (4 | ) | ||||||||||
Operating expenses | (935 | ) | (973 | ) | (913 | ) | ||||||||||
Profit on disposal of associates and joint ventures | 326 | – | – | |||||||||||||
Profit before tax | 671 | 307 | 245 | |||||||||||||
Balance sheet information | ||||||||||||||||
Loans and advances to customers | £ | 11.4bn | £ | 9.0bn | £ | 6.2bn | ||||||||||
Customer accounts | £ | 42.4bn | £ | 34.4bn | £ | 28.3bn | ||||||||||
Total assets | £ | 13.3bn | £ | 18.2bn | £ | 15.0bn | ||||||||||
Performance ratios | ||||||||||||||||
Cost:income ratio | 71% | 76% | 79% | |||||||||||||
Other financial measures | ||||||||||||||||
Risk Tendency | £ | 20m | £ | 10m | £ | 10m | ||||||||||
Risk weighted assets a | £ | 10.3bn | £ | 8.2bn | £ | 6.1bn |
Note
a |
2006/05
Barclays Wealth profit before tax showed very strong growth of 49% (£81m) to £245m (2005: £164m). Performance was driven by broadly based income growth and favourable market conditions. This was partially offset by additional volume related costs and a significant increase in investment in people and infrastructure to support future growth.
Income increased 12% (£126m) to £1,160m (2005: £1,034m).
Net interest income increased 13% (£46m) to £392m (2005: £346m) reflecting growth in both customer deposits and customer lending. Average deposits grew 6% (£1.6bn) to £27.7bn (2005: £26.1bn). Average lending grew 17% to £5.5bn (2005: £4.7bn), driven by increased lending to offshore and private banking clients. Asset and liability margins were higher relative to 2005.
Net fee and commission income increased 14% (£81m) to £674m (2005: £593m). This reflected growth in client assets and higher transactional income, including increased sales of investment products to high net worth and affluent clients, and higher stockbroking volumes.
Operating expenses increased 5% (£45m) to £913m (2005: £868m) with greater volume related and investment costs more than offsetting efficiency gains. Investment costs included increased hiring of client-facing staff and improvements to infrastructure with the upgrade of technology and operations platforms. The cost:income ratio improved five percentage points to 79% (2005: 84%).
Total client assets, comprising customer deposits and client investments, increased 19% (£18.6bn) to £116.1bn (2005: £97.5bn) reflecting good net new asset inflows and favourable market conditions. Multi-Manager assets increased 68% (£4.1bn) to £10.1bn (2005: £6.0bn); this growth included transfers of existing client assets.
Barclays Annual Report | ||||
Financial review
Analysis of results by business
Head office functions and other operations
Who we are
Head office functions and other operations comprises:
Head office and central support functions |
Businesses in transition |
|
What we do
Head office and central support functions comprises the following areas: Executive Management, Finance, Treasury, Corporate Affairs, Human Resources, Strategy and Planning, Internal Audit, Legal, Corporate Secretariat, Property, Tax, Compliance and Risk. Costs incurred wholly on behalf of the businesses are recharged to them.
Businesses in transition principally relate to certain lending portfolios that are centrally managed with the objective of maximising recovery from the assets.
Performance
2008/07
Head office functions and other operations loss before tax increased £430m to £858m (2007: £428m).
Total income decreased £185m to a loss of £377m (2007: loss of £192m).
Group segmental reporting is performed in accordance with Group accounting policies. This means that inter-segment transactions are recorded in each segment as if undertaken on an arm’s length basis. Adjustments necessary to eliminate inter-segment transactions are included in Head office functions and other operations. The impact of such inter-segment adjustments increased £32m to £265m (2007: £233m). These adjustments included internal fees for structured capital market activities of £141m (2007: £169m) and fees paid to Barclays Capital for debt and equity raising and risk management advice of £151m (2007: £65m), both of which reduce net fees and commission income.
Net interest income increased £54m to £182m (2007: £128m) primarily due to a consolidation adjustment between net interest income and trading income required to match the booking of certain derivative hedging transactions between different segments in the Group. This resulted in a £111m increase in net interest income to £143m (2007: £32m) with an equal and opposite decrease in principal transactions.
PerformanceThis was partially offset by an increase in costs in central funding activity due to the money market dislocation, in particular LIBOR resets.
Principal transactions loss increased £135m to £218m (2007: £83m) reflecting the £111m increase in consolidation reclassification adjustment on derivative hedging transactions.
Impairment charges increased £27m to £30m (2007: £3m) mainly reflecting losses on Floating Rate Notes held for hedging purposes.
Operating expenses increased £217m to £451m (2007: £234m). The main drivers of this increase were: a £101m charge for the Group’s share of levies that will be raised by the UK Financial Services Compensation Scheme; £64m costs relating to an internal review of Barclays compliance with US economic sanctions; the non-recurrence of a £58m break fee relating to the ABN Amro transaction; lower rental income and lower proceeds on property sales.
2007/06
Head office functions and other operations loss before tax increased £169m to £428m (2006: £259m).
Group segmental reporting is performed in accordance with Group accounting policies. This means that inter-segment transactions are recorded in each segment as if undertaken on an arm’s length basis. Adjustments necessary to eliminate inter-segment transactions are included in Head office functions and other operations.
The impact of such inter-segment adjustments increased £86m to £233m (2006: £147m). These adjustments included internal fees for structured capital market activities of £169m (2006: £87m) and fees paid to Barclays Capital for debt and equity raising and risk management advice of £65m (2006: £23m), both of which increased net fee and commission expense in headHead office. The impact on the inter-segment adjustments of the timing of the recognition of insurance commissions included in Barclaycard was a reduction in headHead office income of £9m (2006: £44m). This net reduction was reflected in a decrease in net fee and commission income of £162m (2006: £184m) and an increase in net premium income of £153m (2006: £140m).
Principal transactions decreased to a loss of £83m (2006: £42m profit). 2006 included a £55m profit from a hedge of the expected Absa foreign currency earnings. 2007 included a loss of £33m relating to fair valuation of call options embedded within retail US$ preference shares arising from widening of own credit spreads.
Operating expenses decreased £35m to £234m (2006: £269m). The primary driver of this decrease was the receipt of a break fee relating to the ABN AMRO transaction which, net of transaction costs, reduced expenses by £58m. This was partially offset by lower rental income and lower proceeds on property sales.
| ||
2007 £m | 2006 £m | 2005 £m | ||||||||||||||||
Income statement information | ||||||||||||||||||
Net interest income | 128 | 80 | 160 | |||||||||||||||
Net fee and commission income | (424 | ) | (301 | ) | (324 | ) | ||||||||||||
Net trading (loss)/income | (66 | ) | 40 | 85 | ||||||||||||||
Net investment (expense)/income | (17 | ) | 2 | 8 | ||||||||||||||
Principal transactions | (83 | ) | 42 | 93 | ||||||||||||||
Net premiums from insurance contracts | 152 | 139 | 72 | |||||||||||||||
Other income | 35 | 39 | 24 | |||||||||||||||
Total income | (192 | ) | (1 | ) | 25 | |||||||||||||
Impairment (charges)/releases | (3 | ) | 11 | (1 | ) | |||||||||||||
Net income | (195 | ) | 10 | 24 | ||||||||||||||
Operating expenses excluding amortisation of intangible assets | (233 | ) | (259 | ) | (343 | ) | ||||||||||||
Amortisation of intangible assets | (1 | ) | (10 | ) | (4 | ) | ||||||||||||
Operating expenses | (234 | ) | (269 | ) | (347 | ) | ||||||||||||
Profit on disposal of associates and joint ventures | 1 | – | – | |||||||||||||||
Loss before tax | (428 | ) | (259 | ) | (323 | ) | ||||||||||||
Balance sheet information | ||||||||||||||||||
Total assets | £ | 7.1bn | £ | 7.1bn | £ | 9.3bn | ||||||||||||
Selected statistical measures | ||||||||||||||||||
Risk Tendencya | £ | 10m | £ | 10m | £ | 25m | ||||||||||||
Risk weighted assets | £ | 1.6bn | £ | 1.9bn | £ | 4.0bn |
2006/05
Head office functions and other operations loss before tax decreased £64m to £259m (2005: loss £323m).
Net interest income decreased £80m to £80m (2005: £160m) reflecting a reduction in net interest income in Treasury following the acquisition of Absa Group Limited. Treasury’s net interest income also included the hedge ineffectiveness for the period, which together with other related Treasury adjustments amounted to a gain of £11m (2005: £18m) and the cost of hedging the foreign exchange risk on the Group’s equity investment in Absa, which amounted to £71m (2005: £37m).
The impact of such inter-segment adjustments reduced £72m to £147m (2005: £219m). These adjustments related to internal fees for structured capital market activities of £87m (2005: £67m) and fees paid to Barclays Capital for capital raising and risk management advice of £23m (2005: £39m), both of which reduce net fees and commission income.
In addition the impact of the timing of the recognition of insurance commissions included in Barclaycard and UK Retail Banking reduced to £44m (2005: £113m). This reduction was reflected in a decrease in net fee and commission income of £184m (2005: £185m) and an increase in net premium income of £140m (2005: £72m).
Principal transactions decreased £51m to £42m (2005: £93m). 2005 included hedging related gains in Treasury of £80m. 2006 included £55m (2005: £nil) in respect of the economic hedge of the translation exposure arising from Absa foreign currency earnings.
The impairment charge improved £12m to a release of £11m (2005: £1m charge) as a number of workout situations were resolved.
Operating expenses decreased £78m to £269m (2005: £347m) primarily due to the expenses of the 2005 Head office relocation to Canary Wharf not recurring in 2006 (2005: £105m) and the gains of £26m (2005: £nil) from the sale and leaseback of property offset by increased costs, principally driven by major project expenditure including work related to implementing Basel II.
Barclays Annual Report | |||
51 |
Financial review
Results by nature of incomeHead office functions and expenseother operations
2008 £m | 2007 £m | 2006 £m | ||||||||||||||
Income statement information | ||||||||||||||||
Net interest income | 182 | 128 | 80 | |||||||||||||
Net fee and commission income | (486 | ) | (424 | ) | (301 | ) | ||||||||||
Net trading (loss)/income | (245 | ) | (66 | ) | 40 | |||||||||||
Net investment income/(expense) | 27 | (17 | ) | 2 | ||||||||||||
Principal transactions | (218 | ) | (83 | ) | 42 | |||||||||||
Net premiums from insurance contracts | 119 | 152 | 139 | |||||||||||||
Other income | 26 | 35 | 39 | |||||||||||||
Total income | (377 | ) | (192 | ) | (1 | ) | ||||||||||
Impairment (charges)/releases | (30 | ) | (3 | ) | 11 | |||||||||||
Net income | (407 | ) | (195 | ) | 10 | |||||||||||
Operating expenses excluding amortisation of intangible assets | (451 | ) | (233 | ) | (259 | ) | ||||||||||
Amortisation of intangible assets | – | (1 | ) | (10 | ) | |||||||||||
Operating expenses | (451 | ) | (234 | ) | (269 | ) | ||||||||||
Profit on disposal of associates and joint ventures | – | 1 | – | |||||||||||||
Loss before tax | (858 | ) | (428 | ) | (259 | ) | ||||||||||
Balance sheet information | ||||||||||||||||
Total assets | £ | 3.1bn | £ | 5.7bn | £ | 7.1bn | ||||||||||
Other financial measures | ||||||||||||||||
Risk Tendency | £ | 5m | £ | 10m | £ | 10m | ||||||||||
Risk weighted assetsa | £ | 0.4bn | £ | 1.1bn | £ | 1.9bn |
Results by nature of income and expenseNote
Net interest income
2007 £m | 2006 £m | 2005 £m | |||||||
Cash and balances with central banks | 145 | 91 | 9 | ||||||
Available for sale investments | 2,580 | 2,811 | 2,272 | ||||||
Loans and advances to banks | 1,416 | 903 | 690 | ||||||
Loans and advances to customers | 19,559 | 16,290 | 12,944 | ||||||
Other | 1,608 | 1,710 | 1,317 | ||||||
Interest income | 25,308 | 21,805 | 17,232 | ||||||
Deposits from banks | (2,720 | ) | (2,819 | ) | (2,056 | ) | |||
Customer accounts | (4,110 | ) | (3,076 | ) | (2,715 | ) | |||
Debt securities in issue | (6,651 | ) | (5,282 | ) | (3,268 | ) | |||
Subordinated liabilities | (878 | ) | (777 | ) | (605 | ) | |||
Other | (1,339 | ) | (708 | ) | (513 | ) | |||
Interest expense | (15,698 | ) | (12,662 | ) | (9,157 | ) | |||
Net interest income | 9,610 | 9,143 | 8,075 |
2007/06
Group net interest income increased 5% (£467m) to £9,610m (2006: £9,143m) reflecting balance sheet growth across a number of businesses.
Group net interest income reflects structural hedges which function to reduce the impact of the volatility of short-term interest rate movements on equity and customer balances that do not re-price with market rates.
The contribution of structural hedges relative to average base rates decreased to £351m expense (2006: £26m income), largely due to the smoothing effect of the structural hedge on changes in interest rates.
Other interest expense principally includes interest on repurchase agreements and hedging activity.
2006/05
Group net interest income increased 13% (£1,068m) to £9,143m (2005: £8,075m). The inclusion of Absa contributed net interest income of £1,138m (2005a: £516m). Group net interest income excluding Absa grew 6%.
The contribution of the structural hedge decreased to £26m (2005: £145m), largely due to the impact of relatively higher short-term interest rates and lower medium-term rates.
Notes
a |
| ||
Financial review
Results by nature of income and expense
Net fee and commission income
2007 £m | 2006 £m | 2005 £m | |||||||
Brokerage fees | 109 | 70 | 64 | ||||||
Investment management fees | 1,787 | 1,535 | 1,250 | ||||||
Securities lending | 241 | 185 | 151 | ||||||
Banking and credit related fees and commissions | 6,363 | 6,031 | 4,805 | ||||||
Foreign exchange commission | 178 | 184 | 160 | ||||||
Fee and commission income | 8,678 | 8,005 | 6,430 | ||||||
Fee and commission expense | (970 | ) | (828 | ) | (725 | ) | |||
Net fee and commission income | 7,708 | 7,177 | 5,705 |
2007/06
Net fee and commission income increased 7% (£531m) to £7,708m (2006: £7,177m).
Fee and commission income rose 8% (£673m) to £8,678m (2006: £8,005m) reflecting increased management and securities lending fees in Barclays Global Investors, increased client assets and higher transactional income in Barclays Wealth and higher income generated from lending fees in Barclays Commercial Bank. Fee income in Barclays Capital increased primarily due to the acquisition of HomEq.
2006/05
Net fee and commission income increased 26% (£1,472m) to £7,177m (2005: £5,705m). The inclusion of Absa contributed net fee and commission income of £850m (2005a: £334m). Group net fee and commission income excluding Absa grew 18%, reflecting growth across all businesses.
Fee and commission income rose 24% (£1,575m) to £8,005m (2005: £6,430m). The inclusion of Absa contributed fee and commission income of £896m (2005a: £386m). Excluding Absa, fee and commission income grew 18%, driven by a broadly based performance across the Group, particularly within Barclays Global Investors.
Fee and commission expense increased 14% (£103m) to £828m (2005: £725m), reflecting the growth in Barclaycard US. Absa contributed fee and commission expense of £46m (2005a: £52m).
Principal transactions
2007 £m | 2006 £m | 2005 £m | |||||
Rates related business | 4,162 | 2,848 | 1,732 | ||||
Credit related business | (403 | ) | 766 | 589 | |||
Net trading income | 3,759 | 3,614 | 2,321 | ||||
Net gain from disposal of available for sale assets | 560 | 307 | 120 | ||||
Dividend income | 26 | 15 | 22 | ||||
Net gain from financial instruments designated at fair value | 293 | 447 | 389 | ||||
Other investment income | 337 | 193 | 327 | ||||
Net investment income | 1,216 | 962 | 858 | ||||
Principal transactions | 4,975 | 4,576 | 3,179 |
2007/06
Principal transactions increased 9% (£399m) to £4,975m (2006: £4,576m).
Net trading income increased 4% (£145m) to £3,759m (2006: £3,614m). The majority of the Group’s net trading income arises in Barclays Capital. Growth in the Rates related business reflects very strong performances in fixed income, commodities, foreign exchange, equity and prime services. The Credit related business includes net losses from credit market turbulence and the benefits of widening credit spreads on the fair value of issued notes.
Net investment income increased 26% (£254m) to £1,216m (2006: £962m). The cumulative gain from disposal of available for sale assets increased 82% (£253m) to £560m (2006: £307m) largely as a result of a number of private equity realisations and divestments. Net income from financial instruments designated at fair value decreased by 34% (£154m) largely due to lower growth in the value of linked insurance assets within Barclays Wealth.
Fair value movements on insurance assets included within net investment income contributed £113m (2006: £205m).
2006/05
Net trading income increased 56% (£1,293m) to £3,614m (2005: £2,321m) due to excellent performances in Barclays Capital Rates and Credit businesses, in particular in commodities, fixed income, equities, credit derivatives and emerging markets. This was driven by higher volumes of client – led activity and favourable market conditions. The inclusion of Absa contributed net trading income of £60m (2005a: £9m). Group net trading income excluding Absa grew 54%.
Net investment income increased 12% (£104m) to £962m (2005: £858m). The inclusion of Absa contributed net investment income of £144m (2005 a: £62m). Group net investment income excluding Absa increased 3%.
The cumulative gain from disposal of available for sale assets increased 156% (£187m) to £307m (2005: £120m) driven by investment realisations, primarily in Private Equity.
Fair value movements on certain assets and liabilities have been reported within net trading income or within net investment income depending on the nature of the transaction. Fair value movements on insurance assets included within net investment income contributed £205m (2005: £317m).
Note
| ||
Other income
2007 £m | 2006 £m | 2005 £m | |||||||
Increase in fair value of assets held in respect of linked liabilities to customers under investment contracts | 5,592 | 7,417 | 9,234 | ||||||
Increase in liabilities to customers under investment contracts | (5,592 | ) | (7,417 | ) | (9,234 | ) | |||
Property rentals | 53 | 55 | 54 | ||||||
Loss on part disposal of Monument credit card portfolio | (27 | ) | – | – | |||||
Other | 162 | 159 | 93 | ||||||
Other income | 188 | 214 | 147 |
Certain asset management products offered to institutional clients by Barclays Global Investors are recognised as investment contracts. Accordingly the invested assets and the related liabilities to investors are held at fair value and changes in those fair values are reported within other income.
Impairment charges and other credit provisions
2007 £m | 2006 £m | 2005 £m | |||||||
Impairment charges on loans and advances | |||||||||
– New and increased impairment allowances | 2,871 | 2,722 | 2,129 | ||||||
– Releases | (338 | ) | (389 | ) | (333 | ) | |||
– Recoveries | (227 | ) | (259 | ) | (222 | ) | |||
Impairment charges on loans and advances | 2,306 | 2,074 | 1,574 | ||||||
Other credit provisions | |||||||||
Charges/(credits) in respect of undrawn contractually committed facilities and guarantees | 476 | (6 | ) | (7 | ) | ||||
Impairment charges on loans and advances and other credit provisionsImpairment charges on available for saleassets | 2,782 | 2,068 | 1,567 | ||||||
13 | 86 | 4 | |||||||
Impairment charges and other creditprovisions | 2,795 | 2,154 | 1,571 | ||||||
Impairment charges and other credit provisions on ABS CDO Super Senior and other credit market exposures included above: | |||||||||
Impairment charges on loans and advances | 313 | – | – | ||||||
Charges in respect of undrawn facilities | 469 | – | – | ||||||
Impairment charges and other creditprovisions on ABS CDO Super seniorand other credit market positions | 782 | – | – |
2007/06
Total impairment charges and other credit provisions increased 30% (£641m) to £2,795m (2006: £2,154m).
Impairment charges on loans and advances and other credit provisions increased 35% (£714m) to £2,782m (2006: £2,068m) reflecting charges of £782m against ABS CDO Super Senior and other credit market positions.
Impairment charges on loans and advances and other credit provisions as a percentage of Group total loans and advances increased to 0.71% (2006: 0.65%); total loans and advances grew 23% to £389,290m (2006: £316,561m).
Retail
Retail impairment charges on loans and advances fell 11% (£204m) to £1,605m (2006: £1,809m). Retail impairment charges as a percentage of period end total loans and advances reduced to 0.98% (2006: 1.30%); total retail loans and advances increased 18% to £164,062m (2006: £139,350m).
Barclaycard impairment charges improved 21% (£229m) to £838m (2006: £1,067m) reflecting reduced flows into delinquency, lower levels of arrears and lower charge-offs in UK Cards. We made changes to our impairment methodologies to standardise our approach and in anticipation of Basel II. The net positive impact of these changes in methodology was offset by the increase in impairment charges in Barclaycard International and secured consumer lending.
Impairment charges in UK Retail Banking decreased by £76m (12%) to £559m (2006: £635m), reflecting lower charges in unsecured Consumer Lending and Local Business driven by improved collection processes, reduced flows into delinquency, lower arrears trends and stable charge-offs. In UK Home Finance, asset quality remained strong and mortgage charges remained negligible. Mortgage delinquencies as a percentage of outstandings remained stable and amounts charged off were low.
Impairment charges in International Retail and Commercial Banking –excluding Absa rose by £38m (93%) to £79m (2006: £41m) reflecting very strong balance sheet growth in 2006 and 2007 and the impact of lower releases in 2007.
Arrears in some of International Retail and Commercial Banking – Absa’s retail portfolios deteriorated in 2007, driven by interest rate increases in 2006 and 2007 resulting in pressure on collections.
Wholesale and corporate
Wholesale and corporate impairment charges on loans and advances increased £436m to £701m (2006: £265m). Wholesale and corporate impairment charges as a percentage of period end total loans and advances increased to 0.31% (2006: 0.15%); total loans and advances grew 27% to £225,228m (2006: £177,211m).
Barclays Capital impairment charges and other credit provisions of £846m included a charge of £782m against ABS CDO Super Senior and other credit market exposures and £58m net of fees relating to drawn leveraged finance positions.
The impairment charge in Barclays Commercial Bank increased £38m (15%) to £290m (2006: £252m), primarily due to higher impairment charges in Larger Business, partially offset by a lower charge in Medium Business due to a tightening of the lending criteria.
| ||
Financial review
Results by nature of income and expense
Impairment charges (continued)
2006/05
Total impairment charges increased 37% (£583m) to £2,154m (2005: £1,571m).
Impairment charges on loans and advances and other credit provisions increased 32% (£501m) to £2,068m (2005: £1,567m). Excluding Absa, the increase was 26% (£395m) and largely reflected the continued challenging credit environment in UK unsecured retail lending through 2006. The wholesale and corporate sectors remained stable with a low level of defaults.
The Group impairment charges on loans and advances and other credit provisions as a percentage of year-end total loans and advances of £316,561m (2005: £303,451m) increased to 0.65% (2005: 0.52%).
Retail
Retail impairment charges on loans and advances and other credit provisions increased to £1,809m (2005: £1,254m), including £99m (2005a: £10m) in respect of Absa. Retail impairment charges on loans and advances amounted to 1.30% (2005b: 0.93%) as a percentage of year-end total loans and advances of £139,350m (2005b: £134,420m), including balances in Absa of £20,090m (2005: £20,836m).
In the UK retail businesses, household cash flows remained under pressure leading to a deterioration in consumer credit quality. High debt levels and changing social attitudes to bankruptcy and debt default contributed to higher levels of insolvency and increased impairment charges. In UK cards and unsecured consumer lending, the flows of new delinquencies and the levels of arrears balances declined in the second half of 2006, reflecting more selective customer recruitment, limit management and improved collections.
In UK Home Finance, delinquencies were flat and amounts charged-off remained low. The weaker external environment led to increased credit delinquency in Local Business, where there were both higher balances on caution status and higher flows into delinquency, which both stabilised towards the year end.
Wholesale and corporate
In the wholesale and corporate businesses, impairment charges on loans and advances and other credit provisions decreased to £259m (2005: £313m), including £27m (2005a: £10m) in respect of Absa. The fall was due mainly to recoveries in Barclays Capital as a result of the benign wholesale credit environment. This was partially offset by an increase in Barclays Commercial Bank, reflecting higher charges in Medium Business and growth in lending balances.
The wholesale and corporate impairment charge was 0.15% (2005b: 0.19%) as a percentage of year-end total loans and advances to banks and to customers of £177,211m (2005b: £169,031m), including balances in Absa of £9,299m (2005: £9,731m).
In Absa, impairment charges increased to £126m (2005b: £20m) reflecting a full year of business and normalisation of credit conditions in South Africa following a period of low interest rates.
Impairment on available for sale assets
The total impairment charges in Barclays Capital included losses of £83m (2005: £nil) on an available for sale portfolio where an intention to sell caused the losses to be viewed as other than temporary in nature. These losses in 2006 were primarily due to interest rate movements, rather than credit deterioration, with a corresponding gain arising on offsetting derivatives recognised in net trading income.
Operating expenses
2007 £m | 2006 £m | 2005 £m | ||||||
Staff costs (refer to page 37) | 8,405 | 8,169 | 6,318 | |||||
Administrative expenses | 3,978 | 3,980 | 3,443 | |||||
Depreciation | 467 | 455 | 362 | |||||
Impairment loss – property and equipment and intangible assets | 16 | 21 | 9 | |||||
Operating lease rentals | 414 | 345 | 316 | |||||
Gain on property disposals | (267 | ) | (432 | ) | – | |||
Amortisation of intangible assets | 186 | 136 | 79 | |||||
Operating expenses | 13,199 | 12,674 | 10,527 |
2007/06
Operating expenses grew 4% (£525m) to £13,199m (2006: £12,674m). The increase was driven by growth of 3% (£236m) in staff costs to £8,405m (2006: £8,169m) and lower gains on property disposals.
Administrative expenses remained flat at £3,978m (2006: £3,980m) reflecting good cost control across all businesses.
Operating lease rentals increased 20% (£69m) to £414m (2006: £345m), primarily due to increased property held under operating leases.
Operating expenses were reduced by gains from the sale of property of £267m (2006: £432m) as the Group continued the sale and leaseback of some of its freehold portfolio, principally in UK Banking.
Amortisation of intangible assets increased 37% (£50m) to £186m (2006: £136m) primarily reflecting the amortisation of mortgage servicing rights relating to the acquisition of HomEq in November 2006.
The Group cost:income ratio improved two percentage points to 57% (2006: 59%).
2006/05
Operating expenses increased 20% (£2,147m) to £12,674m (2005: £10,527m). The inclusion of Absa contributed operating expenses of £1,496m (2005a: £664m). Group operating expenses excluding Absa grew 13%, reflecting a higher level of business activity and an increase in performance related pay.
Administrative expenses increased 16% (£537m) to £3,980m (2005: £3,443m). The inclusion of Absa contributed administrative expenses of £579m (2005a: £257m). Group administrative expenses excluding Absa grew 7% principally as a result of higher business activity in UK Banking and Barclays Capital.
Operating lease rentals increased 9% (£29m) to £345m (2005: £316m). The inclusion of Absa contributed operating lease rentals of £73m (2005a: £27m), which more than offset the absence of double occupancy costs incurred in 2005, associated with the Head office relocation to Canary Wharf.
Operating expenses were reduced by gains from the sale of property of £432m (2005: £nil) as the Group took advantage of historically low yields on property to realise gains on some of its freehold portfolio.
Amortisation of intangible assets increased 72% (£57m) to £136m (2005: £79m) primarily reflecting the inclusion of Absa for the full year.
The Group cost:income ratio improved to 59% (2005: 61%). This reflected improved productivity.
Notes
| ||
Staff costs
2007 £m | 2006 £m | 2005 £m | ||||
Salaries and accrued incentive payments | 6,993 | 6,635 | 5,036 | |||
Social security costs | 508 | 502 | 412 | |||
Pension costs | ||||||
– defined contribution plans | 141 | 128 | 76 | |||
– defined benefit plans | 150 | 282 | 271 | |||
Other post-retirement benefits | 10 | 30 | 27 | |||
Other | 603 | 592 | 496 | |||
Staff costs | 8,405 | 8,169 | 6,318 |
2007/06
Staff costs increased 3% (£236m) to £8,405m (2006: £8,169m).
Salaries and accrued incentive payments rose 5% (£358m) to £6,993m (2006: £6,635m), reflecting increased permanent and fixed term staff worldwide.
Defined benefit plans pension costs decreased 47% (£132m) to £150m (2006: £282m). This was mainly due to lower service costs.
2006/05
Staff costs increased 29% (£1,851m) to £8,169m (2005: £6,318m). The inclusion of Absa contributed staff costs of £694m (2005a: £296m). Group staff costs excluding Absa rose 24%.
Salaries and accrued incentive payments rose 32% (£1,599m) to £6,635m (2005: £5,036m), principally due to increased performance related payments and the full year inclusion of Absa. The inclusion of Absa contributed salaries and incentive payments of £615m (2005a: £276m). Group salaries and accrued incentive payments excluding Absa rose 26%.
Staff numbers
2007 | 2006 | 2005 | ||||||||
UK Banking | 41,200 | 42,600 | 41,100 | |||||||
UK Retail Banking | 32,800 | 34,500 | 33,300 | |||||||
Barclays Commercial Bank | 8,400 | 8,100 | 7,800 | |||||||
Barclaycard | 7,800 | 8,500 | 7,700 | |||||||
IRCB | 58,300 | 47,800 | 45,200 | |||||||
IRCB – ex Absa | 22,100 | 13,900 | 12,500 | |||||||
IRCB – Absa | 36,200 | 33,900 | 32,700 | |||||||
Barclays Capital | 16,200 | 13,200 | 9,900 | |||||||
Barclays Global Investors | 3,400 | 2,700 | 2,300 | |||||||
Barclays Wealth | 6,900 | 6,600 | 6,200 | |||||||
Head office functions and other operations | 1,100 | 1,200 | 900 | |||||||
Total Group permanent staff worldwide | 134,900 | 122,600 | 113,300 |
2007/06
Staff numbers are shown on a full-time equivalent basis. Total Group permanent and fixed term contract staff comprised 61,900 (2006: 62,400) in the UK and 73,000 (2006: 60,200) internationally.
UK Retail Banking headcount decreased 1,700 to 32,800 (2006: 34,500), due to efficiency initiatives in back office operations and the transfer of operations personnel to Barclays Commercial Bank. Barclays Commercial Bank headcount increased 300 to 8,400 (2006: 8,100) due to the transfer of operations personnel from UK Retail Banking and additional investment in front line staff to drive improved geographical coverage.
Barclaycard staff numbers decreased 700 to 7,800 (2006: 8,500), due to efficiency initiatives implemented across the UK operation and the sale of part of the Monument card portfolio, partially offset by an increase in the International cards businesses.
International Retail and Commercial Banking staff numbers increased 10,500 to 58,300 (2006: 47,800). International Retail and Commercial Banking – excluding Absa staff numbers increased 8,200 to 22,100 (2006: 13,900) due to growth in the distribution network. International Retail and Commercial Banking – Absa staff numbers increased 2,300 to 36,200 (2006: 33,900), reflecting growth in the business and distribution network.
Barclays Capital staff numbers increased 3,000 to 16,200 (2006: 13,200) including 800 from the acquisition of EquiFirst. This reflected further investment in the front office, systems development and control functions to support continued business expansion. The majority of organic growth was in Asia Pacific.
Barclays Global Investors staff numbers increased 700 to 3,400 (2006: 2,700). Headcount increased in all geographical regions and across product groups and the support functions, reflecting continued investment to support further growth.
Barclays Wealth staff numbers increased 300 to 6,900 (2006: 6,600) principally due to the acquisition of Walbrook and increased client facing professionals.
Note
| ||
Financial review
Results by nature of income and expense
Staff numbers (continued)
2006/05
Total Group permanent and contract staff comprised 62,400 (2005: 59,100) in the UK and 60,200 (2005: 54,200) internationally.
UK Banking staff numbers increased 1,500 to 42,600 (2005: 41,100), primarily reflecting the inclusion in UK Retail Banking of mortgage processing staff involved in activities previously outsourced.
Barclaycard staff numbers rose 800 to 8,500 (2005: 7,700), reflecting growth of 400 in Barclaycard US and increases in operations and customer-facing staff in the UK.
International Retail and Commercial Banking increased staff numbers 2,600 to 47,800 (2005: 45,200). International Retail and Commercial Banking – excluding Absa increased staff numbers by 1,400 to 13,900 (2005: 12,500), mainly due to growth in continental Europe and Africa. International Retail and Commercial Banking – Absa increased staff numbers by 1,200 to 33,900 (2005: 32,700), reflecting continued growth in the business.
Barclays Capital staff numbers increased 3,300 during 2006 to 13,200 (2005: 9,900) and included 1,300 from the acquisition of HomEq. Organic growth was broadly based across all regions and reflected further investments in the front office, systems development and control functions to support continued business expansion.
Barclays Global Investors increased staff numbers 400 to 2,700 (2005: 2,300) spread across regions, product groups and support functions, reflecting continued investment to support strategic initiatives.
Barclays Wealth staff numbers rose 400 to 6,600 (2005: 6,200) to support the continued expansion of the business, including increased hiring of client-facing staff.
Head office functions and other operations staff numbers grew 300 to 1,200 (2005: 900) primarily reflecting the centralisation of functional activity and the increased regulatory environment and audit demands as a result of the expansion of business areas.
Share of post-tax results of associates and joint ventures
2007 £m | 2006 £m | 2005 £m | ||||||
Profit from associates | 33 | 53 | 53 | |||||
Profit/(loss) from joint ventures | 9 | (7 | ) | (8 | ) | |||
Share of post-tax results of associates and joint ventures | 42 | 46 | 45 |
2007/06
The overall share of post-tax results of associates and joint ventures decreased £4m to £42m (2006: £46m). The share of results from associates decreased £20m mainly due to the sale of FirstCaribbean International Bank (2006: £41m) at the end of 2006, partially offset by an increased contribution from private equity associates. The share of results from joint ventures increased by £16m mainly due to the contribution from private equity entities.
2006/05
The share of post-tax results of associates and joint ventures increased 2% (£1m) to £46m (2005: £45m).
Of the £46m share of post-tax results of associates and joint ventures, FirstCaribbean International Bank contributed £41m (2005: £37m).
Profit on disposal of subsidiaries, associates and joint ventures
2007 £m | 2006 £m | 2005 £m | ||||
Profit on disposal of subsidiaries,associates and joint ventures | 28 | 323 | – |
2007/06
The profit on disposal in 2007 relates mainly to the disposal of the Group’s shareholdings in Gabetti Property Solutions (£8m) and Intelenet Global Services (£13m).
2006/05
The profit on disposal of subsidiaries, associates and joint ventures includes £247m profit on disposal of FirstCaribbean International Bank and £76m from the sale of interests in vehicle leasing and vendor finance businesses.
| ||
Tax
The overall tax charge is explained in the following table:
2007 £m | 2006 £m | 2005 £m | |||||||
Profit before tax | 7,076 | 7,136 | 5,280 | ||||||
Tax charge at average UK corporation tax rate of 30% | 2,123 | 2,141 | 1,584 | ||||||
Prior year adjustments | (37 | ) | 24 | (133 | ) | ||||
Differing overseas tax rates | (77 | ) | (17 | ) | (35 | ) | |||
Non-taxable gains and income (including amounts offset by unrecognised tax losses) | (136 | ) | (393 | ) | (129 | ) | |||
Share-based payments | 72 | 27 | (12 | ) | |||||
Deferred tax assets not previously recognised | (158 | ) | (4 | ) | (7 | ) | |||
Change in tax rates | 24 | 4 | 3 | ||||||
Other non-allowable expenses | 170 | 159 | 168 | ||||||
Overall tax charge | 1,981 | 1,941 | 1,439 | ||||||
Effective tax rate | 28% | 27% | 27% |
2007/06
The tax charge for the period was based on a UK corporation tax rate of 30% (2006: 30%). The effective rate of tax for 2007, based on profit before tax, was 28.0% (2006: 27.2%). The effective tax rate differed from 30% as it took account of the different tax rates applied to profits earned outside the UK, non-taxable gains and income and adjustments to prior year tax provisions. The forthcoming change in the UK rate of corporation tax from 30% to 28% on 1st April 2008 led to an additional tax charge in 2007 as a result of its effect on the Group’s net deferred tax asset. The effective tax rate for 2007 was higher than the 2006 rate, principally because there was a higher level of profit on disposals of subsidiaries, associates and joint ventures offset by losses or exemptions in 2006.
2006/05
The charge for the period is based upon a UK corporation tax rate of 30% for the calendar year 2006 (2005: 30%). The effective rate of tax for 2006, based on profit before tax, was 27.2% (2005: 27.3%). The effective tax rate differs from 30% as it takes account of the different tax rates which are applied to the profits earned outside the UK, disallowable expenditure, certain non-taxable gains and adjustments to prior year tax provisions. The effective tax rate for 2006 is consistent with the prior period. The tax charge for the year includes £1,234m (2005: £961m) arising in the UK and £707m (2005: £478m) arising overseas.
The profit on disposal of subsidiaries, associates and joint ventures of £323m was substantially offset by losses or exemptions. The effective tax rate on profit before business disposals was 28.5%.
| ||
Financial review
Total assets and risk weighted assets
Total assets
2007 £m | 2006 £m | 2005 £m | ||||||||||
UK Banking | 161,777 | 147,576 | 137,981 | |||||||||
UK Retail Banking | 87,833 | 81,692 | 78,066 | |||||||||
Barclays Commercial Bank | 73,944 | 65,884 | 59,915 | |||||||||
Barclaycard | 22,164 | 20,082 | 18,236 | |||||||||
IRCB | 89,457 | 68,588 | 63,383 | |||||||||
IRCB – ex Absa | 52,204 | 38,191 | 34,022 | |||||||||
IRCB – Absa | 37,253 | 30,397 | 29,361 | |||||||||
Barclays Capital | 839,662 | 657,922 | 601,193 | |||||||||
Barclays Global Investors | 89,224 | 80,515 | 80,900 | |||||||||
Barclays Wealth | 18,024 | 15,022 | 13,401 | |||||||||
Head office functions and other operations | 7,053 | 7,082 | 9,263 | |||||||||
Total assets | 1,227,361 | 996,787 | 924,357 | |||||||||
Risk weighted assetsa | ||||||||||||
2007 £m | 2006 £m | 2005 £m | ||||||||||
UK Banking | 99,836 | 92,981 | 87,971 | |||||||||
UK Retail Banking | 45,992 | 43,020 | 40,845 | |||||||||
Barclays Commercial Bank | 53,844 | 49,961 | 47,126 | |||||||||
Barclaycard | 19,929 | 17,035 | 13,625 | |||||||||
IRCB | 53,269 | 40,810 | 41,069 | |||||||||
IRCB – ex Absa | 29,667 | 20,082 | 20,235 | |||||||||
IRCB – Absa | 23,602 | 20,728 | 20,834 | |||||||||
Barclays Capital | 169,124 | 137,635 | 116,677 | |||||||||
Barclays Global Investors | 1,994 | 1,375 | 1,456 | |||||||||
Barclays Wealth | 7,692 | 6,077 | 4,305 | |||||||||
Head office functions and other operations | 1,632 | 1,920 | 4,045 | |||||||||
Risk weighted assets | 353,476 | 297,833 | 269,148 |
Note
2007/06
Total assets increased 23% to £1,227.4bn (2006: £996.8bn). Risk weighted assets increased 19% to £353.5bn (2006: £297.8bn). Loans and advances to customers that have been securitised increased £4.3bn to £28.7bn (2006: £24.4bn). The increase in risk weighted assets since 2006 reflected a rise of £31.6bn in the banking book and a rise of £24.0bn in the trading book.
UK Retail Banking total assets increased 7% to £87.8bn (2006: £81.7bn). This was mainly attributable to growth in mortgage balances. Risk weighted assets increased by 7% to £46.0bn (2006: £43.0bn) with growth in mortgages partially offset by an increase in securitised balances and other reductions.
Barclays Commercial Bank total assets grew 12% to £73.9bn (2006: £65.9bn) driven by good growth across lending products. Risk weighted assets increased 8% to £53.8bn (2006: £50.0bn), reflecting asset growth partially offset by increased regulatory netting and an increase in securitised balances.
Barclaycard total assets increased 10% to £22.2bn (2006: £20.1bn). Risk weighted assets increased 17% to £19.9bn (2006: £17.0bn), primarily reflecting the increase in total assets, redemption of securitisation transactions, partially offset by changes to the treatment of regulatory associates and the sale of part of the Monument card portfolio.
International Retail and Commercial Banking – excluding Absa total assets grew 37% to £52.2bn (2006: £38.2bn). This growth was mainly driven by increases in retail mortgages and unsecured lending in Western Europe and increases in unsecured lending in Emerging Markets. Risk weighted assets increased 48% to £29.7bn (2006: £20.1bn), reflecting asset growth and a change in product mix.
International Retail and Commercial Banking – Absa total assets increased 23% to £37.3bn (2006: £30.4bn), primarily driven by increases in mortgages, credit cards and commercial property finance. Risk weighted assets increased 14% to £23.6bn (2006: £20.7bn), reflecting balance sheet growth.
Barclays Capital total assets rose 28% to £839.7bn (2006: £657.9bn). Derivative assets increased £109.3bn primarily due to movements across a range of market indices. This was accompanied by a corresponding increase in derivative liabilities. The increase in non-derivative assets reflects an expansion of the business across a number of asset classes, combined with an increase in drawn leveraged loan positions and mortgage-related assets. Risk weighted assets increased 23% to £169.1bn (2006: £137.6bn) reflecting growth in fixed income, equities and credit derivatives.
Barclays Global Investors total assets increased 11% to £89.2bn (2006: £80.5bn), mainly attributable to growth in certain asset management products recognised as investment contracts. The majority of total assets relates to asset management products with equal and offsetting balances reflected within liabilities to customers. Risk weighted assets increased 43% to £2.0bn (2006: £1.4bn) mainly attributable to overall growth in the balance sheet and the mix of securities lending activity.
Barclays Wealth total assets increased 20% to £18.0bn (2006: £15.0bn) reflecting strong growth in lending to high net worth, affluent and intermediary clients. Risk weighted assets increased 26% to £7.7bn (2006: £6.1bn) reflecting the increase in lending.
Head office functions and other operations total assets remained flat at £7.1bn (2006: £7.1bn). Risk weighted assets decreased 16% to £1.6bn (2006: £1.9bn).
|
2006/05
Total assets increased 8% to £996.8bn (2005: £924.4bn). Risk weighted assets increased 11% to £297.8bn (2005: £269.1bn). Loans and advances to customers that have been securitised increased £5.8bn to £24.4bn (2005: £18.6bn). The increase in risk weighted assets since 2005 reflects a rise of £18.1bn in the banking book and a rise of £10.9bn in the trading book.
UK Retail Banking total assets increased 5% to £81.7bn (2005: £78.1bn). This was mainly attributable to growth in mortgage balances. Risk weighted assets increased 5% to £43.0bn (2005: £40.8bn) also primarily reflecting the growth in mortgage balances.
Barclays Commercial Bank total assets increased 10% to £65.9bn (2005: £59.9bn) reflecting good growth across short, medium and long term lending products. Risk weighted assets increased 6% to £50.0bn (2005: £47.1bn), reflecting asset growth and increased regulatory netting.
Barclaycard total assets increased 10% to £20.1bn (2005: £18.2bn) driven by growth in lending balances in the international businesses and FirstPlus. Risk weighted assets increased 25% to £17.0bn (2005: £13.6bn), primarily reflecting the increase in total assets and lower securitised balances.
International Retail and Commercial Banking-excluding Absa total assets increased 12% to £38.2bn (2005: £34.0bn) mainly reflecting increases in mortgage and other lending. Risk weighted assets remained flat at £20.1bn (2005: £20.2bn), with balance sheet growth offset by the sale of FirstCaribbean International Bank.
International Retail and Commercial Banking-Absa total assets increased 3% to £30.4bn (2005: £29.4bn). Risk weighted assets remained flat at £20.7bn (2005: £20.8bn). This reflects very strong growth in Rand terms offset by a 21% decline in the value of the Rand. In Rand terms assets grew 31% to R417bn (2005: R319bn) and risk weighted assets grew 25% to R284bn (2005: R227bn) due to strong growth in mortgage lending along with growth in corporate lending.
Barclays Capital total assets increased 9% to £657.9bn (2005: £601.2bn). This reflected continued expansion of the business with growth in reverse repurchase agreements, debt securities and traded equity securities. Risk weighted assets increased 18% to £137.6bn (2005: £116.7bn) in line with risk, driven by the growth in equity derivatives, credit derivatives and fixed income.
Barclays Global Investors total assets remained flat at £80.5bn (2005: £80.9bn). The majority of total assets relates to asset management products with equal and offsetting balances reflected within liabilities to customers. Risk weighted assets decreased 7% to £1.4bn (2005: £1.5bn).
Barclays Wealth total assets increased 12% to £15.0bn (2005: £13.4bn) reflecting strong growth in lending to high net worth, affluent and intermediary clients. Risk weighted assets increased 42% to £6.1bn (2005: £4.3bn) above the rate of balance sheet growth driven by changes in the mix of lending and growth in guarantees.
Head office functions and other operations total assets decreased 24% to £7.1bn (2005: £9.3bn). Risk weighted assets decreased 53% to £1.9bn (2005: £4.0bn).
| ||
Financial review
Total shareholders’ equity
2007 £m | 2006 £m | 2005 £m | |||||||||||
Barclays PLC Group | |||||||||||||
Called up share capital | 1,651 | 1,634 | 1,623 | ||||||||||
Share premium account | 56 | 5,818 | 5,650 | ||||||||||
Available for sale reserve | 154 | 132 | 225 | ||||||||||
Cash flow hedging reserve | 26 | (230 | ) | 70 | |||||||||
Capital redemption reserve | 384 | 309 | 309 | ||||||||||
Other capital reserve | 617 | 617 | 617 | ||||||||||
Currency translation reserve | (307 | ) | (438 | ) | 156 | ||||||||
Other reserves | 874 | 390 | 1,377 | ||||||||||
Retained earnings | 20,970 | 12,169 | 8,957 | ||||||||||
Less: Treasury shares | (260 | ) | (212 | ) | (181 | ) | |||||||
Shareholders’ equity excluding minority interests | 23,291 | 19,799 | 17,426 | ||||||||||
Minority interests | 9,185 | 7,591 | 7,004 | ||||||||||
Total shareholders’ equity | 32,476 | 27,390 | 24,430 |
2007/06
Total shareholders’ equity increased £5,086m to £32,476m (2006: £27,390m).
Called up share capital comprises 6,600 million (2006: 6,535 million) ordinary shares of 25p each and 1 million (2006: 1 million) staff shares of £1 each. Called up share capital increased by £17m representing the nominal value of shares issued to Temasek Holdings, China Development Bank (CDB) and employees under share option plans largely offset by a reduction in nominal value arising from share buy-backs. Share premium reduced by £5,762m; the reclassification of £7,223m to retained earnings resulting from the High Court approved cancellation of share premium was partly offset by additional premium arising on the issuance to CDB and on employee options. The capital redemption reserve increased by £75m representing the nominal value of the share buy-backs.
Retained earnings increased by £8,801m. Increases primarily arose from profit attributable to equity holders of the parent of £4,417m, the reclassification of share premium of £7,223m and the proceeds of the Temasek issuance in excess of nominal value of £941m. Reductions primarily arose from external dividends paid of £2,079m and the total cost of share repurchases of £1,802m.
Movements in other reserves, except the capital redemption reserve, reflect the relevant amounts recorded in the consolidated statement of recognised income and expense on page 162.
Minority interests increased £1,594m to £9,185m (2006: £7,591m). The increase was primarily driven by preference share issuances of £1,322m and an increase in the minority interest in Absa of £225m.
The Group’s authority to buy-back equity shares was renewed at the 2007 AGM.
2006/05
Total shareholders’ equity increased £2,960m to £27,390m (2005: £24,430m).
Called up share capital and share premium increased by £11m and £168m respectively representing the issue of shares to employees under share option plans.
Retained earnings increased by £3,212m primarily reflecting profit attributable to equity holders of the parent of £4,571m partly offset by dividends paid of £1,771m.
Movements in other reserves reflect the relevant amounts recorded in the consolidated statement of recognised income and expense.
Minority interests increased £587m primarily reflecting the issuance of preference shares by Barclays Bank PLC and Absa.
Barclays Bank PLC
Preference shares issued by Barclays Bank PLC are included within share capital and share premium in the Barclays Bank PLC Group but represent minority interests in the Barclays PLC Group. Certain issuances of reserve capital instruments and capital notes by Barclays Bank PLC are included within other shareholders’ equity in the Barclays Bank PLC Group but represent minority interests in Barclays PLC Group.
2007 £m | 2006 £m | 2005 £m | |||||||||||
Barclays Bank PLC Group | |||||||||||||
Called up share capital | 2,382 | 2,363 | 2,348 | ||||||||||
Share premium account | 10,751 | 9,452 | 8,882 | ||||||||||
Available for sale reserve | 111 | 184 | 257 | ||||||||||
Cash flow hedging reserve | 26 | (230 | ) | 70 | |||||||||
Currency translation reserve | (307 | ) | (438 | ) | 156 | ||||||||
Other reserves | (170 | ) | (484 | ) | 483 | ||||||||
Other shareholders’ equity | 2,687 | 2,534 | 2,490 | ||||||||||
Retained earnings | 14,222 | 11,556 | 8,462 | ||||||||||
Shareholders’ equity excluding minority interests | 29,872 | 25,421 | 22,665 | ||||||||||
Minority interests | 1,949 | 1,685 | 1,578 | ||||||||||
Total shareholders’ equity | 31,821 | 27,106 | 24,243 |
| ||
Capital ratios
Basel II | Basel I | Basel I | Basel I | |||||||||||||||||
2007 | 2007 | 2006 | 2005 | |||||||||||||||||
Barclays PLC Group | Barclays PLC Group | Barclays Bank PLC Group | Barclays PLC Group | Barclays Bank PLC Group | Barclays PLC Group | Barclays Bank PLC Group | ||||||||||||||
Capital ratios | % | % | % | % | % | % | % | |||||||||||||
Tier 1 ratio | 7.6 | 7.8 | 7.5 | 7.7 | 7.5 | 7.0 | 6.9 | |||||||||||||
Risk asset ratio | 11.2 | 12.1 | 11.8 | 11.7 | 11.5 | 11.3 | 11.2 | |||||||||||||
Risk weighted assets | £m | £m | £m | £m | £m | £m | £m | |||||||||||||
Banking book | ||||||||||||||||||||
on-balance sheet | n/a | 231,496 | 231,491 | 197,979 | 197,979 | 180,808 | 180,808 | |||||||||||||
off-balance sheet | n/a | 32,620 | 32,620 | 33,821 | 33,821 | 31,351 | 31,351 | |||||||||||||
Associates and joint ventures | n/a | 1,354 | 1,354 | 2,072 | 2,072 | 3,914 | 3,914 | |||||||||||||
Total banking book | 244,474 | 265,470 | 265,465 | 233,872 | 233,872 | 216,073 | 216,073 | |||||||||||||
Trading book | ||||||||||||||||||||
Market risks | 39,812 | 36,265 | 36,265 | 30,291 | 30,291 | 23,216 | 23,216 | |||||||||||||
Counterparty and settlement risks | 41,203 | 51,741 | 51,741 | 33,670 | 33,670 | 29,859 | 29,859 | |||||||||||||
Total trading book | 81,015 | 88,006 | 88,006 | 63,961 | 63,961 | 53,075 | 53,075 | |||||||||||||
Operational risk | 28,389 | n/a | n/a | n/a | n/a | n/a | n/a | |||||||||||||
Total risk weighted assets | 353,878 | 353,476 | 353,471 | 297,833 | 297,833 | 269,148 | 269,148 |
Minimum requirements under the FSA’s Basel rules are expressed as a ratio of capital resources to risk weighted assets (Risk Asset Ratio). Risk weighted assets are a function of risk weights applied to the Group’s assets using calculations developed by the Basel Committee on Banking Supervision.
Basel I
At 31st December 2007, the Tier 1 capital ratio was 7.8% and the risk asset ratio was 12.1%. From 31st December 2006, total net capital resources rose £7.9bn and risk weighted assets increased £55.6bn.
Tier 1 capital rose £4.4bn, including £2.3bn arising from profits attributable to equity holders of the parent net of dividends paid. Minority interests within Tier 1 capital increased £2.7bn primarily due to the issuance of reserve capital instruments and preference shares. The deduction for goodwill and intangible assets increased by £1.1bn. Tier 2 capital increased £3.1bn mainly as a result of an increase of £3.0bn of dated loan capital.
Basel II
Under Basel II, effective from 1st January 2008, the Group has been granted approval by the FSA to adopt the advanced approaches to credit and operational risk management. Pillar 1 risk weighted assets will be generated using the Group’s risk models. Pillar 1 minimum capital requirements under Basel II are Pillar 1 risk weighted assets multiplied by 8%, the internationally agreed minimum ratio.
Under Pillar 2 of Basel II, the Group is subject to an overall regulatory capital requirement (expressed in £ terms) based on individual capital guidance (‘ICG’) received from the FSA. The ICG imposes additional capital requirements in excess of Pillar 1 minimum capital requirements. Barclays received its ICG from the FSA in December 2007.
Risk weighted assets calculated on a Basel II basis are broadly in line with risk weighted assets calculated on a Basel I basis. A reduction in credit and counterparty risk weighted assets of £31.5bn more than offset the identification of capital equivalent risk weighted assets of £28.4bn attributable to operational risk. The reduced risk weighted assets attributable to credit risk were mainly driven by recognition of the low risk profile of first charge residential mortgages in UK Retail Banking and Absa and the use of internal models to assess exposures to counterparty risk in the trading book. These were partially offset by higher counterparty risk weightings in emerging markets and greater recognition of undrawn commitments.
Compared to Basel I, deductions from Tier 1 and Tier 2 capital under Basel II include additional amounts relating to expected loss and securitisations. For advanced portfolios, any excess of expected loss over impairment allowances is deducted half from Tier 1 and half from Tier 2 capital. Deductions relating to securitisation transactions, which are made from total capital under Basel I, are deducted half from Tier 1 and half from Tier 2 capital under Basel II.
For portfolios treated under the standardised approach, the inclusion of collectively assessed impairment allowances in Tier 2 capital remains the same under Basel II. Collectively assessed impairment allowances against exposures treated under Basel II advanced approaches are not eligible for direct inclusion in Tier 2 capital.
| ||
Financial review
Capital resources and deposits
Total net capital resources
Basel II | Basel I | Basel I | Basel I | ||||||||||||||||||||
2007 £m | 2007 £m | 2006 £m | 2005 £m | ||||||||||||||||||||
Capital resources (as defined for regulatory purposes) | Barclays PLC Group | | Barclays PLC Group | | Barclays Bank PLC Group | | Barclays PLC Group | | Barclays Bank PLC Group | | Barclays PLC Group | | Barclays Bank PLC Group | | |||||||||
Tier 1 | |||||||||||||||||||||||
Called up share capital | 1,651 | 1,651 | 2,382 | 1,634 | 2,363 | 1,623 | 2,348 | ||||||||||||||||
Eligible reserves | 22,939 | 22,526 | 25,615 | 19,608 | 21,700 | 16,837 | 18,646 | ||||||||||||||||
Minority interests | 10,551 | 10,551 | 5,857 | 7,899 | 4,528 | 6,634 | 3,700 | ||||||||||||||||
Tier One Notes | 899 | 899 | 899 | 909 | 909 | 981 | 981 | ||||||||||||||||
Less: Intangible assets | (8,191 | ) | (8,191 | ) | (8,191 | ) | (7,045 | ) | (7,045 | ) | (7,180 | ) | (7,180 | ) | |||||||||
Less: Deductions from Tier 1 capital | (1,106 | ) | (28 | ) | (28 | ) | – | – | – | – | |||||||||||||
Total qualifying tier 1 capital | 26,743 | 27,408 | 26,534 | 23,005 | 22,455 | 18,895 | 18,495 | ||||||||||||||||
Tier 2 | |||||||||||||||||||||||
Revaluation reserves | 26 | 26 | 26 | 25 | 25 | 25 | 25 | ||||||||||||||||
Available for sale equity | 295 | 295 | 295 | 221 | 221 | 223 | 223 | ||||||||||||||||
Collectively assessed impairment allowances | 440 | 2,619 | 2,619 | 2,556 | 2,556 | 2,306 | 2,306 | ||||||||||||||||
Minority interests | 442 | 442 | 442 | 451 | 451 | 515 | 515 | ||||||||||||||||
Qualifying subordinated liabilities | |||||||||||||||||||||||
Undated loan capital | 3,191 | 3,191 | 3,191 | 3,180 | 3,180 | 3,212 | 3,212 | ||||||||||||||||
Dated loan capital | 10,578 | 10,578 | 10,578 | 7,603 | 7,603 | 7,069 | 7,069 | ||||||||||||||||
Less: Deductions from Tier 2 capital | (1,106 | ) | (28 | ) | (28 | ) | – | – | – | – | |||||||||||||
Total qualifying tier 2 capital | 13,866 | 17,123 | 17,123 | 14,036 | 14,036 | 13,350 | 13,350 | ||||||||||||||||
Less: Regulatory deductions | |||||||||||||||||||||||
Investments not consolidated for supervisory purposes | (633 | ) | (633 | ) | (633 | ) | (982 | ) | (982 | ) | (782 | ) | (782 | ) | |||||||||
Other deductions | (193 | ) | (1,256 | ) | (1,256 | ) | (1,348 | ) | (1,348 | ) | (961 | ) | (961 | ) | |||||||||
Total deductions | (826 | ) | (1,889 | ) | (1,889 | ) | (2,330 | ) | (2,330 | ) | (1,743 | ) | (1,743 | ) | |||||||||
Total net capital resources | 39,783 | 42,642 | 41,768 | 34,711 | 34,161 | 30,502 | 30,102 |
| ||
Financial review
Deposits and short-term borrowings
Deposits
Deposits include deposits from banks and customers accounts.
Average: year ended 31st December | ||||||
2007 £m | 2006 £m | 2005 £m | ||||
Deposits from banks | ||||||
Customers in the United Kingdom | 15,321 | 12,832 | 9,703 | |||
Customers outside the | ||||||
United Kingdom: | ||||||
Other European Union | 33,162 | 30,116 | 29,092 | |||
United States | 6,656 | 7,352 | 8,670 | |||
Africa | 4,452 | 4,140 | 3,236 | |||
Rest of the World | 36,626 | 35,013 | 39,060 | |||
Total deposits from banks | 96,217 | 89,453 | 89,761 | |||
Customer accounts | ||||||
Customers in the United Kingdom | 187,249 | 173,767 | 155,252 | |||
Customers outside the | ||||||
United Kingdom: | ||||||
Other European Union | 23,696 | 22,448 | 20,773 | |||
United States | 21,908 | 17,661 | 15,167 | |||
Africa | 29,855 | 23,560 | 17,169 | |||
Rest of the World | 23,032 | 19,992 | 16,911 | |||
Customer accounts | 285,740 | 257,428 | 225,272 |
Deposits from banks in offices in the United Kingdom from non-residents amounted to £45,162m (2006: £41,762m).
Year ended 31st December | ||||||
2007 £m | 2006 £m | 2005 £m | ||||
Customer accounts | 294,987 | 256,754 | 238,684 | |||
In offices in the United Kingdom: | ||||||
Current and Demand accounts | ||||||
– interest free | 33,400 | 25,650 | 22,980 | |||
Current and Demand accounts | ||||||
– interest bearing | 32,047 | 31,769 | 28,416 | |||
Savings accounts | 70,682 | 62,745 | 57,715 | |||
Other time deposits – retail | 36,123 | 36,110 | 35,142 | |||
Other time deposits – wholesale | 65,726 | 53,733 | 42,967 | |||
Total repayable in offices in the United Kingdom | 237,978 | 210,007 | 187,220 | |||
In offices outside the United Kingdom: | ||||||
Current and Demand accounts | ||||||
– interest free | 2,990 | 2,169 | 2,300 | |||
Current and Demand accounts | ||||||
– interest bearing | 11,570 | 17,626 | 20,494 | |||
Savings accounts | 3,917 | 3,041 | 3,230 | |||
Other time deposits | 38,532 | 23,911 | 25,440 | |||
Total repayable in offices outside the United Kingdom | 57,009 | 46,747 | 51,464 |
Customer accounts deposits in offices in the United Kingdom received from non-residents amounted to £49,179m (2006: £40,291m).
Note
Short-term borrowings
Short-term borrowings include deposits from banks, commercial paper and negotiable certificates of deposit.
Deposits from banks
Deposits from banks are taken from a wide range of counterparties and generally have maturities of less than one year.
2007 £m | 2006 £m | 2005 £m | ||||
Year-end balance | 90,546 | 79,562 | 75,127 | |||
Average balance | 96,217 | 89,453 | 89,761 | |||
Maximum balance | 109,586 | 97,165 | 103,397 | |||
Average interest rate during year | 4.1% | 4.2% | 2.6% | |||
Year-end interest rate | 4.0% | 4.3% | 3.6% |
Commercial paper
Commercial paper is issued by the Group, mainly in the United States, generally in denominations of not less than US$100,000, with maturities of up to 270 days.
2007 £m | 2006 £m | 2005 £m | ||||
Year-end balance | 23,451 | 26,546 | 28,275 | |||
Average balance | 26,229 | 29,740 | 22,309 | |||
Maximum balance | 30,736 | 31,859 | 28,598 | |||
Average interest rate during yeara | 5.4% | 4.4% | 3.1% | |||
Year-end interest rate | 5.2% | 5.0% | 4.5% |
Negotiable certificates of deposit
Negotiable certificates of deposits are issued mainly in the UK and US, generally in denominations of not less than US$100,000.
2007 £m | 2006 £m | 2005 £m | ||||
Year-end balance | 58,401 | 52,800 | 43,109 | |||
Average balance | 55,394 | 49,327 | 45,533 | |||
Maximum balance | 62,436 | 60,914 | 53,456 | |||
Average interest rate during yeara | 5.1% | 5.3% | 3.9% | |||
Year-end interest rate | 5.0% | 5.1% | 4.5% |
| ||
Financial Review
Commitments and contractual obligations
Commitments and contractual obligations
Commitments and contractual obligations include loan commitments, contingent liabilities, debt securities and purchase obligations.
Commercial commitments
Amount of commitment expiration per period | ||||||||||
Less than one year £m | Between one to three years £m | Between three to five years £m | After five years £m | Total amounts committed £m | ||||||
Acceptances and endorsements | 365 | – | – | – | 365 | |||||
Guarantees and letters of credit pledged as collateral security | 29,136 | 2,711 | 1,971 | 1,874 | 35,692 | |||||
Other contingent liabilities | 6,594 | 1,556 | 416 | 1,151 | 9,717 | |||||
Documentary credits and other short-term trade related transactions | 401 | 121 | – | – | 522 | |||||
Forward asset purchases and forward deposits placed | 283 | – | – | – | 283 | |||||
Standby facilities, credit lines and other | 136,457 | 17,039 | 28,127 | 10,211 | 191,834 |
Contractual obligations
Payments due by period | ||||||||||
Less than one year £m | Between one to three years £m | Between three to five years £m | After five years £m | Total £m | ||||||
Long-term debt | 90,201 | 13,558 | 8,630 | 19,358 | 131,747 | |||||
Operating lease obligations | 197 | 755 | 610 | 2,225 | 3,787 | |||||
Purchase obligations | 141 | 186 | 27 | 6 | 360 | |||||
Total | 90,539 | 14,499 | 9,267 | 21,589 | 135,894 |
The long-term debt does not include undated loan capital of £6,631m.
Further information on the contractual maturity of the Group’s assets and liabilities is given in Note 48.
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Financial review
Securities
The following table analyses the book value of securities which are carried at fair value.
2007 | 2006 | 2005 | ||||||||||
Book value £m | Amortised £m | Book value £m | Amortised £m | Book value £m | Amortised £m | |||||||
Investment securities – available for sale | ||||||||||||
Debt securities: | ||||||||||||
United Kingdom government | 78 | 81 | 758 | 761 | 31 | 31 | ||||||
Other government | 7,383 | 7,434 | 12,587 | 12,735 | 14,860 | 14,827 | ||||||
Other public bodies | 634 | 632 | 280 | 277 | 216 | 216 | ||||||
Mortgage and asset backed securities | 1,367 | 1,429 | 1,706 | 1,706 | 3,062 | 3,062 | ||||||
Corporate issuers | 19,664 | 19,649 | 27,089 | 27,100 | 25,590 | 25,597 | ||||||
Other issuers | 9,547 | 9,599 | 5,492 | 5,450 | 6,265 | 6,257 | ||||||
Equity securities | 1,676 | 1,418 | 1,371 | 1,047 | 1,250 | 1,007 | ||||||
Investment securities – available for sale | 40,349 | 40,242 | 49,283 | 49,076 | 51,274 | 50,997 | ||||||
Other securities – held for trading | ||||||||||||
Debt securities: | ||||||||||||
United Kingdom government | 3,832 | n/a | 4,986 | n/a | 4,786 | n/a | ||||||
Other government | 51,104 | n/a | 46,845 | n/a | 46,426 | n/a | ||||||
Mortgage and asset backed securities | 37,038 | n/a | 29,606 | n/a | 17,644 | n/a | ||||||
Bank and building society certificates of deposit | 17,751 | n/a | 14,159 | n/a | 15,837 | n/a | ||||||
Other issuers | 43,053 | n/a | 44,980 | n/a | 43,674 | n/a | ||||||
Equity securities | 36,307 | n/a | 31,548 | n/a | 20,299 | n/a | ||||||
Other securities – held for trading | 189,085 | n/a | 172,124 | n/a | 148,666 | n/a |
Investment debt securities include government securities held as part of the Group’s treasury management portfolio for asset and liability, liquidity and regulatory purposes and are for use on a continuing basis in the activities of the Group. In addition, the Group holds as investments listed and unlisted corporate securities.
Mortgage and asset backed securities and other issuers within held for trading debt securities have been restated in 2006 and 2005 to reflect changes in classification of assets.
Bank and building society certificates of deposit are freely negotiable and have original maturities of up to five years, but are typically held for shorter periods. In addition to UK government securities shown above, at 31st December 2007, 2006 and 2005, the Group held the following government securities which exceeded 10% of shareholders’ equity.
Government securities
2007 | 2006 | 2005 | ||||
Book value £m | Book value £m | Book value £m | ||||
United States | 15,156 | 18,343 | 16,093 | |||
Japan | 9,124 | 15,505 | 14,560 | |||
Germany | 5,136 | 4,741 | 6,376 | |||
France | 3,538 | 4,336 | 4,822 | |||
Italy | 5,090 | 3,419 | 4,300 | |||
Spain | 3,674 | 2,859 | 2,456 | |||
Netherlands | 1,270 | 395 | 2,791 |
Maturities and yield of available for sale debt securities
Maturing within one year: | Maturing after one but within five years: | Maturing after five but within ten years: | Maturing after ten years: | Total: | ||||||||||||||||
Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | Amount £m | Yield % | |||||||||||
Government | 1,354 | 5.8 | 3,997 | 4.0 | 788 | 1.6 | 1,322 | 1.1 | 7,461 | 3.5 | ||||||||||
Other public bodies | 546 | 8.6 | 78 | 1.3 | – | – | 10 | 5.2 | 634 | 7.7 | ||||||||||
Other issuers | 11,849 | 5.2 | 12,542 | 4.9 | 4,343 | 5.6 | 1,844 | 7.0 | 30,578 | 5.2 | ||||||||||
Total book value | 13,749 | 5.4 | 16,617 | 4.6 | 5,131 | 5.0 | 3,176 | 4.5 | 38,673 | 5.0 |
The yield for each range of maturities is calculated by dividing the annualised interest income prevailing at 31st December 2007 by the fair value of securities held at that date.
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Financial review
The Group’s accounting policies are set out on pages 149 to 157.
Certain of these policies, as well as estimates made by management, are considered to be important to an understanding of the Group’s financial condition since they require management to make difficult, complex or subjective judgements and estimates, some of which may relate to matters that are inherently uncertain. The following accounting policies include estimates which are particularly sensitive in terms of judgements and the extent to which estimates are used. Other accounting policies involve significant amounts of judgements and estimates, but the total amounts involved are not significant to the financial statements. Management has discussed the accounting policies and critical accounting estimates with the Board Audit Committee.
Fair value of financial instruments
Some of the Group’s financial instruments are carried at fair value through profit or loss such as those held for trading, designated by management under the fair value option and non-cash flow hedging derivatives.
Other non-derivative financial assets may be designated as available for sale. Available for sale financial investments are initially recognised at fair value and are subsequently held at fair value. Gains and losses arising from changes in fair value of such assets are included as a separate component of equity. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Financial instruments entered into as trading transactions, together with any associated hedging, are measured at fair value and the resultant profits and losses are included in net trading income, along with interest and dividends arising from long and short positions and funding costs relating to trading activities. Assets and liabilities resulting from gains and losses on financial instruments held for trading are reported gross in trading portfolio assets and liabilities or derivative financial instruments, reduced by the effects of netting agreements where there is an intention to settle net with counterparties.
Valuation methodology
The method of determining the fair value of financial instruments can be analysed into the following categories:
The valuation techniques in (b) and (c) use inputs such as interest rate yield curves, equity prices, commodity and currency prices/yields, volatilities of underlyings and correlations between inputs. The models used in these valuation techniques are calibrated against industry standards, economic models and to observed transaction prices where available.
The following tables set out the total financial instruments stated at fair value as at 31st December 2007 and those fair values are calculated with valuation techniques using unobservable inputs.
Unobservable inputs £m | Total £m | |||
Assets stated at fair value | ||||
Trading portfolio assets | 4,457 | 193,691 | ||
Financial assets designated at fair value: | ||||
– held on own account | 16,819 | 56,629 | ||
– held in respect of linked liabilities to customers under investment contracts | – | 90,851 | ||
Derivative financial instruments | 2,707 | 248,088 | ||
Available for sale financial investments | 810 | 43,072 | ||
Total | 24,793 | 632,331 | ||
Unobservable inputs £m | Total £m | |||
Liabilities stated at fair value | ||||
Trading portfolio liabilities | 42 | 65,402 | ||
Financial liabilities designated at fair value | 6,172 | 74,489 | ||
Liabilities to customers under investment contracts | – | 92,639 | ||
Derivative financial instruments | 4,382 | 248,288 | ||
Total | 10,596 | 480,818 |
Various factors influence the availability of observable inputs and these may vary from product to product and change over time. Factors include for example, the depth of activity in the relevant market, the type of product, whether the product is new and not widely traded in the market place, the maturity of market modelling and the nature of the transaction (bespoke or generic).
To the extent that valuation is based on models or inputs that are not observable in the market, the determination of fair value can be more subjective, dependant on the significance of the unobservable input to the overall valuation. Unobservable inputs are determined based on the best information available, for example by reference to similar assets, similar maturities, appropriate proxies, or other analytical techniques. The effect of changing the assumptions for those financial instruments for which the fair values were measured using valuation techniques that are determined in full or in part on assumptions that are not supported by observable inputs to a range of reasonably possible alternative assumptions, would be to provide a range of £1.2bn (2006: £0.1bn) lower to £1.5bn (2006: £0.1bn) higher than the fair values recognised in the financial statements.
The size of this range will vary over time in response to market volatility, market uncertainty and changes to benchmark proxy relationships of similar assets and liabilities. The calculation of this range is performed on a consistent basis each period.
Further information on the fair value of financial instruments is provided in Note 49 to the accounts.
The following summary sets out those instruments which use inputs where it may be necessary to use valuation techniques as described above.
Corporate bonds
Corporate bonds are generally valued using observable quoted prices or recently executed transactions. Where observable price quotations are not available, the fair value is determined based on cash flow models where significant inputs may include yield curves, bond or single name credit default swap spreads.
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Mortgage whole loans
The fair value of mortgage whole loans are determined using observable quoted prices or recently executed transactions for comparable assets. Where observable price quotations or benchmark proxies are not available, fair value is determined using cash flow models where significant inputs include yield curves, collateral specific loss assumptions, asset specific prepayment assumptions, yield spreads and expected default rates.
Commercial mortgage backed securities and asset backed securities
Commercial mortgage backed securities and asset backed securities (ABS) (residential mortgages, credit cards, auto loans, student loans and leases) are generally valued using observable information. Wherever possible, the fair value is determined using quoted prices or recently executed transactions. Where observable price quotations are not available, fair value is determined based on cash flow models where the significant inputs may include yield curves, credit spreads, prepayment rates. Securities that are backed by the residual cash flows of an asset portfolio are generally valued using similar cash flow models.
The fair value of home equity loan bonds are determined using models which use scenario analysis with significant inputs including age, rating, internal grade, and index prices.
Collateralised debt obligations
The valuation of collateralised debt obligations (CDOs) notes is first based on an assessment of the probability of an event of default occurring due to a credit deterioration. This is determined by reference to the probability of event of default occurring and the probability of exercise of contractual rights related to event of default. The notes are then valued by determining appropriate valuation multiples to be applied to the contractual cash flows. These are based on inputs including the prospective cash flow performance of the underlying securities, the structural features of the transaction and the net asset value of the underlying portfolio.
Private equity
The fair value of private equity is determined using appropriate valuation methodologies which, dependent on the nature of the investment, may include discounted cash flow analysis, enterprise value comparisons with similar companies, price:earnings comparisons and turnover multiples. For each investment the relevant methodology is applied consistently over time.
Own credit on financial liabilities
The carrying amount of financial liabilities held at fair value is adjusted to reflect the effect of changes in own credit spreads. As a result, the carrying value of issued notes that have been designated at fair value through profit and loss is adjusted by reference to the movement in the appropriate spreads. The resulting gain or loss is recognised in the income statement.
Derivatives
Derivative contracts can be exchange traded or over the counter (OTC). OTC derivative contracts include forward, swap and option contracts related to interest rates, bonds, foreign currencies, credit standing of reference entities, equity prices, fund levels, commodity prices or indices on these assets.
The fair value of OTC derivative contracts are modelled using a series of techniques, including closed form analytical formulae (such as the Black-Scholes option pricing model) and simulation based models. The choice of model is dependant on factors such as; the complexity of the product, inherent risks and hedging strategy: statistical behaviour of the underlying, and ability of the model to price consistently with observed market transactions. For many pricing models there is no material subjectivity because the methodologies employed do not necessitate significant judgement and the pricing inputs are observed from actively quoted markets, as is the case for generic interest rate swaps and option markets. In the case of more established derivative products, the pricing models used are widely accepted and used by the other market participants.
Significant inputs used in these models may include yield curves, credit spreads, recovery rates, dividend rates, volatility of underlying interest rates, equity prices or foreign exchange rates and, in some cases, correlation between these inputs. These inputs are determined with reference to quoted prices, recently executed trades, independent market quotes and consensus data.
New, long dated or complex derivative products may require a greater degree of judgement in the implementation of appropriate valuation techniques, due to the complexity of the valuation assumptions and the reduced observability of inputs. The valuation of more complex products may use more generic derivatives as a component to calculating the overall value.
Derivatives where valuation involves a significant degree of judgement include:
– Fund derivatives
Fund derivatives are derivatives whose underlyings include mutual funds, hedge funds, indices and multi asset portfolios. They are valued using underlying fund prices, yield curves and available market information on the level of the hedging risk. Some fund derivatives are valued using unobservable information, generally where the level of the hedging risk is not observable in the market. These are valued taking account of risk of the underlying fund or collection of funds, diversification of the fund by asset, concentration by geographic sector, strategy of the fund, size of the transaction and concentration of specific fund managers.
– Commodity derivatives
Commodity derivatives are valued using models where the significant inputs may include interest rate yield curves, commodity price curves, volatility of the underlying commodities and, in some cases, correlation between these inputs, which are generally observable. This approach is applied to base metal, precious metal, energy, power, gas, emissions, soft commodities and freight positions. Due to the significant time span in the various market closes, curves are constructed using differentials to a benchmark curve to ensure that all curves are valued using the dominant market base price.
– Structured credit derivatives
Collateralised synthetic obligations (CSOs)are structured credit derivatives which reference the loss profile of a portfolio of loans, debts or synthetic underlyings. The reference asset can be a corporate credit or an asset backed credit. For CSOs that reference corporate credits an analytical model is used. For CSOs on asset backed underlyings, due to the path dependent nature of a CSO on an amortising portfolio a Monte Carlo simulation is used rather than analytic approximation. The expected loss probability for each reference credit in the portfolio is derived from the single name credit default swap spread curve and in addition, for ABS references, a prepayment rate assumption. A simulation is then used to compute survival time which allows us to calculate the marginal loss over each payment period by reference to estimated recovery rates. Significant inputs include prepayment rates, cumulative default rates, and recovery rates.
Allowances for loan impairment and other credit risk provisions
Allowances for loan impairment represent management’s estimate of the losses incurred in the loan portfolios as at the balance sheet date. Changes to the allowances for loan impairment and changes to the provisions for undrawn contractually committed facilities and guarantees provided are reported in the consolidated income statement as part of the impairment charge. Provision is made for undrawn loan commitments and similar facilities if it is probable that the facility will be drawn and result in recognition of an asset at an amount less than the amount advanced.
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Financial review
Critical accounting estimates
Within the retail and small businesses portfolios, which comprise large numbers of small homogeneous assets with similar risk characteristics where credit scoring techniques are generally used, statistical techniques are used to calculate impairment allowances on a portfolio basis, based on historical recovery rates and assumed emergence periods. These statistical analyses use as primary inputs the extent to which accounts in the portfolio are in arrears and historical information on the eventual losses encountered from such delinquent portfolios. There are many such models in use, each tailored to a product, line of business or customer category. Judgement and knowledge is needed in selecting the statistical methods to use when the models are developed or revised. The impairment allowance reflected in the financial statements for these portfolios is therefore considered to be reasonable and supportable. The impairment charge reflected in the income statement for these portfolios is £1,605m (2006: £1,809m) and amounts to 70% (2006: 87%) of the total impairment charge on loans and advances in 2007.
For larger accounts, impairment allowances are calculated on an individual basis and all relevant considerations that have a bearing on the expected future cash flows are taken into account, for example, the business prospects for the customer, the realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. The level of the impairment allowance is the difference between the value of the discounted expected future cash flows (discounted at the loan’s original effective interest rate), and its carrying amount. Subjective judgements are made in the calculation of future cash flows. Furthermore, judgements change with time as new information becomes available or as work-out strategies evolve, resulting in frequent revisions to the impairment allowance as individual decisions are taken. Changes in these estimates would result in a change in the allowances and have a direct impact on the impairment charge. The impairment charge reflected in the financial statements in relation to larger accounts is £701m (2006: £265m) or 30% (2006: 13%) of the total impairment charge on loans and advances in 2007. Further information on impairment allowances is set out on pages 84 to 85.
Goodwill
Management have to consider at least annually whether the current carrying value of goodwill is impaired. The first step of the impairment review process requires the identification of independent cash generating units, by dividing the Group business into as many largely independent income streams as is reasonably practicable. The goodwill is then allocated to these independent units. The first element of this allocation is based on the areas of the business expected to benefit from the synergies derived from the acquisition. The second element reflects the allocation of the net assets acquired and the difference between the consideration paid for those net assets and their fair value. This allocation is reviewed following business reorganisation. The carrying value of the unit, including the allocated goodwill, is compared to its fair value to determine whether any impairment exists. If the fair value of a unit is less than its carrying value, goodwill will be impaired. Detailed calculations may need to be carried out taking into consideration changes in the market in which a business operates (e.g. competitive activity, regulatory change). In the absence of readily available market price data this calculation is based upon discounting expected pre-tax cash flows at a risk adjusted interest rate appropriate to the operating unit, the determination of both of which requires the exercise of judgement. The estimation of pre-tax cash flows is sensitive to the periods for which detailed forecasts are available and to assumptions regarding the long term sustainable cash flows. While forecasts are compared with actual performance and external economic data, expected cash flows naturally reflect management’s view of future performance. The most significant amounts of goodwill relate to the Absa and Woolwich acquisitions. The goodwill impairment testing performed in 2007 indicated that none of the goodwill was impaired. Management believes that reasonable changes in key assumptions used to determine the recoverable amounts of Absa and Woolwich goodwill would not result in impairment.
Intangible assets
Intangible assets that derive their value from contractual customer relationships or that can be separated and sold and have a finite useful life are amortised over their estimated useful life. Determining the estimated useful life of these finite life intangible assets requires an analysis of circumstances, and judgement by the Bank’s management. At each balance sheet date, or more frequently when events or changes in circumstances dictate, intangible assets are assessed for indications of impairment. If indications are present, these assets are subject to an impairment review. The impairment review comprises a comparison of the carrying amount of the asset with its recoverable amount: the higher of the assets’ or the cash-generating unit’s net selling price and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arms-length transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market-based discount rate on a pre-tax basis. The most significant amounts of intangible assets relate to the Absa acquisition.
Retirement benefit obligations
The Group provides pension plans for employees in most parts of the world. Arrangements for staff retirement benefits vary from country to country and are made in accordance with local regulations and customs. For defined contribution schemes, the pension cost recognised in the profit and loss account represents the contributions payable to the scheme. For defined benefit schemes, actuarial valuation of each of the scheme’s obligations using the projected unit credit method and the fair valuation of each of the scheme’s assets are performed annually in accordance with the requirements of IAS 19.
The actuarial valuation is dependent upon a series of assumptions, the key ones being interest rates, mortality, investment returns and inflation. Mortality estimates are based on standard industry and national mortality tables, adjusted where appropriate to reflect the Group’s own experience. The returns on fixed interest investments are set to market yields at the valuation date (less an allowance for risk) to ensure consistency with the asset valuation. The returns on UK and overseas equities are based on the long-term outlook for global equities at the calculation date having regard to current market yields and dividend growth expectations. The inflation assumption reflects long-term expectations of both earnings and retail price inflation.
The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognised actuarial gains or losses and past service cost, is recognised as a liability in the balance sheet. An asset arising, for example, as a result of past over-funding or the performance of the plan investments, is recognised to the extent that it does not exceed the present value of future contribution holidays or refunds of contributions. To the extent that any unrecognised gains or losses at the start of the measurement year in relation to any individual defined benefit scheme exceed 10% of the greater of the fair value of the scheme assets and the defined benefit obligation for that scheme, a proportion of the excess is recognised in the income statement.
The Group’s IAS 19 pension surplus across all pension and post-retirement schemes as at 31st December 2007 was a surplus of £393m (2006: £817m deficit). This comprises net recognised liabilities of £1,501m (2006: £1,719m) and unrecognised actuarial gains of £1,894m (2006: £902m). The net recognised liabilities comprises retirement benefit liabilities of £1,537m (2006: £1,807m) relating to schemes that are in deficit, and assets of £36m (2006: £88m) relating to schemes that are in surplus. The Group’s IAS 19 pension surplus in respect of the main UK scheme as at 31st December 2007 was £668m (2006: £495m deficit). The estimated actuarial funding position of the main UK pension scheme as at 31st December 2007, estimated from the triennial valuation in 2004, was a surplus of £1,200m (2006: £1,300m). Cash contributions to the main UK scheme were £355m (2006: £351m).
Further information on retirement benefit obligations, including assumptions is set out in Note 30 to the accounts.
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Off-balance sheet arrangements
In the ordinary course of business and primarily to facilitate client transactions, the Group enters into transactions which may involve the use of off-balance sheet arrangements and special purpose entities (SPEs). These arrangements include the provision of guarantees, loan commitments, retained interests in assets which have been transferred to an unconsolidated SPE or obligations arising from the Group’s involvements with such SPEs.
Guarantees
The Group issues guarantees on behalf of its customers. In the majority of cases, the Group will hold collateral against the exposure, have a right of recourse to the customer or both. In addition, the Group issues guarantees on its own behalf. The main types of guarantees provided are: financial guarantees given to banks and financial institutions on behalf of customers to secure loans: overdrafts; and other banking facilities, including stock borrowing indemnities and standby letters of credit. Other guarantees provided include performance guarantees, advance payment guarantees, tender guarantees, guarantees to Her Majesty’s Revenue and Customs and retention guarantees. The nominal principal amount of contingent liabilities with off-balance sheet risk is set out in Note 34 and in the table on page 46.
Loan commitments
The Group enters into commitments to lend to its customers subject to certain conditions. Such loan commitments are made either for a fixed period, or are cancellable by the Group subject to notice conditions. Information on loan commitments and similar facilities is set out in Note 34 and in the table on page 46.
Special purpose entities
Transactions entered into by the Group may involve the use of SPEs. SPEs are entities that are created to accomplish a narrow and well defined objective. There are often specific restrictions or limits around their ongoing activities.
Transactions with SPEs take a number of forms, including:
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Depending on the nature of the Group’s resulting exposure, it may consolidate the SPE on to the Group’s balance sheet. The consolidation of SPEs is considered at inception based on the arrangements in place and the assessed risk exposures at that time. In accordance with IFRS, SPEs are consolidated when the substance of the relationship between the Group and the entity indicates control. Potential indicators of control include, amongst others, an assessment of the Group’s exposure to the risks and benefits of the SPE. The initial consolidation analysis is revisited at a later date if:
A number of the Group’s transactions have recourse only to the assets of unconsolidated SPEs. Typically, the majority of the exposure to these assets is borne by third parties and the Group’s risk is mitigated through over-collateralisation, unwind features and other protective measures. The Group’s involvement with unconsolidated third party conduits, collateralised debt obligations and structured investment vehicles is described further below.
Collateralised Debt Obligations
The Group has structured and underwritten CDOs. At inception, the Group’s exposure principally takes the form of a liquidity facility provided to support future funding difficulties or cash shortfalls in the vehicles. If required by the vehicle, the facility is drawn with the amount advanced included within loans and advances in the balance sheet. Upon an event of default or other triggering event, the Group may acquire control of a CDO and, therefore, be required to fully consolidate the vehicle for accounting purposes. The potential for transactions to hit default triggers before the end of 2008 has been assessed and included in the determination of impairment charges and other credit provisions (£782m in relation to ABS CDO Super Senior and other credit market exposures for the year ended 31st December 2007).
The Group’s exposure to ABS CDO Super Senior positions before hedging was £6,018m as at 31st December 2007. This includes £1,149m of undrawn facilities provided to mezzanine transactions (exposure stated net of writedowns and charges). Undrawn facilities provided to unconsolidated CDOs are included as part of commitments in Note 34 to the accounts.
The remaining £4,869m is the Group’s exposure to High Grade CDOs, stated net of writedowns and charges. £3,782m of drawn balances are included within loans and advances on the balance sheet, with the remaining £1,087m representing consolidated High Grade CDOs accounted for on a fair value basis.
Collateral
The collateral underlying unconsolidated CDOs comprised 77% residential mortgage backed securities, 6% non-residential asset backed securities and 17% in other categories, including 10% ABS CDO exposure (a proportion of which will be backed by residential mortgage collateral).
The remaining Weighted Average Life (WAL) of all collateral is 3.9 years. The combined Net Asset Value (NAV) for all of the CDOs was £2.8bn below the nominal amount, equivalent to an aggregate 40.2% decline in value on average for all investors.
Funding
The CDOs were funded with senior unrated notes and rated notes up to AAA. The capital structure senior to the AAA notes on cash CDOs was supported by a liquidity facility provided by the Group. On mezzanine CDOs, this portion of the capital structure is unfunded, but a liquidity facility is provided to support the level of synthetic instruments within each transaction. The senior portion covered by liquidity facilities is on average 79% of the capital structure.
The initial WAL of the notes in issue averaged 7.1 years. The full contractual maturity is 37.8 years.
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Financial review
Off-balance sheet arrangements
Interests in Third Party CDOs
The Group has purchased securities in and entered into derivative instruments with third party CDOs. These interests are held as trading assets or liabilities on the Group’s balance sheet and measured at fair value. The Group has not provided liquidity facilities or similar agreements to third party CDOs.
Structured Investment Vehicles (SIVs)
The Group has not structured or managed SIVs. Group exposure to third party SIVs comprised:
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Other than the repo facilities, which when drawn are more than 100% collateralised by assets held by the Group with the collateral being valued daily, the items above are included in the credit market positions discussed on page 53.
SIV-Lites
The Group structured and helped to underwrite three SIV-Lite transactions. The Group is not involved in their ongoing management.
The Group provided £0.55bn in liquidity facilities as partial support to the £2.6bn of CP programmes on these transactions. These facilities have now been fully drawn or are terminated, such that no further drawings are possible. One of the three vehicles has been restructured into a cash CDO. As part of this restructuring, the Group acquired the £800m senior note in the CDO which is held at fair value within trading portfolio assets. The credit risk on this note has been transferred to a third party investment bank. For the remaining facilities, the amount drawn totalled £152m and is included on the balance sheet within loans and advances to customers and included in the credit market positions discussed on page 53.
Commercial Paper and Medium-term Note Conduits
The Group provided £19bn in undrawn backstop liquidity facilities to its own sponsored CP conduits. The Group fully consolidates these entities such that the underlying assets are reflected on the Group balance sheet.
The Group provided backstop facilities to support the paper issued by six third party conduits. These facilities totalled £1bn, with underlying collateral comprising auto loans (81%), bank-guaranteed residential mortgages (11%), bank-guaranteed commercial and project finance loans (5%) and UK consumer finance receivables (3%). Drawings on these facilities were £46m as at 31st December 2007 and are included within loans and advances to customers.
The Group provided backstop facilities to six third-party SPEs that fund themselves with medium term notes. These notes are sold to investors as a series of 12 month securities and remarketed to investors annually. If investors decline to renew their holdings at a price below a pre-agreed spread, the backstop facility requires the Group to purchase the
outstanding notes at scheduled maturity. The group has provided facilities of £2.9bn, to SPEs holding prime UK and Australian owner-occupied Residential Mortgage Back Securities (RMBS) assets. As at 31st December 2007, the Group had acquired notes of £90m under these backstop facilities (included as available for sale assets in the balance sheet) and further acquisitions are expected through 2008 as other notes are remarketed. The notes generally rank pari passu with the other term AAA+ rated notes from the same issuer. The facilities have been designated at fair value and are reflected in the balance sheet at their current fair value.
The Group’s own CP conduits provided facilities of £1.3bn to third party conduits containing prime UK buy-to-let RMBS. As at 31st December 2007, £290m of this facility had been drawn. The undrawn facilities are included within the commitments disclosed in Note 34 to the accounts, while the drawn elements are included within loans and advances to customers.
Asset securitisations
The Group has assisted companies with the formation of asset securitisations, some of which are effected through the use of SPEs. These entities have minimal equity and rely on funding in the form of notes to purchase the assets for securitisation. As these SPEs are created for other companies, the Group does not usually control these entities and therefore does not consolidate them. The Group may provide financing in the form of senior notes or junior notes and may also provide derivatives to the SPE. These transactions are included on the balance sheet.
The Group has used SPEs to securitise part of its originated and purchased retail and commercial lending portfolios and credit card receivables. These SPEs are usually consolidated and derecognition only occurs when the Group transfers its contractual right to receive cash flows from the financial assets, or retains the contractual rights to receive the cash flows, but assumes a contractual obligation to pay the cash flows to another party without material delay or reinvestment, and also transfers substantially all the risks and rewards of ownership, including credit risk, prepayment risk and interest rate risk. The carrying amount of securitised assets together with the associated liabilities are set out in Note 29.
Client intermediation
The Group has structured transactions as a financial intermediary to meet investor and client needs. These transactions involve entities structured by either the Group or the client and they are used to modify cash flows of third party assets to create investments with specific risk or return profiles or to assist clients in the efficient management of other risks. Such transactions will typically result in a derivative being shown on the balance sheet, representing the Group’s exposure to the relevant asset.
The Group also invests in lessor entities specifically to acquire assets for leasing. Client intermediation also includes arrangements to fund the purchase or construction of specific assets (most common in the property industry).
Fund management
The Group provides asset management services to a large number of investment entities on an arm’s-length basis and at market terms and prices. The majority of these entities are investment funds that are owned by a large and diversified number of investors. These funds are not consolidated because the Group does not own either a significant portion of the equity, or the risks and rewards inherent in the assets.
During 2007, Group operating expenses included charges of £80m (2006: £nil) related to selective support of liquidity products managed by Barclays Global Investors and not consolidated by the Group. The Group has continued to provide further selective support to liquidity products subsequent to 31st December 2007.
52 |
| |
Financial review
Barclays Capital credit market positions
Barclays Capital credit market positions
Barclays Capital credit market exposures resulted in net losses of £1,635m in 2007, due to dislocations in the credit markets. The net losses primarily related to ABS CDO super senior exposures, with additional losses from other credit market exposures partially offset by gains from the general widening of credit spreads on issued notes held at fair value.
Credit market exposures in this note are stated relative to comparatives as at 30th June 2007, being the reporting date immediately prior to the credit market dislocations.
As at | ||||||
31st December £m | 30th June £m | |||||
ABS CDO Super Senior | ||||||
High Grade | 4,869 | 6,151 | ||||
Mezzanine | 1,149 | 1,629 | ||||
Exposure before hedging | 6,018 | 7,780 | ||||
Hedges | (1,347 | ) | (348 | ) | ||
Net ABS CDO Super Senior | 4,671 | 7,432 | ||||
Other US sub-prime | ||||||
Whole loans | 3,205 | 2,900 | ||||
Other direct and indirect exposures | 1,832 | 3,146 | ||||
Other US sub-prime | 5,037 | 6,046 | ||||
Alt-A | 4,916 | 3,760 | ||||
Monoline insurers | 1,335 | 140 | ||||
Commercial mortgages | 12,399 | 8,282 | ||||
SIV-lite liquidity facilities | 152 | 692 | ||||
Structured investment vehicles | 590 | 925 |
ABS CDO Super Senior exposure
ABS CDO Super Senior net exposure was £4,671m (30th June 2007: £7,432m). Exposures are stated net of writedowns and charges of £1,412m (30th June 2007: £56m) and hedges of £1,347m (30th June 2007: £348m).
The collateral for the ABS CDO Super Senior exposures primarily comprised Residential Mortgage Backed Securities. 79% of the RMBS sub-prime collateral comprised 2005 or earlier vintage mortgages. On ABS CDO super senior exposures, the combination of subordination, hedging and writedowns provide protection against loss levels to 72% on US sub-prime collateral as at 31st December 2007. None of the above hedges of ABS CDO Super Senior exposures as at 31st December 2007 were held with monoline insurer counterparties.
Other credit market exposures
Barclays Capital held other exposures impacted by the turbulence in credit markets, including: whole loans and other direct and indirect exposures to US sub-prime and Alt-A borrowers; exposures to monoline
insurers; and commercial mortgage backed securities. The net losses in 2007 from these exposures were £823m.
Other US sub-prime whole loan and net trading book exposure was £5,037m (30th June 2007: £6,046m). Whole loans included £2,843m (30th June 2007: £1,886m) acquired since the acquisition of EquiFirst in March 2007, all of which were subject to Barclays underwriting criteria. As at 31st December 2007 the average loan to value of these EquiFirst loans was 80% with less than 3% at above 95% loan to value. 99% of the EquiFirst inventory was first lien.
Net exposure to the Alt-A market was £4,916m (30th June 2007: £3,760m), through a combination of securities held on the balance sheet including those held in consolidated conduits and residuals. Alt-A exposure is generally to borrowers of a higher credit quality than sub-prime borrowers. As at 31st December 2007, 99% of the Alt-A whole loan exposure was performing, and the average loan to value ratio was 81%. 96% of the Alt-A securities held were rated AAA or AA.
Barclays Capital held assets with insurance protection or other credit enhancement from monoline insurers. The value of exposure to monoline insurers under these contracts was £1,335m (30th June 2007: £140m). There were no claims due under these contracts as none of the underlying assets were in default.
Exposures in our commercial mortgage backed securities business comprised commercial real estate loans of £11,103m (30th June 2007: £7,653m) and commercial mortgage backed securities of £1,296m (30th June 2007: £629m). The loan exposures were 54% US and 43% European. The US exposures had an average loan to value of 65% and the European exposures had an average loan to value of 71%. 87% of the commercial mortgage backed securities held as at 31st December 2007 were AAA or AA rated.
Loans and advances to customers included £152m (30th June 2007: £692m) of drawn liquidity facilities in respect of SIV-lites. Total exposure to other structured investment vehicles, including derivatives, undrawn commercial paper backstop facilities and bonds held in trading portfolio assets was £590m (30th June 2007: £925m).
Leveraged Finance
At 31st December 2007, drawn leveraged finance positions were £7,368m (30th June 2007: £7,317m). The positions were stated net of fees of £130m and impairment of £58m driven by widening of corporate credit spreads.
Own Credit
At 31st December 2007, Barclays Capital had issued notes held at fair value of £57,162m (30th June 2007: £44,622m). The general widening of credit spreads affected the carrying value of these notes and as a result revaluation gains of £658m were recognised in trading income.
| ||
Financial review
Average balance sheet and net interest income (year ended 31st December)
2007 | 2006 | 2005 | ||||||||||||||||||||||
Average balance(a) £m | | Interest £m | | Average rate % | Average balance(a) £m | | Interest £m | | Average rate % | Average balance(a) £m | | Interest £m | | Average rate % | ||||||||||
Assets | ||||||||||||||||||||||||
Loans and advances to banksb: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 29.431 | 1,074 | 3.6 | 18,401 | 647 | 3.5 | 14,798 | 454 | 3.1 | |||||||||||||||
– in offices outside the United Kingdom | 12,262 | 779 | 6.4 | 12,278 | 488 | 4.0 | 11,063 | 403 | 3.6 | |||||||||||||||
Loans and advances to customersb: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 205,707 | 13,027 | 6.3 | 184,392 | 11,247 | 6.1 | 172,398 | 10,229 | 5.9 | |||||||||||||||
– in offices outside the United Kingdom | 88,212 | 6,733 | 7.6 | 77,615 | 4,931 | 6.4 | 50,699 | 2,975 | 5.9 | |||||||||||||||
Lease receivables: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 4,822 | 283 | 5.9 | 5,266 | 300 | 5.7 | 6,521 | 348 | 5.3 | |||||||||||||||
– in offices outside the United Kingdom | 5,861 | 691 | 11.8 | 6,162 | 595 | 9.7 | 1,706 | 117 | 6.9 | |||||||||||||||
Financial investments: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 37,803 | 2,039 | 5.4 | 41,125 | 1,936 | 4.7 | 43,133 | 1,755 | 4.1 | |||||||||||||||
– in offices outside the United Kingdom | 14,750 | 452 | 3.1 | 14,191 | 830 | 5.8 | 10,349 | 467 | 4.5 | |||||||||||||||
Reverse repurchase agreements and cash collateral on securities borrowed | ||||||||||||||||||||||||
– in offices in the United Kingdom | 211,709 | 9,644 | 4.6 | 166,713 | 6,136 | 3.7 | 156,292 | 4,617 | 3.0 | |||||||||||||||
– in offices outside the United Kingdom | 109,012 | 5,454 | 5.0 | 100,416 | 5,040 | 5.0 | 92,407 | 2,724 | 2.9 | |||||||||||||||
Trading portfolio assets: | ||||||||||||||||||||||||
– in offices in the United Kingdom | 120,691 | 5,926 | 4.9 | 106,148 | 4,166 | 3.9 | 81,607 | 2,710 | 3.3 | |||||||||||||||
– in offices outside the United Kingdom | 57,535 | 3,489 | 6.1 | 61,370 | 2,608 | 4.2 | 57,452 | 2,116 | 3.7 | |||||||||||||||
Total average interest earning assets | 897,795 | 49,591 | 5.5 | 794,077 | 38,924 | 4.9 | 698,425 | 28,915 | 4.1 | |||||||||||||||
Impairment allowances/provisions | (4,435 | ) | (3,565 | ) | (3,105 | ) | ||||||||||||||||||
Non-interest earning assets | 422,834 | 310,949 | 278,328 | |||||||||||||||||||||
Total average assets and interest income | 1,316,194 | 49,591 | 3.8 | 1,101,461 | 38,924 | 3.5 | 973,648 | 28,915 | 3.0 | |||||||||||||||
Percentage of total average interest earning assets in offices outside the United Kingdom | 32.0% | 34.3% | 32.0% | |||||||||||||||||||||
Total average interest earning assets related to: | ||||||||||||||||||||||||
Interest income | 49,591 | 5.5 | 38,924 | 4.9 | 28,915 | 4.1 | ||||||||||||||||||
Interest expense | (37,892 | ) | 4.2 | (30,385 | ) | 3.8 | (20,965 | ) | 3.0 | |||||||||||||||
11,699 | 1.3 | 8,539 | 1.1 | 7,950 | 1.0 |
Notes
Barclays Annual Report | ||
Sustainability and Barclays
At Barclays, we recognise that our sustainability values have an increased importance in the current financial climate. We are focused on: supporting our existing customers; being a bank that welcomes all potential customers; being an equal opportunity employer; our commitment to climate change; and ensuring we behave at all times as a responsible global citizen.
Doing this effectively helps us to reduce our risk and positions us well to capture commercial opportunities arising from the global transition towards a more sustainable future.
Developing our strategic framework
To measure our success in integrating sustainability into our business we have addressed the broad sustainability agenda through five key themes:
– | Customers and Clients |
Average balance sheet
– | Inclusive Banking |
– | Diversity and Our People |
– | Environment |
– | Responsible Global Citizenship |
These themes resonate in our businesses, provide a platform for action, and net interest income (year ended 31st December)give us a clear purpose and direction. Implementation is driven by actionable goals and robust performance measurement.
We manage and report our progress on the sustainability topics of most significance to our business and our stakeholders. We have determined this in part through:
2007 | 2006 | 2005 | ||||||||||||||||
Average balance(a) £m | Interest £m | Average rate % | Average balance(a) £m | Interest £m | Average rate % | Average balance(a) £m | Interest £m | Average rate % | ||||||||||
Liabilities and shareholders’ equity | ||||||||||||||||||
Deposits by banks: | ||||||||||||||||||
– in offices in the United Kingdom | 63,902 | 2,511 | 3.9 | 62,236 | 2,464 | 4.0 | 54,801 | 1,665 | 3.0 | |||||||||
– in offices outside the United Kingdom | 27,596 | 1,225 | 4.4 | 23,438 | 1,137 | 4.9 | 21,921 | 705 | 3.2 | |||||||||
Customer accounts: | ||||||||||||||||||
demand deposits: | ||||||||||||||||||
– in offices in the United Kingdom | 29,110 | 858 | 2.9 | 25,397 | 680 | 2.7 | 22,593 | 510 | 2.3 | |||||||||
– in offices outside the United Kingdom | 13,799 | 404 | 2.9 | 10,351 | 254 | 2.5 | 6,196 | 88 | 1.4 | |||||||||
Customer accounts: | ||||||||||||||||||
savings deposits: | ||||||||||||||||||
– in offices in the United Kingdom | 55,064 | 2,048 | 3.7 | 57,734 | 1,691 | 2.9 | 52,569 | 1,570 | 3.0 | |||||||||
– in offices outside the United Kingdom | 4,848 | 128 | 2.6 | 3,124 | 74 | 2.4 | 1,904 | 39 | 2.0 | |||||||||
Customer accounts: | ||||||||||||||||||
other time deposits – retail: | ||||||||||||||||||
– in offices in the United Kingdom | 30,578 | 1,601 | 5.2 | 34,865 | 1,548 | 4.4 | 33,932 | 1,470 | 4.3 | |||||||||
– in offices outside the United Kingdom | 12,425 | 724 | 5.8 | 8,946 | 482 | 5.4 | 6,346 | 260 | 4.1 | |||||||||
Customer accounts: | ||||||||||||||||||
other time deposits – wholesale: | ||||||||||||||||||
– in offices in the United Kingdom | 52,147 | 2,482 | 4.8 | 45,930 | 1,794 | 3.9 | 41,745 | 1,191 | 2.9 | |||||||||
– in offices outside the United Kingdom | 24,298 | 1,661 | 6.8 | 23,442 | 1,191 | 5.1 | 12,545 | 590 | 4.7 | |||||||||
Debt securities in issue: | ||||||||||||||||||
– in offices in the United Kingdom | 41,552 | 2,053 | 4.9 | 47,216 | 1,850 | 3.9 | 46,583 | 1,631 | 3.5 | |||||||||
– in offices outside the United Kingdom | 94,271 | 5,055 | 5.4 | 74,125 | 3,686 | 5.0 | 52,696 | 1,695 | 3.2 | |||||||||
Dated and undated loan capital and other subordinated liabilities principally: | ||||||||||||||||||
– in offices in the United Kingdom | 12,972 | 763 | 5.9 | 13,686 | 777 | 5.7 | 11,286 | 605 | 5.4 | |||||||||
Repurchase agreements and cash collateral on securities lent: | ||||||||||||||||||
– in offices in the United Kingdom | 169,272 | 7,616 | 4.5 | 141,862 | 5,080 | 3.6 | 130,767 | 3,634 | 2.8 | |||||||||
– in offices outside the United Kingdom | 118,050 | 5,051 | 4.3 | 86,693 | 4,311 | 5.0 | 80,391 | 2,379 | 3.0 | |||||||||
Trading portfolio liabilities: | ||||||||||||||||||
– in offices in the United Kingdom | 47,971 | 2,277 | 4.7 | 49,892 | 2,014 | 4.0 | 44,349 | 1,737 | 3.9 | |||||||||
– in offices outside the United Kingdom | 29,838 | 1,435 | 4.8 | 39,064 | 1,352 | 3.5 | 36,538 | 1,196 | 3.3 | |||||||||
Total average interest bearing liabilities | 827,693 | 37,892 | 4.6 | 748,001 | 30,385 | 4.1 | 657,162 | 20,965 | 3.2 | |||||||||
Interest free customer deposits: | ||||||||||||||||||
– in offices in the United Kingdom | 34,109 | 27,549 | 25,095 | |||||||||||||||
– in offices outside the United Kingdom | 3,092 | 2,228 | 2,053 | |||||||||||||||
Other non-interest bearing liabilities | 421,473 | 297,816 | 267,531 | |||||||||||||||
Minority and other interests and shareholders’ equity | 29,827 | 25,867 | 21,807 | |||||||||||||||
Total average liabilities, shareholders’ equity and interest expense | 1,316,194 | 37,892 | 2.9 | 1,101,461 | 30,385 | 2.8 | 973,648 | 20,965 | 2.2 | |||||||||
Percentage of total average interest bearing non-capital liabilities in offices outside the United Kingdom | 39.4% | 36.1% | 33.3% |
– | our research initiatives and partnerships |
Note
dialogue with our stakeholders including customers, investors governments, non-governmental organisations, consumer groups, and |
– | internal and external focus groups including hosting consumer roundtables in the UK. |
Stakeholder insight and feedback on our sustainability agenda is vital, and encourages us to be open and transparent about the issues our stakeholders are concerned about.
Measuring progress
We aim to measure and monitor our sustainability progress both internally and externally. In 2008, we developed a framework for regular progress reports to the Group Executive Committee and the Board. It provides consistent tracking of our progress by sustainability theme and Business Unit.
Barclays participates in a number of external indices, forums and initiatives which help to measure our progress including the Dow Jones Sustainability Index and FTSE4Good. In 2008, Barclays ranked joint first in the Carbon Disclosure Project’s Leadership Index.
Customers and clients
In 2008, amid widespread uncertainty in financial markets and the wider global economy, it was vital to stay close to our clients and customers, who we recognise have a choice where they bank.
During the year, we worked to help our customers and clients cope with the challenging economic circumstances. Our record of lending responsibly has allowed us to continue mortgage lending in the UK, increasing our share of net new lending from 8% in 2007 to 36% in 2008.
We increased lending to UK SMEs by 6% to a total of £15bn. We also provided support to small businesses in the UK and South Africa and also made significant investment in the Barclays Business Support team which is dedicated to helping business customers in financial difficulty in the UK.
In addition, we have committed to lend an additional 10% (£1.5bn) to SMEs in the UK by the end of 2009. We continue to act on customer and client feedback to develop appropriate products and services to meet different needs.
Inclusive banking
For Barclays, inclusive banking means helping those who are excluded from the financial system to join and benefit from it.
We have dedicated accounts for people on low incomes across several countries in Africa. In 2008, these basic accounts made up 27% of our total current and savings accounts in Africa.
Absa, which has 10 million customers, is now the market leader for low income customers in South Africa – those earning less than R3,000 (£200) a month – with a market share of 33%.
We continued to support better access to financial products and services in the UK through our basic-level Cash Card Account, which is now held by more than 730,000 customers, and through partnerships with community finance organisations and charities which help excluded and vulnerable people in society.
In March 2008, Barclays launched the ‘Hello Money’ service in India which allows customers to carry out banking transactions easily and securely over their mobile phones. Hello Money is already making a significant impact in giving access to financial services for people in India’s rural areas.
Diversity and Our People
Barclays aims to provide a safe working environment in which employees are treated fairly and with respect, encouraged to develop, and rewarded on the basis of individual performance.
| ||
Financial review
Average balance sheet
Changes in net interest income – volume and rate analysis
The following tables allocate changes in net interest income between changes in volume and changes in interest rates for the last two years. Volume and rate variances have been calculated on the movement in the average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities. Where variances have arisen from changes in both volumes and interest rates, these have been allocated proportionately between the two.
2007/2006 Change due to increase/(decrease) in: | 2006/2005 Change due to increase/(decrease) in: | 2005/2004aChange due to increase/(decrease) in: | |||||||||||||||||||||||
Total change £m | | Volume £m | | Rate £m | | Total change £m | | Volume £m | | Rate £m | Total change £m | Volume £m | | Rate £m | | ||||||||||
Interest receivable | |||||||||||||||||||||||||
Treasury bills and other eligible bills: | |||||||||||||||||||||||||
– in offices in the UK | n/a | n/a | n/a | n/a | n/a | n/a | (68) | (68 | ) | n/a | |||||||||||||||
– in offices outside the UK | n/a | n/a | n/a | n/a | n/a | n/a | (63) | (63 | ) | n/a | |||||||||||||||
n/a | n/a | n/a | n/a | n/a | n/a | (131) | (131 | ) | n/a | ||||||||||||||||
Loans and advances to banks: | |||||||||||||||||||||||||
– in offices in the UK | 427 | 402 | 25 | 193 | 121 | 72 | (237) | (115 | ) | (122 | ) | ||||||||||||||
– in offices outside the UK | 291 | (1 | ) | 292 | 85 | 46 | 39 | 132 | 45 | 87 | |||||||||||||||
718 | 401 | 317 | 278 | 167 | 111 | (105) | (70 | ) | (35 | ) | |||||||||||||||
Loans and advances to customers: | |||||||||||||||||||||||||
– in offices in the UK | 1,780 | 1,337 | 443 | 1,018 | 726 | 292 | 1,419 | 1,681 | (262 | ) | |||||||||||||||
– in offices outside the UK | 1,802 | 728 | 1,074 | 1,956 | 1,695 | 261 | 1,705 | 787 | 918 | ||||||||||||||||
3,582 | 2,065 | 1,517 | 2,974 | 2,421 | 553 | 3,124 | 2,468 | 656 | |||||||||||||||||
Lease receivables: | |||||||||||||||||||||||||
– in offices in the UK | (17 | ) | (26 | ) | 9 | (48 | ) | (70 | ) | 22 | 128 | 78 | 50 | ||||||||||||
– in offices outside the UK | 96 | (30 | ) | 126 | 478 | 413 | 65 | 96 | 91 | 5 | |||||||||||||||
79 | (56 | ) | 135 | 430 | 343 | 87 | 224 | 169 | 55 | ||||||||||||||||
Debt securities: | |||||||||||||||||||||||||
– in offices in the UK | n/a | n/a | n/a | n/a | n/a | n/a | (2,129) | (2,129 | ) | n/a | |||||||||||||||
– in offices outside the UK | n/a | n/a | n/a | n/a | n/a | n/a | (338) | (338 | ) | n/a | |||||||||||||||
n/a | n/a | n/a | n/a | n/a | n/a | (2,467) | (2,467 | ) | n/a | ||||||||||||||||
Financial investments: | |||||||||||||||||||||||||
– in offices in the UK | 103 | (165 | ) | 268 | 181 | (85 | ) | 266 | 1,755 | 1,755 | n/a | ||||||||||||||
– in offices outside the UK | (378 | ) | 32 | (410 | ) | 363 | 202 | 161 | 467 | 467 | n/a | ||||||||||||||
(275 | ) | (133 | ) | (142 | ) | 544 | 117 | 427 | 2,222 | 2,222 | n/a | ||||||||||||||
External trading assets: | |||||||||||||||||||||||||
– in offices in the UK and | n/a | n/a | n/a | n/a | n/a | n/a | (4,971) | (4,971 | ) | n/a | |||||||||||||||
– outside the UK | n/a | n/a | n/a | n/a | n/a | n/a | (2,224) | (2,224 | ) | n/a | |||||||||||||||
n/a | n/a | n/a | n/a | n/a | n/a | (7,195) | (7,195 | ) | n/a | ||||||||||||||||
Reverse repurchase agreements and cash collateral on securities borrowed: | |||||||||||||||||||||||||
– in offices in the UK | 3,508 | 1,865 | 1,643 | 1,519 | 324 | 1,195 | 4,617 | 4,617 | n/a | ||||||||||||||||
– in offices outside the UK | 414 | 430 | (16 | ) | 2,316 | 254 | 2,062 | 2,724 | 2,724 | n/a | |||||||||||||||
3,922 | 2,295 | 1,627 | 3,835 | 578 | 3,257 | 7,341 | 7,341 | n/a | |||||||||||||||||
Trading portfolio assets: | |||||||||||||||||||||||||
– in offices in the UK | 1,760 | 621 | 1,139 | 1,456 | 907 | 549 | 2,710 | 2,710 | n/a | ||||||||||||||||
– in offices outside the UK | 881 | (172 | ) | 1,053 | 492 | 151 | 341 | 2,116 | 2,116 | n/a | |||||||||||||||
2,641 | 449 | 2,192 | 1,948 | 1,058 | 890 | 4,826 | 4,826 | n/a | |||||||||||||||||
Total interest receivable: | |||||||||||||||||||||||||
– in offices in the UK | 7,561 | 4,034 | 3,527 | 4,319 | 1,923 | 2,396 | 3,224 | 3,558 | (334 | ) | |||||||||||||||
– in offices outside the UK | 3,106 | 987 | 2,119 | 5,690 | 2,761 | 2,929 | 4,615 | 3,605 | 1,010 | ||||||||||||||||
10,667 | 5,021 | 5,646 | 10,009 | 4,684 | 5,325 | 7,839 | 7,163 | 676 |
Note
a 2004 figures do not reflect the applications of IAS 32 and IAS 39 and IFRS 4 which became effective from 1st January 2005.
Barclays Annual Report | |||
53 |
In 2008, Antony Jenkins, CEO Barclaycard was appointed Diversity and Inclusion Executive Champion to drive our diversity agenda across Global Retail and Commercial Banking. Initiatives in 2008 included establishing the requirement that every senior executive has a diversity objective linked to their performance goals.
In 2009, we intend to extend our Women’s Leadership Programme, aimed at developing talented women employees, across all 15 countries in our GRCB – Emerging Markets business with secondments of between 3 and 12 months.
ChangesEnvironment
We seek to minimise our environmental impact through reducing Barclays energy, water and waste footprints and managing the risks and opportunities associated with climate change.
Businesses have a vital role to play in net interest income – volumemanaging and rate analysismitigating climate change. At Barclays, we recognise that we have an impact on the environment both directly through our own operations, and indirectly through our supply chain and corporate lending. We monitor and manage both sets of impacts.
2007/2006 Change due to increase/(decrease) in: | 2006/2005 Change due to increase/(decrease) in: | 2005/2004aChange due to increase/(decrease) in: | ||||||||||||||||||||||||
Total change £m | | Volume £m | | Rate £m | | Total change £m | | Volume £m | | Rate £m | Total change £m | | Volume £m | | Rate £m | | ||||||||||
Interest payable | ||||||||||||||||||||||||||
Deposits by banks: | ||||||||||||||||||||||||||
– in offices in the UK | 47 | 66 | (19 | ) | 799 | 247 | 552 | 440 | 231 | 209 | ||||||||||||||||
– in offices outside the UK | 88 | 190 | (102 | ) | 432 | 52 | 380 | 395 | 121 | 274 | ||||||||||||||||
135 | 256 | (121 | ) | 1,231 | 299 | 932 | 835 | 352 | 483 | |||||||||||||||||
Customer accounts – demand deposits: | ||||||||||||||||||||||||||
– in offices in the UK | 178 | 105 | 73 | 170 | 68 | 102 | 200 | 28 | 172 | |||||||||||||||||
– in offices outside the UK | 150 | 95 | 55 | 166 | 80 | 86 | 57 | 36 | 21 | |||||||||||||||||
328 | 200 | 128 | 336 | 148 | 188 | 257 | 64 | 193 | ||||||||||||||||||
Customer accounts – savings deposits: | ||||||||||||||||||||||||||
– in offices in the UK | 357 | (81 | ) | 438 | 121 | 152 | (31) | 245 | 145 | 100 | ||||||||||||||||
– in offices outside the UK | 54 | 45 | 9 | 35 | 28 | 7 | 18 | 16 | 2 | |||||||||||||||||
411 | (36 | ) | 447 | 156 | 180 | (24) | 263 | 161 | 102 | |||||||||||||||||
Customer accounts – other time deposits – retail: | ||||||||||||||||||||||||||
– in offices in the UK | 53 | (204 | ) | 257 | 78 | 41 | 37 | 164 | (23 | ) | 187 | |||||||||||||||
– in offices outside the UK | 242 | 200 | 42 | 222 | 125 | 97 | 142 | 59 | 83 | |||||||||||||||||
295 | (4 | ) | 299 | 300 | 166 | 134 | 306 | 36 | 270 | |||||||||||||||||
Customer accounts – other time deposits – wholesale: | ||||||||||||||||||||||||||
– in offices in the UK | 688 | 263 | 425 | 603 | 129 | 474 | (653 | ) | (479 | ) | (174 | ) | ||||||||||||||
– in offices outside the UK | 470 | 45 | 425 | 601 | 550 | 51 | 248 | (16 | ) | 264 | ||||||||||||||||
1,158 | 308 | 850 | 1,204 | 679 | 525 | (405 | ) | (495 | ) | 90 | ||||||||||||||||
Debt securities in issue: | ||||||||||||||||||||||||||
– in offices in the UK | 203 | (240 | ) | 443 | 219 | 22 | 197 | 398 | 507 | (109 | ) | |||||||||||||||
– in offices outside the UK | 1,369 | 1,063 | 306 | 1,991 | 850 | 1,141 | 1,359 | 323 | 1,036 | |||||||||||||||||
1,572 | 823 | 749 | 2,210 | 872 | 1,338 | 1,757 | 830 | 927 | ||||||||||||||||||
Dated and undated loan capital and other subordinated liabilities principally in offices in the UK | (14 | ) | (41 | ) | 27 | 172 | 135 | 37 | (87 | ) | (78 | ) | (9 | ) | ||||||||||||
External trading liabilities: | ||||||||||||||||||||||||||
– in offices in the UK | n/a | n/a | n/a | n/a | n/a | n/a | (5,611 | ) | (5,611 | ) | n/a | |||||||||||||||
– outside the UK | n/a | n/a | n/a | n/a | n/a | n/a | (1,805 | ) | (1,805 | ) | n/a | |||||||||||||||
n/a | n/a | n/a | n/a | n/a | n/a | (7,416 | ) | (7,416 | ) | n/a | ||||||||||||||||
Repurchase agreements and cash collateral on securities lent: | ||||||||||||||||||||||||||
– in offices in the UK | 2,536 | 1,090 | 1,446 | 1,446 | 329 | 1,117 | 3,634 | 3,634 | n/a | |||||||||||||||||
– in offices outside the UK | 740 | 1,402 | (662 | ) | 1,932 | 200 | 1,732 | 2,379 | 2,379 | n/a | ||||||||||||||||
3,276 | 2,492 | 784 | 3,378 | 529 | 2,849 | 6,013 | 6,013 | n/a | ||||||||||||||||||
Trading portfolio liabilities: | ||||||||||||||||||||||||||
– in offices in the UK | 263 | (80 | ) | 343 | 277 | 222 | 55 | 1,737 | 1,737 | n/a | ||||||||||||||||
– in offices outside the UK | 83 | (366 | ) | 449 | 156 | 85 | 71 | 1,196 | 1,196 | n/a | ||||||||||||||||
346 | (446 | ) | 792 | 433 | 307 | 126 | 2,933 | 2,933 | n/a | |||||||||||||||||
Internal funding of trading businesses | n/a | n/a | n/a | n/a | n/a | n/a | 2,045 | 2,045 | n/a | |||||||||||||||||
Total interest payable: | ||||||||||||||||||||||||||
– in offices in the UK | 4,311 | 878 | 3,433 | 3,885 | 1,345 | 2,540 | 2,512 | 2,136 | 376 | |||||||||||||||||
– in offices outside the UK | 3,196 | 2,674 | 522 | 5,535 | 1,970 | 3,565 | 3,989 | 2,309 | 1,680 | |||||||||||||||||
7,507 | 3,552 | 3,955 | 9,420 | 3,315 | 6,105 | 6,501 | 4,445 | 2,056 | ||||||||||||||||||
Movement in net interest income | ||||||||||||||||||||||||||
Increase/(decrease) in interest receivable | 10,667 | 5,021 | 5,646 | 10,009 | 4,684 | 5,325 | 7,839 | 7,163 | 676 | |||||||||||||||||
(Increase)/decrease in interest payable | (7,507 | ) | (3,552 | ) | (3,955 | ) | (9,420 | ) | (3,315 | ) | (6,105) | (6,501 | ) | (4,445 | ) | (2,056 | ) | |||||||||
3,160 | 1,469 | 1,691 | 589 | 1,369 | (780) | 1,338 | 2,718 | (1,380 | ) |
NoteIn 2008, Barclays set environmental targets that apply to global operations. We will measure our performance over three years from 2009 to 2011 against a 2008 baseline.
a 2004 figures do not reflect the applications of IAS 32 and IAS 39 and IFRS 4 which became effective from 1st January 2005.The targets are to reduce:
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– | energy use from buildings (excluding data centres) by 6% per employee, achieving an average 2% reduction per year |
– | water use by 6% per employee, achieving an average 2% reduction per year. |
For Barclays, thereWe made our UK and European operations carbon neutral by offsetting emissions from energy use and travel. We are two separate but mutually dependent aspectson track to sustainability. One is our duty as a bank to provide sound and enduring returns for our shareholders, and the best possible services for our customers. The other is our responsibility to conductmake our global business ethically,banking operations carbon neutral by the end of 2009.
Environmental and with full regard to wider social and environmental considerations. Our ambition is to develop both of these complementary strands as we move forward.
Barclays as a sustainable bank
Banks are central to every society; they provide the funding that facilitates business and entrepreneurship, support a sound financial system, and help to create jobs and wealth. As one of the world’s leading banks, with nearly 135,000 employees and operations in over 50 countries across the world, Barclays plays a significant role, whether it is working with governments on major infrastructure projects or bringing mainstream banking to customers in emerging markets.
In all of this, the customer is absolutely central. If we are to make sustainable banking successful, and successful banking sustainable, we must put our customers at the heart of everything we do, and build our services around them. We must earn – and keep – their trust by ensuring that the products we sell are understandable and appropriate.
This may seem like a statement of the obvious, but the banking sector in general has not always had a reputation for doing this. We want to change that. This aspiration covers every aspect of our business and every stage in a customer’s relationship with us, from the purchase of a Barclays product for the first time, to the way we assess applications for loans, to the more general aspects of customer service such as complaints-handling, confidentiality, and security.
Focusing more on the customer is also an integral part of what we call ‘inclusive banking’. This is partly about appealing to the broadest possible range of people as part of our strategic move into mass-market services in our emerging markets businesses, and partly about understanding the exact nature of our local customer base, and adapting our business model and product range accordingly.
A good example is our approach to basic banking accounts. In the UK we now have over 660,000 customers who have our basic Cash Card Account, and we have been working closely with consumer groups and third parties such as housing associations to ensure that these accounts are easily accessible and the product features and communications are tailored to meet their needs. In Africa the potential for growth in this area is enormous: over 100 million of the continent’s people have yet to be brought into mainstream banking, and could in time buy a whole range of other financial services. Absa has been a pioneer of basic banking in South Africa, and has attracted over 4 million customers to these accounts. The same thinking is now being applied in other African markets and India, with new basic banking products being developed. We are also distributing these products through new and innovative formats such as express branches and direct sales agents, alongside our traditional branches.
This is another lesson we have learnt from our South African operations. In Ghana our microbanking programme is now working with over 500 Susu collectors and reaching over 280,000 market traders across the country. The programme is being extended to other intermediaries such as credit unions, trade associations, microfinance institutions and church groups.
Responsible lending
We have reported on this issue in our recent Corporate Responsibility reviews, setting out our approach to what remains a high-profile and intractable issue, especially in the UK. In the last year we have continued to enforce strict criteria on new credit card applications, using a scoring system that takes over 400 variables into account when assessing an applicant’s likely ability to manage their credit. Around 50% of applications for credit cards are declined as a result. We have also extended our data-sharing collaboration with the UK credit reference agencies: pooling information about cash advances and minimum payments is proving to be an effective way of flagging up those customers who are in danger of incurring serious debt problems. We have a new unit that can step in at this stage and offer support and guidance to get their finances back on track.
We are also testing a new product, Barclaycard Freedom, which combines a credit card and the features of a structured loan, making it easier for people to manage their borrowing and keep their interest payments down.
Customer service
We have a strategic priority to be the best bank in the UK. In the last twelve months we have started to roll all our various customer initiatives into what we are calling ‘Real Retail’. We are sharing best practice more actively, and both managers and employees are getting new powers to make decisions, and tailor their product range, based on local customer needs.
Real Retail also includes a new programme to telephone customers to ask about the quality of our service and products they have purchased. Over 20,000 calls have been made so far, and the feedback is being channelled back to our product development teams.
Risk managementrisk
The incorporationmajority of the environmental and social risks into mainstream commercial credit assessments is an area where Barclays has demonstrated genuine leadership.associated with our business are indirect. These impacts arise through business relationships, including those with our supply chain and those with our clients through financing activities.
We have beenapply our Environmental and Social Impact Assessment policy (ESIA) to projects that we are considering financing. In 2008, a membertotal of 31 project finance deals were assessed against the Equator Principles, since their inception,a set of social and currently chairenvironmental criteria adopted by many banks. In addition, the Steering Committee for the group of Equator banks. Environmental Risk Management team assessed 229 non-project finance transactions.
We continue to assess our environmental and social impact beyond the project finance remit of these principles (see table on page 59)the Equator Principles and are working to include climate change and human rights risks. considerations in these assessments.
Responsible global citizenship
We nowacknowledge and accept that we have ten briefing notes for all lending coveringan obligation to be a wide range ofresponsible global citizen, and our sustainability efforts help us to achieve this. This means managing our business and supply chain to improve our social, economic and environmental risks. These notes set outimpact, and doing business ethically.
Community Investment
Investing in the communities in which we operate is an overviewintegral part of Barclays sustainability strategy. During 2008, we maintained our levels of investment in communities despite the risks facing different sectors,challenging conditions. We invested £52.2m and more than 57,000 colleagues in 31 countries were involved in volunteering, fundraising and regular giving. In addition, Barclays launched a three-year global community investment partnership with UNICEF, the waysleading children’s organisation, in which we committed to invest £5m.
Human Rights and Barclays
In June 2008, we refined our statement on human rights (first introduced in 2004) which outlines the approach we take to human rights through our three main areas of impact – as an employer, as a provider of financial services to customers and clients, and as a purchaser of goods and services from suppliers. We aim to operate in accordance with the:
– | Universal Declaration of Human Rights |
– | OECD Guidelines for Multinational Enterprises |
– | International Labour Organisation’s Core Conventions. |
Barclays is active in developing the global business and human rights agenda through our membership of two organisations – the Business Leaders’ Initiative on Human Rights, launched in 2003 of which we are a founder member, and United Nations Environment Programme Finance Initiative (UNEP FI), for which we co-chair the Human Rights Workstream.
We extended the guidance provided to our employees on human rights in 2008 to include access to an online tool for front-line lending managers, which assists in identifying and mitigating human rights risks.
Supply chain
We work closely with our suppliers to help them manage their own impacts and ensure they can be mitigated,share our commitment to sustainability. Our Group-wide sourcing process includes criteria for measuring and assessing our suppliers’ sustainability. Tenders for supplies deemed to have a potentially high sustainability impact or risk, such as wellprint or corporate wear, require suppliers to complete our sustainable supply chain questionnaire on their sustainability impact, policies and management processes.
During 2008, we continued to engage directly with our suppliers on sustainability, both as the legislativepart of our ongoing supplier relationships and regulatory environment applicable to that industry. A good example of this process in practice in 2007 is Absa’s involvement with the Bujagali Hydropower project in Uganda. A rigorous social and environmental assessment was carried out, and the results were incorporated into the final plans.address specific issues such as reducing their carbon emissions.
Barclays Annual Report | ||||
Barclays asaims to provide a responsible global citizensafe working environment in which employees are treated fairly and with respect, encouraged to develop, and rewarded on the basis of individual performance. We are committed to ensuring equality to all employees on the basis of merit. Discrimination, bullying or harassment of any kind is not tolerated.
Twenty years agoOur Guiding Principles set out the idea of ‘corporate citizenship’ described a company’s community activities, which rarely extended beyond philanthropic donations. Public understanding of the responsibilities of business has evolved considerably since then. For us, being a responsible global citizen does not just cover our award-winning community investment programme, but also includesvalues that govern how we behave as an employer, and how we manage Barclays wider social and environmental impacts.act. They are:
Climate change has become the single biggest challenge the world faces at the beginning of the 21st century, and in response we are focusing increasingly on our work on the environment, which includes both our direct and indirect impacts.
The environment
As a major financial services organisation we want to take a lead in helping our clients thrive in a lower-carbon future, and use our position to press for appropriate policies and regulatory frameworks to deal with climate change. We will be 100% carbon neutral globally by next year. We remain committed to increasing our energy efficiency, and reducing our carbon footprint on an ongoing basis, as well as helping our supply chain reduce its emissions.
We also believe we can make a positive impact though the products and services we offer, and the lending decisions we make. In 2007, we invested further in our emissions trading capability, and moved into the consumer market with new lower-carbon products and services.
An example is Barclaycard Breathe, a new card that gives consumers incentives when they buy green products, and donates half its profits to environmental projects. In the wholesale market we have Barclays Capital’s commitment to the EU emissions trading market, where it brings its full range of commodity trading and risk management expertise to bear to help clients manage their carbon risk. Since 2005 we have traded over 600 million tonnes of carbon credits, with a notional value of over $14 billion.
Project Finance Deals – whole Barclays Group
Category | A Higher Risk | B Medium Risk | C Lower Risk | Total 2007 | Total 2006 | |||||
Number of project finance deals | 7 | 18 | 29 | 54 | 36 | |||||
Deals completed or pending | 4 | 12 | 29 | 45 | 30 | |||||
– of which, number where sustainability related changes were made. | 4 | 12 | 29 | 45 | 30 | |||||
Deals considered, but not participated in | 3 | 6 | 0 | 9 | 6 | |||||
Projects referred from EU | 5 | 9 | 24 | 38 | 25 | |||||
Projects referred from Africa | 2 | 1 | 4 | 7 | 5 | |||||
Projects referred from Asia Pacific | 0 | 4 | 1 | 5 | 3 | |||||
Projects referred from North America | 0 | 4 | 0 | 4 | 3 |
Our supply chain
Since 2006 we have required all new and high-risk suppliers to provide us detailed information about their social, environmental and ethical performance. In the last year Absa adapted it for the special conditions of the South African market.
Measuring the emissions generated from a company’s supply chain is also becoming increasingly important, and we are engaging more with our own suppliers on this. This included a special forum for nine key suppliers, which has been followed up with one-to-one discussions to ascertain the proportion of each firm’s emissions that are attributable to us. We have identified a number of ways to help suppliers address their emissions, and now have a working group in place to take these ideas forward in 2008.
Human rights
We have represented the banking sector on the Business Leaders’ Initiative on Human Rights since its launch in 2003 and, since October 2006, have co-chaired the United Nations Environment Programme Finance Initiative (UNEPFI) human rights work stream. During 2007 we worked as part of a team of 12 financial institutions to develop an online tool for UNEPFI that provides guidance on human rights issues associated with corporate lending. It is designed to help identify potential risks and how they may be reduced or managed. The guidance covers specific issues relevant to different sectors, ranging from employment terms and conditions, to health and safety, to child labour, to relocation of communities, among many others.
Project finance deals by sector | Project finance a deals | Non project finance deals referred to E and S Risk Team | ||
Agriculture and Fisheries | 0 | 4 | ||
Forestry and Logging | 0 | 16 | ||
Manufacturing | 3 | 30 | ||
Chemicals, pharmaceuticals manufacturing and bulk storage | 1 | 6 | ||
Mining and Metals | 6 | 91 | ||
Power generationb | 16 | 118 | ||
Oil and gas | 4 | 41 | ||
Utilities and Waste Management | 5 | 7 | ||
Infrastructure (including dams, pipelines) | 9 | 26 | ||
Service Industry | 10 | 7 | ||
Totals | 54 | 346 |
Note
| Winning together | – | Doing what’s right for Barclays, our teams and our colleagues, to achieve collective and individual success. | |||
ii) | Best people | – | Developing and upgrading talented colleagues and differentiating rewards | |||
– | Doing what’s needed to ensure a leading position in the global financial services industry. | |||||
iii) | Customer and client focus | – | Understanding what our customers and client focus clients want and need | |||
– | And then serving them brilliantly. | |||||
iv) | Pioneering | – | Driving new ideas, especially those that make us profitable and improve control | |||
– | Improving operational excellence | |||||
– | Adding diverse skills to stimulate new perspectives and bold steps | |||||
v) | Trusted | – | Being trusted is the bedrock of a successful bank | |||
– | Acting with the highest levels of integrity to retain the trust of our customers, external stakeholders and our colleagues | |||||
– | Taking full responsibility for our decisions and actions. |
Corporate sustainability
Barclays – an international picture
2007 | 2006 | |||||
FTE by world region | ||||||
UK | 61,900 | 62,400 | ||||
Africa & Middle East | 51,748 | 44,326 | ||||
Continental Europe | 9,750 | 8,100 | ||||
Americas | 6,413 | 4,905 | ||||
Asia Pacific | 5,089 | 2,869 | ||||
Total | 134,900 | 122,600 | ||||
Global employment statistics | ||||||
FTE | 134,900 | 122,600 | ||||
Total employee headcount | 141,885 | 133,529 | ||||
Percentage of female employees | 56.3 | % | 60.6 | % | ||
Percentage of female senior executives | 13.7 | % | 12.2 | % | ||
Percentage of female senior managers | 20.6 | % | 20.8 | % | ||
Percentage working part time | 12.4 | % | 13.6 | % | ||
Turnover rate | 18.3 | % | 16.9 | % | ||
Resignation rate | 12.3 | % | 10.9 | % | ||
Sickness absence rate | 3.0 | % | 3.6 | % | ||
Barclays UK employees | ||||||
2007a | 2006b | |||||
UK employment statistics | ||||||
Total employee headcount | 61,900 | 62,400 | ||||
Average length of service (years) | 9.7 | 9.8 | ||||
Percentage working part time | 16.8 | % | 21.8 | % | ||
Sickness absence rate | 3.0 | % | 4.0 | % | ||
Turnover rate | 16.6 | % | 19.0 | % | ||
Resignation rate | 11.1 | % | 12.0 | % | ||
Women in Barclays | ||||||
Percentage of all employees | 58.0 | % | 61.0 | % | ||
Percentage of management grades | 28.4 | % | 33.0 | % | ||
Percentage of senior executives | 13.0 | % | 12.9 | % | ||
Ethnic minorities in Barclays | ||||||
Percentage of all employees | 12.3 | % | 12.7 | % | ||
Percentage of management grades | 10.0 | % | 8.1 | % | ||
Percentage of senior executives | 6.6 | % | 6.1 | % | ||
Disabled employees in Barclays | ||||||
Percentage of all employees | 3.4 | % | 5.0 | % | ||
Age profile | ||||||
Employees aged under 25 | 16.5 | % | 17.4 | % | ||
Employees aged 25-29 | 17.0 | % | 15.9 | % | ||
Employees aged 30-49 | 54.2 | % | 56.0 | % | ||
Employees aged 50+ | 10.3 | % | 10.7 | % | ||
Pensions | ||||||
Barclays Bank UK Retirement Fund active members | 53,473 | 55,558 | ||||
Current pensioners | 48,607 | 43,754 |
An international picture
| ||||
2008 | 2007a | |||
FTE by world region | ||||
UK | 60,700 | 61,900 | ||
Africa and Middle East | 55,700 | 51,748 | ||
Continental Europe | 13,400 | 9,750 | ||
Americas | 15,700 | 6,413 | ||
Asia Pacific | 10,800 | 5,089 | ||
Total | 156,300 | 134,900 | ||
FTE by business unit | ||||
UK Retail Banking | 30,400 | 30,700 | ||
Barclays Commercial Bank | 9,800 | 9,200 | ||
Barclaycard | 9,600 | 8,900 | ||
GRCB – Western Europe | 10,900 | 8,800 | ||
GRCB – Emerging Markets | 22,700 | 13,900 | ||
GRCB – Absa | 36,800 | 35,800 | ||
Barclays Capital | 23,100 | 16,200 | ||
Barclays Global Investors | 3,700 | 3,400 | ||
Barclays Wealth | 7,900 | 6,900 | ||
Head office and other operations | 1,400 | 1,100 | ||
Total | 156,300 | 134,900 | ||
Global employment statistics | ||||
FTE | 156,300 | 134,900 | ||
Total employee headcount | 161,000 | 141,885 | ||
Percentage of female employees | 53.1% | 56.3% | ||
Percentage of female senior executives | 15.2% | 13.7% | ||
Percentage of female senior managers | 24.6% | 20.6% | ||
Percentage working part time | 8.5% | 12.4% | ||
Turnover rate | 20.9% | 18.3% | ||
Resignation rate | 12.1% | 12.3% | ||
Sickness absence rateb | 2.3% | 3.0% |
NotesNote
a | 2007 UK data – includes 1,000 BGI |
b |
Barclays as an employer
c | Excludes BGI and Barclays Capital. |
One of our guiding principles is to develop the best people, and in such an intensely competitive industry we want to find, develop and retain the best talent. We are committed to diversity as a way of helping to ensure we are able to attract the best people. We have a wide range of development and leadership programmes for employees, and a policy that ensures that they are all treated with respect, regardless of age, race, sexuality, gender or disability.
d | Excludes BGI. |
We use ourGlobal governance
Barclays manages its people through these Guiding Principles in a devolved manner. To maintain the right balance between overall control and effective local decision making we have established governance frameworks which are overseen by the Group Operational Committee, and compliance with them is monitored by the Group Human Resources Risk Committee.
Employee relations
Barclays recognises and works constructively with 30 employee representative organisations throughout the world. Employee consultations on significant operational changes are carried out in accordance with local legislation.
Our employee opinion surveys
Barclays businesses conduct employee opinion surveys, to understandsuit the needs of each business. We benchmark the findings against other global financial services organisations and engage our employees. We continuehigh-performing organisations, and create action plans to score well but we are working to improve our scores further.address any areas of concern.
As we grow internationally our workforce becomes ever more diverse, reflectingOccupational health and safety
Barclays manages health and safety at a local level under the worldwide markets in which we operate. The percentage of UK ethnic minority employees has increased significantly from 7.2% in 2001, to 12.3% in 2007. As we grow we are determined to build the local talent base in the markets in which we operate, we see this as a crucial success factor for us in emerging markets. In the UK we also continued to invest in the disability mentoring and ‘reasonable adjustments’ schemes in 2007, and have again been ranked in the top 20 of Stonewall’s listrequirements of the best employers for lesbian, gayhealth and bisexual people.
These are clear successes; but we have much more worksafety governance framework. Key data on health and safety is reported regularly to do on our gender balance, especially at senior level: 20.6% of our senior managers are women. The drive to improve this comes from the very top of the bank.Board HR and Remuneration Committee.
Barclays in the communityTraining and educating our people
Barclays has always been a proudDeveloping both existing and committed investor in its communities. In 2007 we invested £52.4 million in communities around the world and 44,000 Barclaysnew employees in 26 countries were involved in our fundraising and volunteering initiatives. Our flagship programme, Banking on Brighter Futures, enabled us to use our skills and expertise, as well as our money, to maximum effect helping people improve their economic prospects, especially those in poverty, disadvantage, and debt. Projects ranged from supporting elderly people in the UK who are in financial difficulty through to helping Ugandan women affected by HIV/AIDS to set up their own businesses. This is not just about good works: the more we help individuals and communities improve their economic circumstances and financial literacy, the better the environment in which we operate.
We are investing $150 million over the next five years in the Banking on Brighter Futures programme. 1,500 projects will be supported around the world, and employees will be encouraged to volunteer 150,000 hours of their time on projects focusing on financial education, entrepreneurship, employment and financial inclusion.
Governance
Corporate responsibility is firmly established as one of the Barclays Principal Risks, which means that it is managed within a robust framework of internal control, governance, and risk management processes.
Responsibility for Barclays Corporate Sustainability Strategy rests with the Group Executive Committee, with oversight by the Board. The Group Chief Executive has primary responsibility for embedding corporate sustainability throughout Barclays, supported by the Group Executive Committee. This includes ensuring there are effective processes for identifying and monitoring all the business risks or commercial opportunities that have a significant social, environmental or ethical dimension.
The Brand and Reputation Committee is a sub-committee of Group Executive Committee, and is chaired by Sir Nigel Rudd, Deputy Chairman and a Non-Executive Director on the Board. This Committee’s role is to identify and manage issues that could have a significant impact on Barclays reputation. It met six times during the year and dealt with issues ranging from Barclays presence in Zimbabwe to new areas of commodities business and the fee structure for Barclaycard.
The Community Partnerships Committee, chaired by Gary Hoffman, sets the policy and provides governance for our global community investment programmes, and the Environmental Steering Group gives direction and governancekey to our environmentalfuture prosperity. We undertake this through formal and climate change strategies. The Treating Customers Fairly (TCF) Forum, chairedinformal training and education, including mandatory training required by our Consumer champion, Catharine French, monitors compliance across all retailregulatory bodies and wholesale business units, detailed on-the-job training and development.
UK and non-UK, to embed TCF principles in our relationships with customers. Taking this wider approach to TCF goes significantly beyond our regulatory requirements.employees
2008 | 2007a | |||
UK employment statistics | ||||
FTE | 60,700 | 61,900 | ||
Average length of service (years) | 9.2 | 9.7 | ||
Percentage working part time | 16.1% | 16.8% | ||
Sickness absence ratec | 3.1% | 3.0% | ||
Turnover rate | 19.3% | 16.6% | ||
Resignation rate | 12.2% | 11.1% | ||
Women in Barclays | ||||
Percentage of all employees | 56.1% | 58.0% | ||
Percentage of management grades | 28.0% | 28.4% | ||
Percentage of senior executives | 14.6% | 13.0% | ||
Ethnic minorities in Barclays | ||||
Percentage of all employees | 12.3% | 12.3% | ||
Percentage of management grades | 11.5% | 10.0% | ||
Percentage of senior executives | 8.0% | 6.6% | ||
Disabled employees in Barclays | ||||
Percentage of all employeesd | 2.0% | 3.4% | ||
Age profile | ||||
Employees under 25 | 15.5% | 16.5% | ||
Employees aged 25-29 | 18.5% | 17.0% | ||
Employees aged 30-49 | 55.8% | 54.2% | ||
Employees aged 50+ | 10.2% | 10.3% | ||
Pensions | ||||
Barclays UK Retirement Fund active members | 58,316 | 53,473 | ||
Current pensioners | 50,499 | 48,607 |
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Barclays Annual Report 2008 | 55 |
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Risk management
List of Credit, Market and Operational Risk tables and charts included within the 2007 Annual Report and Accounts
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Barclays Annual Report | ||||
Risk management
Risk factors disclosure
The following information sets forth certain risk factors that the Group believes could cause its actual future results to differ materially from expected results. For further information related to such matters, please refer to page 53 (Barclays Capital credit market positions), pages 65-66 (2007 risk developments), pages 80 to 88 (credit risk management and market risk management), pages 91-95 (liquidity risk management and operational risk management), page 201 (Note 35 – legal proceedings) and page 202 (Note 36 – competition and regulatory matters). However, other factors could also adversely affect the Group results and so the factors discussed in this report should not be considered to be a complete set of all potential risks and uncertainties.
Business conditions and general economy
The profitability of Barclays businesses could be adversely affected by athe worsening of general economic conditions in the United Kingdom, globally or in certain individual markets such as the USUnited States, Spain or South Africa. Factors such as interest rates, inflation, investor sentiment, the availability and cost of credit, foreign exchange risk, creditworthiness of counterparties, the liquidity of the global financial markets and the level and volatility of equity prices could significantly affect the Group’s customers’ activity level of customers.levels and financial position. For example:
– |
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– |
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– |
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– | a further market downturn could reduce the fees |
– |
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Current market volatility and recent market developments
The global financial system has been experiencing difficulties since August 2007 and financial markets have deteriorated dramatically since the bankruptcy filing of Lehman Brothers in September 2008. Despite measures taken by the United Kingdom and United States governments and the European Central Bank and other central banks to stabilise the financial markets, the volatility and disruption of the capital and credit markets have continued. Together with the significant declines in the property markets in the United Kingdom, the United States, Spain and other countries, these events over the past two years have contributed to significant write-downs of asset values by financial institutions, including government-sponsored entities and major retail, commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions, to be nationalised and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have substantially reduced and, in some cases, stopped their funding to borrowers, including other financial institutions.
While the capital and credit markets have been experiencing difficulties for some time, the volatility and disruption reached unprecedented levels in the final months of 2008 and economic activity started to contract in many of the economies in which the Group operates. These conditions have produced downward pressure on stock prices and credit capacity for certain issuers. The resulting lack of credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could continue to materially and adversely affect the Group’s business, financial condition and results of operations.
Barclays Annual Report 2008 | 57 |
Credit risk
Credit risk is the risk of suffering financial loss, should any of the Group’s customers, clients or market counterparties fail to fulfil their contractual obligations to the Group. CreditThe credit risk that the Group faces arises mainly from wholesale and retail loans and advances. However, credit risk may also arise where the downgrading of an entity’s credit rating causes the fair value of the Group’s investment in that entity’s financial instruments to fall. The
In a recessionary environment, such as that ongoing in the United Kingdom, the United States and other economies, credit risk that the Group faces arises mainly from commercial and consumer loans and advances, including credit card lending.
increases. Credit risk may also be manifested as country risk where difficulties may arise in the country in which the exposure is domiciled, thus impeding or reducing the value of the asset,assets, or where the counterparty may be the country itself.
Another form of credit risk is settlement risk, which is the possibility that the Group may pay a counterparty – for example, a bank in a foreign exchange transaction – but fail to receive the corresponding settlement in return. The Group is exposed to many different industries and counterparties in the normal course of its business, but its exposure to counterparties in the financial services industry is particularly significant. This exposure can arise through trading, lending, deposit-taking, clearance and settlement and many other activities and relationships. These counterparties include brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. Many of these relationships expose the Group to credit risk in the event of default of a counterparty and to systemic risk affecting its counterparties. Where the Group holds collateral against counterparty exposures, it may not be able to realise it or liquidate it at prices sufficient to cover the full exposures. Many of the hedging and other risk management strategies utilised by the Group also involve transactions with financial services counterparties. The failure of these counterparties to settle or the perceived weakness of these counterparties may impair the effectiveness of the Group’s hedging and other risk management strategies.
The Group’s credit risk governance structure, management and measurement methodologies, together with an analysis of exposures to credit risk is detailed in the ‘Credit risk management’ section on page 67 and the ‘Credit Risk’ note to the financial statements on page 250.
Barclays Capital credit market exposures
An analysis of Barclays Capital’s credit market exposures is detailed on pages 93 to 105.
Market risk
Market risk is the risk that the Group’s earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or volatility of market rates or prices such as interest rates, credit spreads, commodity prices, equity prices and foreign exchange rates. Market risk has increased due to the volatility of the current financial markets.
The main market risk arises from trading activities. The GroupBarclays is also exposed to market risk through non-traded interest rate risk in the banking book and market risk in the pension fund.
The Group’s market risk governance structure, management and measurement methodologies, together with an analysis of exposures to both traded and non-traded market risk is detailed in the ‘Market risk management’ section on page 119 and the ‘Market Risk’ note to the financial statements on page 264. Pension risk is analysed in note 30 on page 220.
The Group’s future earnings could be affected by depressed asset valuations resulting from a deterioration in market conditions. Financial markets are sometimes subject to stress conditions where steep falls in asset values can occur, as demonstrated by recent events affecting asset backed CDOs and the US sub-prime residential mortgage market and which may occur in other asset classes during an economic downturn. Severe market events are difficult to predict and, if they continue to occur, could result in the Group incurring additional losses.
In 2007 and in 2008, the Group recorded material net losses on certain credit market exposures, including ABS CDO Super Senior exposures. As market conditions change, the fair value of these exposures could fall further and result in additional losses or impairment charges, which could have a material adverse effect on the Group’s earnings. Such losses or impairment charges could derive from: a decline in the value of exposures; a decline in the ability of counterparties, including monoline insurers, to meet their obligations as they fall due; or the ineffectiveness of hedging and other risk management strategies in circumstances of severe stress.
Liquidity risk
This is the risk that the Group is unable to meet its obligations when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows, such as debt maturities. Such outflows would deplete available cash resources for client lending, trading activities and investments. In extreme circumstances, lack of liquidity could result in reductions in balance sheet and sales of assets, or potentially an inability to fulfil lending commitments. This risk is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters. The Group’s liquidity risk management has several components:
– | intra-day monitoring to maintain sufficient liquidity to meet all settlement obligations; |
– | mismatch limits to control expected cash flows from maturing assets and liabilities; |
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Risk management
Risk factors
– | monitoring of undrawn lending commitments, overdrafts and contingent liabilities; and |
– | diversification of liquidity sources by geography and provider. |
During periods of market dislocation, such as those currently ongoing, the Group’s ability to manage liquidity requirements may be impacted by a reduction in the availability of wholesale term funding as well as an increase in the cost of raising wholesale funds. Asset sales, balance sheet reductions and the increasing costs of raising funding will affect the earnings of the Group.
In illiquid markets, the Group may decide to hold assets rather than securitising, syndicating or disposing of them. This could affect the Group’s ability to originate new loans or support other customer transactions as both capital and liquidity are consumed by existing or legacy assets.
The Group’s liquidity risk management and measurement methodologies are detailed in the ‘Liquidity Risk Management’ section on page 111 and the ‘Liquidity Risk’ note to the financial statements on page 268.
Capital risk
Capital risk is the risk that the Group has insufficient capital resources to:
– | meet minimum regulatory capital requirements in the UK and in other jurisdictions such as the United States and South Africa where regulated activities are undertaken. The Group’s authority to operate as a bank is dependent upon the maintenance of adequate capital resources; |
– | support its credit rating. A weaker credit rating would increase the Group’s cost of funds; |
– | support its growth and strategic options. |
During periods of market dislocation, increasing the Group’s capital resources may prove more difficult or costly. Regulators have also recently increased the Group’s capital targets and amended the way in which capital targets are calculated and may further do so in future. This would constrain the Group’s planned activities and contribute to adverse impacts on the Group’s earnings.
The Group’s capital management objectives and processes are detailed in the ‘Capital risk management’ section on page 114.
Operational risk
Operational risk is the risk of direct or indirect losses resulting from human factors, external events, and inadequate or failed internal processes and
systems. Operational risks are inherent in Barclaysthe Group’s operations and are typical of any large enterprise. Major sources of operational risk include operational process reliability, IT security, outsourcing of operations, dependence on key suppliers, implementation of strategic change, integration of acquisitions, fraud, human error, customer service quality, regulatory compliance, recruitment, training and retention of staff, and social and environmental impacts.
The Group’s operational risk management and measurement methodologies are detailed in the ‘Operational risk management’ section on page 117.
Financial crime risk
Financial crime risk is a category of operational risk. It arises from the risk that the Group might fail to comply with financial crime legislation and industry laws on anti-money laundering or might suffer losses as a result of internal or external fraud, or might fail to ensure the security of personnel, physical premises and the Group’s assets.
The Group’s financial crime management and processes are detailed in the ‘Financial crime risk management’ section on page 120.
Regulatory compliance risk
Regulatory compliance risk arises from a failure or inability to comply fully with the laws, regulations or codes applicable specifically to the financial service industry. Non-compliance could lead to fines, public reprimands, damage to reputation, enforced suspension of operations or, in extreme cases, withdrawal of authorisations to operate.
In addition, the Group’s businesses and earnings can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the United Kingdom, the European Union (‘EU’), the United States, South Africa and elsewhere. All these are subject to change, particularly in the current market environment where recent developments in the global markets have led to an increase in the involvement of various governmental and regulatory authorities in the financial sector and in the operations of financial institutions. In particular, governmental and regulatory authorities in the United Kingdom, the United States and elsewhere are implementing measures to increase regulatory control in their respective banking sectors, including by imposing enhanced capital requirements or by imposing conditions on direct capital injections and funding. Any future regulatory changes may potentially restrict the Group’s operations, mandate certain lending activity and impose other compliance costs. It is uncertain how the more rigorous regulatory climate will impact financial institutions, including the Group.
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Capital risk
Capital risk is the risk that the Group has insufficient capital resources to:Areas where changes could have an impact include:
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– | changes in competition and pricing environments; |
– | further developments in the financial reporting environment; |
– | differentiation amongst financial institutions by governments with respect to the extension of guarantees to customer deposits and the terms attaching to those guarantees; and |
– | implementation of, or costs related to, local customer or depositor compensation or reimbursement schemes. |
Two specific matters that directly impact the Group are the Banking Act 2009 and the Financial Services Compensation Scheme:
Liquidity riskBanking Act 2009
Liquidity riskOn 21st February 2009, the Banking Act 2009 came into force which provides a permanent regime to allow the FSA, the UK Treasury and the Bank of England (the ‘Tripartite Authorities’) to resolve failing banks in the UK. The Banking Act aims to balance the need to protect depositors and prevent systemic failure with the potentially adverse consequences that using powers to deal with those events could have on private law rights, and, as a consequence, wider markets and investor confidence.
These powers, which apply regardless of any contractual restrictions, include: (a) power to issue share transfer orders pursuant to which there may be transferred to a commercial purchaser or Bank of England entity, all or some of the securities issued by a bank; the share transfer order can extend to a wide range of ‘securities’ including shares and bonds issued by a UK Bank (including Barclays Bank PLC) or its holding company (Barclays PLC) and warrants for such; and (b) the power to transfer all or some of the property, rights and liabilities of the UK bank to a purchaser or Bank of England entity. In certain circumstances encumbrances and trusts can be over-reached. Power also exists to over-ride any default provisions in transactions otherwise affected by these powers. Compensation may be payable in the context of both share transfer orders and property appropriation. In the case of share transfer orders any compensation
will be paid to the person who held the security immediately before the transfer, who may not be the encumbrancer.
The Banking Act also vests power in the Bank of England to over-ride, vary or impose contractual obligations between a UK bank or its holding company and its former group undertakings (as defined in the Banking Act), for reasonable consideration, in order to enable any transferee or successor bank of the UK bank to operate effectively. There is also power for the Treasury to amend the law (save for a provision made by or under the Banking Act) by order for the purpose of enabling it to use the special resolution regime powers effectively, potentially with retrospective effect.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (the ‘FSCS’) was created under the Financial Services and Markets Act 2000 and is the risk that the GroupUK’s statutory fund of last resort for customers of authorised financial services firms. The FSCS can pay compensation to customers if a firm is unable, or likely to meet its obligations when they fall due and to replace funds when they are withdrawn, with consequent failure to repay depositors and fulfil commitments to lend. The risk that it will be unable, to do sopay claims against it. The FSCS is inherent in all bankingfunded by levies on authorised UK firms such as Barclays Bank PLC. In the event that the FSCS raises funds from the authorised firms, raises those funds more frequently or significantly increases the levies to be paid by such firms, the associated costs to the Group may have a material impact on the Group’s results of operations and can be impacted by a rangefinancial condition.
Further details of institution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters.
Business risk
Business risk is the risk of adverse outcomes resulting from a weak competitive position or from poor choice of strategy, markets, products, activities or structures. Major potential sources of business risk include revenue volatility due to factors such as macroeconomic conditions, inflexible cost structures, uncompetitive products or pricing and structural inefficiencies.
Insurance risk
Insurance risk is the riskspecific matters that impact the Group will haveare included in the ‘Competition and regulatory matters’ note to make higher than anticipated payments to settle claims arising from its long-term and short-term insurance businesses.the financial statements on page 232.
Legal risk
The Group is subject to a comprehensive range of legal obligations in all countries in which it operates. As a result, the Group is exposed to many forms of legal risk, which may arise in a number of ways. Primarily:
– | the Group’s business may not be conducted in accordance with applicable laws around the world; |
– | contractual obligations may either not be enforceable as intended or may be enforced against the Group in an adverse way; |
– | the intellectual property of the Group (such as its trade names) may not be adequately protected; and |
– | the Group may be liable for damages to third parties harmed by the conduct of its business. |
The Group faces risk where legal proceedings are brought against it. Regardless of whether such claims have merit, the outcome of legal proceedings is inherently uncertain and could result in financial loss.
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Risk factors
Defending legal proceedings can be expensive and time-consuming and there is no guarantee that all costs incurred will be recovered even if the Group is successful. Although the Group has processes and controls to manage legal risks, failure to manage these risks could impact the Group adversely, both financially and by reputation.
Further details of the Group’s legal proceedings are included in the ‘Legal proceedings’ note to the financial statements on page 231.
Insurance risk
Insurance risk is the risk that the Group will have to make higher than anticipated payments to settle claims arising from its long-term and short-term insurance businesses.
Further details of the Group’s insurance assets and liabilities, including a sensitivity analysis of insurance contract liabilities, are included in the ‘Insurance assets and liabilities’ note to the financial statements on page 213.
Business risk
The Group devotes substantial management and planning resources to the development of strategic plans for organic growth and identification of possible acquisitions, supported by substantial expenditure to generate growth in customer business. If these strategic plans are not delivered as anticipated, the Group’s earnings could grow more slowly or decline. In addition, potential sources of business risk include revenue volatility due to factors such as macroeconomic conditions, inflexible cost structures, uncompetitive products or pricing and structural inefficiencies.
Competition
The global financial services markets in which the Group operates are highly competitive. Innovative competition for corporate, institutional and retail clients and customers comes both from incumbent players and a steady stream of new market entrants, as well as recent consolidation among banking institutions in the United Kingdom, the United States and throughout Europe. The landscape is expected to remain highly competitive in all areas, which could adversely affect the Group’s profitability if the Group fails to retain and attract clients and customers.
Tax risk
The Group is subject to the tax laws in all countries in which it operates.operates, including tax laws adopted at an EU level. A number of double taxation agreements entered between two countries also impact on the taxation of the Group. The Group is also subject to European Union tax law. Tax risk is the risk associated with changes in tax law or in the interpretation of tax law. It also includes the risk of changes in tax rates and the risk of failure to comply with procedures required by tax authorities. Failure to manage tax risks could lead to an additional tax charge. It could also lead to a financial penalty for failure to comply with required tax procedures or other aspects of tax law. If, as a result of a particular tax risk materialising, the tax costs associated with particular transactions are greater than anticipated, it could affect the profitability of those transactions.
The Group takes a responsible and transparent approach to the management and control of its tax affairs and related tax risk:
– | tax risks are assessed as part of the Group’s formal governance processes and are reviewed by the Executive Committee, Group Finance Director and the Board Risk Committee; |
– | the tax charge is also reviewed by the Board Audit Committee; |
– | the tax risks of proposed transactions or new areas of business are fully considered before proceeding; |
– | the Group takes appropriate advice from reputable professional firms; |
– | the Group employs high-quality tax professionals and provides ongoing technical training; |
– | the tax professionals understand and work closely with the different areas of the business; |
– | the Group uses effective, well-documented and controlled processes to ensure compliance with tax disclosure and filing obligations; and |
– | where disputes arise with tax authorities with regard to the interpretation and application of tax law, the Group is committed to addressing the matter promptly and resolving the matter with the tax authority in an open and constructive manner. |
Effect of governmental policy and regulation
The Group’s businesses and earnings can be affected by the fiscal or other policies and other actions of various governmental and regulatory authorities in the UK, the European Union, the US, South Africa and elsewhere.
Areas where changes could have an impact include:
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Regulatory compliance risk
Regulatory compliance risk arises from a failure or inability to comply fully with the laws, regulations or codes applicable specifically to the financial services industry. Non compliance could lead to fines, public reprimands, damage to reputation, enforced suspension of operations or, in extreme cases, withdrawal of authorisations to operate.
Impact of strategic decisions taken by the Group
The Group devotes substantial management and planning resources to the development of strategic plans for organic growth and identification of possible acquisitions, supported by substantial expenditure to generate growth in customer business. If these strategic plans do not deliver as anticipated, the Group’s earnings could grow more slowly or decline.
Competition
The global financial services markets in which the Group operates are highly competitive. Innovative competition for corporate, institutional and retail clients and customers comes both from incumbent players and a steady stream of new market entrants. The landscape is expected to remain highly competitive in all areas, which could adversely affect the Group’s profitability if the Group fails to retain and attract clients and customers.
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Risk management
RiskBarclays approach to risk management
This risk section outlines Barclays approach to risk management, explaining our objectives as well asexemplified by the high level policies,application of the Group’s Principal Risks Policy, determination of its Risk Appetite and governance around its Risk Methodologies, which cover its processes, measurement techniques and controls that are used. This also presents ourcontrols. In addition, we set out summary information and disclosure on our portfolios and positions. Consequent to the adoption of IFRS 7, some of our risk disclosure is moved from this section to the financial statements section of this report, as described in our list of tables on page 62.
2007 Developments
Wholesale credit risk
The results of severe disruption in the US sub-prime mortgage market were felt across many wholesale credit markets in the second half of 2007, and were reflected in wider credit spreads, higher volatility, tight liquidity in interbank and commercial paper markets, more constrained debt issuance and lower investor risk appetite. Although impairment and other credit provisions in Barclays Capital rose as a consequence of these difficult sub-prime market conditions, our risks in these portfolios were identified in the first half and management actions were taken to reduce limits and positions. Further reductions and increased hedging through the rest of the year continued to bring net positions down and limited the financial effect of the significant decline in market conditions. Our ABS CDO Super Senior positions were reduced during the year and our remaining exposure reflected netting against writedowns, hedges, and subordination. At the end of the year, market conditions remained difficult with reduced liquidity in cash and securitised products, and reflected stress at some counterparties such as the monoline insurers.
The international markets for Leveraged Finance were also disrupted in 2007. The level of underwritten positions was steady during the second half, with some small turnover in the portfolio. The vast majority of positions held were senior tranches. Liquidity conditions at year end remained constrained.
The Group’s wholesale credit risk profile in 2007 benefited from the diversification available from the UK and international portfolios, which grew by 14% and 41% respectively. The corporate credit risk profile remained steady, with corporate credit ratings and watch list balances broadly stable.
At Barclays Commercial Bank there was good growth in loans and advances. The risk profile of the Larger Business portfolio remained stable as early warning list balances, default rates and loan loss rates were steady. There was no increase to exposure levels to leveraged finance during 2007 and limits were reduced.
Wholesale credit portfolio performance was steady in South Africa, particularly for Absa’s most significant wholesale portfolios – agriculture, property and sovereign lending – which were relatively unaffected during 2007 by interest rate rises compared with consumer-facing sectors and retail portfolios. Relatively good performance in these sectors in 2007 was reflected in a reduction in Absa’s wholesale impairment charge. After many years of positive economic conditions in South Africa, the wholsesale portfolios will be under more stress in current market conditions.
Loan loss rates across the Western Europe and Emerging Markets wholesale businesses were stable in 2007. The Group continued to invest in risk management infrastructure to support these businesses’ growth initiatives in Dubai, India, Egypt and Italy.
Going into 2008, the credit environment reflects concern about weakening economic conditions in our major markets. Credit spreads and other indicators signal that the credit cycle has changed after a long period of stability. We expect some deterioration in credit metrics as default probabilities move toward their medium-term averages. This environment has led to a more cautious approach to credit assessment, pricing and ongoing control in the financial industry, which we believe will continue through the year.
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Retail credit risk
A continued improvement in credit quality in the UK unsecured portfolios was a principal feature of the Group’s retail credit risk profile during 2007. Barclaycard continued the underwriting revisions begun in 2006 in UK credit cards, and successfully reduced impairment in the main Barclays branded cards portfolio. Flows into delinquency and arrears balances fell, as did general charge-offs, which were helped by a fall in charge-offs due to bankruptcy. New customer quality increased again in 2007, reflected in a sustained improvement in average approval scores and a fall in early cycle delinquency rates.
The UK unsecured loans portfolio, which is now managed within UK Retail Banking, saw reduced early and late cycle delinquency resulting from revised underwriting criteria. Improved collections processes helped to reduce impairment in Local Business, while in UK Home Finance, delinquency and possession rates remained at the lows recorded since 2004, and impairment charges were negligible. Barclays delinquency and possession rates remain below industry averages, reflecting the high credit quality of the portfolio.
Lending criteria in Absa’s retail portfolios were tightened in response to a more difficult credit environment, signalled by a rise in arrears rates. The change in conditions was primarily driven by a prolonged series of interest rate rises and the implementation of new consumer lending legislation in June 2007.
We increased our investment in credit risk infrastructure in India and Italy to support the launch or expansion of retail banking operations in those countries during 2007. Barclays has also established a credit risk modelling centre in Madrid to support our strategic growth objectives in the Western Europe business.
The US card business continued to grow, and the underwriting and account management criteria were adjusted as the US retail environment weakened during the year.
Looking ahead this year, we expect the retail credit environment to be more challenging in Absa and to some degree in the US portfolio. The UK portfolios’ performance, which has improved in the past two years, will be subject to the evolving economic climate anticipated in 2008.
Risk tendency
Risk tendency at 2007 year-end reflected an increase in portfolio size as well as some weakening in credit grades, evidenced by wider spreads in wholesale credit and potentially more difficult conditions in some of the international retail portfolios in 2008.
Country risk
The portfolio is reasonably well diversified, assisted by increases in business levels in a range of European, African and Asian countries.
Market risk
Dislocation in the credit markets had an impact on all major interest rate, equity and foreign exchange markets, which also experienced higher volatility, particularly in the second half. Barclays Capital’s market risk exposure, as measured by average total Daily Value at Risk (DVaR), increased 13% to an average of £42m in 2007. Over the same period, average daily market risk revenue increased 19% to £26m, satisfying our objective that trading revenues should grow at or above the rate of increase in risk levels. The average DVaR on interest rate and credit spread exposures was broadly unchanged, with increasing volatility in credit spreads offset by reduced positions held in the credit markets.
This reduction in exposure resulted in a lower level of credit stress loss, which is another important market risk control for Barclays Capital. Average commodity DVaR and equity DVaR increased as those businesses grew. Diversification across risk types remaining significant, reflecting the broad product mix. Higher market volatilities in the fourth quarter led to an increase in DVaR at year end, and will contribute to higher average DVaRs in 2008.
Liquidity risk
Bank funding markets and general liquidity in credit markets came under pressure in 2007. In the second half, some money market participants faced difficulties in obtaining funding beyond one week, and term LIBOR premiums rose despite the helpful provision of liquidity by central banks. The cost of longer-term bank funding and capital also increased, and funding channels such as securitisation and covered bond issuance became significantly constrained. Despite these developments, the Group’s liquidity position remained strong due to its deep retail funding base, its diversity of institutional funding sources across tenors, counterparties and geographies and its limited reliance on securitisation as a funding source.
Operational risk
In 2007, Barclays embedded the advanced measurement approach (AMA) to operational risk across the Group, having received AMA approval from the FSA and the SARB. Barclays now allocates operational risk economic capital by business, providing operational insight and greater tangible incentives to the Group’s businesses to further improve the management of their operational risk profiles. As a percentage of revenues, operational risk events fell in 2007.
Financial crime
The Group introduced two-factor authentication for online transactions through its PINsentry device and continued to offer all UK personal customers anti-phishing software to combat internet fraud. Combined with improvements in transaction profiling, these changes enabled us to reduce net reported fraud losses. The threat from financial crime constantly evolves, however, and Barclays will continue to build the capacity to respond rapidly to emerging issues as well as to invest in strategic improvements in transaction channel security.
Basel II and capital management
New capital adequacy rules came into force in the UK from 1st January 2008, following the implementation of the Basel II banking accord. Barclays regulatory capital requirement will now more closely reflect the risk profile as measured by its own risk measurement systems (an approach termed the Advanced Internal Ratings Based approach or AIRB).
Permission from the FSA to apply the AIRB approach to capital calculations was the culmination of a lengthy and detailed programme of work across all business areas and covering all risk types. As part of the application process, Barclays assessed over 200 models to ensure that they were consistent with regulators’ standards and that they met the ‘use’ test, which assesses a model’s fitness as an input to capital calculations by the extent to which management make use of its output in business decisions.
Our focus over the coming years will be to further enhance risk models, processes and systems infrastructure, in line with our ambition to remain at the leading edge of risk management. With the most significant portfolios already consistent with the AIRB approach, the focus of our Basel II work will now be to progress the roll-out of the advanced approach for the remaining minority of our portfolios. In line with the schedule agreed with regulators, we will complete this process by 2011.
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Risk management
Barclays approach to risk management
Barclays approach to risk management
Barclays approach to risk management involves a number of fundamental elements that drive our processes across the Group:
The Group’sRisk appetite sets out the level of risk that the Bank is willing to take in pursuit of its business objectives. This is expressed as the Group’s appetite for earnings volatility across all businesses from credit, market, and operational risk. It is calibrated against our broad financial targets, including income and impairment targets, dividend coverage and capital levels. It is prepared each year as part of the Group’s Medium Term Planning process, and combines a top-down view of the Bank’s risk capacity with a bottom-up view of the risk profile requested and recommended by each business. This entails making business plan adjustments as necessary to ensure that our Medium Term Plan creates a risk profile that meets our Risk Appetite (page 71).
ThePrincipal risk policyRisks Policy covers the Group’s main risk types, assigning responsibility for the management of specific risks, and setting out the requirements for control frameworks for all of the risk types. The individual control frameworks are reinforced by a robust system of review and challenge, and a governance process of aggregation and broad review by businesses and risk across the Group (page 68)65).
The Group’sRisk Appetite sets out the level of risk that the Board is willing to take in pursuit of its business objectives. This is expressed as the Group’s appetite for earnings volatility across all businesses from credit, market, and operational risk. It is calibrated against our broad financial targets, including income and impairment targets, dividend coverage and capital levels. It is prepared each year as part of the Group’s Medium-Term Planning process, and combines a top-down view of the Group’s risk capacity with a bottom-up view of the risk profile requested and recommended by each business. This entails making business plan adjustments as necessary to ensure that our Medium-Term Plan creates a risk profile that meets our Risk Appetite (page 65).
BarclaysRisk methodologiesMethodologies include systems that enable the Group to measure, aggregate and report risk for internal and regulatory purposes. As an example, our credit grading models produce Internal Ratings through internally derived estimates of default probabilities. These measurements are used by management in an extensive range of decisions, from credit grading, pricing and approval to portfolio management, economic capital allocation and capital adequacy processes (page 70)66).
Risk management is a fundamental part of Barclays business activity and an essential component of its planning process. To keep risk management at the centre of the executive agenda, it is embedded in the everyday management of the business.
Barclays ensures that it has the functional capacity to manage the risk in new and existing businesses. At a strategic level, our risk management objectives are:
– | To identify the Group’s material risks and ensure that business profile and plans are consistent with risk appetite. |
– | To optimise risk/return decisions by taking them as closely as possible to the business, while establishing strong and independent review and challenge structures. |
– | To ensure that business growth plans are properly supported by effective risk infrastructure. |
– | To manage risk profile to ensure that specific financial deliverables remain possible under a range of adverse business conditions. |
– | To help executives improve the control and |
In pursuit of these objectives, Group Risk breaks down risk management into five discrete processes: direct, assess, control, report, and manage/challenge (see panel below).
Process |
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Direct | – Understand the principal risks to achieving Group strategy. | |
– Establish Risk Appetite. | ||
– Establish and communicate the risk management framework including responsibilities, authorities and key controls. | ||
Assess | – Establish the process for identifying and analysing business-level risks. | |
– Agree and implement measurement and reporting standards and methodologies. | ||
Control | – Establish key control processes and practices, including limit structures, impairment allowance criteria and reporting requirements. | |
– Monitor the operation of the controls and adherence to risk direction and limits. | ||
– Provide early warning of control or appetite breaches. | ||
– Ensure that risk management practices and conditions are appropriate for the business environment. | ||
Report | – Interpret and report on risk exposures, concentrations and risk-taking outcomes. | |
– Interpret and report on sensitivities and Key Risk Indicators. | ||
– Communicate with external parties. | ||
Manage and Challenge
| – Review and challenge all aspects of the Group’s risk profile. | |
– Assess new risk-return opportunities. | ||
– Advise on optimising the Group’s risk profile. | ||
– Review and challenge risk management practices. | ||
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Risk management
Barclays approach to risk management
Responsibility for risk management resides at all levels within the Group, from the Executive down through the organisation to each business manager and risk specialist. Barclays distributes these responsibilities so that risk/return decisions are taken at the most appropriate level; as close as possible to the business, and subject to robust and effective review and challenge.
Every business manager is accountable for managing risk in his or her business area; they must understand and control the key risks inherent in the business undertaken. Each business area also employs risk specialists to provide an independent control function and to support the development of a strong risk management environment. This functional approach to risk management is built on formal control processes that rely on individual responsibility and independent oversight, as well as challenge through peer reviews.
The Board approves Risk Appetite and the Board Risk Committee monitors the Group’s risk profile against this agreed appetite.
Business Heads are responsible for the identification and management of risk in their businesses.
The Group Risk Director, under delegated authority from the Group Chief Executive and Group Finance Director, has responsibility for ensuring effective risk management and control.
Risk-Type Heads exist at Group-level for the main risk types, and report to the Risk Director. Along with their teams, they are responsible for establishing a risk control framework and risk oversight.
Each business has an embedded risk management team reporting to a Business Risk Director or Chief Credit Officer who reports to the Risk Director. The risk management teams assist Group Risk in the formulation of Group Risk policy and its implementation across the businesses.
Business risk teams, each under the management of a Business Risk Director, are responsible for assisting Business Heads in the identification and management of their business risk profiles and for implementing appropriate controls. The functional coverage of risk responsibilities is illustrated in the diagram below.
Internal Audit is responsible for the independent review of risk management and the control environment.
To support expanded risk taking, Barclays has continued to strengthen the independent and specialised risk teams in each of its businesses, supported by matching teams at Group level, acting in both a consultancy and oversight capacity. As a prerequisite to business growth plans, it has made the recruitment, development and retention of risk professionals a priority.
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Risk management
Barclays approach to risk management
The Committees shown below receive regular and comprehensive reports. The Board Risk Committee receives a quarterly report covering allreports on the Group’s risk profile and forward risk trends (for further information on the membership and activities of our principal risks.the Board Risk Committee, see page 152). The Board Audit Committee receives quarterly reports on control issues of significance and half-yearly impairment allowances and regulatory reports. See page 163 for additional details on the membership and activities of the Board Audit Committee. Both Board and Audit Committees also receive reports dealing in more depth with specific issues relevant at the time. The proceedings of both Committees are reported to the full Board, which also receives a concise quarterly risk report. Internal Audit supports both
Committees by attendance and/or the provision of quarterly reports resulting from its work on governance, risk and control issues of significance. The Board Audit Committee reviews and approves Internal Audit’s plans and resources, and evaluates the effectiveness of Internal Audit.
An assessment by external advisers is also carried out periodically.
In addition to the Committees shown in the chart, there is a Brand and Reputation Committee reviewing emerging issues with potentially significant reputational impact.
Governance structure at Group level
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The Group Risk Director has overall day to day accountability for risk management. Reporting to the Group Risk Director are Group Risk Heads for Retail Credit Risk, Wholesale Credit Risk, Market Risk, Operational Risk, Financial Crime Risk and Capital Demand. Along with their teams, they are responsible for establishing a risk control framework and risk oversight at Group level. This core team liaises with each business as part of the monitoring and management processes.
Each business has an embedded risk management team reporting to a Business Risk Director who reports to the Group Risk Director. The risk management teams assist Group Risk in the formulation of Group Risk policy and its implementation across the businesses.
Business risk teams are responsible for assisting Business Heads in the identification and management of their business risk profiles and for implementing appropriate controls. The functional coverage of risk responsibilities is illustrated in the diagram below.
Internal Audit is responsible for the independent review of risk management and the control environment.
To support risk taking, Barclays has continued to strengthen the independent and specialised risk teams in each of its businesses, supported by matching teams at Group level, acting in both a consultancy and oversight capacity. As a prerequisite to business growth plans, it has made the recruitment, development and retention of risk professionals a priority.
64 | Barclays Annual Report 2008 |
Risk management
Barclays approach to risk management
Material risks and control frameworkPrincipal Risks
As well as overall responsibility for the Group’s risk exposure versus appetite, theThe Board is also responsible for the Group Internal Control and Assurance Framework (‘GICAF’). As part of the GICAF, it approves the Principal Risks Policy, which sets out responsibilities for the management of the Group’s most significant risk exposures. The Board oversees the operating effectiveness of the Principal Risks Policy through the regular review of reports on the Group’s material risk exposures and controls.
The Group’s risk categorisation comprises 17 risk categories (‘Level 1’), thirteen13 of which are known as Principal Risks. Each Principal Risk is owned by a senior individual at the Group level, who liaises with Principal Risk owners within Business Units and Central Support Units.Group Centre Functions. The 17 risk categories are shown in the panel below.
Each Group Principal Risk Owner (‘GPRO’) is responsible for setting minimum control requirements for their risk and for overseeing the risk and control performance across the Group. Group control requirements (e.g. Group Policies/Processes/Committee oversight) for each of these risks are defined, in consultation with Business Units, and communicated and maintained by the GPRO.
Implementation of the control requirements for each Principal Risk provides each Business Unit or Central Support UnitGroup Centre Function with the foundation of its system of internal control for that particular risk. This will usually be built upon in more detail, according to the circumstances of each Business Unit, to provide a complete and appropriate system of internal control.
The specific controls for individual Principal Risks are supplemented by generic risk management requirements. These requirements are articulated as the Group’s Operational Risk Management Framework (see page 93)117) and include policies on:
– | Internal Risk Event Identification and Reporting |
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– | Key Indicators |
– | Key Risk Scenarios |
Business Unit and Central Support UnitGroup Centre Function Heads are responsible for maintaining ongoing assurance that the controls they have put in place to manage the risks to their business objectives are operating effectively. They are required to undertake a formal six-monthly review of assurance information. These reviews support the regulatory requirement for the Group to make a statement about its system of internal control (the ‘Turnbull’ statement), in the annual reportAnnual Report and accounts.Accounts.
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In order to maximise shareholder value through optimising both the level and mix of capital resources, Barclays operates a centralised capital management model, considering both regulatory and economic capital. Decisions on the allocation of capital resources, conducted as part of the strategic planning review, are based on a number of factors including returns on economic and regulatory capital.
The Group’s capital management objectives are to:
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Treasury Committee manages compliance with the Group’s capital management objectives. The Committee reviews actual and forecast capital demand and resources on a monthly basis.
The processes in place for delivering the Group’s capital management objectives include:
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Internal targets
To support its capital management objectives, the Group sets internal targets for its key capital ratios. The internal targets exceed minimum capital requirements to take into account:
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Risk management
Barclays approach to risk management
Local entity regulatory capital adequacy
The Group manages its capital resources to ensure that those Group entities that are subject to local capital adequacy regulation in individual jurisdictions meet their minimum capital requirements. Local management manages compliance with subsidiary entity minimum regulatory capital requirements with reporting to local Asset and Liability Committees and to Treasury Committee, as required.
Injections of capital resources into Group subsidiary entities are controlled under authorities delegated from the Group Executive Committee. The Group’s policy is for profits generated in subsidiary entities to be repatriated to Barclays Bank PLC in the form of dividends.
Annual risk appetite settingAppetite
Risk Appetite is the level of risk the Board of Barclays chooses to take in pursuit of its strategic objectives, recognising a range of possible outcomes as business plans are implemented. Barclays framework, approved by the Board Risk Committee, combines a top-down view of its capacity to take risk with a bottom-up view of the business risk profile requested and recommended by each business area.
To determine this acceptable level of risk, management estimates the potential earnings volatility from different businesses under various scenarios.
This annual setting of Risk Appetite considers the bank’sBank’s ability to support business growth, desired dividend payout levels and capital ratio targets. If the projections entail too high a level of risk, management will challenge each area to find new ways to rebalance the business mix to incur less risk on a diversified basis. Performance against Risk Appetite is measured and reported to the Executive and Board regularly throughout the year.
Barclays believes that this framework enables it to:
– | Improve risk and return characteristics across the business |
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– | Improve management confidence and debate regarding our risk profile |
– | Improve executive management control and co-ordination of risk-taking across businesses |
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The Risk Appetite framework considers credit, market and operational risk and is applied using two perspectives: ‘financial volatility’ and ‘mandate and scale’.
Financial Volatility is the level of potential deviation from expected financial performance that Barclays is prepared to sustain at relevant points on the risk profile. It is established with reference to the strategic objectives and to the business plans of the Group, including the achievement of annual financial targets, payment of dividends, funding of capital growth and maintenance of acceptable capital ratios and our credit rating.
The portfolio is analysed in this way at four representative levels:
– | Expected performance (including the average credit losses based on measurements over many years) |
– | A level of loss that corresponds to moderate increases in market, credit or operational risk from expected levels |
– | A more severe level of loss which is much less likely |
– | An extreme but highly improbable level of loss which is used to determine the Group’s economic |
These potentially larger but increasingly less likely levels of loss are illustrated in the Risk Appetite concepts chart below.
TheMandate and Scale framework is a formal review and control of our business activities to ensure that they are within our mandate (i.e. aligned to the expectations of external stakeholders) and are of an appropriate scale (relative to the risk and reward of the underlying activities). Appropriate assurance is achieved by using limits and triggers to avoid concentrations and operational risks which could lead to unexpected losses of a scale that would result in a disproportionate fall in Barclays market capitalisation.
Taken as a whole, the Risk Appetite framework provides a basis for the allocation of risk capacity to each business. Since the level of loss at any given probability is dependent on the portfolio of exposures in each business, the statistical measurement for each key risk category gives the Group clearer sight and better control of risk-taking throughout the enterprise.
Review of the Group’s strategic medium-term plan
Capital adequacy forms a critical part of the Group’s annual strategic medium-term planning process. During the planning process, the Group sets limits for business capital demand to ensure the capital management objectives including meeting internal targets will continue to be met over the medium-term period. Treasury Committee reviews the limits on a monthly basis.
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AchievingRisk Methodologies
Fundamental to the planned performance in each business is dependent upon the abilitydelivery of the businessGroup’s risk management objectives are a series of risk methodologies that allow it to direct, assess, control,measure, model, price, stress, aggregate, report and manage and challengemitigate the risks in the business accurately. Group Risk supports the planning process by providing robust review and challengethat arise from its activities. Many of the business plansmost important processes relate to ensure that:
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This reviewthe internal ratings used in granting credit and challenge is achievedare discussed separately on page 82. The specific methodologies used to manage market risk, liquidity risk, capital risk and operational risk are also discussed in their corresponding sections. At a more general level, the Group’s approach to risk management can be illustrated through Risk Executive Dialogues involving among others, the Group Risk Directorits use of stress testing and the business risk directors.
Economic capital management
Economic capital is an internal measure of the minimum equity and preference capital required for the Group to maintain its credit rating based upon its risk profile.
Barclays assesses economic capital requirements by measuring the Group risk profile using both internally and externally developed models. The Group assigns economic capital primarily within the following risks: Credit Risk, Market Risk, Business Risk, Operational Risk, Insurance Risk, Fixed Assets and Private Equity. Group Risk owns the methodology and policy for economic capital while the businesses are primarily responsible for the calculation.
The Group regularly enhances its economic capital methodology and benchmarks outputs to external reference points. The framework reflects default probabilities during average credit conditions, rather than those prevailing at the balance sheet date, thus removing cyclicality from the economic capital calculation. Economic capital for wholesale credit risk includes counterparty credit risk arising as a result of credit risk on traded market exposures. The framework also adjusts economic capital to reflect time horizon, correlation of risks and risk concentrations.
Economic capital is allocated on a consistent basis across all of Barclays businesses and risk activities. A single cost of equity is applied to calculate the cost of risk. Economic capital allocations reflect varying levels of risk.
The total average economic capital required by the Group, as determined by risk assessment models and after considering the Group’s estimated portfolio effects, is compared with the average supply of capital resources to evaluate economic capital utilisation.
The Group’s economic capital calculations form the basis of its Internal Capital Adequacy Assessment Process (‘ICAAP’) submission to the FSA under Pillar 2 of Basel II.controls around model governance.
Stress testing
As part of the annual stress testing process, Barclays estimates the impact of a severe economic downturn on the projected demand and supply of capital. This process enables the Group to assess whether it
could meet its minimum regulatory capital requirements throughout a severe recession.
The Risk Appetite numbers are validated by estimating the Group sensitivity to adverse changes in the business environment and to include operational events that impact the Group as a whole using stress testing and scenario analysis. For instance, changes in certain macroeconomic variables represent environmental stresses which may reveal systemic credit and market risk sensitivities in our retail and wholesale portfolios.
The recession scenarios considered incorporate changes in macroeconomic variables, including:
– | Weaker GDP, employment or property prices |
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Lower equity prices |
– | Interest rate curve shifts |
– | Commodity price movements |
Such Group-wide stress tests allow senior management to gain a better understanding of how portfolios are likely to react to changing economic and geopolitical conditions and how the Group can best prepare for and react to them. The stress test simulates the balance sheet and profit and loss effects of stresses across the Group, investigating the impact on profits and the ability to maintain appropriate capital ratios. Insights gained are fully integrated into the senior management process and the Risk Appetite framework. This process of analysis and senior management oversight also provides the basis for fulfilling the stress testing requirements of Basel II.
Group-wide stress testing is only one of a number of stress test analyses that are performed as part of the wider risk management process. Specific stress test analysis is used across all risk types to gain a better understanding of the risk profile and the potential effects of changes in external factors. These stress tests are performed at a range of different levels, from analysis covering specific stresses on individual sub-portfolios (e.g. high value mortgages in the South East of England), to portfolio level stresses (e.g. the overall commodities portfolio).
Managing capital ratio sensitivity to foreign exchange rate movements
The Group’s regulatory capital ratios are sensitive to foreign exchange movements in reserves, goodwill, minority interests and other non Sterling debt capital as well as non Sterling risk weighted assets. For material currencies, the Group seeks to hold capital in currencies to match the risk weighted assets transacted in those currencies, in the same proportion as the Group capital ratio targets, also taking into account the impact of hedging net investments.
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Barclays has a large number of models in place across the Group, covering all risk types. To minimise the risk of loss through model failure, a Group Policy for the Control of Model Risk Policy (GMRP) has been developed. This has been extensively reviewed and enhanced during the course of 2008.
The PolicyGMRP helps reduce the potential for model failure by setting minimum standards around the end-to-end model development and implementation process. The Policy also sets the Group governance processes for all
models, which allows model risk to be monitored, across the Group, and seeks to identify and escalate any potential problems at an early stage.
To help ensure that sufficient management time is spent on the more material models, each model is provided with a materiality rating. Group Model Risk PolicyGMRP defines the materiality ranges for all model types. The materiality ranges are based on an assessment of the impact to the Group in the event of a model error. The materiality affects the approval and reporting level for each model, with the most material models being approved by the Executive Models Committee, a technical sub-committee of Group Executive Committee (ExCo).
TheCommittee. Although final level of model sign-off will vary, depending on model materiality, the standards of model build, implementation, monitoring and maintenance do not change with the materiality level.
Documentation must be sufficiently detailed, to allow an expert to recreate theunderstand all appropriate aspects of model from the original data sources.development. It must include a description of the data used for model development, the methodology used (and the rationale for choosing such a methodology), a description of any assumptions used in the model, andmade, as well as details of where the model works well and areas that are known model weaknesses.
All models are subject to a validation and independent review process before the model can be signed-off for implementation. The model validation exercise must demonstrate that the model is fit for purpose and provides accurate estimates. The independent review process will also ensure that all aspects of the model development process have been performed in a suitable manner.
The initial sign-off process ensures that the model is technically fit for purpose as well as ensuring that the model satisfies the business requirements and all the relevant regulatory requirements. The rulesAs detailed above, the process for model sign-off areis based on materiality, with all of a business unit’s models at least initially being approved in business-led committees, and Group involvement increasing as the models become more material. The most material models receive their ultimate sign-off for implementation from Group ExCo.
AllOnce implemented, all models within the Group are subject to an annual review,validation, to ensure that the modelsthey are performing as expected, and that assumptions used in model development are still appropriate. In additionalline with initial sign-off requirements, annual validations are also formally reviewed at the appropriate technical committee.
In addition to annual review, manyvalidation, models are subject to more frequentquarterly performance monitoring. Model performance monitoring ensures that deficiencies in models are identified early, and that remedial action can be taken before the deficiency becomes serious and affectsenough to affect the decision-making process. As part of this process, model owners set performance triggers and define appropriate actions for their models in the event of breaches.
Externally developed models are subject to the same governance standards as internal models, and must be initially approved for use following athe validation and independent review process. External models are also subject to the same standards for ongoing monitoring and annual validation requirements.
Within Barclays Capital, where models are used to value positions within the trading book the positions are subject to regular independent price testing which covers all trading positions. Prices are compared to direct external market data where possible. When this is not possible, more analytic techniques are used, such as industry consensus pricing services. These services enable Barclays to anonymously compare structured products and model-input parameters with those of other banks engaged in the trading of the same financial products. The conclusions and any exceptions to this exercise are communicated to senior levels of business and infrastructure management.
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Risk management
Credit risk management
Credit risk is the risk of suffering financial loss should any of the Group’s customers, clients or market counterparties fail to fulfil their contractual obligations to the Group. Credit risk may also arise where the downgrading of an entity’s credit rating causes the fair value of the Group’s investment in that entity’s financial instruments to fall. The credit risk that the Group faces arises mainly from commercial and consumer loans and advances, including credit card lending.
The granting of credit is one of the Group’s major sources of income and, as its most significant risk, the Group dedicates considerable resources to controlling it. The importance of credit risk is illustrated by noting that almost two-thirds of risk-based economic capital is allocated to credit risk. Credit exposures arise principally inThe credit risk that the Group faces arises mainly from wholesale and retail loans and advances.
Barclays is also exposed to other credit risks arising from its trading activities, including debt securities, derivatives, settlement balances with market counterparties and reverse repurchase loans.
In managing credit risk, the Group applies the five-step risk management process and internal control framework described previously (page 67).
framework. Specific credit risk management objectives are:
– | To gain a clear and accurate understanding and assessment of credit risk across the business, from the level of individual facilities up to the total portfolio. |
– | To control and plan the taking of credit risk, ensuring it is coherently priced across the business and avoiding undesirable concentrations. |
– | To support strategic growth and decision-making based on sound credit risk management principles and a |
– | To ensure a robust framework for the creation, use and ongoing monitoring of the Group’s credit risk measurement models. |
– | To ensure that our balance sheet |
In the review of Barclays credit risk management that follows, we first explain how the Group meets its credit risk management objectives through its organisation, structure and governance, its measurement, reporting and system of internal ratings and its mechanisms for credit risk mitigation.
We then provide a summary of the Group’s total assets, including the asset types which give rise to credit risk and counterparty credit risk, namely: loans and advances, debt securities and derivatives.
On pages 76 to 89, we set out a detailed analysis of the Group’s loans and advances across a number of asset classes and businesses referencing significant portfolios and including summary measures of asset quality.
We next provide disclosures and analyses of the credit risk profiles of these asset categories, beginning with Barclays Capital’s credit market exposures by asset class, covering current exposures, losses during 2008, sales and paydowns, foreign exchange movements and, where appropriate, details of collateral held, geographic spread, vintage and credit quality. These are given on pages 93 to 105.
Finally, additional analysis of debt securities and derivatives can be found on pages 90 and 91 to 92.
Barclays Annual Report 2008 | 67 |
Risk management
Credit risk management
Barclays has structured the responsibilities of credit risk management so that decisions are taken as close as possible to the business, whilst ensuring robust review and challenge of performance, risk infrastructure and strategic plans.
The credit risk management teams in each business are accountable to the Business Risk Directors in those businesses who, in turn, report to the heads of their businesses and also to the Risk Director.
These credit risk management teams assist Group Risk in the formulation of Group Risk policy and its implementation across the businesses.
Examples include:
– | maximum exposure guidelines to limit the exposures to an individual customer or counterparty |
– | country risk policies to specify risk appetite by country and avoid excessive concentration of credit risk in individual countries |
– | policies to limit lending to certain industrial sectors |
– | underwriting criteria for personal loans and maximum loan-to-value ratios for home loans |
Within Group Risk, the Credit Risk function provides Group-wide direction of credit risk-taking. This functional team manages the resolution of all significant credit policy issues and runs the Credit Committee, which approves major credit decisions.
The principal Committees that review credit risk management, formulate overall Group credit policy and resolve all significant credit policy issues are the Group Wholesale Credit Risk Management Committee, the Group Retail Credit Risk Management Committee, the Risk Oversight
Committee and the Board Risk Committee (see page 69 for more details of this Committee).Committee. The Board Audit Committee also reviews the impairment allowance as part of financial reporting.
The Group Credit Risk Impairment Committee (GCRIC), on a semi-annual basis, obtains assurance on behalf of the Group that all businesses are recognising impairment in their portfolios accurately and promptly in their recommendations and in accordance with policy, accounting standards and established governance.
GCRIC exercises the authority of the Group Risk Director, as delegated by the Group Chief Executive, and is chaired by Barclays Credit Risk Director. GCRIC reviews the movements to impairment in the businesses, including those already agreed at Credit Committee, as well as Potential Credit Risk Loans, loan loss rates, asset quality metrics and Risk Tendency.
These committees are supported by a number of Group policies including:
– | Group Retail and Wholesale Impairment and Provisioning Policies |
– | Group Retail and Wholesale Expected Loss Policies |
– | Group Model Policy |
GCRIC makes twice-yearly recommendations to the Board Audit Committee on the adequacy of Group impairment allowances. Impairment allowances are reviewed relative to the risk in the portfolio, business and economic trends, current policies and methodologies, and our position against peer banks.
GCRIC has delegated the detailed review of loan impairment in the businesses to the Retail and Wholesale Credit Risk Management Committees.
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Risk management
Credit risk management
Measurement, reporting and internal ratings
The principal objective of credit risk measurement is to produce the most accurate possible quantitative assessment of the credit risk to which the Group is exposed, from the level of individual facilities up to the total portfolio.
The key building blocks in this quantitative assessment are:
Probability of default (PD) |
Exposure in the event of default (EAD) |
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Barclays first began to use internal estimates of PD (internal ratings) in all its main businesses in the 1990s. Internally derived estimates for PD, EAD and LGD have since been used since then in all our major risk decision makingdecision-making processes, enabling the application of coherent risk measurement across all credit exposures, retail and wholesale.
With the advent of the Basel II accord on banking, Barclays has been given permission to use internal rating models as an input into its regulatory capital calculations. In preparation, Barclays has spent considerable time developing and upgrading a number of such models across the Group, moving towards compliance with the Basel II advanced internal ratings based approach. As part of this process, all Basel credit risk models arehave been assessed against the Basel II minimum requirements prior to model sign-off to ensure that they are fit to be used for regulatory purposes.
Applications of internal ratings
The three components described above – the probability of default, exposure at defaultPD, EAD and loss given defaultLGD – are building blocks used in a variety of applications that measure credit risk across the entire portfolio.
Two examples are Risk Tendency (RT) and Expected Loss (EL) which are statistical estimates These parameters can be calculated incorporating different aspects of the average loss for the loan portfolio for a 12-month period, taking into account the portfolio’s size and risk characteristics under either current credit conditions (RT) or average credit conditions (EL). As such, RT uses a point-in-time PD while EL uses a through-the-cycle PD but the basic calculation is the same for both:
PD x EAD x LGD
Since through-the-cycle PDs provide a measure of risk that is independent of the current credit conditions for a particular customer type, they are more stable than point-in-time ratings. RT and EL provide insightcycle into the credit quality of the portfolio and assist managementestimates:
– | PD estimates can be calculated on a through-the-cycle (TTC) basis, reflecting the predicted default frequency in an average 12 month period across the credit cycle, or on a point-in-time (PIT) basis, reflecting the predicted default frequency in the next 12 months. |
– | LGD and EAD estimates can be calculated as downturn measures, reflecting behaviour observed under stressed economic conditions, or as business-as-usual (BAU) measures, reflecting best modelled behaviour under actual conditions. |
These parameters, in tracking risk changes as the Group’s stocksuitable combination, are used in a wide range of credit exposures evolves in size or risk profile in the course of business.
Asmeasurement and management and as our understanding and experience have developed, we have extended the use and sophistication of internal ratings. The other main business processes that use internal estimates of PD, LGD and EAD, are as follows:ratings into the following:
Credit |
– | Credit Grading: originally introduced in the early 1990s to provide a common measure of risk across the Group using an eight point rating scale; wholesale credit grading now employs a 21 point scale |
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Risk |
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IAS |
Collections and Recoveries: model outputs are frequently used to segment portfolios allowing for suitably prioritised collections and recoveries strategies in retail portfolios. |
– | Economic capital (EC) |
Risk management |
Calculation of internal ratings
To calculateprobability of default (PD), Barclays assesses the credit quality of borrowers and other counterparties and assigns them an internal risk rating.
Multiple rating methodologies may be used to inform the rating decision on individual large credits, such as internal and external models, rating agency ratings, and for wholesale assets market information such as credit spreads. For smaller credits, a single source may suffice such as the result from an internal rating model.
Barclays recognises the need for
Barclays Annual Report 2008 | 69 |
two different expressions of PD depending on the purpose for which it is used. For the purposes of calculating regulatory and economic capital, long-run average through-the-cycle PDs are required. However, for the purposes of pricing, and risk tendency, PDs should represent the best estimate of probability of default, typically in the next 12 months, dependent on the current position in the credit cycle. Hence, point-in-time PDs are also required.
When eachEach PD model is constructed, its output is specified as one ofoutputs a point-in-time (PIT) or, through-the-cycle (TTC) or a hybrid, e.g. a 50:50 blend. Using this distinction betweenblend, default estimate. Conversion techniques appropriate to the portfolio are then applied to calculate both PIT and TTC the PDs are bucketed into both PIT Default Grades (DGs) and TTC bands, adopting techniques that are relevant to the model’s initial output calibration, the industryestimates. Industry and location of the counterparty and an understanding of the current and long-term credit conditions.conditions are considered in deriving the appropriate conversion. Two gradesratings are therefore recorded for each client, the DGPIT and the TTC band. A customer may therefore be rated DG 6 reflecting sectoral performance and TTC band 8 reflecting long-term credit conditions.
This same PIT/TTC distinction is applied to agency ratings. Within Barclays, an agency alphabet rating is also expressed in terms of PIT DG and TTC band. It is therefore no longer possible to produce a static mapping of agency letter ratings to either DGs or TTC bands because they are considered a hybrid of both PIT and TTC. As such, any mappings would change over time with movements in the credit cycle.estimates.
Barclays internal rating system also differentiates between corporatewholesale and retail customers.
For corporatewholesale portfolios, (primarily Barclays Capital, BCB and the commercial areas of IRCB), the rating system is constructed to ensure that each client receives the same rating independent of the part of the business with which they are dealing. To achieve this, a model hierarchy is adopted which requires users to adopt a specific approach to rating each counterparty depending upon the nature of the business and its location.
A range of methods is approved for estimating wholesale counterparty PDs. These include bespoke grading models developed within the Barclays Group (Internal Models), vendor models such as MKMV Credit Edge and RiskCalc, and a conversion of external alphabet ratings from either S&P, Moody’s or Fitch.
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Risk management
Credit risk management Retail models, especially those used for capital purposes, are almost exclusively built internally using Barclays data, although in some cases bureau models may be used in conjunction with these models. In addition, in some low data/low default environments external developments may be utilised for decision-making purposes.
A key element of the Barclays Wholesale framework is the Masterscale.probability of default distribution, which maps PDs into internal grades both for PIT (default grades) and TTC (TTC band) purposes. This has been developed to record differences in the probability of default risk at meaningful levels throughout the risk range (see table below).
range. In contrast to corporatewholesale businesses, retail areas do not bucket exposures into generic grades or bands for account management purposes (although they may be used for reporting purposes). Instead, accounts are managed either at a granular level or based on internal, product specific segmentations of accounts, for instance, deriving from the cut-offs of the associated models. The cut-offs may be in the form of a score, a probability of default, a measure of forecast loss or a more sophisticated risk/reward based measure.bespoke segmentations.
Exposure at default (EAD) represents the expected level of usage of the credit facility when default occurs. At default, the customer may not have drawn the loan fully or may already have repaid some of the principal,
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DG/TTC | Default Probability | |||||
Band | >=Min | Mid | <Max | |||
1 | 0.00% | 0.010% | 0.02% | |||
2 | 0.02% | 0.025% | 0.03% | |||
3 | 0.03% | 0.040% | 0.05% | |||
4 | 0.05% | 0.075% | 0.10% | |||
5 | 0.10% | 0.125% | 0.15% | |||
6 | 0.15% | 0.175% | 0.20% | |||
7 | 0.20% | 0.225% | 0.25% | |||
8 | 0.25% | 0.275% | 0.30% | |||
9 | 0.30% | 0.350% | 0.40% | |||
10 | 0.40% | 0.450% | 0.50% | |||
11 | 0.50% | 0.550% | 0.60% | |||
12 | 0.60% | 0.900% | 1.20% | |||
13 | 1.20% | 1.375% | 1.55% | |||
14 | 1.55% | 1.850% | 2.15% | |||
15 | 2.15% | 2.600% | 3.05% | |||
16 | 3.05% | 3.750% | 4.45% | |||
17 | 4.45% | 5.400% | 6.35% | |||
18 | 6.35% | 7.500% | 8.65% | |||
19 | 8.65% | 10.000% | 11.35% | |||
20 | 11.35% | 15.000% | 18.65% | |||
21 | 18.65% | 30.000% | 100.00% |
so that exposure is typically less than the approved loan limit. When the Group evaluates loans, it takes exposure at default into consideration, using its extensive historical experience. It recognises that customers may make heavier than average usage of their facilities as they approach default. The lower bound of EAD is the actual outstanding balance at calculation of EAD. For derivative instruments, exposure in the event of default is the estimated cost of replacing contracts with a positive value should counterparties fail to perform their obligations.
When a customer defaults, some part of the amount outstanding on their loansthe loan is usually recovered. The part that is not recovered, the actual loss, together with the economic costs associated with the recovery process, combine to a figure calledcomprise theloss given default(LGD), which is expressed as a percentage of EAD.
Using historical information, the Group can estimateestimates how much is likely to be lost, on average, for various types of loans. To illustrate, LGD is lower for residential mortgages than for unsecured loans becausein the event of the property pledged as collateral.default.
The level of LGD depends principally on: the type of collateral (if any); the seniority or subordination of the exposure; the industry in which the customer operates (if a business); the length of time taken for the recovery process and the timing of all associated cash flows; and the jurisdiction applicable and work-out expenses. The outcome is also dependent on economic conditions that may determine, for example, the prices that can be realised for assets, whether a businessesbusiness can readily be refinanced or the availability of a repayment source for personal customers.
The Barclays Masterscale (Wholesale)
DG/TTC Band | Default Probability | |||||
>=Min | Mid | <Max | ||||
1 | 0.00% | 0.010% | 0.02% | |||
2 | 0.02% | 0.025% | 0.03% | |||
3 | 0.03% | 0.040% | 0.05% | |||
4 | 0.05% | 0.075% | 0.10% | |||
5 | 0.10% | 0.125% | 0.15% | |||
6 | 0.15% | 0.175% | 0.20% | |||
7 | 0.20% | 0.225% | 0.25% | |||
8 | 0.25% | 0.275% | 0.30% | |||
9 | 0.30% | 0.350% | 0.40% | |||
10 | 0.40% | 0.450% | 0.50% | |||
11 | 0.50% | 0.550% | 0.60% | |||
12 | 0.60% | 0.900% | 1.20% | |||
13 | 1.20% | 1.375% | 1.55% | |||
14 | 1.55% | 1.850% | 2.15% | |||
15 | 2.15% | 2.600% | 3.05% | |||
16 | 3.05% | 3.750% | 4.45% | |||
17 | 4.45% | 5.400% | 6.35% | |||
18 | 6.35% | 7.500% | 8.65% | |||
19 | 8.65% | 10.000% | 11.35% | |||
20 | 11.35% | 15.000% | 18.65% | |||
21 | 18.65% | 30.000% | 100.00% |
The ratings process
The term ‘internal ratings’ usually refers to internally calculated estimates of PD. These ratings are combined with EAD and LGD in the range of applications described previously. The ‘ratings process’ refers to the use of PD, EAD and LGD across the Group. In Barclays, the rating process is defined by each business. For central government and banks, institutions and corporate customers many of the models used in the rating process are shared across businesses as the models are customer specific. For retail exposures, the ratings models are usually unique to the business and product type e.g. mortgages, credit cards, and consumer loans.
Wholesale Approaches
A bespoke model has been built for PD and LGD forSovereign ratings. For Sovereigns where there is no externally available rating, we use an internally developed PD scorecard. The scorecard has been developed using historic data on Sovereigns from an external data provider covering a wide range of qualitative and quantitative information. Our LGD model is based on resolved recoveries in the public domain, with a significant element of conservatism added to compensate for the small sample size.
70 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Measurement, reporting and internal ratings
To construct ratings forinstitutions, corporates, specialised lending and purchased corporate receivables andequity exposures, we use external models, rating agencies and internally constructed models. External models employed include Moody’s Credit Edge, rating agency ratings and Moody’s RiskCalc. The applicability of each of these approaches to our customers has been validated by us to internal rating standards. The data used in validating these primary indicators are representative of the population of the bank’s actual obligors and exposures and its long-term experience.
Internally built PD models are also widely used. We employ a range of methods in the construction of these models. The basic types of PD modelling approaches used are:
– | Structural |
– | Expert lender |
– | Statistical |
Structural models incorporate in their specification the elements of the industry acceptedindustry-accepted Merton framework to identify the distance to default for a counterparty. This relies upon the modeller having access to specific time series data or data proxies for the portfolio. Data samples used to build and validate these models are typically constructed by adding together data sets from internal default observations with comparable externally obtained data sets from commercial providers such as rating agencies and industry gathering consortia.
| ||
Expert lender models are used for parts of the portfolio where the risk drivers are specific to a particular counterparty, but where there is insufficient data to support the construction of a statistical model. These models utilise the knowledge of credit experts that have in depth experience of the specific customer type being modelled. Where possible, the characteristics identified by the expert lenders for use in these models are linked during the modelling process to the Merton framework. This linkage ensures that the model is intuitive and that there is some economic rationale for the default process that is being captured by the model.
For any of the portfolios where we have a low number of default observations we adopt specific rules to ensure that the calibration of the model meets the Basel II and FSA criteria for conservatism. We have developed our own internal policy which describes specific criteria for the use of parametric (e.g. Pluto Tasche) and non-parametric low default portfolio calibration techniques.
Statistical models such as behavioural and application scorecards are used for our high volume portfolios such asSME Small/Medium Enterprises (SME). The model builds typically incorporate the use of large amounts of internal data, combined with supplemental data from external data suppliers. Where external data is sourced to validate or enhance internally-held data as part of the risk assessment process or to support model development and BAU operation, a similar approach is adopted towards ensuring data quality to that applied to the management of internal data. This entails adherence to the Group’s procurement and supplier management process, including the agreement of specifications and service level agreements.
In wholesale portfolios the main approaches to calculate LGD aim to establish the affects of drivers (including industry, collateral coverage, recovery periods, seniority and costs) by looking at Barclays historical experience, supplemented with other external information where necessary. Estimates built using historical information are reviewed to establish whether they can be expected to be representative of future loss rates, and adjusted if necessary.
In a similar fashion, wholesale EAD models estimate the potential utilisation of headroom based on historical information also considering the future outlook of client behaviour.
Typically, modellers do not manipulate external data before using it as input to the model estimation or validation procedure. Changes required in the estimation and validation process are documented in the model build papers.
For all the above asset classes we use the Basel II definition of default, utilising the 90 day past due criteria as the final trigger of default.
Derivative counterparty credit risk measurement
The magnitude of trading exposure is determined by considering the current mark to market of the contract, the historic volatility of the underlying asset and the time to maturity. This allows calculation of a credit equivalent exposure (CEE) for such exposures using a stochastic method and a 98% confidence level.
Retail Approaches
Ourretail banking operations have long and extensive experience of using credit models in assessing and managing risk in their businesses and as a result models play an integral role in retailcustomer approval and customer management (e.g. limit setting, cross-sell etc.) processes.
Models used include PD models, mostly in the form of application and behavioural scorecards, and/or PD/as well as LGD and EAD models. These may be used in isolation, in combination
Application scorecards are derived from the historically observed performance of new clients. They are built using customer demographic and financial information, supplemented by credit bureau information where available. Through statistical techniques, the relationship between these candidate variables and the default marker is quantified to produce measuresoutput scores reflecting a PD. These scores are used primarily for new customer decisioning but are, in some cases, also used to allocate PDs to new customers for the purposes of forecast loss orcapital calculation.
Behavioural scorecards are derived from the historically observed performance of existing clients as partwell as being supplemented by the same data as is used for application scoring, including the use of a suitebureau data. The techniques used to derive the output are the same as for application scoring. The output scores are used for existing customer management activities as well as for allocating PDs to existing customers for the purposes of models that underpin risk/reward based decisions. The score cut-offs will be set at the appropriate level depending on the specific objective, such as ensuring all the accepted accounts meet the minimum required return on EC. capital calculation.
Barclays Annual Report 2008 | 71 |
It is Barclays philosophy to embed the Basel II models as extensively as possible in the portfolio management process. This is an ongoing initiative and we expect greater convergence over time. However, in some cases there are sound business reasons for having different models for capital allocations and internal processes.
EAD models within retail portfolios are split into two main methodological categories. The less complex models derive product level credit conversion factors (CCFs) from historical balance migrations; these are frequently further segmented at a delinquency bucket level. The most sophisticated EAD models are behavioural based, determining customer level CCFs from characteristics of the individual facility.
Retail LGD models are built using bespoke methods chosen to best model the observed recovery process. In line with Basel II requirements, Barclays will usea number of secured portfolios, structural models are often used which parameterise the LGD drivers giving models which can easily be updated to reflect current market trends. Models based on historical cash collected curves are often utilised in portfolios where recoveries are not based on the recovery of a single source of collateral. Finally, in some instances regression techniques are used to generate predicted LGDs based on account characteristics. In all available relevant data, including data relatinginstances bespoke country level factors are derived to other Barclays accounts and external agency data. Barclays does not use pooled data.discount recovery flows to the point of default. For capital calculations, customised economic downturn adjustments are made to adjust losses to stressed conditions.
Most retail models within Barclays are built in-house, although occasionally external consultants will be contracted to build models on behalf of the businesses. Whilst most models are statistically or empirically derived, some expert lender models (similar to those described above in the wholesale context) are used, particularly where data limitations preclude a more sophisticated approach. For mortgage originations Barclays use a third party scorecard (Omniscore), supported by a series of policy rules, to arrive at a lending decision.
All new models, including third partyWhere models are measured against the required Group minimum standards as detailedused in the Barclays Model Risk Policy.
For retail asset classes, Basel II specifies thatcalculation of regulatory capital, the definition of default must include a trigger based onis in line with the regulatory definition of default requirements i.e. for UK portfolios the default definition is 180 days past due with the number of days being between 90 and 180. All Barclays advanced internal ratings-basedwhilst international regulators may have different rules. In some cases, for models not used in regulatory capital calculations, in order to maximise model suitability, different default definitions are compliant with this, with the majority using 180 days as the trigger. Inused. However, in all cases EAD and LGD models are specified so that they have a definition of default aligned to that used in the corresponding PD model.appropriately aligned.
The control mechanisms for the rating system
Each of the business risk teams is responsible for the design, oversight and performance of the individual credit rating models – PD, LGD and EAD –that– that comprise the credit rating system for a particular customer within each asset class. Group-wide standards in each of these areas are set by Group Risk and are governed through a series of committees with responsibility for oversight, modelling and credit measurement methodologies.
Through their day-to-day activities, key senior management in Group Credit Risk, the businesses and the business risk teams have a good understanding of the operation and design of the rating systems used.
For example:
– | The respective Business Risk Heads or equivalents are responsible for supplying a robust rating system. |
– | The Group Risk Director, Credit Risk Director and Wholesale and Retail Credit Risk Directors are required to understand the operation and design of the rating system used to assess and manage credit risk in order to carry out their responsibilities effectively. This extends to the Business CEOs, Business Risk Directors and the Commercial/ Managing Directors or equivalent. |
In addition,Group Model Risk Policyrequires that all models be validated as part of the model build (see page 73)66). This is an iterative process that is carried out by the model owner. Additionally, a formal independent review is carried out after each model is built to check that it is robust, meets all internal and external standards and is documented appropriately. These reviews must be documented and conducted by personnel who are independent of those involved in the model-building process. The results of the review are required to be signed off by an appropriate authority.
In addition to the independent review, post implementation and annual reviews take place for each model. These reviews are designed to ensure compliance with policy requirements such as:
– | integration of models into the business process |
– | compliance with the model risk policy |
– | continuation of a robust governance process around model data inputs and use of outputs |
Model performance is monitored regularly; frequency of monitoring is monthly for those models that are applicable to higher volume or volatile portfolios, and quarterly for lower volume or less volatile portfolios. Model monitoring can includeincludes coverage of the following characteristics: utility, stability, efficiency, accuracy, portfolio and data.
Model owners set performance ranges and define appropriate actions for their models. As part of the regular monitoring, the performance of the models is compared with these operational ranges. If breaches occur, the model owner reports these to the approval body appropriate for the materiality of the model. The model approver is responsible for ensuring completion of the defined action, which may ultimately be a complete rebuild of the model.
72 | Barclays Annual Report | |||||
Risk management
Credit risk management
Risk Tendency
As part of its credit risk management system, the group uses a model-based methodology to assess the point-in-time expected loss of credit portfolios across different customer categories. The approach is termed Risk Tendency and applies to credit exposures not already reported as Credit Risk Loans for both wholesale and retail sectors. Risk tendency models provide statistical estimates of average expected loss levels for a rolling 12-month period based on averages in the ranges of possible losses expected from each of the current portfolios. This contrasts with impairment charges as required under accounting standards, which derive almost entirely from Credit Risk Loans where there is objective evidence of actual impairment as at the balance sheet date.
Since Risk Tendency and impairment allowances are calculated for different parts of the portfolio, for different purposes and on different bases, Risk Tendency does not predict loan impairment. Risk Tendency is provided to present a view of the evolution of the scale and quality of the credit portfolios.
In 2007, Risk Tendency increased 4% (£95m) to £2,355m (2006: £2,260m), significantly less than the 23% growth in the Group’s loans and advances balances. This relatively small rise in Risk Tendency reflected, in particular, the improving risk profile of the UK unsecured loan book. Other factors influencing Risk Tendency included: methodology changes in Barclaycard, UK Retail Banking and International Retail and Commercial Banking – Absa; the sale of the Monument portfolio; and a maturing credit risk profile in the international card portfolios.
UK Retail Banking Risk Tendency decreased £30m to £470m (2006: £500m). This reflected an improvement in the credit risk profile in the UK unsecured consumer lending portfolios, partially offset by the impact of methodology changes and asset growth.
Risk Tendency in Barclays Commercial Bank increased £15m to £305m (2006: £290m). This reflected some growth in loan balances offset by improvements in the credit risk profile.
Barclaycard Risk Tendency decreased £190m to £945m (2006: £1,135m). This reflected improvement in the credit risk profile of UK cards, the sale of part of the Monument portfolio and methodology changes in UK cards, partially offset by asset growth in the international portfolios.
Risk Tendency at International Retail and Commercial Banking – excluding Absa increased £145m to £220m (2006: £75m), reflecting an increase to the risk profile and balance sheet growth in Emerging Markets and Western Europe.
In International Retail and Commercial Banking – Absa, the increase of £110m in Risk Tendency to £255m (2006: £145m) included a change to the methodology following the introduction of Basel compliant, PD, EAD and LGD models. Excluding this change, Risk Tendency increased £90m, reflecting a weakening of retail credit conditions in South Africa after a series of interest rate rises in 2006 and 2007 and balance sheet growth.
Risk Tendency in Barclays Capital increased £45m to £140m (2006: £95m) primarily due to drawn leveraged loan positions. The drawn liquidity facilities on ABS CDO Super Senior positions are classified as credit risk loans and therefore no Risk Tendency is calculated on them.
Since Risk Tendency and impairment allowances are calculated for different parts of the portfolio, for different purposes and on different bases, Risk Tendency does not predict loan impairment.
The Group uses a wide variety of techniques to reduce credit risk on its lending. The most basic of these is performing an assessment of the ability of a borrower to service the proposed level of borrowing without distress. In addition, the Group commonly obtains security for the funds advanced, such as in the case of a retail or commercial mortgage, a reverse repurchase agreement, or a commercial loan with a floating charge over book debts and inventories. The Group ensures that the collateral held is sufficiently liquid, legally effective, enforceable and regularly valued.
Various forms of collateral are held and commonly includeinclude: cash in major currencies; fixed income products including government bonds; Lettersletters of Credit;credit; property, including residential and commercial; and other fixed assets. For further discussion concerning credit risk mitigation, see credit risk Note 47.
The Group actively manages its credit exposures and when weaknesses in exposures are detected – either in individual exposures or in groups of exposures – action is taken to mitigate the risks. These include steps to reduce the amounts outstanding (in discussion with the customers, clients or counterparties, if appropriate), the use of credit derivatives and, sometimes, the sale of the loan assets. (Credit derivatives may also be traded for profit; details of these activities may be found on page 89 and Note 14 to the accounts).
The Group also uses various forms of specialised legal agreements to reduce risk, including netting agreements which permit it to offset positive and negative balances with customers in certain circumstances to minimise the exposure at default, as well as financial guarantees, and the use of covenants in commercial lending agreements.
Barclays manages the diversification of its portfolio to avoid unwanted credit risk concentrations. A concentration of credit risk exists when a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.
Credit risk mitigation to address concentrations takes several dimensions. MaximumWithin wholesale credit risk, maximum exposure guidelines are in place relating to the exposures to any individual counterparty. These permit higher exposures to highly rated borrowers than to lower rated borrowers.with higher ratings. They also distinguish between types of counterparty, for example, between sovereign governments, banks and corporations. Excesses to maximum exposure guidelines are considered individually at the time of credit sanctioning, are reviewed regularly, and are reported to the Risk Oversight Committee and the Board Risk Committee.
‘Wrong way risk’ in a trading exposure arises when there is significant correlation between the underlying asset and the counterparty which in the event of default would lead to a significant mark to market loss.
When assessing the credit exposure of a wrong way trade, analysts take into account the correlation between the counterparty and the underlying asset as part of the sanctioning process. Adjustments to the calculated CEE are considered on a case by case basis.
Notes
| ||
The Risk Oversight Committee has delegated and apportioned responsibility for risk management to the Retail and Wholesale Credit Risk Management Committees.
The Retail Credit Risk Management Committee (RCRMC) oversees exposures, which comprise unsecured personal lending (including small businesses), mortgages and credit cards. The RCRMC monitors the risk profile and performance of the retail
portfolios by receipt of key risk measures and indicators at an individual portfolio level, ensuring mitigating actions taken to address performance are appropriate and timely. Metrics reviewed will consider portfolio composition at both an overall stock and new flow level.
The Wholesale Credit Risk Management Committee (WCRMC) oversees wholesale exposures, comprising lending to businesses, banks, and other financial institutions.institutions and sovereigns. The WCRMC monitors exposure by country, industry sector, individual large exposures and exposures to sub-investment grade countries.
Country concentrations are addressed through thecountry risk policy and utilisation of country limits which specifiesspecify Risk Appetite by country and avoidsavoid excessive concentrations of credits in individual countries. Country risk grades are assigned to all countries where the Group has, or is likely to have, exposure and are reviewed regularly to ensure they remain appropriate.
Country grades, which are derived from long-term sovereign foreign currency ratings, range from 1 (lowest probability of default) to 21 (highest probability of default). A ceiling is applied where a country is graded 12 or worse so that the counterparty cannot normally receive a higher risk grading than the country, unless some form of protection is available in the event of a cross-border event, such as a significant portion of a counterparty’s assets or income being held or generated in hard currency.
To manage exposure to country risk, the Group uses two country limits: the Prudential Guideline and the Country Guideline. The Prudential Guideline is identified through the strict mapping of a country grade to derive a model-driven acceptable level of loss given default.country appetite. The Country Guideline for all graded countries is set by the Group Credit Committee (GCC) based on the Prudential Guideline and the internal appetite forassessment of country risk. The Country Guideline may therefore be above or below the Prudential Guideline.
Country risk is managedcalculated through the application of Country Loss Given Default (CLGD). All cross-border or domestic foreign currency transactions incur CLGD from the Country Guideline agreed at GCC.Credit Committee. The level of CLGD incurred by a counterparty transaction will largely depend on three main factors: the country severity, the product severity and counterparty grade.
CLGD is incurred in the country of direct risk, defined as where the majority of operating assets are held. This may differ from the country of incorporation. However, where transactions are secured with collateral, the country risk can be transferred from the country of the borrower to the country of the collateral provider. This is only permitted where the collateral covers the borrowing and is not expected to decrease over time.
Country Managers are in place for all countries where the Group has exposure and they, under the direction of GCC,Credit Committee, have responsibility for allocating country risk to individual transactions. The total allocation of country limits is monitored on a daily basis by Group Credit Risk, as headed by the Group Credit Risk Director. Discretions exist to increase the Country Guideline above the level agreed by GCCCredit Committee where the Country Guideline is below the Prudential Guideline. All requests to increase the Country Guideline in line with individual discretions must be submitted to and applied centrally through Group Credit Risk.
Barclays Annual Report 2008 | 73 |
A further mitigant against undesirable concentration of risk is the mandate and scale framework described on page 71.65. Mandate and scale limits, which can also be set at Group level to reflect overall Risk Appetite, can relate either to the stock of current exposures in the relevant portfolio or to the flow of new exposures into that portfolio. Typical limits include the caps on UK commercial investment property lending, the proportion of lending with maturity in excess of seven years and the proportion of new mortgage business that is buy-to-let. The mandate and scale framework also provides protection against undue concentrations within the collateral held.
Concentrations of credit exposure described in this credit risk management section and the following statistical section are not proportionally related to credit loss. Some segments of the Group’s portfolio have and are expected to have proportionally higher credit charges in relation to the exposure than others. Moreover, the volatility of credit loss is different in different parts of the portfolio. Thus, comparatively large credit impairment charges could arise in parts of the portfolio not mentioned here.
Securitisations
In the course of its business, Barclays undertakeshas traditionally undertaken securitisations of its own originated assets as well as the securitisation of third party assets via sponsored conduit vehicles and shelf programmes.
Barclays securitiseshas securitised its own originated assets in order to remove risk frommanage the Group’s credit risk position, to obtain regulatory capital relief, and to obtaingenerate term liquidity for the Group balance sheet.
For these transactions Barclays adopts the following roles in the securitisation process:
– | Originator of securitised assets |
– | Executor of securitisation trades including bond marketing and syndication |
– | Provider of securitisation trade servicing, including data management, investor payments and |
As at the end 2008 Barclays alsohas securitised its own originated retail and commercial mortgages, credit cards and corporate loans across both funded traditional and synthetic transactions.
Barclays acts as an administrator and manager of multi-seller conduits through which interests in third-party-originated assets are securitised and funded via the issuance of asset backed commercial paper. From a regulatory perspective, Barclays would be defined primarily as a sponsor of these conduits.
In relation to such conduit activity, Barclays may also provide all or a portion of the backstop liquidity to the commercial paper, programme-wide credit enhancement and, as appropriate, interest rate and foreign currency hedging facilities. Barclays receives fees for the provision of these services.
In addition to the above, Barclays has provided swaps to securitisation vehicles, both those sponsored by Barclays and those sponsored by third
parties, in order to provide hedges against interest rate and/or currency movements. This forms part of Barclays Capital’s market making activity in interest rate and foreign exchange products.
Barclays also acts as an investor in third-party securitisations (i.e. where Barclays would not be defined as an originator or a sponsor for regulatory purposes). This includes positions in ABS CDO Super Senior, other US Sub Prime & Alt A and bonds which benefit from monoline credit protection. See ‘Barclays Capital Credit Market Exposures’ on pages 93-105 for further details.
Due to the market disruption experienced since August 2007, the volume of securitisation activity in all forms that Barclays has undertaken has been more limited than previously. In addition, the change in risk weighting of certain assets (for example residential mortgages) and of banks securitisations exposures as a result of the introduction of the Basel II regime means that the extent of regulatory relief obtainable from securitisations has changed.
As such, Barclays own asset securitisation in 2008 was limited mainly to trades where securities have been retained on balance sheet and used as required as in central bank liquidity schemes.
During 2008, Barclays launched Salisbury Receivables Corporations (‘Salisbury’), a multi-seller asset-backed commercial paper conduit modelled after Sheffield Receivables Corporation (‘Sheffield’), which was launched in December 1991. Similar to Sheffield, Salisbury has the ability to issue both US commercial paper (‘CP’) and Euro CP notes to finance client asset-backed receivable transactions. Sponsored conduits primarily fund traditional assets such as credit cards, auto loans, student loans, prime mortgages and trade receivables.
RWAs reported for securitised assets as at December 20072008 are calculated in line with rules set out in IPRU (BANK)FSA regulations as well as any individual guidance received from the FSA as at the end of the period. Barclays has approval to use the Internal Ratings Based Approach for the calculation of RWAs. Within this, period.
As of 1st January 2008, Barclays calculatesthe Group uses the Internal Assessment Approach and the Supervisory Formula Approach to calculate its regulatory capital requirements arising from its securitisation RWAs using the ratings based approach and/or the supervisory formula method as per the FSA’s revised rules, which implement the Basel Accord and Capital Requirements Directive.exposures.
Further information about securitisation activities and accounting treatment is in Note 29. The Group’s accounting policies, including those relevant to securitisation activities (policies 4 and 10), are on pages 149page 179.
For certain transactions, there may be a divergence between the accounting and 152.regulatory treatment of Barclays exposure to securitisations, for example in the treatment of exposure values. This will reflect differing guidance given in the accounting and regulatory regimes which in turn reflect the areas in which the aims of each regime differ.
Barclays employs External Credit Assessment Institutions to provide ratings for its asset backed securities. Their use is dependantdependent on the transaction or asset class involved. For existing transactions, we employ Standard & Poor’s, Moody’s and Fitch for securitisations of corporate, residential mortgage and other retail exposures and Standard & Poor’s and Moody’s only for securitisations of small and medium-sized entity and revolving retail exposures.
74 | Barclays Annual Report | |||||
Risk management
Credit risk management
MonitoringAnalysis of total assets and credit risk exposures
Analysis of total assets | Sub analysis | |||||||||||||||||
Assets | Loans and advancesa £m | Debt £m | Derivatives c £m | Reverse repurchase agreements d £m | Other £m | Assets £m | Assets not £m | Total assets £m | Credit market exposurese £m | |||||||||
Cash and balances at central banks | 30,019 | 30,019 | 30,019 | |||||||||||||||
Items in the course of collection from other banks | 1,695 | 1,695 | 1,695 | |||||||||||||||
Treasury and other eligible bills | 4,544 | 4,544 | 4,544 | |||||||||||||||
Debt securities | 148,686 | 148,686 | 148,686 | 4,745 | ||||||||||||||
Equity securitiesf | 30,535 | 30,535 | ||||||||||||||||
Traded loans | 1,070 | 1,070 | 1,070 | |||||||||||||||
Commoditiesg | 802 | 802 | ||||||||||||||||
Total Trading portfolio assets | 1,070 | 153,230 | 154,300 | 31,337 | 185,637 | |||||||||||||
Financial assets designated at fair value | ||||||||||||||||||
Loans and advances | 30,057 | 130 | 30,187 | 30,187 | 14,429 | |||||||||||||
Debt securities | 8,628 | 8,628 | 8,628 | |||||||||||||||
Equity securitiesf | 6,496 | 6,496 | ||||||||||||||||
Other financial assetsh | 1,469 | 7,283 | 479 | 9,231 | 9,231 | |||||||||||||
Held on own account | 31,526 | 8,628 | – | 7,283 | 609 | 48,046 | 6,496 | 54,542 | ||||||||||
Held in respect of linked liabilities under investment contractsi | 66,657 | 66,657 | ||||||||||||||||
Derivative financial instruments | 984,802 | 984,802 | 984,802 | 9,234 | ||||||||||||||
Loans and advances to banks | 47,707 | 47,707 | 47,707 | |||||||||||||||
Loans and advances to customers | 461,815 | 461,815 | 461,815 | 12,808 | ||||||||||||||
Debt securities | 58,831 | 58,831 | 58,831 | 727 | ||||||||||||||
Equity securitiesf | 2,142 | 2,142 | ||||||||||||||||
Treasury and other eligible bills | 4,003 | 4,003 | 4,003 | |||||||||||||||
Available for sale financial instruments | 62,834 | 62,834 | 2,142 | 64,976 | ||||||||||||||
Reverse repurchase agreements and cash collateral on securities borrowed | 130,354 | 130,354 | 130,354 | |||||||||||||||
Other assets | 3,096 | 3,096 | 3,206 | 6,302 | 109 | |||||||||||||
Current tax assets | 389 | 389 | ||||||||||||||||
Investments in associates and joint ventures | 341 | 341 | ||||||||||||||||
Goodwill | 7,625 | 7,625 | ||||||||||||||||
Intangible assets | 2,777 | 2,777 | ||||||||||||||||
Property, plant and equipment | 4,674 | 4,674 | ||||||||||||||||
Deferred tax assets | 2,668 | 2,668 | ||||||||||||||||
Total on-balance sheet | 542,118 | 224,692 | 984,802 | 137,637 | 35,419 | 1,924,668 | 128,312 | 2,052,980 | ||||||||||
Off-balance sheet: | ||||||||||||||||||
Acceptances and endorsements | 585 | |||||||||||||||||
Guarantees and letters of credit pledged as collateral security and securities lending arrangements | 53,942 | |||||||||||||||||
Commitments | 260,816 | 1,030 | ||||||||||||||||
Total off-balance sheet | 315,343 | |||||||||||||||||
Total maximum exposure to credit risk | 2,240,011 |
Notes
a | Further analysis of loans and advances is on pages 76 to 89 |
b | Further analysis of debt securities and other bills is on page 90 |
c | Further analysis of derivatives is on pages 91 to 92. |
d | Reverse repurchase agreements comprise primarily short-term cash lending with assets pledged by counterparties securing the loan. |
e | Further analysis of Barclays Capital credit market exposures is on pages 93 to 105. |
f | Equity securities comprise primarily equity securities determined by available quoted prices in active markets. |
g | Commodities primarily consists of physical inventory positions. |
h | These instruments consist primarily of loans with embedded derivatives and reverse repurchase agreements designated at fair value. |
i | Financial assets designated at fair value in respect of linked liabilities to customers under investment contracts have not been further analysed as the Group is not exposed to the risks inherent in these assets. |
Barclays Annual Report 2008 | 75 |
Risk management
Credit risk management
As the granting of credit is one of the Group’s major sources of income and its most significant risk, the Group dedicates considerable resources to gaining a clear and accurate understanding of credit risk across the business and ensuring that its balance sheet correctly reflects the value of the assets in accordance with applicable accounting principles. This process can be broken down intosummarised in the following broad stages:
– | Measuring exposures and concentrations |
– | Monitoring weakness in exposures |
– | Identifying potential problem loans and credit risk loans (collectively known as potential credit risk loans or PCRLs) |
– | Raising allowances for impaired loans |
– | Writing off assets when the whole or part of a debt is considered irrecoverable |
Fig. 1: Loans and advances
2007 £m | 2006 £m | |||
Retail businesses | ||||
Banks | — | — | ||
Customers | 164,062 | 139,350 | ||
Total retail businesses | 164,062 | 139,350 | ||
Wholesale businesses | ||||
Banks | 40,123 | 30,930 | ||
Customers | 185,105 | 146,281 | ||
Total wholesale businesses | 225,228 | 177,211 | ||
Loans and advances | 389,290 | 316,561 |
Measuring exposures and concentrations
Loans and advances to customers provide the principal source of credit risk to the Group although Barclays can also be exposed to other forms of credit risk
through loans to banks, loan commitments, contingent liabilities and debt securities; see page 46)securities . The value of outstanding loans and advances balances, their risk profile, and potential concentrations within them can therefore have a considerable influence on the level of credit risk in the Group.
As at 31st December 2007, outstanding2008, total loans and advances to customers and banks net of impairment allowance were valued£542,118m (2007: £410,789m), a rise of 32% on the previous year. Loans and advances at £389bn (2006: £317bn), of which £349bn (2006: £286bn) was granted to personal or corporate customers (see figure 1)amortised cost were £509,522m (2007: £385,518m) and loans and advances at fair value were £32,596m (2007: £25,271m). Loans and advances were well distributed across the retail and wholesale portfolios.
Loans and advances were also well spread across industry classifications (figure 2). Excluding Financial Services,classifications. Barclays largest sectoral exposures areexposure is to home loans which, combined with other personal and business services sectors ,comprise 48% of total loans and other services.advances (2007: 53%). These categories are generally comprised of small loans, have low volatility of credit risk outcomes, and are intrinsically highly diversified.
Balances Growth in loans and advances to the financial services sector reflected an increased client base in the fund management business and increases in cash collateral. Loans and advances are alsofurther diversified across a number of geographical regions, (figure 3, based on location of customers). The majority of Barclays exposure is to the UK, which includes secured home loans exposure, followed by the United States, Africa and the rest of the European Union.
Fig. 4: Analysis of loans-to-value ratios of mortgages in the UK home loan portfolio at 31st December 2007 %
Table 1: Loans and advances at amortised cost
| ||||||||||||||||
As at 31st December 2008 | Gross loans and advances £m | Impairment allowance £m | Loans and advances net of impairment £m | Credit risk Loans £m | CRLs % of gross loans and advances % | Impairment £m | Loan loss rates basis points | |||||||||
Wholesale – customers | 266,750 | 2,784 | 263,966 | 8,144 | 3.1 | 2,540 | 95 | |||||||||
Wholesale – banks | 47,758 | 51 | 47,707 | 48 | 0.1 | 40 | 8 | |||||||||
Total wholesale | 314,508 | 2,835 | 311,673 | 8,192 | 2.6 | 2,580 | 82 | |||||||||
Retail – customers | 201,588 | 3,739 | 197,849 | 7,508 | 3.7 | 2,333 | 116 | |||||||||
Total retail | 201,588 | 3,739 | 197,849 | 7,508 | 3.7 | 2,333 | 116 | |||||||||
Total | 516,096 | 6,574 | 509,522 | 15,700 | 3.0 | 4,913 | 95 | |||||||||
As at 31st December 2007 | ||||||||||||||||
Wholesale – customers | 187,086 | 1,309 | 185,777 | 5,157 | 2.8 | 1,190 | 64 | |||||||||
Wholesale – banks | 40,123 | 3 | 40,120 | – | – | (13 | ) | (3 | ) | |||||||
Total wholesale | 227,209 | 1,312 | 225,897 | 5,157 | 2.3 | 1,177 | 52 | |||||||||
Retail – customers | 162,081 | 2,460 | 159,621 | 4,484 | 2.8 | 1,605 | 99 | |||||||||
Total retail | 162,081 | 2,460 | 159,621 | 4,484 | 2.8 | 1,605 | 99 | |||||||||
Total | 389,290 | 3,772 | 385,518 | 9,641 | 2.5 | 2,782 | 71 |
Barclays Annual Report | ||||
Risk Management
Credit Risk Management
Loans and advances
based on location of customers. The majority of Barclays exposure is now outside the UK, reflecting higher rates of growth in the international portfolios as well as the effects of currency movements in 2008.
Barclays also actively monitors exposure and concentrations to sub-investment grade countries (see country risk policy, page 73). Details of the 15 largest sub-investment grade countries, by limit, are shown in figure 3.
Contractual maturity represents a further area of potential concentration. The analysis shown in figure 4 indicates that just over 40% of loans to customers have a maturity of more than five years; the majority of this segment comprises secured home loans.
Barclays risk is therefore spread across a large number of industries and customers and in the case of home loans, for example, well secured. These classifications have been prepared at the level of the borrowing entity. This means that a loan to the subsidiary of a major corporation is classified by the industry in which the subsidiary operates, even through the parent’s predominant sphere of activity may be in a different industry.
UK exposure to home loans accounts for just over 60 per cent of the Group’s total home loans exposure. The loan-to-value ratios (LTV) on the Group’s UK home loan portfolio are shown in figure 4. The valuations in the chart are those which applied at the last credit decision on each loan, i.e. when the customer last requested an increase in the limit or, if there has been no increase, at inception of the loan. Business flows (new business versus loans redeemed) have not materially changed the risk profile of the portfolio.
The impact of house price inflation will result in a reduction in LTV ratios within the mortgage book on a current valuation basis. On this basis, LTV on the residential mortgage book averaged 33% at the end of 2007 (2006: 34%). This ratio is a point-in-time analysis of the stock with LTV updated to current house prices by reference to an external price index and as a result may be influenced by external market conditions as well as changes in the stock of loans.
Barclays also actively monitors the risk profile of itsCorporate and wholesale loans and advances
Gross loans and advances to wholesale customers and banks grew 38% to £314,508m (31st December 2007: £227,209m), largely due to Barclays Capital where loans and advances increased £72,514m (53%).
Credit Risk Loans (CRLs) rose 59% to £8,192m (31st December 2007: £5,157m). As a percentage of gross loans and advances, CRLs increased 13% to 2.6% (31st December 2007: 2.3%). CRL balances were higher in all businesses, reflecting the downturn in economic conditions, with some deterioration across default grades, higher levels of Early Warning List balances and a viewrise in impairment and loan loss rates in most wholesale portfolios. The largest rises were in Barclays Capital and GRCB – Western Europe.
Impairment charges on loans and advances rose 119% (£1,403m) to £2,580m (31st December 2007: £1,177m), primarily in Barclays Capital, although all other businesses were higher than the early detection of any concentrationsprevious year. Impairment in higher risk segments. Figure 5 depicts Barclays wholesale loan profile by existing risk grade (see page 67 for a description ofCommercial Bank rose in both the rating system). The majority of Barclays exposure is to the higher quality names with just under 70% of exposure to customers with a DG of 10 or better. It is important to note that Barclays prices loans to risk. Thus, higher risk loans will usually have higher interest rates or fees or both. The profitability of a higher risk portfolio may, therefore, equal or exceed that of a lower-risk portfolio.
Barclays also actively monitors exposureLarger and concentrations to sub-investment grade countries (see country risk policy, page 66). Details of the 15 largest sub-investment grade countries, by limit, are shown in figure 6.
Contractual maturity represents a further area of potential concentration. The analysis shown in figure 7 indicates that just over 40% of loans to customers have a maturity of more than five years; the majority of this segment comprises secured home loans.
Table 2: Wholesale loans and advances to customers and banks
| ||||||||||||||
As at 31st December 2008 | Gross loans and advances £m | Impairment allowance £m | Loans and advances net of impairment £m | Credit risk £m | CRLs % of gross loans and advances % | Impairment £m | Loan loss rates basis points | |||||||
Barclays Commercial Bank | 68,904 | 504 | 68,400 | 1,181 | 1.70 | 414 | 60 | |||||||
Barclaycard | 301 | 2 | 299 | 20 | 6.60 | 11 | 365 | |||||||
GRCB – Western Europe | 15,432 | 232 | 15,200 | 578 | 3.70 | 125 | 81 | |||||||
GRCB – Emerging Markets | 7,551 | 122 | 7,429 | 191 | 2.50 | 36 | 48 | |||||||
GRCB – Absa | 8,648 | 140 | 8,508 | 304 | 3.50 | 19 | 22 | |||||||
Barclays Capital | 208,596 | 1,796 | 206,800 | 5,743 | 2.80 | 1,936 | 93 | |||||||
Barclays Global Investors | 834 | – | 834 | – | – | – | – | |||||||
Barclays Wealth | 3,282 | 28 | 3,254 | 174 | 5.30 | 28 | 85 | |||||||
Head office | 960 | 11 | 949 | 1 | 0.10 | 11 | 115 | |||||||
Total | 314,508 | 2,835 | 311,673 | 8,192 | 2.60 | 2,580 | 82 | |||||||
As at 31st December 2007 | ||||||||||||||
Barclays Commercial Bank | 65,535 | 483 | 65,052 | 956 | 1.50 | 292 | 45 | |||||||
Barclaycard | 295 | 3 | 292 | 17 | 5.80 | 9 | 305 | |||||||
GRCB – Western Europe | 10,927 | 63 | 10,864 | 93 | 0.90 | 19 | 17 | |||||||
GRCB – Emerging Markets | 4,833 | 79 | 4,754 | 119 | 2.50 | 10 | 21 | |||||||
GRCB – Absa | 5,321 | 112 | 5,209 | 97 | 1.80 | 11 | 21 | |||||||
Barclays Capital | 136,082 | 514 | 135,568 | 3,791 | 2.80 | 833 | 61 | |||||||
Barclays Global Investors | 211 | – | 211 | – | – | – | – | |||||||
Barclays Wealth | 2,745 | 7 | 2,738 | 47 | 1.70 | – | – | |||||||
Head office | 1,260 | 51 | 1,209 | 37 | 2.90 | 3 | 24 | |||||||
Total | 227,209 | 1,312 | 225,897 | 5,157 | 2.30 | 1,177 | 52 |
BarclaysAnnual Report 2008 | 77 |
Medium Business divisions. Deterioration in the Spanish commercial and residential property markets led to higher impairment in GRCB –Western Europe, while in GRCB – Absa, wholesale credit impairment began to rise from a low base and credit indicators began to show deterioration. The loan loss rate on the wholesale and corporate portfolio rose to 82bp (2007: 52bp).
In the wholesale and corporate portfolios impairment allowances increased 116% to £2,835m (31st December 2007: £1,312m).
Barclays largest corporate loan portfolios continue to be in Barclays Capital and Barclays Commercial Bank. Barclays Capital’s corporate loan book grew 43% to £72,796m in 2008, driven by the decline in the value of Sterling relative to other currencies as well as drawdowns on existing loan facilities and the extension of new loans at current terms to financial and manufacturing institutions. Loans and advances at amortised cost grew 5% in Barclays Commercial Bank and was focused in lower-risk portfolios in Larger Business.
Portfolio growth rates were higher in the international businesses, where Global Retail and Commercial Banking’s wholesale portfolios in Western Europe, Emerging Markets and Absa grew by 40%, 56% and 63%, respectively.
Analysis of Barclays Capital wholesale loans and advances net of impairment allowances
Barclays Capital wholesale loans and advances increased 53% to £208,596m (2007: £136,082m). This was driven by a decline in the value of Sterling relative to other currencies, increased drawdowns on existing corporate lending facilities and the extension of new loans to corporate clients at current terms. Additionally, continuing market volatility resulted in increased cash collateral being placed with clients relating to OTC derivatives.
The corporate lending portfolio, including leveraged finance, increased 47% to £76,556m (2007: £52,258) primarily due to drawdowns on existing loan facilities and the extension of new loans at current terms to financial and manufacturing institutions.
Included within corporate lending and other wholesale lending portfolios are £7,674m of loans backed by retail mortgage collateral.
Barclays Capital loans and advances held at fair value
Barclays Capital loans and advances held at fair value were £19,630m (2007: £18,259m). These assets are primarily made up of US RMBS whole loans and commercial real estate loans, £14,429m of which is discussed within the credit market exposures.
Table 3: Analysis of wholesale loans and advances net of impairment allowances
| ||||||||||||||||||||
Corporate | Government | Settlement balance and cash collateral | Other wholesale | Total wholesale | ||||||||||||||||
Wholesale | 2008 £m | 2007 £m | 2008 £m | 2007 £m | 2008 £m | 2007 £m | 2008 £m | 2007 £m | 2008 £m | 20 07 £m | ||||||||||
BCB | 67,741 | 64,773 | 659 | 279 | – | – | – | – | 68,400 | 65,052 | ||||||||||
Barclaycard | 299 | 292 | – | – | – | – | – | – | 299 | 292 | ||||||||||
GRCB – Western Europe | 15,017 | 10,721 | 32 | 4 | – | – | 151 | 139 | 15,200 | 10,864 | ||||||||||
GRCB – Emerging Markets | 5,283 | 3,276 | 1,709 | 1,193 | – | – | 437 | 285 | 7,429 | 4,754 | ||||||||||
GRCB – Absa | 8,480 | 5,204 | 28 | 5 | – | – | – | – | 8,508 | 5,209 | ||||||||||
Barclays Capital | 72,796 | 51,038 | 3,760 | 1,220 | 79,418 | 46,639 | 50,826 | 36,671 | 206,800 | 135,568 | ||||||||||
BGI | 834 | 211 | – | – | – | – | – | – | 834 | 211 | ||||||||||
Barclays Wealth | 3,254 | 2,738 | – | – | – | – | – | – | 3,254 | 2,738 | ||||||||||
Head office | 949 | 1,209 | – | – | – | – | – | – | 949 | 1,209 | ||||||||||
Total | 174,653 | 139,462 | 6,188 | 2,701 | 79,418 | 46,639 | 51,414 | 37,095 | 311,673 | 225,897 |
Table 4: Analysis of Barclays Capital’s loans and advances at amortised cost
| ||||||||||||||
As at 31st December 2008 | Gross loans and advances £m | Impairment allowance £m | Loans and advances net of impairment £m | Credit risk £m | CRLs % of gross loans and advances % | Impairment £m | Loan loss rates basis points | |||||||
Loans and advances bank | ||||||||||||||
Cash collateral and settlement balances | 19,264 | – | 19,264 | – | – | – | – | |||||||
Interbank lending | 24,086 | 51 | 24,035 | 48 | 0.2 | 40 | 17 | |||||||
Loans and advances to customers | ||||||||||||||
Corporate lending | 77,042 | 486 | 76,556 | 1,100 | 1.4 | 305 | 40 | |||||||
ABS CDO Super Senior | 4,117 | 1,013 | 3,104 | 4,117 | 100.0 | 1,383 | 3,359 | |||||||
Other wholesale lending | 23,933 | 246 | 23,687 | 478 | 2.0 | 208 | 87 | |||||||
Cash collateral and settlement balances | 60,154 | – | 60,154 | – | – | – | – | |||||||
Total | 208,596 | 1,796 | 206,800 | 5,743 | 2.8 | 1,936 | 93 |
78 | Barclays Annual Report 2008 |
Risk Management
Credit Risk Management
Loans and advances
Analysis of Barclays Commercial Bank loans and advances
The tables below analyse the industry split of Barclays Commercial Bank loans and advances after impairment allowance of £504m. The loan book consists of both loans and advances held at amortised cost and loans and advances held at fair value.
Loans and advances held at fair value were £12,966m as at 31st December 2008. Of these, £12,360m related to government, local authority and social housing. Fair value exceeds amortised cost by £3,018m. Fair value is calculated using a valuation model with reference
to observable market inputs and is matched by offsetting fair value movements on hedging instruments. The underlying nominal portfolio increased 47% in 2008.
Property balances within loans and advances at amortised cost and held at fair value totalled £16,351m, of which £8,795m related to social housing.
The weighted average of the drawn balance loss given default, for all of the above loans and advances, was 31%.
Table 5: Analysis of Barclays Commercial Bank loans and advances
Loans and advances to banks at amortised cost | ||
Total £m | ||
Financial institutions and services | 867 | |
Total | 867 | |
Loans and advances to customers at amortised cost | ||
Total £m | ||
Business and other services | 16,611 | |
Construction | 3,974 | |
Energy and water | 1,112 | |
Financial institutions and services | 6,427 | |
Finance Lease receivables | 6,644 | |
Manufacturing | 8,378 | |
Postal and communications | 1,303 | |
Property | 8,985 | |
Transport | 2,014 | |
Wholesale and retail distribution and leisure | 11,426 | |
Government | 659 | |
Total | 67,533 | |
Loans and advances held at fair value | ||
Total £m | ||
Business and other services | 535 | |
Construction | 39 | |
Financial institutions and services | 32 | |
Property | 7,366 | |
Government | 4,994 | |
Total | 12,966 |
Barclays Annual Report | 79 |
Barclays Commercial Bank financial sponsor leveraged finance
As at 31st December 2008, the exposure relating to financial sponsor related leveraged finance loans in Barclays Commercial Bank was £2,445m, of which £1,875m related to drawn amounts recorded in loans and advances.
Table 6: Barclays Commercial Bank financial sponsor leveraged finance
Leveraged finance exposure by region | ||
As at 31st December 2008 | £m | |
UK | 2,111 | |
Europe | 323 | |
Other | 11 | |
Total lending and commitments | 2,445 | |
Underwriting | 28 | |
Total exposure | 2,473 | |
The industry classification of the exposure was as follows: | ||
Leveraged finance exposure by industry |
As at 31st December 2008 | Drawn £m | Undrawn £m | Total £m | |||
Business and other services | 1,083 | 288 | 1,371 | |||
Construction | 12 | 5 | 17 | |||
Energy and water | 43 | 17 | 60 | |||
Financial institutions and services | 58 | 10 | 68 | |||
Manufacturing | 307 | 130 | 437 | |||
Postal and communications | 35 | 2 | 37 | |||
Property | 26 | 5 | 31 | |||
Transport | 14 | 43 | 57 | |||
Wholesale and retail distribution and leisure | 297 | 70 | 367 | |||
Total exposure | 1,875 | 570 | 2,445 |
80 | Barclays Annual Report 2008 |
Risk Management
Credit Risk Management
Loans and advances
Retail loans and advances
Gross Loans and Advances to retail customers grew 24% to £201,588m (31st December 2007: £162,081m). The principal drivers were GRCB – Western Europe, UK Retail Banking, and Barclaycard. The GRCB – Western Europe retail portfolio grew by £14,436m (59%) to £38,918m, largely driven by home loans in Spain and Italy, and the appreciation of the Euro against Sterling. The UK Retail Banking portfolio increased by £12,319m (15%) to £96,083m, primarily driven by UK home loans. The Barclaycard Retail portfolios grew by £8,866m (43%) to £29,390m, with growth across the US, UK and Barclaycard’s other European card portfolios.
Total home loans to retail customers grew by 27% to £135,077m, driven by the 58% rise in GRCB – Western Europe, reflecting currency movements and book growth. The UK home finance portfolios within UK Retail Banking grew 18% to £82,303m (31st December 2007: £69,805m).
Unsecured retail credit (credit card and unsecured loans) portfolios grew 43% to £38,856m (31st December 2007: £27,256m), principally as a result of growth in Barclaycard US and GRCB – Western Europe as well as the acquisition of Goldfish in the UK.
Table 7: Retail loans and advances net of impairment allowances
As at 31st December 2008 | Gross loans and advances £m | Impairment allowance £m | Loans and advances net of impairment £m | Credit risk £m | CRLs % of gross loans and advances % | Impairment £m | Loan loss rates basis points | |||||||
UK Retail Banking | 96,083 | 1,134 | 94,949 | 2,403 | 2.50 | 602 | 63 | |||||||
Barclaycard | 29,390 | 1,677 | 27,713 | 2,566 | 8.70 | 1,086 | 370 | |||||||
GRCB – Western Europe | 38,918 | 302 | 38,616 | 794 | 2.00 | 171 | 44 | |||||||
GRCB – Emerging Markets | 4,083 | 191 | 3,892 | 179 | 4.40 | 130 | 318 | |||||||
GRCB – Absa | 24,677 | 411 | 24,266 | 1,518 | 6.20 | 328 | 133 | |||||||
Barclays Wealth | 8,437 | 24 | 8,413 | 48 | 0.60 | 16 | 19 | |||||||
Total | 201,588 | 3,739 | 197,849 | 7,508 | 3.70 | 2,333 | 116 | |||||||
As at 31st December 2007 | ||||||||||||||
UK Retail Banking | 83,764 | 1,005 | 82,759 | 2,063 | 2.50 | 559 | 67 | |||||||
Barclaycard | 20,524 | 1,093 | 19,431 | 1,601 | 7.80 | 818 | 399 | |||||||
GRCB – Western Europe | 24,482 | 81 | 24,401 | 250 | 1.00 | 57 | 23 | |||||||
GRCB – Emerging Markets | 1,881 | 44 | 1,837 | 67 | 3.60 | 29 | 154 | |||||||
GRCB – Absa | 24,994 | 235 | 24,759 | 499 | 2.00 | 135 | 54 | |||||||
Barclays Wealth | 6,436 | 2 | 6,434 | 4 | 0.10 | 7 | 11 | |||||||
Total | 162,081 | 2,460 | 159,621 | 4,484 | 2.80 | 1,605 | 99 |
Table 8: Analysis of retail loans and advances net of impairment allowances
Home loans | Cards and unsecured loans | Other retail | Total retail | |||||||||||||
2008 £m | 2007 £m | 2008 £m | 2007 £m | 2008 £m | 2007 £m | 2008 £m | 2007 £m | |||||||||
UK Retail Banking | 82,303 | 69,805 | 8,294 | 8,297 | 4,352 | 4,657 | 94,949 | 82,759 | ||||||||
Barclaycard | – | – | 23,224 | 14,930 | 4,489 | 4,501 | 27,713 | 19,431 | ||||||||
GRCB – Western Europe | 33,760 | 21,393 | 4,395 | 2,660 | 461 | 348 | 38,616 | 24,401 | ||||||||
GRCB – Emerging Markets | 603 | 285 | 2,900 | 1,369 | 389 | 183 | 3,892 | 1,837 | ||||||||
GRCB – Absa | 18,411 | 15,136 | 43 | – | 5,812 | 9,623 | 24,266 | 24,759 | ||||||||
Barclays Wealth | – | – | – | – | 8,413 | 6,434 | 8,413 | 6,434 | ||||||||
Total | 135,077 | 106,619 | 38,856 | 27,256 | 23,916 | 25,746 | 197,849 | 159,621 |
Barclays Annual Report 2008 | 81 |
Home Loans
The Group’s principal home loans portfolios continue to be in the UK Retail Banking Home Finance business (61% of the Group’s total), GRCB – Western Europe (25%) primarily Spain, and South Africa (14%). During the year, the Group managed the risk profile of these portfolios by strengthening underwriting criteria and reducing the maximum loan to value (LTV) ratios, with greater discrimination between purchases and remortgages and, within the UK buy to let (BTL) segment, between portfolio customers and single property investors.
Credit quality of the principal home loan portfolios reflected relatively low levels of high LTV lending. The LTVs on the Group’s principal home loan portfolios are shown in table 9. Using recent valuations, the LTV of the portfolios as at 31st December 2008 was 40% for UK Retail Banking’s mortgage business, 48% for the Spanish mortgage portfolio within GRCB – Western Europe and 41% for GRCB – Absa’s mortgage portfolio in South Africa. The average LTV for new mortgage business during 2008 at origination for these portfolios was 47% for the UK, 63% for Spain and 58% for South Africa. The percentage of balances with an LTV of over 85% based on current values was 10% for the UK, 5% for Spain and 25% for South Africa. In the UK, BTL mortgages comprised 6.8% the total stock.
Impairment charges rose across the home loan portfolios, reflecting the impact of lower house prices as well as some increase in arrears rates. Three-month arrears as at 31st December 2008 were 0.91% for UK
mortgages, 0.76% for Spain and 2.11% for South Africa. To support the Group’s risk profile, we increased collections staff across the businesses and improved operational practices to boost effectiveness.
Credit Cards and Unsecured Loans
The Group’s largest card and unsecured loan portfolios are in the UK (47% of Group total). The US accounts for 19%, where Barclaycard’s portfolio is largely Prime credit quality (FICO score of 660 or more). To address the impact of economic deterioration and the impact of weaker labour markets on the unsecured portfolios in 2008, the Group used a range of measures to improve new customer quality and control the risk profile of existing customers.
In the UK Cards portfolio, initial credit lines were made more conservative, followed by selective credit limit increases using more accurately assessed customer behaviour. The overall number of credit limit increases were reduced by strengthening qualification criteria and a proportion of higher-risk dormant accounts were closed. Arrears rates in the UK Cards portfolio fell slightly during the year, reflecting measures taken to improve customer quality in 2007 and 2008. Repayment Plan balances grew to support government initiatives to supply relief to customers experiencing financial difficulty. Payment rates in repayment plans remained relatively stable.
As a percentage of the portfolio, three-month arrears rates rose during 2008 to 1.87% for UK Loans and 2.15% for US Cards. The rate reduced to 1.28% for UK Cards.
Table 9: Home loans – distribution of balances by loan to value (mark to market)a
UK | Spain | South Africa | ||||||||||
2008 % | 2007 % | 2008 % | 2007 % | 2008 % | 2007 % | |||||||
<= 75% | 78.2 | 90.1 | 86.7 | 92.2 | 60.5 | 68.6 | ||||||
> 75% and <= 80% | 6.1 | 4.7 | 4.8 | 4.2 | 7.5 | 7.2 | ||||||
> 80% and <= 85% | 5.5 | 2.5 | 3.7 | 1.6 | 7.2 | 7.1 | ||||||
> 85% and <= 90% | 4.5 | 1.5 | 1.6 | 0.7 | 7.6 | 5.9 | ||||||
> 90% and <= 95% | 2.5 | 0.9 | 1.3 | 0.6 | 6.7 | 6.1 | ||||||
> 95% | 3.1 | 0.3 | 1.9 | 0.7 | 10.5 | 5.1 | ||||||
Portfolio loan-to-value (mark to market) | 40 | 34 | 48 | 45 | 41 | 38 | ||||||
Average loan-to-value on new mortgages during the year | 47 | 49 | 63 | 63 | 58 | 59 |
Table 10: Home loans three-month arrearsa, b
| ||||||
As at 31.12.08 % | As at 30.06.08 % | As at 31.12.07 % | ||||
UK | 0.91 | 0.70 | 0.63 | |||
Spain | 0.76 | 0.46 | 0.24 | |||
South Africa | 2.11 | 0.96 | 0.25 |
Table 11: Unsecured lending three-month arrearsc
| ||||||
As at 31.12.08 % | As at 30.06.08 % | As at 31.12.07 % | ||||
UK Cards | 1.28 | 1.36 | 1.36 | |||
UK Loans | 1.87 | 1.40 | 1.35 | |||
US Cards | 2.15 | 2.08 | 1.83 |
Note
a | Based on the following portfolios: UK: UKRB Residential Mortgage and Buy to Let portfolios; Spain: GRCB – Western Europe Spanish retail home finance portfolio; South Africa: GRCB – Absa retail home finance portfolio. |
b | Defined as total 90 day + delinquent balances as a percentage of outstandings. |
c | Defined as total 90 day + delinquent balances as a percentage of outstandings. Excludes legal and repayment plans. UK Cards based on Barclaycard Branded Cards, excluding Goldfish. UK Loans based on Barclayloan. US cards excludes Business Card and US Airways portfolios. |
82 | Barclays Annual Report 2008 |
Risk managementManagement
Credit risk managementRisk Management
Loans and advances
Monitoring weaknesses in exposures
Barclays actively manages its credit exposures. When weaknesses in exposures are detected – either in individual exposures or in groups of exposures – the Group takes action to mitigate the risks. Such actions may, for example, include: reducing the amounts outstanding (in discussion with the customers, clients or counterparties if appropriate); using credit derivatives securitising the assets; and, on occasion, selling them.
Corporate accounts that are deemed to contain heightened levels of risk are recorded on graded early warning or watch lists comprising three categories graded in line with the perceived severity of increasing concern.the risk attached to the lending, and its probability of default. These are updated monthly and circulated to the relevant risk control points. Once listing has taken place, exposure is very carefully monitored and, where appropriate, exposure reductions are effected.
Should an account become impaired, it will normally, but not necessarily, have passed through all three categories, which reflect the need for ever-increasing caution and control.
Where an obligor’s financial health gives grounds for concern, it is immediately placed into the appropriate
category. All obligors, regardless of financial health, are subject to a full review of all facilities on, at least, an annual basis. More frequent interim reviews may be undertaken should circumstances dictate.
Warning list balances rose throughout the year as wholesale credit conditions deteriorated across the regions in which Barclays operates.
Within Local Business, accounts that are deemed to have a heightened level of risk, or that exhibit some unsatisfactory features which could affect viability in the short/medium term, are transferred to a separate ‘Caution’ stream. Accounts on the Caution stream are reviewed on at least a quarterly basis, at which time consideration is given to continuing with the agreed strategy, returning the customer to a lower risk refer stream, or instigating recovery/exit action.
Within the personal portfolios, which tend to comprise homogeneous assets, statistical techniques more readily allow potential weaknesses to be monitored on a portfolio basis. This applies in parts of UK Retail Banking, Barclays Wealth, International Retail and Commercial BankingGRCB’s international retail portfolios and Barclaycard. The approach is consistent with the Group’s policy of raising a collective impairment allowance as soon as objective evidence of impairment is identified.
CRLs and PPLs balances by UK and non-UK
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
b | From 1st January 2005, the application of IAS 39 required interest to be recognised on the remaining balance of an impaired financial asset (or group of financial assets) at the effective interest rate for that asset. As a result, interest is credited to the income statement |
in relation to impaired loans; therefore these loans technically are not classified as ‘non-accrual’. In 2005, the Group replaced the ‘non-accrual’ category with one termed ‘impaired loans’. The SEC requires loans to be classified, where applicable, as non-accrual, accruing past due 90 days or more, ‘troubled debt restructurings’ and potential problem loans. |
Barclays Annual Report 2008 | 83 |
Potential credit risk loans
IfIn line with disclosure requirements from the Securities Exchange Commission (SEC) in the US, if the credit quality of a loan on an early warning or watch list deteriorates to the highest category, consideration is given to including it within the Potential Problem Loan (PPL) list. PPLs are loans where payment of principal and interest is up to date but where serious doubt exists as to the ability of the borrowers to continue to comply with repayment terms in the near future.
Should further evidence of deterioration be observed, a loan may move to the Credit Risk Loan (CRL) category.category as required by the SEC. Events that would trigger the transfer of a loan from the PPL to the CRL category could include a missed payment or a breach of covenant.
CRLs comprise three classes of loans:
– | ‘Impaired loans’ comprise loans where individual identified impairment allowance has been raised and also include loans which are fully collateralised or where indebtedness has already been written down to the expected realisable value. The impaired loan category may include loans, which, while impaired, are still performing. |
Notes
The category ‘impaired and restructured loans’ comprises loans not included above where, for economic or legal reasons related to the |
debtor’s financial difficulties, a concession has been granted to the debtor that would not otherwise be considered. Where the concession results in the expected cash flows discounted at the effective interest rate being less than the loan’s carrying value, an impairment allowance will be raised. |
In 2007, the term Credit Risk Loans replaced the term Non-Performing Loans (NPLs) as the collective term for the total of these three classes to recognise the fact that the impaired loan category may include loans which, while impaired, are still performing. This category includes drawn ABS CDO Super Senior positions.
Potential Credit Risk Loans (PCRLs) comprise PPLs and CRLs. Figures 5 and 6 show CRL and PPL balances by UK and non-UK. The amounts are shown before deduction of value of security held, impairment allowances (from 2005 onwards) and provisions or interest suspense (2004), all of which might reduce the impact of an eventual loss, should it occur. The significant increase to non-UK CRL and PPL balances, in 2007 and 2008, is principally due to the inclusion of US-located ABS CDO Super Senior positions and other credit market exposures.
Credit Risk Loans
In 2008, CRLs rose 63% to £15,700m (2007: £9,641m). Balances were higher in all businesses as credit conditions deteriorated across Barclays areas of operations and total loans and advances grew. The most notable increases were in Barclays Capital and the non-UK businesses in Global Retail and Commercial Banking.
CRLs and PPLs as a percentage of Loans and Advances
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
From 1st January 2005, the application of IAS 39 required interest to be recognised on the remaining balance of an impaired financial asset (or group of financial assets) at the effective interest rate for that asset. As a result, interest is credited to the income statement |
in relation to impaired |
Barclays Annual Report | ||||
Risk management
Credit risk management
Loans and advances
CRLs in retail secured mortgage products increased by £1,309m (89%) to £2,783m (2007: £1,474m). The term Credit Risk Loans has replacedkey driver was Absa Home Finance where balances increased significantly as a result of higher interest rates and increasing consumer indebtedness. Increases were also seen in UK Home Finance, reflecting weakening UK house prices and the term Non-Performing Loans (NPLs)slowing economy, and in Spain, as economic conditions deteriorated.
CRLs in the collective termunsecured and other retail portfolios increased by £1,715m (57%) to £4,725m (2007: £3,010m). The key drivers for the total of these three classes since it recognises the fact that the impaired loan category may include loans,this increase were: Absa, which while impaired, are still performing. This category includes drawn ABS CDO Super Senior positions.
Potential Credit Risk Loans (PCRLs) comprise potential problem loans (PPLs)was impacted by higher interest rates and credit risk loans (CRLs). Figures 8 and 9 show CRL and PPL balances by geography. The amounts are shown before deduction of value of security held, impairment allowances (from 2005 onwards) and provisions or interest suspense (2004
and earlier), all of which might reduce the impact of an eventual loss, should it occur. The significant increase to non-UK CRL and PPL balances is principallyincreasing consumer indebtedness, Barclaycard US, due to the inclusion of US-locateddeteriorating credit conditions which resulted in rising delinquency rates, asset growth and exchange rate movements, and Spain, as economic conditions deteriorated and consumer indebtedness increased.
Corporate/Wholesale CRLs, excluding ABS CDO Super Senior positions, increased by £2,262m (125%) to £4,075m (2007: £1,813m). The key drivers were: Barclays Capital following a number of credit downgrades; increasing default probabilities; and otherSpain, primarily due to increases to the property-related names. Balances also increased in Barclays Commercial Bank and Absa Commercial and Banking Business as corporate credit market exposures.conditions deteriorated, particularly in the last quarter of 2008.
Figures 12 and 13 show impairment allowances as a percentage of CRLs and PCRLs. Including the drawnon ABS CDO Super Senior positions allowance coverageincreased £773m (23%) to £4,117m (2007: £3,344m). The majority of this increase resulted from a migration of assets, totalling £801m, from potential problem loans (PPLs) to CRLs.
Potential Problem Loans
Balances within the Group’s potential problem loans (PPLs) category rose by £659m to £2,456m (31st December 2007: £1,797m). The principal movements were in the corporate and wholesale portfolios, where PPLs rose £1,463m to £1,959m (31st December 2007: £496m) as credit conditions deteriorated. This rise was offset by a fall in PPLs relating to ABS CDO positions, as those balances moved into the CRL category. Broadly flat PPLs from retail portfolios reflected methodology alignments affecting GRCB – Absa which transferred balances of just over £200m previously reported as PPLs to CRLs. This was offset by rises in UK Retail Banking, GRCB – Western Europe and GRCB – Emerging Markets.
Potential Credit Risk Loans
Combining CRLs and PCRLs decreasedPPLs, total potential credit risk loans (PCRL) balances in the corporate and wholesale portfolios increased by 161% in 2008 to 39.1%£6,034m (31st December 2006: 65.6%)2007: £2,309m) as a number of names migrated into the CRL and 33.0%PPL categories, reflecting higher default probabilities in the deteriorating global wholesale environment. PCRLs relating to ABS CDO positions remained stable at £4,117m (31st December 2006: 57.0%), respectively. These movements reflect2007: £4,145m).
Total retail PCRL balances increased 61% to £8,005m (31st December 2007: £4,984m) as delinquency rates rose across a number of secured and unsecured portfolios following a deterioration in credit conditions, particularly in the fact that allowance coverage ofUK, US, Spain and South Africa.
Group PCRL balances rose 59% to £18,156m (31st December 2007: £11,438m). Excluding ABS CDO Super Senior credit risk loans was low relativepositions, PCRLs increased 92% to allowance coverage of other credit risk loans since substantial protection against loss is also provided by subordination£14,039m (31st December 2007: £7,293m).
Table 12: Potential credit risk loans and coverage ratios | ||||||||||||
CRLs | PPLs | PCRLs | ||||||||||
31.12.08 | 31.12.07 | 31.12.08 | 31.12.07 | 31.12.08 | 31.12.07 | |||||||
Retail Secured | 2,783 | 1,474 | 280 | 317 | 3,063 | 1,791 | ||||||
Retail Unsecured and other | 4,725 | 3,010 | 217 | 183 | 4,942 | 3,193 | ||||||
Retail | 7,508 | 4,484 | 497 | 500 | 8,005 | 4,984 | ||||||
Corporate/Wholesale (excl ABS) | 4,075 | 1,813 | 1,959 | 496 | 6,034 | 2,309 | ||||||
Group (excl ABS) | 11,583 | 6,297 | 2,456 | 996 | 14,039 | 7,293 | ||||||
ABS CDO Super Senior | 4,117 | 3,344 | – | 801 | 4,117 | 4,145 | ||||||
Group | 15,700 | 9,641 | 2,456 | 1,797 | 18,156 | 11,438 | ||||||
Impairment allowance | CRL coverage | PCRL cove rage | ||||||||||
31.12.08 | 31.12.07 | 31.12.08 | 31.12.07 | 31.12.08 | 31.12.07 | |||||||
Retail Secured | 561 | 320 | 20.2% | 21.7% | 18.3% | 17.9% | ||||||
Retail Unsecured and other | 3,178 | 2,140 | 67.3% | 71.1% | 64.3% | 67.0% | ||||||
Retail | 3,739 | 2,460 | 49.8% | 54.9% | 46.7% | 49.4% | ||||||
Corporate/Wholesale (excl ABS) | 1,822 | 1,022 | 44.7% | 56.4% | 30.2% | 44.3% | ||||||
Group (excl ABS) | 5,561 | 3,482 | 48.0% | 55.3% | 39.6% | 47.7% | ||||||
ABS CDO Super Senior | 1,013 | 290 | 24.6% | 8.7% | 24.6% | 7.0% | ||||||
Group | 6,574 | 3,772 | 41.9% | 39.1% | 36.2% | 33.0% |
Barclays Annual Report 2008 | 85 |
Impairment Allowances and hedges. OnCoverage Ratios
In 2008, impairment allowances increased 74% to £6,574m (31st December 2007: £3,772m). Excluding ABS CDO Super Senior exposures,positions, allowances increased by 60% to £5,561m (31st December 2007: £3,482m). Allowances increased in all businesses as credit conditions deteriorated, but most notably in Barclays Capital and GRCB’s international portfolios.
Reflecting this 74% rise in impairment allowance compared with the combination63% rise in total CRLs, the Group’s CRL coverage ratio rose to 41.9% (31st December 2007: 39.1%). Coverage ratios for PCRLs rose to 36.2% (31st December 2007: 33.0%).
The largest driver for these increases was the near four-fold increase in the impairment held against ABS CDO Super Senior positions as the LGD of subordination, hedges and write-downs provided protection against loss levels to 72% on US sub-prime collateral as at 31st December 2007.these assets increased.
Figures 14 and 15 show allowanceAllowance coverage ratios of CRLs and PCRLs excluding the drawn ABS CDO Super Senior positions decreased to 55.6%48.0% (31st December 2006: 65.6%2007: 55.3%) and 49.0%39.6% (31st December 2006: 57.0%2007: 47.7%), respectively. These movements in coverage ratios reflected:
– | An increase in CRLs and PCRLs in the well-secured home loan portfolios. |
– | Higher CRLs and PCRLs in the corporate sector, where the recovery outlook is relatively high. |
– | Increased early-cycle delinquent balances in the retail unsecured portfolios, as credit conditions worsened. These earlier-cycle balances, which tend to attract relatively lower impairment requirements, have increased as a proportion of the total delinquent balances. |
The decrease in these ratios reflected a changethe PCRL coverage ratio, excluding the drawn ABS CDO Super Senior positions, was also driven by the overall increase in the mix of CRLs and PCRLs. Unsecured retail exposures, where the recovery outlook is low, decreasedPPLs as a proportion of the total as the collections and underwriting processes were improved. Secured retail and wholesale and corporate exposures, where the recovery outlook is relatively high, increased asPCRLs. Since, by definition, PPLs attract lower
levels of impairment than CRLs, a higher proportion of PCRLs.
Notes
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Risk managementPPLs in total PCRLs will tend to lower the overall coverage ratio.
Credit risk management
Allowances for impairment and other credit provisions
Barclays establishes, through charges against profit, impairment allowances and other credit provisions for the incurred loss inherent in the lending book.
Under IFRS, impairment allowances are recognised where there is objective evidence of impairment as a result of one or more loss events that have occurred after initial recognition, and where these events have had an impact on the estimated future cash flows of the financial asset or portfolio of financial assets. Impairment of loans and receivables is measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. If the carrying amount is less than the discounted cash flows, then no further allowance is necessary.
Impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises homogenous assets and where appropriate statistical techniques are available.
In terms of individual assessment, the trigger point for impairment is formal classification of an account as exhibiting serious financial problems and where any further deterioration is likely to lead to failure. Two key inputs to the cash flow calculation are the valuation of all security and collateral, andas well as the timing of all asset realisations, after allowing for all attendant costs. This method applies in the corporate portfolios – Barclays Commercial Bank, Barclays Capital and certain areas within International Retail and Commercial BankingGRCB’s international portfolios and Barclaycard.
For collective assessment, the trigger point for impairment is the missing of a contractual payment. The impairment calculation is based on a roll-rate approach, where the percentage of assets that move from the initial delinquency to default are derived from statistical probabilities based on experience. Recovery amounts and contractual interest rates are
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
86 | Barclays Annual Report 2008 |
Risk Management
Credit Risk Management
Loans and advances
calculated using a weighted average for the relevant portfolio. This method applies to parts of International Retail and Commercial Banking,GRCB’s international portfolios, Barclaycard and UK Retail Banking and is consistent with Barclays policy of raising an allowance as soon as impairment is identified.
Unidentified impairment allowances, albeit significantly lower in amount than those reported above, are also raised to cover losses which are judged to be incurred but not yet specifically identified in customer exposures at the balance sheet date, and which, therefore, have not been specifically reported.
The incurred but not yet reported calculation is based on the asset’s probability of moving from the performing portfolio to being specifically identified as impaired within the given emergence period and then on to
default within a specified period. This is calculated on the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate.
The emergence periods vary across businesses and are based on actual experience and are reviewed on an annual basis. This methodology ensures that the Group only captures the loss incurred at the balance sheet date.
These impairment allowances are reviewed and adjusted at least quarterly by an appropriate charge or release of the stock of impairment allowances based on statistical analysis and management judgement.
Where appropriate, the accuracy of this analysis is periodically assessed against actual losses.
As one of the controls of ensuring that adequate impairment allowances are held, movements in impairment allowances to individual names above £10m are presented to the Group Credit Committee for agreement.
The Group Credit Risk Impairment Committee (GCRIC),charges and other credit provisions in 2008
In 2008, total impairment charges increased 94% (£2,624m) to £5,419m (2007: £2,795m). This figure included impairment charges of £506m
(2007: £13m) on a semi-annual basis, obtains assuranceavailable for sale assets and reverse repurchase agreements.
Impairment charges on behalfloans and advances and other credit provisions increased 77% (£2,131m) to £4,913m (2007: £2,782m) (see table 1 on page 76) reflecting charges of the Group that all businesses are recognising impairment in their portfolios accurately£1,763m against ABS CDO Super Senior and promptly in their recommendationsother credit market exposures and in accordance with policy, accounting standards and established governance.
GCRIC exercises the authority of the Barclays Risk Director, as delegated by the Chief Executive, and is chaired by Barclays Credit Risk Director.
GCRIC reviews the movements toincreased impairment in the businesses, including those already agreed atinternational portfolios within Global Retail and Commercial Banking. Total loans and advances grew 33% to £516,096m (31st December 2007: £389,290m). As a result, impairment charges on loans and advances and other credit provisions as a percentage of period end Group Credit Committee, Potential Credit Risk Loanstotal loans and Risk Tendency.advances increased to 0.95% (2007: 0.71%).
These committees are supported byIn the retail portfolios, impairment charges on loans and advances and other credit provisions rose 45% (£728m) to £2,333m (2007: £1,605m) (see table 1 on page 76) principally as a numberconsequence of Group Policies including: Group Retail Impairment and Provisioning Policy; Group Wholesale Impairment and Provisioning Policy; and, Group Model Policy.
GCRIC makes twice-yearly recommendations to the Board Audit Committee on the adequacy of Groupincreased impairment allowances. Impairment allowances are reviewed relative to the risk in the portfolio, businessinternational portfolios, whilst total loans and advances increased 24% to £201,588m (31st December 2007: £162,081m). As a result, impairment charges as a percentage of period end total loans and advances increased to 1.16% (2007: 0.99%).
In the wholesale and corporate portfolios, impairment charges on loans and advances and other credit provisions rose by 119% (£1,403m) to £2,580m (2007: £1,177m) (see table 1 on page 76) whilst total loans and advances increased 38% to £314,508m (31st December 2007: £227,209m). As a result, impairment charges as a percentage of period end total loans and advances increased to 0.82% (2007: 0.52%).
Global Retail and Commercial Banking
Impairment charges in UK Retail Banking increased £43m to £602m (2007: £559m), reflecting growth in the book and deteriorating economic trends,conditions. In UK Home Finance, whilst three month arrears increased from 0.63% to 0.91%, the quality of the book and conservative loan to value ratios meant that the impairment charges and amounts charged off remained low at £24m (2007: £3m release). Impairment charges in Consumer Lending increased 3% reflecting the current policieseconomic environment and methodologies and our position against peer banks.loan growth.
Fig. 16: Impairment charges for bad and doubtful debts
2007 £m | 2006 £m | 2005 £m | ||||
UK Banking | 849 | 887 | 671 | |||
Barclaycard | 838 | 1,067 | 753 | |||
International Retail and | ||||||
Commercial Banking | 252 | 167 | 33 | |||
Barclays Capital | 846 | 42 | 111 | |||
Barclays Global Investors | – | – | – | |||
Barclays Wealth | 7 | 2 | 2 | |||
Head office functions and other operations | 3 | (11) | 1 | |||
Total impairment charges | 2,795 | 2,154 | 1,571 |
Fig. 17 Impairment/provisions charges over five years £
NotesNote
a |
Table 13: Impairment Charges and Other Credit Provisions
| ||||
Year Ended 31.12.08 £m | Year Ended 31.12.07 £m | |||
UK Retail Banking | 602 | 559 | ||
Barclays Commercial Bank | 414 | 292 | ||
Barclaycard | 1,097 | 827 | ||
GRCB – Western Europe | 296 | 76 | ||
GRCB – Emerging Markets | 166 | 39 | ||
GRCB – Absa | 347 | 146 | ||
Barclays Capital | 419 | 64 | ||
Barclays Wealth | 44 | 7 | ||
Head office functions and other operations | 11 | 3 | ||
Group Total | 3,396 | 2,013 | ||
ABS CDO Sub-Prime and other credit | ||||
Market Provisions | 1,763 | 782 | ||
Group Total (Including ABS CDO) | 5,159 | 2,795 | ||
Other AFS Assets and Reverse Repos | 260 | – | ||
Group Total | ||||
(Including ABS CDO and AFS/Reverse Repos) | 5,419 | 2,795 |
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87 |
GCRICThe impairment charge in Barclays Commercial Bank increased £122m to £414m (2007: £292m), primarily reflecting higher impairment losses in Larger Business, particularly in the final quarter as the UK corporate credit environment deteriorated.
The impairment charge in Barclaycard increased £270m (33%) to £1,097m (2007: £827m), reflecting higher charges in Barclaycard International portfolios, particularly Barclaycard US which was driven by loan growth, rising delinquency due to deteriorating economic conditions and exchange rate movements; and £68m from the inclusion of Goldfish. These factors were partially offset by lower charges in UK Cards and secured consumer lending.
Impairment charges in GRCB – Western Europe increased £220m to £296m (2007: £76m) principally due to deteriorating economic trends and asset growth in Spain, where there were higher charges in the commercial portfolios as a consequence of the slowdown in the property and construction sectors. In addition higher household indebtedness and rising unemployment has delegateddriven up delinquency and charge-offs in the detailed reviewpersonal sector.
Impairment charges in GRCB – Emerging Markets increased £127m to £166m (2007: £39m), reflecting: weakening credit conditions which adversely impacted delinquency trends in the majority of loanthe retail portfolios; asset growth, particularly in India; and increased wholesale impairment in Africa.
Impairment charges in GRCB – Absa increased £201m to £347m (2007: £146m) as a result of rising delinquency levels in the businesses to the Retailretail portfolios, which have been impacted by rising interest and Wholesale Credit Risk Management Committees.inflation rates and increasing consumer indebtedness.
In 2007, totalimpairment charges on loansInvestment Banking and advances and other credit provisions increased 30% (£641m) to £2,795m (2006: £2,154m) reflectingInvestment Management
Barclays Capital impairment charges of £782m£2,423m (2007: £846m) included a charge of £1,763m (2007: £782m) against ABS CDO Super Senior and other credit market positions.
Impairment Further impairment charges on loansof £241m were incurred in respect of available for sale assets and advancesreverse repurchase
agreements (2007: £nil). Other impairment charges increased £355m to £419m (2007: £64m) and primarily related to charges in the private equity and other credit provisions as a percentage of Group total loans and advances rose to 0.71% (2006: 0.65%); total loans and advances grew by 23% to £389,290m (2006: £316,561m).
Retail impairment charges on loans and advances fell 11% (£204m) to £1,605m (2006: £1,809m). Retail impairment charges as a percentage of period-end total loans and advances reduced to 0.98% (2006: 1.30%); total retail loans and advances rose by 18% to £164,062m (2006: £139,350m)
Barclaycard impairment charges improved £229m (21%) to £838m (2006: £1,067m) reflecting reduce flows into delinquency, lower levels of arrears and lower charge-offs in UK Cards. We made changes to our impairment methodologies to standardise our approach and in anticipation of Basel II. The net positive impact of these changes in methodology was offset by the increase in impairment charges in Barclaycard International and secured consumer lending.
Impairment charges in UK Retail Bank decreased by £76m (12%) to £559m (2006: £635m), reflecting lower charges in unsecured Consumer Lending and Local Business driven by improved collection processes, reduced flows into delinquency, lower trends of arrears and stable charge-offs. In UK Home Finance, asset quality remained strong and mortgage charges remained negligible. Mortgage delinquencies as a percentage of outstandings remained stable and amounts charged-off were low.
Impairment charges in International Retail and Commercial Banking –excluding Absa rose by £38m (93%) to £79m (2006: £41m) reflecting very strong balance sheet growth in 2006 and 2007 and the impact of lower releases in 2007.
Arrears in some of International Retail and Commercial Banking – Absa’s key retail portfolios deteriorated in 2007, driven by interest rate increases in 2006 and 2007 resulting in pressure on collections.
Wholesale and corporate impairment charges on loans and advances increased £436m to £701m (2006: £265m). Wholesale and corporate impairment charges as a percentage of period-end total loans and advances increased to 0.31% (2006: 0.15%); total loans and advances grew by 27% to £225,228m (2006: £177,211m).
Barclays Capital impairment charges and other credit provisions of £846m included a charge of £782m against ABS CDO Super Senior and other credit market exposure and £58m relating to drawn leveraged finance positions.business.
The impairment charge in Barclays Commercial BankWealth increased by £38m (15%)£37m to £290m (2006: £252m), primarily due£44m (2007: £7m) from a very low base. This increase reflected both the substantial increase in the loan book over the last three years and the impact of the current economic environment on client liquidity and collateral values.
The impairment charge in Head Office Functions and Other Operations increased £8m to higher gross£11m (2007: £3m) mainly reflecting losses on Floating Rate Notes held for hedging purposes. An additional £19m (2007: £nil) of impairment charges in Larger Business, partially offset by a lower charge in Medium Business due to a tightening of the lending criteria.were incurred on available for sale assets.
Writing-off of assets
After an advance has been identified as impaired and is subject to an impairment allowance, the stage may be reached whereby it is concluded that there is no realistic prospect of further recovery. Write-off will occur when, and to the extent that, the whole or part of a debt is considered irrecoverable.
The timing and extent of write-offs may involve some element of subjective judgement. Nevertheless, a write-off will often be prompted by a specific event, such as the inception of insolvency proceedings or other formal recovery action, which makes it possible to establish that some or the entire advance is beyond realistic prospect of recovery. In any event, the position of impaired loans is reviewed at least quarterly to ensure that irrecoverable advances are being written off in a prompt and orderly manner and in compliance with any local regulations.
Such assets are only written off once all the necessary procedures have been completed and the amount of the loss has been determined.
Subsequent recoveries of amounts previously written off are written back and hence decrease the amount of the reported loan impairment charge in the income statement.
Total write-offs of impaired financial assets decreasedincreased by £211m£956m to £1,963m (2006: £2,174m)£2,919m (2007: £1,963m).
Note
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
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Risk management
Market risk management
Market risk is the risk that Barclays earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or volatility of market rates or prices such as interest rates, credit spreads, commodity prices, equity prices and foreign exchange rates. The main market risk arises from trading activities. Barclays is also exposed to interest rate risk in the banking book and the pension fund.
Barclays market risk objectives are to:
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The Board approves market risk appetite for trading and non-trading activities. The Market Risk Director is responsible for the market risk control framework and, under delegated authority from the Risk Director, sets a limit framework within the context of the approved market risk appetite. A daily market risk report summarises Barclays market risk exposures against agreed limits. This daily report is sent to the Risk Director, the Market Risk Director, the Finance Director and the appropriate Business Risk Directors.
The Head of each business, assisted by the business risk management team, is accountable for all market risks associated with its activities. Each business is responsible for the identification, measurement, management, control and reporting of market risk as outlined in the Barclays Market Risk Control Framework. Oversight and support is provided to the business by the Market Risk Director, assisted by the central market risk team. The Market Risk Committee reviews, approves, and makes recommendations concerning the market risk profile across Barclays including risk appetite, limits and utilisation. The Committee is held monthly and is chaired by the Market Risk Director. Attendees include the Risk Director, respective business risk managers and senior managers from the central market risk team.
In Barclays Capital, the Head of Market Risk is responsible for implementing the market risk control framework. Day to day responsibility for market risk lies with the senior management of Barclays Capital, supported by the Market Risk Management team that operates independently of the trading areas. Daily market risk reports are produced for the main Barclays Capital business areas covering the different risk categories including interest rate, credit spread, commodity, equity and foreign exchange. A more detailed trading market risk presentation is produced fortnightly and discussed at the Barclays Capital Traded Products Risk Review meeting. The attendees at this meeting include senior managers from Barclays Capital and the central market risk team.
Outside Barclays Capital, Global Retail and Commercial Banking is responsible for the non-structural interest rate risk in the banking book and Group Treasury is responsible for structural risk (interest rate and FX). The chart below right gives an overview of the business control structure.
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Barclays policy is to concentrate trading activities in Barclays Capital. This includes transactions where Barclays Capital acts as principal with clients or with the market. For maximum efficiency, Barclays manages client and market activities together. In Barclays Capital, trading risk occurs in both the trading book and the banking book as defined for regulatory purposes.
In anticipation of future customer demand, Barclays maintains access to market liquidity by quoting bid and offer prices with other market makers and carries an inventory of capital market and treasury instruments, including a broad range of cash, securities and derivatives. Derivatives entered into for trading purposes include swaps, forward rate agreements, futures, credit derivatives, options and combinations of these instruments. For a description of the nature of derivative instruments, see page 89.
Traded market risk measurement
The measurement techniques used to measure and control traded market risk include Daily Value at Risk and Stress Testing.
Daily Value at Risk (DVaR) is an estimate of the potential loss which might arise from unfavourable market movements, if the current positions were to be held unchanged for one business day, measured to a confidence level of 98%. Daily losses exceeding the DVaR figure are likely to occur, on average, twice in every 100 business days.
DVaR uses the historical simulation method with a historic sample of two years. The credit spread calculation takes into account specific risks associated with different business names.
There are a number of considerations that should be taken into account when reviewing DVaR numbers. These are:
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To complement DVaR, stress testing is performed and there is a large set of non-DVaR limits including foreign exchange concentration limits and interest rate delta limits.
DVaR is an important market risk measurement and control tool and consequently the model is regularly assessed. The main approach employed is the technique known asback-testing which counts the number of days when trading losses exceed the corresponding DVaR estimate.
On the basis of DVaR estimated to a 98% confidence level, on average there would be five days each year when trading losses would be expected to exceed DVaR and would therefore be reflected as back-testing exceptions. For Barclays Capital’s trading book, there were seven instances of a daily trading loss exceeding the corresponding 98% back-testing DVaR. These back-testing exceptions in 2007 reflected the increased volatility across a number of markets in which Barclays Capital operates. There were no instances of back-testing exceptions on a similar basis in 2006.
Stress testing provides an indication of the potential size of losses that could arise in extreme conditions. The three main types of stress test are:
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Stress results are produced at least fortnightly and are included in the Traded Products Risk Review meeting information pack. If a potential stress loss exceeds the corresponding trigger limit, the positions captured by the stress test are reviewed and discussed by Barclays Capital market risk and the respective Barclays Capital Business Head(s). The minutes of the discussion, including the merits of the position and the appropriate course of action, are then sent to the Market Risk Director for review.
| ||
Risk management
Market risk management
Analysis of traded market risk exposures
The analysis of traded market risk exposures is given in Note 46.
Analysis of trading revenue
The histograms show the distribution of daily trading revenue for Barclays Capital in 2007 and 2006. Revenue includes net trading income, net interest income and net fees and commissions relating to primary trading. The average daily revenue in 2007 was £26.2m (2006: £22.0m) and there were 224 positive revenue days out of 253 (2006: 243 out of 252). The number of negative revenue days increased in 2007 largely as a result of volatile markets in the second half of the year. The number of large positive revenue days also increased but these were spread across the year.
Interest rate risk in the banking book
Interest rate risk arises from the provision of retail and wholesale (non-traded) banking products and services, as well as structural exposures within Barclays balance sheet.
The management approach of Barclays with respect to interest rate risk is to transfer the risk from the businesses either into local treasuries or to Group Treasury using an internal transfer price or interest rate swap. The methodology used to transfer this risk depends on whether the product contains yield curve risk, basis risk or customer optionality. Limits exist to ensure no material risk is retained within any business or product area.
Once each business’s risk has been transferred, the treasuries manage any residual yield curve and basis risks subject to modest risk limits and other controls. Market risk is also taken in overseas treasuries, within these limits, to support and facilitate customer activity.
Risk measurement
The techniques used to measure and control interest rate risk in the banking book include Annual Earnings at Risk, Daily Value at Risk and Stress Testing.
Annual Earnings at Risk (AEaR) measures the sensitivity of net interest income (NII) over the next 12 months. It is calculated as the difference between the estimated income using the current yield curve and the lowest estimated income following a 50 basis points increase or decrease in interest rates.
Outside Barclays Capital, Barclays uses a simplified approach to calculateDVaR. It is used as a complementary tool to AEaR. Both AEaR and DVaR are supplemented by stress testing and a range of non-DVaR limits.
Stress testing is carried out by the business centres and is reviewed by senior management and business-level asset and liability committees. The stress testing is tailored to the business and typically incorporates scenario analysis and historical stress movements applied to respective portfolios.
Analysis of interest rate risk in the banking book exposures
The analysis of interest rate risk in the banking book is given in Note 46.
Barclays maintains a number of defined benefit pension schemes for past and current employees. The ability of the Pension Fund to meet the projected pension payments is maintained through investments and regular Bank contributions.Pension risk arises because: the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, Barclays could be required or might choose to make extra contributions to the pension fund. Financial details of the pension fund are in Note 30.
Investment risk is the risk of financial volatility arising from changes in the market value of investments, principally occurring in Barclays insurance companies. These investments may comprise various liquid instruments, such as cash, bonds and listed equities, to cover future insurance liability flows, and may therefore give rise to a mismatch between the revaluation of assets and liabilities. It is Barclays policy to hedge such exposures in line with a defined risk appetite.
Barclays policy is for foreign exchange trading risk to be concentrated and managed in Barclays Capital. Some transactionforeign exchange riskexposure arises within the local treasury operations in Global Retail and Commercial Banking to support and facilitate client activity. This is minimised in accordance with modest risk limits and was not material as at end 2007. Other non-Barclays Capital foreign exchange exposure is covered in Note 46.
Asset management structural market risk arises where the fee and commission income earned by asset management products and businesses is affected by a change in market levels, primarily through the link between income and the value of assets under management. Where support agreements exist, the Group is exposed to the performance of the underlying asset. This exposure arises mainly within Barclays Global Investors, but also in Global Retail and Commercial Banking, and Barclays Wealth. It is Barclays policy that businesses monitor and report this risk against a defined risk appetite and regularly assess potential hedging strategies.
88 | Barclays Annual Report | |||
Risk management
Credit risk management
Loans and advances
Risk Tendency
In 2008, Risk Tendency increased 58% (£1,355m) to £3,710m (31st December 2007: £2,355m), compared with 32% growth in the Group’s loans and advances balances. This was reflective of the higher credit risk profile, weakening credit conditions across our main businesses, and changing mix, as a consequence of planned growth, in a number of businesses and portfolios. Risk Tendency in 2008 also increased as a result of the weakening of Sterling against a number of other foreign currencies, including the US Dollar and the Euro.
UK Retail Banking Risk Tendency increased £50m to £520m (31st December 2007: £470m). This reflected a higher risk profile in the unsecured and secured loans portfolios, weakening UK credit conditions, and asset growth, primarily in the Home Finance portfolio.
Risk Tendency in Barclays Commercial Bank increased £95m to £400m (31st December 2007: £305m). This reflected the deteriorating UK corporate credit environment and asset growth.
Barclaycard Risk Tendency increased £520m to £1,475m (31st December 2007: £955m) primarily reflecting the inclusion of new business acquisitions (£260m) as well as asset growth, exchange rate movements, and the economic conditions in the US. Risk Tendency in the UK Cards portfolio remained stable as improvements in portfolio quality were offset by deterioration in the UK economic environment.
Risk Tendency at GRCB – Western Europe increased £135m to £270m (31st December 2007: £135m) principally reflecting weakening credit conditions across Europe, particularly in Spain, asset growth and movements in the Euro/Sterling exchange rate.
Risk Tendency at GRCB – Emerging Markets increased £210m to £350m (31st December 2007: £140m) reflecting weakening credit conditions across the majority of regions, a change in the risk profile following a broadening of the product offering through new product launches and new market entry in India and UAE, and asset growth.
Risk Tendency at GRCB – Absa increased £65m to £255m (31st December 2007: £190m) reflecting weakening retail and, to a lesser extent, corporate credit conditions in South Africa and asset growth and movements in the Rand/Sterling exchange rate.
Risk Tendency in Barclays Capital increased £275m to £415m (31st December 2007: £140m) reflecting credit downgrades and asset growth. The drawn liquidity facilities on ABS CDO Super Senior positions are classified as credit risk loans and therefore no Risk Tendency is calculated on them.
Risk Tendency at Barclays Wealth increased £10m to £20m (31st December 2007: £10m) reflecting a weakening credit risk profile and asset growth.
Notes
a | Excludes ABS CDO Super Senior positions as these are classified as credit risk loans and therefore no Risk Tendency is calculated on them. |
b | Head office functions and other operations comprise discontinued businesses in transition. |
. |
Barclays Annual Report 2008 | 89 |
Risk management
Credit risk management
Debt securities and other bills
The following table presents an analysis of the credit quality of debt and similar securities, other than loans held within the Group. Securities rated as investment grade amounted to 91.6% of the portfolio (2007: 88.0%).
As at 31.12.08 | Treasury and other eligible bills £m | Debt securities £m | Total £m | % | ||||
AAA to BBB– (investment grade) | 7,314 | 198,493 | 205,807 | 91.6 | ||||
BB+ to B | 1,233 | 15,309 | 16,542 | 7.4 | ||||
B– or lower | – | 2,343 | 2,343 | 1.0 | ||||
Total | 8,547 | 216,145 | 224,692 | 100.0 | ||||
Of which issued by: | ||||||||
– governments and other public bodies | 8,547 | 73,881 | 82,428 | 36.7 | ||||
– US agency | – | 34,180 | 34,180 | 15.3 | ||||
– mortgage and asset-backed securities | – | 34,844 | 34,844 | 15.5 | ||||
– corporate and other issuers | – | 55,244 | 55,244 | 24.6 | ||||
– bank and building society certificates of deposit | – | 17,996 | 17,996 | 7.9 | ||||
Total | 8,547 | 216,145 | 224,692 | 100.0 | ||||
Of which classified as: | ||||||||
– trading portfolio assets | 4,544 | 148,686 | 153,230 | 68.2 | ||||
– financial instruments designated at fair value | – | 8,628 | 8,628 | 3.8 | ||||
– available-for-sale securities | 4,003 | 58,831 | 62,834 | 28.0 | ||||
Total | 8,547 | 216,145 | 224,692 | 100.0 | ||||
As at 31.12.07 | Treasury and other eligible bills £m | Debt securities £m | Total £m | % | ||||
AAA to BBB– (investment grade) | 4,114 | 189,794 | 193,908 | 88.0 | ||||
BB+ to B | 703 | 24,693 | 25,396 | 11.5 | ||||
B– or lower | – | 1,181 | 1,181 | 0.5 | ||||
Total | 4,817 | 215,668 | 220,485 | 100.0 | ||||
Of which issued by: | ||||||||
– governments and other public bodies | 4,817 | 63,798 | 68,615 | 31.1 | ||||
– US agency | – | 13,956 | 13,956 | 6.3 | ||||
– mortgage and asset-backed securities | – | 28,928 | 28,928 | 13.1 | ||||
– corporate and other issuers | – | 88,207 | 88,207 | 40.0 | ||||
– bank and building society certificates of deposit | – | 20,779 | 20,779 | 9.5 | ||||
Total | 4,817 | 215,668 | 220,485 | 100.0 | ||||
Of which classified as: | ||||||||
– trading portfolio assets | 2,094 | 152,778 | 154,872 | 70.2 | ||||
– financial instruments designated at fair value | – | 24,217 | 24,217 | 11.0 | ||||
– available-for-sale securities | 2,723 | 38,673 | 41,396 | 18.8 | ||||
Total | 4,817 | 215,668 | 220,485 | 100.0 |
90 | Barclays Annual Report 2008 |
Risk management
Credit risk management
The use of derivatives and their sale to customers as risk management products are an integral part of the Group’s trading activities. These instruments are also used to manage the Group’s own exposure to fluctuations in interest, exchange rates and commodity and equity prices as part of its asset and liability management activities.
Barclays Capital manages the trading derivatives book as part of the market risk book. This includes foreign exchange, interest rate, equity, commodity and credit derivatives. The policies regarding market risk management are outlined in the market risk management section on pages 86 to 88.
The policies for derivatives that are used to manage the Group’s own exposure to interest and exchange rate fluctuations are outlined in the asset and liability market risk section on page 223.106-110.
Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. They include swaps, forward rate agreements, futures, options and combinations of these instruments and primarily affect the Group’s net interest income, net trading income, net fee and commission income and derivative assets and liabilities. Notional amounts of the contracts are not recorded on the balance sheet.
The Group participates both in exchange traded and over the counter derivatives markets.
Exchange traded derivatives
The Group buys and sells financial instruments that are traded or cleared on an exchange, including interest rate swaps, futures and options on futures. Holders of exchange traded instruments provide margin daily with cash or other security at the exchange, to which the holders look for ultimate settlement.
Over the counter traded derivatives
The Group also buys and sells financial instruments that are traded over the counter, rather than on a recognised exchange.
These instruments range from commoditised transactions in derivative markets, to trades where the specific terms are tailored to the requirements of the Group’s customers. In many cases, industry standard documentation is used, most commonly in the form of a master agreement, with individual transaction confirmations. The existence of a signed master agreement is intended to give the Group protection in situations where a counterparty is in default.
Foreign exchange derivatives
The Group’s principal exchange rate related contracts are forward foreign exchange contracts, currency swaps and currency options. Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency, usually on a specified future date at an agreed rate. A currency swap generally involves the exchange, or notional exchange, of equivalent amounts of two currencies and a commitment to exchange interest periodically until the principal amounts are re-exchanged on a future date.
Currency options provide the buyer with the right, but not the obligation, either to purchase or sell a fixed amount of a currency at a specified exchange rate on or before a future date. As compensation for assuming the option risk, the option writer generally receives a premium at the start of the option period.
Interest rate derivatives
The Group’s principal interest rate related contracts are interest rate swaps, forward rate agreements, basis swaps, caps, floors and swaptions. Included in this product category are transactions that include combinations of these features.
An interest rate swap is an agreement between two parties to exchange fixed rate and floating rate interest by means of periodic payments based upon a notional principal amount and the interest rates defined in the contract. Certain agreements combine interest rate and foreign currency swap transactions, which may or may not include the exchange of principal amounts. A basis swap is a form of interest rate swap, in which both parties exchange interest payments based on floating rates, where the floating rates are based upon different underlying reference indices. In a forward rate agreement, two parties agree a future settlement of the difference between an agreed rate and a future interest rate, applied to a notional principal amount. The settlement, which generally occurs at the start of the contract period, is the discounted present value of the payment that would otherwise be made at the end of that period.
Credit derivatives
The Group’s principal credit derivative-related contracts include credit default swaps and total return swaps. A credit derivative is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection.
A credit default swap is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
A total return swap is an instrument whereby the seller of protection receives the full return of the asset, including both the income and change in the capital value of the asset. The buyer in return receives a predetermined amount.
Equity derivatives
The Group’s principal equity-related contracts are equity and stock index swaps and options (including warrants, which are equity options listed on an exchange). An equity swap is an agreement between two parties to exchange periodic payments, based upon a notional principal amount, with one side paying fixed or floating interest and the other side paying based on the actual return of the stock or stock index. An equity option provides the buyer with the right, but not the obligation, either to purchase or sell a specified stock, basket of stocks or stock index at a specified price or level on or before a specified date. The Group also enters into fund-linked derivatives, being swaps and options whose underlyings include mutual funds, hedge funds, indices and multi-asset portfolios.
Commodity derivatives
The Group’s principal commodity-related derivative contracts are swaps, options, forwards and futures. The main commodities transacted are base metals, precious metals, oil and oil-related products, power and natural gas.
Barclays Annual Report |
The tables below set out the fair values of the derivative assets together with the value of those assets subject to enforceable counterparty netting arrangements for which the Group holds offsetting liabilities and eligible collateral.
Derivative assets – As at 31.12.08 | Gross assets £m | Counterparty £m | Net exposure £m | |||
Foreign exchange | 107,730 | 91,572 | 16,158 | |||
Interest rate | 615,321 | 558,985 | 56,336 | |||
Credit derivatives | 184,072 | 155,599 | 28,473 | |||
Equity and stock index | 28,684 | 20,110 | 8,574 | |||
Commodity derivatives | 48,995 | 35,903 | 13,092 | |||
984,802 | 862,169 | 122,633 | ||||
Total collateral held | 54,905 | |||||
Net exposure less collateral | 67,728 | |||||
Derivative assets – As at 31.12.07 | Gross assets £m | Counterparty £m | Net exposure | |||
Foreign exchange | 30,824 | 22,066 | 8,758 | |||
Interest rate | 140,504 | 117,292 | 23,212 | |||
Credit derivatives | 38,696 | 31,307 | 7,389 | |||
Equity and stock index | 13,296 | 12,151 | 1,145 | |||
Commodity derivatives | 24,768 | 15,969 | 8,799 | |||
248,088 | 198,785 | 49,303 | ||||
Total collateral held | 16,700 | |||||
Net exposure less collateral | 32,603 |
Gross derivative assets of £985bn (2007: £248bn) cannot be netted down under IFRS. Derivative assets would be £917bn (2007: £215bn) lower than reported under IFRS if counterparty or collateral netting were allowed.
Exposure relating to derivatives, repurchase agreements, reverse repurchase agreements, stock borrowing and loan transactions is calculated using internal, FSA approved models. These are used as the basis to assess both regulatory capital and capital appetite and are managed on a daily basis. The methodology encompasses all relevant factors to enable the current value to be calculated and the future value to be estimated, for example: current market rates, market volatility and legal documentation (including collateral rights).
92 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Barclays Capital credit market exposures
Barclays Capital’s credit market exposures primarily relate to US residential mortgages, commercial mortgages and leveraged finance businesses that have been significantly impacted by the continued deterioration in the global credit markets. The exposures include both significant positions subject to fair value movements in the profit and loss account and positions that are classified as loans and advances and available for sale. None of the exposure disclosed below has been reclassified to loans and advances under the amendments to IAS 39.
The exposures are set out by asset class in US Dollars and Sterling below:
$ma | £ma | |||||||||
US Residential Mortgages | Notes | As at 31.12.08 | As at 31.12.07 | As at 31.12 .08 | As at 31.12.07 | |||||
ABS CDO Super Senior | A1 | 4,526 | 9,356 | 3,104 | 4,671 | |||||
Other US sub- prime | A2 | 5,017 | 10,089 | 3,441 | 5,037 | |||||
Alt-A | A3 | 6,252 | 9,847 | 4,288 | 4,916 | |||||
US RMBS exposure wrapped by monoline insurers | A4 | 2,389 | 1,462 | 1,639 | 730 | |||||
Commercial mortgages | ||||||||||
Commercial real estate | B1 | 16,882 | 22,239 | 11,578 | 11,103 | |||||
Commercial mortgage-backed securities | B1 | 1,072 | 2,596 | 735 | 1,296 | |||||
CMBS exposure wrapped by monoline insurers | B2 | 2,703 | 395 | 1,854 | 197 | |||||
Other Credit Market Exposures | ||||||||||
Leveraged financeb | C1 | 15,152 | 18,081 | 10,391 | 9,027 | |||||
SIVs and SIV-Lites | C2 | 1,404 | 1,570 | 963 | 784 | |||||
CDPCs | C3 | 218 | 39 | 150 | 19 | |||||
CLO and other exposure wrapped by monoline insurers | C4 | 7,202 | 817 | 4,939 | 408 |
These exposures have been actively managed during the year in an exceptionally challenging market environment and have been reduced by net sales and paydowns of £6,311m, offset by the 37% appreciation of the US Dollar against Sterling. In January 2009, there was an additional sale of £3,056m of leveraged finance exposure which was repaid at par. Exposures at 31st December 2008 included £1,060m of securities from the acquisition of Lehman Brothers North American businesses. Exposures wrapped by monolines have increased during the course of 2008 as a result of declines in the fair value of the underlying assets.
Analysis of Barclays Capital credit market exposures by asset class
ABS CDO Super Senior £m | Other US sub -prime £m | Alt-A £m | RMBS £m | Commercial £m | Commercial mortgage backed securities £m | CMBS wrapped by monoline insurers £m | Leveraged finance £m | SIVs and SIV-Lites £m | CDPCs £m | CLO and other exposure wrapped by monoline insurers £m | As at 31.12.08 £m | ||||||||||||||
Debt securities | 782 | 2,532 | 1,420 | 11 | 4,745 | ||||||||||||||||||||
Trading portfolio assets | 782 | 2,532 | 1,420 | 11 | 4,745 | ||||||||||||||||||||
Loans and advances | 1,565 | 778 | 11,555 | 531 | 14,429 | ||||||||||||||||||||
Financial assets designated at fair value | 1,565 | 778 | 11,555 | 531 | 14,429 | ||||||||||||||||||||
Derivative financial instruments | 643 | 398 | 1,639 | 23 | (685 | ) | 1,854 | 273 | 150 | 4,939 | 9,234 | ||||||||||||||
Loans and advances to customers | 3,104 | 195 | 9,361 | 148 | 12,808 | ||||||||||||||||||||
Debt securities | 147 | 580 | 727 | ||||||||||||||||||||||
Available for sale financial instruments | 147 | 580 | 727 | ||||||||||||||||||||||
Other assets | 109 | 109 | |||||||||||||||||||||||
Exposure on balance sheet | 3,104 | 3,441 | 4,288 | 1,639 | 11,578 | 735 | 1,854 | 9,361 | 963 | 150 | 4,939 |
Notes
a | As the majority of exposure is held in US Dollars the exposures above are shown in both US Dollars and Sterling . |
b | Included within the total leveraged finance exposure of £10,391m is £1,030m of off-balance sheet commitments. |
Barclays Annual Report 2008 | 93 |
There were gross losses of £8,053m (2007: £2,999m) in the year to 31st December 2008. These losses were partially offset by related income and hedges of £1,433m (2007: £706m), and gains of £1,663m (2007: £658m) from the general widening of credit spreads on issued notes measured at fair value through the profit and loss account.
The gross losses, which included £1,763m (2007: £782m) in impairment charges, comprised: £5,584m (2007: £2,811m) against US RMBS exposures; £1,488m (2007: £14m) against commercial mortgage exposures; and £981m (2007: £174m) against other credit market exposures.
Fair Value |
Impairment £m |
Gross | |||||||
ABS CDO super senior | (78 | ) | (1,383 | ) | (1,461 | ) | |||
Other US sub-prime | (1,560 | ) | (168 | ) | (1,728 | ) | |||
Alt-A | (1,858 | ) | (125 | ) | (1,983 | ) | |||
US RMBS wrapped by monoline insurers | (412 | ) | – | (412 | ) | ||||
Total US residential mortgages | (3,908 | ) | (1,676 | ) | (5,584 | ) | |||
US | (671 | ) | – | (671 | ) | ||||
Europe | (350 | ) | – | (350 | ) | ||||
Total commercial real estate | (1,021 | ) | – | (1,021 | ) | ||||
Commercial mortgage-backed securities | (127 | ) | – | (127 | ) | ||||
CMBS wrapped by monoline insurers | (340 | ) | – | (340 | ) | ||||
Total commercial mortgages | (1,488 | ) | – | (1,488 | ) | ||||
SIVs and SIV-Lites | (143 | ) | (87 | ) | (230 | ) | |||
CDPCs | (14 | ) | – | (14 | ) | ||||
CLO and other assets wrapped by monoline insurers | (737 | ) | – | (737 | ) | ||||
Total other credit market | (894 | ) | (87 | ) | (981 | ) | |||
Total | (6,290 | ) | (1,763 | ) | (8,053 | ) |
94 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Barclays Capital credit market exposures
A. US Residential Mortgages
US residential mortgage exposures have reduced by 41% in US Dollar terms, and 19% in Sterling terms, since 31st December 2007.
A1. ABS CDO Super Senior
During the year ABS CDO Super Senior exposures reduced by £1,567m to £3,104m (31st December 2007: £4,671m). Net exposures are stated after write-downs and charges of £1,461m incurred in 2008 (2007: £1,816m) and hedges of £nil (31st December 2007: £1,347m). There were no hedges in place at 31st December 2008 as the corresponding liquidity facilities had been terminated. There were liquidations and paydowns of £2,318m in the year; weaker Sterling and a reduction in hedges increased exposure by £865m and £1,347m respectively.
The remaining ABS CDO Super Senior exposure at 31st December 2008 comprised five high grade liquidity facilities which were fully drawn and classified within loans and receivables, and no remaining mezzanine exposure. At 31st December 2007 there were 15 facilities of which nine were high grade and six mezzanine.
The impairment assessment of remaining super senior positions is based on cash flow methodology using standard market assumptions such as default curves and remittance data to calculate the net present value of the future losses for the collateral pool over time. As a result, future potential impairment charges depend on changes in these assumptions.
We have included all ABS CDO Super Senior exposure in the US residential mortgages section as nearly 90% of the underlying collateral relates to US RMBS. The impairment applied to the notional collateral is set out in the table below.
As at 31.12.08 |
As at 31.12.07 |
As at |
As at | ||||||||||||||||
High Grade £m | Total £m | High Grade £m | Mezzanine £m | Total £m | Marksa | Marksa | |||||||||||||
2005 and earlier | 1,226 | 1,226 | 1,458 | 1,152 | 2,610 | 90% | 69% | ||||||||||||
2006 | 471 | 471 | 1,654 | 314 | 1,968 | 37% | 47% | ||||||||||||
2007 and 2008 | 25 | 25 | 176 | 87 | 263 | 69% | 53% | ||||||||||||
Sub-prime | 1,722 | 1,722 | 3,288 | 1,553 | 4,841 | 75% | 60% | ||||||||||||
2005 and earlier | 891 | 891 | 714 | 102 | 816 | 77% | 96% | ||||||||||||
2006 | 269 | 269 | 594 | 68 | 662 | 75% | 90% | ||||||||||||
2007 and 2008 | 62 | 62 | 163 | 13 | 176 | 37% | 80% | ||||||||||||
Alt-A | 1,222 | 1,222 | 1,471 | 183 | 1,654 | 74% | 92% | ||||||||||||
Prime | 520 | 520 | 662 | 123 | 785 | 100% | 100% | ||||||||||||
RMBS CDO | 402 | 402 | 842 | 445 | 1,287 | – | 19% | ||||||||||||
Sub-prime second lien | 127 | 127 | 158 | – | 158 | – | 32% | ||||||||||||
Total RMBS | 3,993 | 3,993 | 6,421 | 2,304 | 8,725 | 68% | 63% | ||||||||||||
CMBS | 44 | 44 | 189 | 110 | 299 | 100% | 96% | ||||||||||||
Non-RMBS CDO | 453 | 453 | 429 | 80 | 509 | 56% | 49% | ||||||||||||
CLOs | 35 | 35 | 26 | – | 26 | 100% | 100% | ||||||||||||
Other ABS | 51 | 51 | 136 | 4 | 140 | 100% | 100% | ||||||||||||
Total other ABS | 583 | 583 | 780 | 194 | 974 | 66% | 72% | ||||||||||||
Total notional collateral | 4,576 | 4,576 | 7,201 | 2,498 | 9,699 | 68% | 64% | ||||||||||||
Subordination | (459 | ) | (459 | ) | (1,001 | ) | (864 | ) | (1,865 | ) | |||||||||
Gross exposure pre impairment | 4,117 | 4,117 | 6,200 | 1,634 | 7,834 | ||||||||||||||
Impairment allowances | (1,013 | ) | (1,013 | ) | (290 | ) | (432 | ) | (722 | ) | |||||||||
Trading losses gross of Hedges | – | – | (1,041 | ) | (53 | ) | (1,094 | ) | |||||||||||
Hedges | – | – | (960 | ) | (387 | ) | (1,347 | ) | |||||||||||
Net exposure | 3,104 | 3,104 | 3,909 | 762 | 4,671 | ||||||||||||||
Collateral marks including liquidated structures | 32% | 62% |
Note
a | Marks above reflect the gross exposure after the impairment and subordination and do not include the benefit of hedges. The change in marks since 31st December 2007 primarily results from the liquidation during 2008 of the most impaired structures. |
Barclays Annual Report 2008 | 95 |
Consolidated collateral of £8.4bn relating to the ten CDOs that were liquidated in 2008 has been sold or are stated at fair value net of hedges within Other US sub-prime, Alt-A and CMBS exposures. The notional collateral remaining at 31st December 2008 is marked at approximately 12%. The collateral valuation for all ABS CDO Super Senior deals, including those liquidated and consolidated in 2008, is approximately 32% (31st December 2007: 62%).
The collateral for the outstanding ABS CDO Super Senior exposures primarily comprises residential mortgage backed securities (RMBS). At 31st December 2008 the residual exposure contains a higher proportion of collateral originated in 2005 and earlier than at 31st December 2007. There is minimal exposure to collateral originated in 2007 or later. The vintages of the sub-prime, Alt-A and US RMBS collateral are set out in the table below.
As at |
As at | |||
Sub-prime Collateral by Vintage | ||||
2005 and earlier | 71% | 54% | ||
2006 | 27% | 41% | ||
2007 and 2008 | 2% | 5% | ||
Alt-A Collateral by Vintage | ||||
2005 and earlier | 73% | 49% | ||
2006 | 22% | 40% | ||
2007 and 2008 | 5% | 11% | ||
US RMBS Collateral by Vintage | ||||
2005 and earlier | 72% | 53% | ||
2006 | 25% | 40% | ||
2007 and 2008 | 3% | 7% |
RMBS collateral for the ABS CDO Super Senior exposures is subject to public ratings. The ratings of sub-prime, Alt-A and total US RMBS CDO collateral are set out in the table below.
31.12.08 |
31.12.07 |
31.12.07 |
31.12.07 | |||||
Sub-prime US RMBS Ratings | ||||||||
AAA/AA | 42% | 43% | 2% | 30% | ||||
A/BBB | 21% | 51% | 82% | 60% | ||||
Non-investment Grade | 37% | 6% | 16% | 10% | ||||
Alt-A RMBS Ratings | ||||||||
AAA/AA | 66% | 89% | 47% | 85% | ||||
A/BBB | 7% | 8% | 45% | 12% | ||||
Non-investment Grade | 27% | 3% | 8% | 3% | ||||
Total US RMBS Ratings | ||||||||
AAA/AA | 50% | 63% | 14% | 50% | ||||
A/BBB | 13% | 31% | 70% | 41% | ||||
Non-investment Grade | 37% | 6% | 16% | 9% |
96 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Barclays Capital credit market exposures
A2. Other US Sub-Prime
As at |
As at |
Marks at 31.12.08 |
Marks at | ||||||
Whole loans – performing | 1,290 | 2,805 | 80% | 100% | |||||
Whole loans – more than 60 days past due | 275 | 372 | 48% | 65% | |||||
Total whole loans | 1,565 | 3,177 | 72% | 94% | |||||
AAA securities | 111 | 735 | 40% | 92% | |||||
Other sub-prime securities | 818 | 525 | 23% | 61% | |||||
Total securities gross of hedges | 929 | 1,260 | 25% | 76% | |||||
Hedges | – | (369 | ) | ||||||
Securities (net of hedges) | 929 | 891 | |||||||
Residuals | – | 233 | – | 24% | |||||
Other exposures with underlying sub-prime collateral: | |||||||||
– Derivatives | 643 | 333 | 87% | 100% | |||||
– Loans | 195 | 346 | 70% | 100% | |||||
– Real Estate | 109 | 57 | 46% | 68% | |||||
Total other direct and indirect exposure | 1,876 | 1,860 | |||||||
Total | 3,441 | 5,037 |
The majority of Other US sub-prime exposures are measured at fair value through profit and loss. US sub-prime securities held in conduits and a collateralised debt obligation (CDO) are categorised as available for sale and are recognised in equity.
Exposure declined from £5,037m to £3,441m driven by gross losses of £1,728m and net sales, paydowns and other movements of £1,649m. Weaker Sterling resulted in an increase in exposure of £1,086m. Exposures at 31st December 2008 included assets acquired from Lehman Brothers North American businesses of £83m in AAA securities and £124m in other US sub-prime securities.
At 31st December 2008, 82% of the whole loan exposure was performing. Whole loans included £1,422m (31st December 2007: £2,843m) acquired on or originated since the acquisition of EquiFirst in March 2007. Of this balance, £281m of new sub-prime loans were originated in 2008. At 31st December 2008, the average loan to value at origination of all the sub-prime whole loans was 79%. Loans guaranteed by Federal Housing Administration (FHA) are not included in the exposure above. An FHA loan is a mortgage loan fully insured by the US Federal Housing Administration and therefore not considered to be a credit sensitive product. EquiFirst has only originated FHA eligible loans since April 2008, and held £132m of these loans at 31st December 2008.
Securities included £37m held by consolidated conduits and £110m held in a CDO on which impairment charges of £16m and £53m respectively have been recorded.
Other exposures with underlying sub-prime collateral include counterparty derivative exposures to vehicles which hold sub-prime collateral. Derivatives of £643m (31st December 2007: £333m) relate to US Dollar denominated interest rate swaps. The increase in the balance principally relates to the decline in interest rates globally and the 37% depreciation of Sterling relative to the US Dollar, especially in the second half of 2008. The majority of all other exposures with underlying sub-prime collateral was the most senior obligation of the vehicle.
Barclays Annual Report 2008 | 97 |
A3. Alt-A
As at |
As at |
Marks at |
Marks at | |||||
AAA securities | 1,847 | 3,553 | 43% | 87% | ||||
Other Alt-A securities | 1,265 | 208 | 9% | 75% | ||||
Whole Loans | 776 | 909 | 67% | 97% | ||||
Residuals | 2 | 25 | 6% | 66% | ||||
Derivative exposure with underlying Alt-A collateral | 398 | 221 | 100% | 100% | ||||
Total | 4,288 | 4,916 |
Alt-A securities, whole loans and residuals are measured at fair value through profit and loss. Alt-A securities held in conduits and a collateralised debt obligation (CDO) are categorised as available for sale and are recognised in equity.
Net exposure to the Alt-A market was £4,288m (31st December 2007: £4,916m), through a combination of whole loans, securities and residuals, including those held in consolidated conduits. There were gross losses of £1,983m in the year and net sales, paydowns and other movements of £181m. Weaker Sterling resulted in an increase in exposure of £1,190m. Exposures at 31st December 2008 included assets acquired from Lehman Brothers North American businesses of £300m in AAA securities and £324m in other Alt-A securities.
Securities included £491m held by consolidated conduits and £89m held in a CDO on which impairment charges of £65m and £58m respectively have been recorded.
At 31st December 2008, 75% of the Alt-A whole loan exposure was performing, and the average loan to value ratio at origination was 81%.
Other exposures with underlying Alt-A collateral include counterparty derivative exposures to vehicles which hold Alt-A collateral. Derivative exposures with underlying Alt-A collateral of £398m (31st December 2007: £221m) relate to US Dollar denominated interest rate swaps. The increase in the balance principally relates to the decline in interest rates globally and the 37% depreciation of Sterling relative to the US Dollar, especially in the second half of 2008. The majority of this exposure was the most senior obligation of the vehicle.
A4. US Residential Mortgage Backed Securities Exposure Wrapped by Monoline Insurers
The deterioration in the US residential mortgage market has resulted in exposure to monoline insurers and other financial guarantors that provide credit protection.
The table below shows RMBS assets where we held protection from monoline insurers at 31st December 2008. These are measured at fair value through profit and loss. Declines in fair value of the underlying assets are reflected in increases in the value of potential claims against monoline insurers. Such declines have resulted in net exposure to monoline insurers under these contracts increasing to £1,639m by 31st December 2008 (2007: £730m).
Claims would become due in the event of default of the underlying assets and losses would only be realised if both the underlying asset and monoline defaulted. At 31st December 2008 while 81% of the underlying assets were non-investment grade, 97% are wrapped by monolines with investment grade ratings.
There is some uncertainty whether all of the monoline insurers would be able to meet all liabilities if such claims were to arise: certain monoline insurers have been subject to downgrades in 2008. Consequently, a fair value loss of £412m has been recognised in the year. There have been no claims due under these contracts as none of the underlying assets were in default at 31st December 2008.
The fair value is determined by a credit valuation adjustment calculation which incorporates stressed cash flow shortfall projections, current market valuations, stressed Probability of Default (PDs) and a range of Loss Given Default (LGD) assumptions. The cash flow shortfall projections are stressed to ensure that we consider the potential for further market deterioration and resultant additional cash flow shortfall in underlying collateral. Monoline ratings are based on external ratings analysis and where appropriate significant internal analysis conducted by the independent Credit Risk function. In addition, we reflect the potential for further deterioration of monolines by using stressed PDs which results in all monolines having an implied sub-investment grade rating. LGDs range from 45% to 100% depending on the monoline.
Exposure by Credit Rating of Monoline Insurer
As at 31.12.08 | |||||||||||
Notional £m | Fair Value £m | Fair Value Exposure £m | Credit Valuation Adjustment £m | Net Exposure £m | |||||||
AAA/AA | – | – | – | – | – | ||||||
A/BBB | 2,567 | 492 | 2,075 | (473 | ) | 1,602 | |||||
Non-investment grade | 74 | 8 | 66 | (29 | ) | 37 | |||||
Total | 2,641 | 500 | 2,141 | (502 | ) | 1,639 | |||||
As at 31.12.07 | |||||||||||
AAA/AA | 2,807 | 2,036 | 771 | (41 | ) | 730 |
98 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Barclays Capital credit market exposures
The notional value of the assets, split by the current rating of the monoline insurer, is shown below.
Rating of Monoline Insurers – As at 31.12.08 | ||||||||
AAA/AA £m | A/BBB £m | Non- £m | Total £m | |||||
2005 and earlier | – | 143 | – | 143 | ||||
2006 | – | 1,240 | – | 1,240 | ||||
2007 and 2008 | – | 510 | – | 510 | ||||
High Grade | – | 1,893 | – | 1,893 | ||||
Mezzanine – 2005 and earlier | – | 625 | 74 | 699 | ||||
CDO2– 2005 and earlier | – | 49 | – | 49 | ||||
US RMBS | – | 2,567 | 74 | 2,641 | ||||
The notional value of the assets, split by the current rating of the underlying asset, is shown below.
| ||||||||
Rating of Underlying Asset – As at 31.12.08 | ||||||||
AAA/AA £m | A/BBB £m | Non- £m | Total £m | |||||
2005 and earlier | 143 | – | – | 143 | ||||
2006 | – | – | 1,240 | 1,240 | ||||
2007 and 2008 | – | – | 510 | 510 | ||||
High Grade | 143 | – | 1,750 | 1,893 | ||||
Mezzanine – 2005 and earlier | 31 | 330 | 338 | 699 | ||||
CDO2– 2005 and earlier | – | – | 49 | 49 | ||||
US RMBS | 174 | 330 | 2,137 | 2,641 |
Barclays Annual Report 2008 | 99 |
B. Commercial Mortgages
Commercial mortgages reduced 18% in US Dollar terms. In Sterling terms these increased by 12%.
B1. Commercial Mortgages
Exposures in Barclays Capital’s commercial mortgages portfolio, all of which are measured at fair value, comprised commercial real estate loan exposure of £11,578m (31st December 2007: £11,103m) and commercial mortgage-backed securities (CMBS) of £735m (31st December 2007: £1,296m). During the year there were gross losses of £1,148m. Gross sales and paydowns of £1,034m in the UK and Continental Europe and £2,167m in the US were partially offset by additional drawdowns. Weaker Sterling increased exposure by £3,058m.
The commercial real estate loan exposure comprised 55% US, 41% UK and Europe and 4% Asia. 5% of the total relates to land or property under construction.
The US exposure included two large transactions which comprised 42% of the total US exposure and have paid down approximately £789m in the year. The remaining 58% of the US exposure comprised 76 transactions. The remaining weighted average number of years to initial maturity of the US portfolio is 1.4 years.
The UK and Europe portfolio is well diversified with 64 transactions in place as at 31st December 2008. In Europe protection is provided by loan covenants and periodic LTV retests, which cover 90% of the portfolio. 47% of the German exposure relates to one transaction secured on multifamily residential assets. Exposure to the Spanish market represents less than 1% of global exposure at 31st December 2008.
Commercial Real Estate Exposure by Region
| ||||||||
As at 31.12.08 £m | As at 31.12.07 £m | Marks at 31.12.08 | Marks at 31.12.07 | |||||
US | 6,329 | 5,947 | 88% | 99% | ||||
Germany | 2,467 | 1,783 | 95% | 100% | ||||
Sweden | 265 | 250 | 96% | 100% | ||||
France | 270 | 289 | 94% | 100% | ||||
Switzerland | 176 | 127 | 97% | 100% | ||||
Spain | 106 | 89 | 92% | 100% | ||||
Other Continental Europe | 677 | 779 | 90% | 100% | ||||
UK | 831 | 1,422 | 89% | 100% | ||||
Asia | 457 | 417 | 97% | 100% | ||||
Total | 11,578 | 11,103 |
Commercial Real Estate Exposure Metrics | ||||||
WALTVa | WAMb | WALAc | ||||
US | 79.5% | 1.4 yrs | 1.6 yrs | |||
Germany | 79.4% | 4.6 yrs | 1.5 yrs | |||
Other Europe | 82.2% | 4.5 yrs | 1.7 yrs | |||
UK | 77.8% | 5.8 yrs | 1.8 yrs | |||
Asia | 93.3% | 4.7 yrs | 1.3 yrs |
Commercial Real Estate Exposure by Industry
| ||||||||||||
As at 31.12.08 | ||||||||||||
US £m | Germany £m | Other Europe £m | UK £m | Asia £m | Total £m | |||||||
Office | 2,081 | 436 | 802 | 192 | 145 | 3,656 | ||||||
Residential | 1,957 | 1,268 | – | 229 | 128 | 3,582 | ||||||
Retail | 66 | 567 | 96 | 110 | 118 | 957 | ||||||
Hotels | 1,145 | – | 441 | 29 | 18 | 1,633 | ||||||
Leisure | – | – | – | 233 | – | 233 | ||||||
Land | 232 | – | – | – | – | 232 | ||||||
Industrial | 582 | 126 | 131 | 38 | 10 | 887 | ||||||
Mixed/Others | 243 | 70 | 24 | – | 38 | 375 | ||||||
Hedges | 23 | – | – | – | – | 23 | ||||||
Total | 6,329 | 2,467 | 1,494 | 831 | 457 | 11,578 |
Notes
a | Weighted-average loan- to-value based on the most recent valuation. |
b | Weighted-average number of years to initial maturity. |
c | Weighted-average loan age. |
100 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Barclays Capital credit market exposures
B1. Commercial Mortgages (continued)
Commercial Mortgage Backed Securities (net of hedges)
| ||||||||
As at 31.12.08 £m | As at £m | Marksa at 31.12.08 | Marksa at 31.12.07 | |||||
AAA securities | 588 | 1,008 | ||||||
Other securities | 147 | 288 | ||||||
Total | 735 | 1,296 | 21% | 98% |
Exposure is stated net of hedges traded in the liquid index swap market with market counterparties. The counterparty exposure is managed through a standard derivative collateralisation process and none of the hedge counterparties are monoline insurers.
Exposures at 31st December 2008 included assets acquired from Lehman Brothers North American businesses of £143m in AAA securities and £86m in other securities.
B2. CMBS Exposure Wrapped by Monoline Insurers
The deterioration in the commercial mortgage market has resulted in exposure to monoline insurers and other financial guarantors that provide credit protection.
The table below shows Commercial Mortgage Backed Security (CMBS) assets where we held protection from monoline insurers at 31st December 2008. These are measured at fair value through profit and loss. Declines in fair value of the underlying assets are reflected in increases in the value of potential claims against monoline insurers. Such declines have resulted in net exposure to monoline insurers under these contracts increasing to £1,854m by 31st December 2008 (31st December 2007: £197m).
Claims would become due in the event of default of the underlying assets and losses would only be realised if both the underlying asset and monoline defaulted. At 31st December 2008 all underlying assets were rated AAA/AA and 89% are wrapped by monolines with investment grade ratings.
There is some uncertainty whether all of the monoline insurers would be able to meet all liabilities if such claims were to arise: certain monoline insurers have been subject to downgrades in 2008. Consequently, a fair value loss of £340m has been recognised in the year. There have been no claims due under these contracts as none of the underlying assets were in default at 31st December 2008.
The fair value is determined by a credit valuation adjustment calculation which incorporates stressed cash flow shortfall projections, current market valuations, stressed Probability of Default (PDs) and a range of Loss Given Default (LGD) assumptions. The cash flow shortfall projections are stressed to ensure that we consider the potential for further market deterioration and resultant additional cash flow shortfall in underlying collateral. Monoline ratings are based on external ratings analysis and where appropriate significant internal analysis conducted by the independent Credit Risk function. In addition, we reflect the potential for further deterioration of monolines by using stressed PDs which results in all monolines having an implied sub-investment grade rating. LGDs range from 45% to 100% depending on the monoline.
Exposure by credit rating of monoline insurer
| |||||||||||
As at 31.12.08 | |||||||||||
Notional £m | Fair value £m | Fair value exposure £m | Credit valuation adjustment £m | Net exposure £m | |||||||
AAA/AA | 69 | 27 | 42 | (4 | ) | 38 | |||||
A/BBB | 3,258 | 1,301 | 1,957 | (320 | ) | 1,637 | |||||
Non-investment grade | 425 | 181 | 244 | (65 | ) | 179 | |||||
Total | 3,752 | 1,509 | 2,243 | (389 | ) | 1,854 | |||||
As at 31.12.07 | |||||||||||
AAA/AA | 3,614 | 3,408 | 206 | (9 | ) | 197 |
The notional value of the assets, split by the current rating of the monoline insurer, is shown below.
Rating of monoline insurers – As at 31.12.08 | ||||||||
AAA/AA £m | A/BBB £m | Non- £m | Total £m | |||||
2005 and earlier | – | 437 | – | 437 | ||||
2006 | 69 | 544 | – | 613 | ||||
2007 and 2008 | – | 2,277 | 425 | 2,702 | ||||
CMBS | 69 | 3,258 | 425 | 3,752 |
Note
a | Marks are based on gross collateral. |
Barclays Annual Report 2008 | 101 |
The notional value of the assets split by the current rating of the underlying asset, is shown below. All CMBS assets were rated AAA/AA at 31st December 2008.
Rating of Underlying Asset – As at 31.12.08 | ||||||||
AAA/AA £m | A/BBB £m | Non- Investment £m | Total £m | |||||
2005 and earlier | 437 | – | – | 437 | ||||
2006 | 613 | – | – | 613 | ||||
2007 and 2008 | 2,702 | – | – | 2,702 | ||||
CMBS | 3,752 | – | – | 3,752 |
C . Other credit market exposures
In the year ended 31st December 2008 these exposures increased by 17% in US Dollar terms, and 61% in Sterling terms.
C1. Leveraged Finance
Leveraged loans are classified within loans and advances and are stated at amortised cost less impairment. The overall credit performance of the assets remains satisfactory.
At 31st December 2008, the gross exposure relating to leveraged finance loans was £10,506m (31st December 2007: £9,217m). Barclays Capital expects to hold these leveraged finance positions until redemption. Material movements since 31st December 2007 reflect exchange rate changes rather than changes in loan positions.
The net exposure relating to leverage finance loans of £10,391m (31st December 2007: £9,027m) was reduced to £7,335m following a repayment of £3,056m at par in January 2009.
Leveraged Finance Exposure by Region
| ||||||
As at 31.12.08 £m | As at 31.12.07 £m | |||||
UK | 4,810 | 4,401 | ||||
US | 3,830 | 3,037 | ||||
Europe | 1,640 | 1,568 | ||||
Asia | 226 | 211 | ||||
Total lending and commitments | 10,506 | 9,217 | ||||
Identified and unidentified impairmenta | (115 | ) | (190 | ) | ||
Net lending and commitments | 10,391 | 9,027 |
Leveraged finance exposure by industry
| ||||||||||||
As at 31.12.08 | As at 31.12.07 | |||||||||||
Drawn £m | Undrawn £m | Total £m | Drawn £m | Undrawn £m | Total £m | |||||||
Insurance | 2,546 | 31 | 2,577 | 2,456 | 78 | 2,534 | ||||||
Telecoms | 2,998 | 211 | 3,209 | 2,259 | 240 | 2,499 | ||||||
Retail | 904 | 128 | 1,032 | 828 | 132 | 960 | ||||||
Health care | 659 | 144 | 803 | 577 | 141 | 718 | ||||||
Media | 655 | 89 | 744 | 469 | 127 | 596 | ||||||
Services | 568 | 131 | 699 | 388 | 134 | 522 | ||||||
Manufacturing | 500 | 102 | 602 | 371 | 125 | 496 | ||||||
Chemicals | 317 | 26 | 343 | 46 | 286 | 332 | ||||||
Other | 329 | 168 | 497 | 233 | 327 | 560 | ||||||
Total | 9,476 | 1,030 | 10,506 | 7,627 | 1,590 | 9,217 |
New leveraged finance commitments originated after 30th June 2007 comprised £573m (31st December 2007: £1,148m).
Note
a | The movement in impairment during the period is primarily due to the release of the provision on the post year end repayment, for which there was a binding commitment as at 31st December 2008. |
102 | Barclays Annual Report 2008 |
Risk management
Credit risk management
Barclays Capital credit market exposures
C2. SIVs and SIV-Lites
SIVs/SIV-Lites
| ||||||||
As at 31.12.08 £m | As at 31.12.07 £m | Marks at 31.12.08 | Marks at 31.12.07 | |||||
Liquidity facilities | 679 | 466 | 62% | 100% | ||||
Bond inventory | 11 | 52 | 7% | 37% | ||||
Derivatives | 273 | 266 | ||||||
Total | 963 | 784 |
SIV exposure increased from £784m to £963m during the year. There were £230m of gross losses against SIVs and SIV lites in the year. Weaker Sterling resulted in an increase in exposure of £281m.
At 31st December 2008 liquidity facilities of £679m (31st December 2007: £466m) include £531m designated at fair value through profit and loss relating to a SIV-lite which had previously been hedged with Lehman Brothers. Following the Lehman Brothers bankruptcy this facility was reflected as a new exposure to the underlying assets. The remaining £148m represented drawn liquidity facilities in respect of SIV-lites and other structured investment vehicles classified as loans and advances stated at cost less impairment.
Bond inventory and derivatives are fair valued through profit and loss.
Movement in derivative exposure primarily related to CDS exposure due to general spread widening. At 31st December 2008 exposure was broadly in line with the prior year.
C3. CDPC exposure
Credit derivative product companies (‘CDPCs’) are specialist providers of credit protection principally on corporate exposures in the form of credit derivatives. The Group has purchased protection from CDPCs against a number of securities with a notional value of £1,772m. The fair value of the exposure to CDPCs at 31st December 2008 was £150m. A fair value loss of £14m has been recognised in the year.
Of the notional exposure, 45% related to AAA/AA rated counterparties, with the remainder rated A/BBB.
Exposure by credit rating of CDPC
| |||||||||
As at 31.12.08 | |||||||||
Notional £m | Gross exposure £m | Credit valuation adjustment £m | Net exposure £m | ||||||
AAA/AA | 796 | 77 | (14 | ) | 63 | ||||
A/BBB | 976 | 87 | – | 87 | |||||
Total | 1,772 | 164 | (14 | ) | 150 | ||||
As at 31.12.07 | |||||||||
AAA/AA | 1,262 | 19 | – | 19 |
Barclays Annual Report 2008 | 103 |
C4. CLO and other exposure wrapped by monoline insurers
The table below shows Collateralised Loan Obligations (CLOs) and other assets where we held protection from monoline insurers at 31st December 2008. The deterioration in markets for these assets has resulted in exposure to monoline insurers and other financial guarantors that provide credit protection. These are measured at fair value through profit and loss. Declines in fair value of the underlying assets are reflected in increases in the value of potential claims against monoline insurers. Such declines have resulted in net exposure to monoline insurers under these contracts increasing to £4,939m by 31st December 2008 (31st December 2007: £408m).
Claims would become due in the event of default of the underlying assets and losses would only be realised if both the underlying asset and monoline defaulted. At 31st December 2008 all of the underlying assets have investment grade ratings and 39% are wrapped by monolines rated AAA/AA. 87% of the underlying assets were CLOs, all of which were rated AAA/AA.
There is some uncertainty whether all of the monoline insurers would be able to meet all liabilities if such claims were to arise: certain monoline insurers have been subject to downgrades in 2008. Consequently, a fair value loss of £737m, has been recognised in the year. There have been no claims due under these contracts as none of the underlying assets were in default at 31st December 2008.
The fair value is determined by a credit valuation adjustment calculation which incorporates stressed cash flow shortfall projections, current market valuations, stressed Probability of Default (PDs) and a range of Loss Given Default (LGD) assumptions. The cash flow shortfall projections are stressed to ensure that we consider the potential for further market deterioration and resultant additional cash flow shortfall in underlying collateral. Monoline ratings are based on external ratings analysis and where appropriate significant internal analysis conducted by the independent Credit Risk function. In addition, we reflect the potential for further deterioration of monolines by using stressed PDs for non-AAA rated monolines, which results in all other monolines having an implied sub-investment grade rating. LGDs range from 45% to 100% depending on the monoline.
Exposure by credit rating of monoline in surer | |||||||||||
As at 31.12.08 | |||||||||||
Notional £m | Fair value £m | Fair value exposure £m | Credit valuation adjustment £m | Net exposure £m | |||||||
AAA/AA | 8,281 | 5,854 | 2,427 | (55 | ) | 2,372 | |||||
A/BBB | 6,446 | 4,808 | 1,638 | (204 | ) | 1,434 | |||||
Non-investment grade | 6,148 | 4,441 | 1,707 | (574 | ) | 1,133 | |||||
Total | 20,875 | 15,103 | 5,772 | (833 | ) | 4,939 | |||||
As at 31.12.07 | |||||||||||
AAA/AA | 15,152 | 14,735 | 417 | (9 | ) | 408 | |||||
The notional value of the assets, split by the current rating of the monoline insurer, is shown below.
| |||||||||||
Rating of monoline insurers – As at 31.12.08 | |||||||||||
AAA/AA £m | A/BBB £m | Non- grade £m | Total £m | ||||||||
2005 and earlier | 2,064 | 1,647 | 2,326 | 6,037 | |||||||
2006 | 1,803 | 2,173 | 1,918 | 5,894 | |||||||
2007 and 2008 | 3,324 | 1,369 | 1,602 | 6,295 | |||||||
CLOs | 7,191 | 5,189 | 5,846 | 18,226 | |||||||
2005 and earlier | 131 | 661 | 70 | 862 | |||||||
2006 | 145 | 158 | 232 | 535 | |||||||
2007 and 2008 | 814 | 438 | – | 1,252 | |||||||
Other | 1,090 | 1,257 | 302 | 2,649 | |||||||
Total | 8,281 | 6,446 | 6,148 | 20,875 |
104 | Barclays Annual Report 2008 |
Risk Management
Credit risk management
Barclays Capital credit market exposures
The notional value of the assets split by the current rating of the underlying asset is shown below. All of the underlying assets had investment grade ratings as at 31st December 2008.
Rating of Underlying Asset – As at 31.12. 08 | ||||||||
AAA/AA £m | A/BBB £m | Non- Investment £m | Total £m | |||||
2005 and earlier | 6,037 | – | – | 6,037 | ||||
2006 | 5,894 | – | – | 5,894 | ||||
2007 and 2008 | 6,295 | – | – | 6,295 | ||||
CLOs | 18,226 | – | – | 18,226 | ||||
2005 and earlier | 862 | – | – | 862 | ||||
2006 | 535 | – | – | 535 | ||||
2007 and 2008 | 785 | 467 | – | 1,252 | ||||
Other | 2,182 | 467 | – | 2,649 | ||||
Total | 20,408 | 467 | – | 20,875 |
Own credit
The carrying amount of issued notes that are designated under the IAS 39 fair value option is adjusted to reflect the effect of changes in own credit spreads. The resulting gain or loss is recognised in the income statement.
At 31st December 2008, the own credit adjustment arose from the fair valuation of £54.5bn of Barclays Capital structured notes (31st December 2007: £40.7bn). The widening of Barclays credit spreads in the year affected the fair value of these notes and as a result revaluation gains of £1,663m were recognised in trading income (2007: £658m).
Barclays Annual Report 2008 | 105 |
Risk management
Market risk is the risk that Barclays earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or volatility of market rates or prices such as interest rates, credit spreads, commodity prices, equity prices and foreign exchange rates. Market risk mainly arises from trading activities. Barclays is also exposed to market risk through non-traded interest rate risk and the pension fund.
Barclays market risk objectives are to:
– Understand and control market risk by robust measurement and the setting of position limits.
– Facilitate business growth within a controlled and transparent risk management framework.
– Ensure traded market risk resides primarily in Barclays Capital.
– Minimise non-traded market risk.
The Board approves market risk appetite for trading and non-trading activities. The Market Risk Director is responsible for the Market Risk Control Framework and, under delegated authority from the Group Risk Director, sets a limit framework within the context of the approved market risk appetite. A daily market risk report summarises Barclays market risk exposures against agreed limits. This daily report is sent to the Group Risk Director, the Market Risk Director, the Group Finance Director and the appropriate Business Risk Directors.
The head of each business, assisted by the business risk management team, is accountable for all market risks associated with its activities. Each business is responsible for the identification, measurement,
management, control and reporting of market risk as outlined in Barclays Market Risk Control Framework. Oversight and
support is provided to the business by the Market Risk Director, assisted by the central market risk team. The Market Risk Committee reviews, approves, and makes recommendations concerning the market risk profile across Barclays including risk appetite, limits and utilisation. The Committee meets monthly and is chaired by the Market Risk Director. Attendees include the Group Risk Director, respective business risk managers and senior managers from the central market risk team.
In Barclays Capital, the Head of Market Risk is responsible for implementing the market risk control framework. Day to day responsibility for market risk lies with the senior management of Barclays Capital, supported by the Market Risk Management team that operates independently of the trading areas. Daily market risk reports are produced for Barclays Capital as a whole as well as for the main business areas. The risks covered include interest rate, credit spread, commodity, equity and foreign exchange. A more detailed trading market risk presentation is produced fortnightly and discussed at the Barclays Capital Traded Positions Risk Review meeting. The attendees at this meeting include the Group Risk Director and senior managers from Barclays Capital and the central market risk team.
In Global Retail and Commercial Banking, each of the six main business areas (UK Retail Banking, Barclays Commercial Bank, Barclaycard, Western Europe, Emerging Markets and Absa) has its own market risk department. The head of each department is responsible for implementing the Market Risk Control Framework, with oversight provided by the central market risk team. A combination of daily and monthly risk reports are sent to the central market risk team. A risk summary is presented at Market Risk Committee and the respective Asset and Liability Committees.
Global Retail and Commercial Banking is responsible for non-structural non-trading interest rate risk and Group Treasury is responsible for structural risk (interest rate and foreign exchange). The chart below gives an overview of the business control structure.
106 | Barclays Annual Report 2008 |
Risk management
Traded market risk
Barclays policy is to concentrate trading activities in Barclays Capital. This includes transactions where Barclays Capital acts as principal with clients or with the market. For maximum efficiency, client and market activities are managed together. In Barclays Capital, trading risk occurs in both the trading book and the banking book, as defined for regulatory purposes.
Risk measurement and control
The measurement techniques used to measure and control traded market risk include Daily Value at Risk (DVaR), Expected Shortfall (ES), stress testing and scenario testing. Book limits such as foreign exchange and interest rate delta limits are also in place.
Daily Value at Risk is an estimate of the potential loss arising from unfavourable market movements, if the current positions were to be held unchanged for one business day. Barclays Capital uses the historical simulation method with a two year unweighted historical period.
In 2008, the confidence level was changed to 95% from 98% as an increasing incidence of significant market movements made the existing measure more volatile and less effective for risk management purposes. Switching to 95% made DVaR more stable and consequently improved management, transparency and control of the market risk profile.
The historical simulation calculation can be split into three parts:
– Calculate hypothetical daily profit or loss for each position over the most recent two years, using observed daily market moves.
– Sum hypothetical profit or losses for day one, giving one total profit or loss. This is repeated for all other days in the two year history.
– DVaR is the 95th percentile selected from the two years of daily hypothetical total profit or loss.
The DVaR model has been approved by the FSA to calculate regulatory capital for the trading book. The approval covers general market risk in interest rate, foreign exchange, commodities and equity products, and issuer specific risk for the majority of single name and portfolio traded credit products. Internally, as noted before, DVaR is calculated for both the trading and banking books.
When reviewing DVaR estimates, a number of considerations should be taken into account. These are:
– Historical simulation uses the recent past to generate possible future market moves but the past may not be a good indicator of the future
– The one day time horizon does not fully capture the market risk of positions that cannot be closed out or hedged within one day
– Intra-day risk is not captured
– DVaR does not indicate the potential loss beyond the 95th percentile.
DVaR is an important market risk measurement and control tool and consequently the model is regularly assessed. The main approach employed is the technique known asback-testing which counts the
The daily average, maximum and minimum values of DVaR, 95% and 98%, were calculated as below.
DVaR (95%) | ||||||||||||||
12 months to 31st December 2008 | 12 months to 31st December 2007 | |||||||||||||
Average £m | High £m | Low £m | Average £m | High £m | Low £m | |||||||||
Interest rate risk | 28.9 | 47.8 | 15.1 | 15.3 | 26.5 | 10.0 | ||||||||
Credit spread risk | 31.1 | 71.7 | 15.4 | 17.3 | 28.0 | 10.8 | ||||||||
Commodity risk | 18.1 | 25.4 | 12.5 | 15.3 | 19.0 | 10.7 | ||||||||
Equity risk | 9.1 | 21.0 | 4.8 | 8.0 | 12.1 | 4.5 | ||||||||
Foreign exchange risk | 5.9 | 13.0 | 2.1 | 3.8 | 7.2 | 2.1 | ||||||||
Diversification effecta | (39.7 | ) | n/a | n/a | (27.2 | ) | n/a | n/a | ||||||
Total DVaR | 53.4 | 95.2 | 35.5 | 32.5 | 40.9 | 25.2 | ||||||||
DVaR (98%) | ||||||||||||||
12 months to 31st December 2008 | 12 months to 31st December 2007 | |||||||||||||
Average £m | High £m | Low £m | Average £m | High £m | Low £m | |||||||||
Interest rate risk | 45.0 | 80.9 | 21.0 | 20.0 | 33.3 | 12.6 | ||||||||
Credit spread risk | 54.0 | 143.4 | 30.1 | 24.9 | 43.3 | 14.6 | ||||||||
Commodity risk | 23.9 | 39.6 | 16.5 | 20.2 | 27.2 | 14.8 | ||||||||
Equity risk | 12.8 | 28.9 | 6.7 | 11.2 | 17.6 | 7.3 | ||||||||
Foreign exchange risk | 8.1 | 21.0 | 2.9 | 4.9 | 9.6 | 2.9 | ||||||||
Diversification effecta | (67.3 | ) | n/a | n/a | (39.2 | ) | n/a | n/a | ||||||
Total DVaR | 76.5 | 158.8 | 47.5 | 42.0 | 59.3 | 33.1 |
Note
a | The high (and low) DVaR figures reported for each category did not necessarily occur on the same day as the high (and low) DVaR reported as a whole. Consequently a diversification effect number for the high (and low) DVaR figures would not be meaningful and it is therefore omitted from the above table. |
Barclays Annual Report 2008 | 107 |
number of days when a loss (as defined by the FSA in BIPRU 7.10) exceeds the corresponding DVaR estimate, measured at the 99% confidence level.
The FSA categorises a DVaR model as green, amber or red. A green model is consistent with a good working DVaR model and is achieved for models that have four or less back-testing exceptions in a 12-month period. For Barclays Capital’s trading book, green model status was maintained for 2008 and 2007.
To further improve the control framework, formal daily monitoring ofExpected Shortfall (ES) was started. This metric is the average of all the hypothetical losses beyond DVaR.
Stress testing provides an indication of the potential size of losses that could arise in extreme conditions. It helps to identify risk concentrations across business lines and assist senior management in capital planning decisions. A variety of different types of stress tests are performed in order to fulfil the objectives of stress testing. The global asset class stress tests have been designed to cover major asset classes including interest rate, credit spread, commodity, equity, foreign exchange rates and emerging markets.
Stress results are produced at least fortnightly. If a potential stress loss exceeds the corresponding trigger limit, the positions captured by the stress test are reviewed and discussed by Barclays Capital market risk management and the respective Barclays Capital business heads. The minutes of the discussion, including the merits of the position and the appropriate course of action, are then sent to the Market Risk Director for review.
Scenario tests are hypothetical events which could lead to extreme yet plausible stress type moves under which profitability is seriously challenged. The scenarios are devised by senior risk managers and economists and are reviewed quarterly. Examples include ‘Global pandemic’, ‘Problems with GBP sovereign issuances’ and ‘Liquidity crisis’. The scenarios are calculated at least fortnightly and the results are included in the Traded Positions Risk Review meeting information pack.
Analysis of traded market risk exposures
The tables and graph show the time series for total DVaR with commentary. Further analysis is given in Note 48.
Analysis of trading revenue
The histograms below show the distribution of daily trading revenue for Barclays Capital in 2008 and 2007. Revenue includes net trading income, net interest income, net fees and commissions relating to primary trading, and the effects of gains or losses on own credit. The average daily revenue in 2008 was £19.5m (2007: £26.2m) and there were 203 positive revenue days out of 254 (2007: 224 out of 253). The number of negative revenue days increased in 2008, largely a result of volatile markets especially in the fourth quarter. The number of positive revenue days greater than £45m also increased but these were spread across the year.
Notes
a | Total DVaR remains broadly at the same level as recorded in Dec 07. |
b | Total DVaR reduces due to reduction in interest rate positions. |
c | Barclays acquires Lehman Brothers North American businesses during a period of extreme market volatility. The Lehman positions are subsequently reduced. |
d | DVaR increases significantly due to extreme market volatility following the failure of several financial intuitions and a material deterioration in the global economic outlook. Barclays changes to 95% DVaR to improve management, transparency and control of the market risk profile. |
108 | Barclays Annual Report 2008 |
Risk management
Market risk management
Barclays objective is to minimise non-traded market risks. This is achieved by transferring risk from the business to a local treasury or Group Treasury, which in turn hedges the net exposure with the external market. Limits exist to ensure no material risk is retained within any business or product area. The majority of exposures are within Global Retail and Commercial Banking.
Non-traded interest rate risk
Non-traded interest rate risk arises from the provision of retail and wholesale (non-traded) banking products and services.
The techniques used to measure and control non-traded interest rate risk include Annual Earnings at Risk, DVaR and Stress Testing. Book limits such as foreign exchange and interest position limits are also in place.
Annual Earnings at Risk (AEaR) measures the sensitivity of net interest income (NII) over the next 12 months. It is calculated on a monthly basis as the difference between the estimated income using the current yield curve and the lowest estimated income following a 100 basis points increase or decrease in interest rates.
To complement AEaR, the Group also uses a simplified version of theDVaR approach used by Barclays Capital.
Stress testing is also carried out by the business centres and is reviewed by senior management and business-level asset and liability committees. The stress testing is tailored to the business and typically incorporates scenario analysis and historical stress movements applied to respective portfolios.
The analysis of non-traded interest rate risk is given in Note 48.
Other market risks
Barclays maintains a number of defined benefit pension schemes for past and current employees. The ability of the Pension Fund to meet the projected pension payments is maintained through investments and regular Bank contributions.Pension risk arises because: the estimated market value of the pension fund assets might decline; or their investment returns might reduce; or the estimated value of the pension liabilities might increase. In these circumstances, Barclays could be required or might choose to make extra contributions to the pension fund. Financial details of the pension fund are in Note 30.
Investment risk is the risk of financial volatility arising from changes in the market value of investments, principally occurring in Barclays insurance companies and Barclays Global Investors. A change in the fair value of these investments may give rise to a liability which may have to be funded by the Group. It is Barclays policy to hedge such exposures in line with a defined risk appetite.
Barclays policy is for foreign exchange traded risk to be concentrated and managed in Barclays Capital. Some transactionalforeign exchange riskexposure arises within the local treasury operations in Global Retail and Commercial Banking to support and facilitate client activity. This is minimised in accordance with modest risk limits and was not material as at 31st December 2008. Other non-Barclays Capital foreign exchange exposure is covered in Note 48.
Asset management structural market risk arises where the fee and commission income earned by asset management products and businesses is affected by a change in market levels, primarily through the link between income and the value of assets under management.
It is Barclays policy that businesses monitor and report this risk against a defined risk appetite and regularly assess potential hedging strategies.
Barclays Annual Report 2008 | 109 |
Risk management
Market risk management
Disclosures about certain trading activities
Disclosures about certain trading activities
including non-exchange traded commodity contracts
The Group provides a fully integrated service to clients for base metals, precious metals, oil, power, natural gas, coal, freight, emission credits, structured products and other related commodities. This service offering continues to expand, as market conditions allow, through the addition of new products and markets.
The Group offers both over the counter (OTC) and exchange traded derivatives, including swaps, options, forwards and futures and enters into physically settled contracts in base metals, power and natural gas, with 2007 seeing the addition of oil and related products to this portfolio.products. Physical commodity positions are held at fair value and reported under the Trading Portfolio in Note 12.12 on page 215.
Fair value measurement
The fair values of physical and derivative positions are primarily determined through a combination of recognised market observable prices, exchange prices, and established inter-commodity relationships.
Further information on fair value measurement of financial instruments can be found in Note 49.50 on page 287.
Credit risk
Credit risk exposures are actively managed by the Group. Refer to Note 47 on page 264 for more information on the Group’s approach to credit risk management and the credit quality of derivative assets.
Fair value of the commodity derivative contracts
The tables below analyse the overall fair value of the OTC commodity derivative contracts by movement over time and maturity. As at
31st December 20072008 the fair value of the commodity derivative contracts reflects a gross positive fair value of £23,571m (2006: £17,501m)£44,881m (2007: £23,571m) and a gross negative value of £22,759m (2006: £15,940m)£45,817m (2007: £22,759m).
Movement in fair value of commodity derivative positions
2007 £m | 2006 £m | |||||
Fair value of contracts outstanding at the beginning of the period | 1,561 | 527 | ||||
Contracts realised or otherwise settled during the period | (764 | ) | 379 | |||
Fair value of new contracts entered into during the period | 243 | 808 | ||||
Other changes in fair values | (228 | ) | (153 | ) | ||
Fair value of contracts outstanding at the end of the period | 812 | 1,561 |
Maturity analysis of commodity derivative fair value
Movement in fair value of commodity derivative positions | ||||||
2008 £m | 2007 £m | |||||
Fair value of contracts outstanding at the beginning of the period | 812 | 1,561 | ||||
Contracts realised or otherwise settled during the period | 241 | (764 | ) | |||
Fair value of new contracts entered into during the period | (1,245 | ) | 243 | |||
Other changes in fair values | (744 | ) | (228 | ) | ||
Fair value of contracts outstanding at the end of the period | (936 | ) | 812 |
2007 £m | 2006 £m | ||||
Not more than one year | (279 | ) | 902 | ||
Over one year but not more than five years | 773 | 327 | |||
Over five years | 318 | 332 | |||
Total | 812 | 1,561 |
Maturity analysis of commodity derivative fair value | ||||||
2008 £m | 2007 £m | |||||
Not more than one year | (2,022 | ) | (279 | ) | ||
Over one year but not more than five years | 999 | 773 | ||||
Over five years | 87 | 318 | ||||
Total | (936 | ) | 812 |
Barclays Annual Report | ||||
Risk management
Liquidity managementOrganisation and structure
Liquidity management
Liquidity risk is the risk that the Group is unable to meet its obligations when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows, such as debt maturities. Such outflows would deplete available cash resources for client lending, trading activities and investments. In extreme circumstances lack of liquidity could result in reductions in balance sheet and sales of assets, or potentially an inability to replace funds when they are withdrawn, with consequent failure to repay depositors and fulfil commitments to lend.lending commitments. The risk that it will be unable to do so is inherent in all banking operations and can be impactedaffected by a range of institution specificinstitution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters.
Barclays Treasury operates a centralised governance and control process that covers all of the Group’s liquidity risk management activities. Businesses assist Barclays Treasury in policy formation and limit setting by providing relevant and expert input for their local markets and customers.
Execution of the Group’s liquidity risk management strategy is carried out at country level within agreed policies, controls and limits, with the Country Treasurer providing reports directly to Barclays Treasury to evidence conformance with the agreed risk profile. Liquidity risk is a standing agenda item at Country and Cluster Asset and Liability Committees and on a consolidated basis is reported to the Group’s Treasury Committee.
The objective of the Group’s liquidity risk management strategy is to ensure that the funding profile of individual businesses and the Group as a whole is appropriate to underlying market conditions and the profile of our business in each given country. Liquidity risk limits and controls are flexed to achieve that profile and are based on regular qualitative and quantitative assessments of conditions and abilities under both normal and stressed conditions. Businesses are only allowed to have funding exposure to wholesale markets where they can demonstrate that their market is sufficiently deep and liquid and then only relative to the size and complexity of their business.
Liquidity limits reflect both local regulatory requirements as well as the behavioural characteristics of their balance sheets. Breaches of limits are reported to Treasury Committee together with details of the requirements to return to compliance.
Barclays Annual Report 2008 | 111 |
Risk management
Liquidity risk management and measurement
Liquidity management within the Group has several components.
Intraday liquidity
The need to monitor, manage and control intraday liquidity in real time is recognised by the Group as a mission critical process: any failure to meet specific intraday commitments would have significant consequences.consequences, such as a visible market disruption.
The Group policy is that each operation must ensure that it has access to sufficient intraday liquidity to meet any obligations it may have to clearing and settlement systems. Major currency payment flows and payment system collateral are monitored and managed in real time to ensure that at all times there is sufficient collateral to make payments. In practice, the Group maintains a significant buffer of surplus intraday liquidity to ensure that payments are made on a timely basis. The Group actively engages in payment system development to help ensure that new payment systems are robust.
Day to day funding
Day to day funding is managed by short term mismatchthrough limits for the next day, weekon wholesale borrowings, secured borrowings and month which control expected cash flows tofunding mismatches. These ensure that requirements can be met.on any day and over any period there is a limited amount of refinancing required. These requirements include replenishment of funds as they mature or are borrowed by customers. The Retail and Commercial Bank together with Wealth maintain no reliance on wholesale funding. The Group maintains an active presence in global money markets through Barclays Capital and monitors and manages the wholesale money market capacity for the Group’s name to enable that to happen.
In addition to cash flow management, Treasury also monitors unmatched medium-termterm mismatches between assets and liabilities, as well as the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees.
Liquid assets
The Group maintains a portfolio of highly marketable assets including UK, US and Euro-area government bonds that can be sold or funded on a secured basis as protection against any unforeseen interruption to cash flow. The Group accesses secured funding markets in these assets on a regular basis to ensure market access.basis. The Group does not rely on committed funding lines for protection against unforeseen interruptioninterruptions to cash flow.
Diversification of liquidity sources
Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, provider, product and term. In addition, to avoid reliance on a particular group of customers or market sectors, the distribution of sources and the maturity profile of deposits are also carefully managed. Important factors in assuring liquidity are competitive ratesstrength of relationships and the maintenance of depositors’ confidence. Such confidence is based on a number of factors including the Group’s reputation and relationship with those clients, the strength of earnings and the Group’s financial position.
| ||
Risk management
Liquidity management
Structural liquidity
An important source of structural liquidity is provided by our core retail deposits in the UK, Europe and Africa, mainly current accounts and savings accounts. Although current accounts are repayable on demand and savings accounts at short notice, the Group’s broad base of customers – numerically and by depositor type – helps to protect against unexpected fluctuations. Such accounts form a stable funding base for the Group’s operations and liquidity needs.
The Group policy is to fund the balance sheet of the retailRetail and commercial bankCommercial Bank together with Wealth and Head office functions on a global basis with customer deposits and capital without recourse to the wholesale markets. This provides protection from the liquidity risk of wholesale market funding. The exception to this policy is Absa, which has a large portion of wholesale funding due to the structural nature of the South African financial sector.
Stress testsScenario analysis and stress testing
Stress testing is undertaken to assess and plan for the impact of various scenarios which may put the Group’s liquidity at risk.
Treasury develops and monitors a range of stress tests on the Group’s projected cash flows. These stress scenarios include Barclays-specific scenarios such as an unexpected rating downgrade and operational problems, and external scenarios such as Emerging Market crises, payment system disruption and macro-economic shocks. The output informs both the liquidity mismatch limits and the Group’s contingency funding plan.
This is maintained by Treasury and is aligned with the Group and country business resumption plans to encompass decision-making authorities, internal and external communication and, in the event of a systems failure, the restoration of liquidity management and payment systems.
112 | Barclays Annual Report 2008 |
Risk management
Liquidity risk management
Key elements
The ability to raise funds is in part dependent on maintaining the Bank’s credit rating. The funding impact of a credit downgrade is regularly estimated.closely tracked. Whilst the impact of a single downgrade may affect the price at which funding is available, the effect on liquidity is not considered material in Group terms.
For further details see contractual obligations and commercial commitments of the Group on page 46.19.
RecentYear end assessment of liquidity
Barclays maintained a strong liquidity profile in 2008, sufficient to absorb the impact of a stressed funding environment. The Group has access to a substantial pool of liquidity both in secured markets and from unsecured depositors including numerous foreign governments and central banks. In addition, our limited reliance on securitisations as a source of funding has meant that the uncertainty in securitisation markets has not impacted our liquidity risk profile.
Whilst funding markets were extremely difficult in the latter half of 2008, and particularly since September 2008, Barclays was able to increase available liquidity, extend the term of unsecured liabilities, and reduce reliance on unsecured funding. Barclays has participated in various government and central bank liquidity facilities, both to aid central banks implementation of monetary policy and support central bank initiatives, where participation has enabled the lengthening of the term of our refinancing. These facilities have improved access to term funding, and helped moderate money market eventsrates.
For the Group, loans and advances to customers and banks are more than covered by the combination of customer deposits and longer term debt at 112% at 31st December 2008 (2007: 125%).
Global Retail and Commercial Banking
The second halfsum of last year sawliabilities in Global Retail and Commercial Banking, Barclays Wealth and Head office functions exceeds assets in those businesses. As a sustained periodresult they have no reliance on wholesale funding. The balance sheet is modelled to reflect behavioural experience in both assets and liabilities, and is managed to maintain a positive cash profile (table 1).
Throughout 2008 Global Retail and Commercial Banking continued to grow the amount of severe stressdeposits despite competitive pressures (table 2).
Barclays Capital
Barclays Capital manages liquidity to be self-funding through wholesale sources, managing access to liquidity to ensure that potential cash outflows in international financial markets characterised by increased volatility and impaired liquidity. Issuance of debt, particularly structured credit and mortgage related, fell sharply. The asset-backed commercial paper market was severely disrupted, resulting in the drawn down of committed liquidity lines from banks, while primary issuance of mortgage-backed securities and covered bonds stopped for a time. The repo markets including tri-party were also disrupted with the repo market for corporate debt closing for a time. Term money market funding became difficult to obtain and spreads over official rates widened.stressed environment are covered.
Funding reliability is maintained by accessing a wide variety of investors and geographies and by building and maintaining strong relationships with these providers of liquidity.
Unsecured funding
Additionally, unsecured funding is managed within specific term limits. The Group maintained its strongterm of unsecured liabilities has been extended, with average life improving by four months from eight months at the end of December 2007 to 12 months at the end of December 2008.
Our capital markets debt issuance includes issues of senior and subordinated debt in US registered offerings and medium term note programmes and European medium term note programs. Substantially all of our unsecured senior issuance is without covenants that trigger increased cost or accelerate maturity. Furthermore, between September and December 2008 we issued £11bn in government guaranteed debt, £9bn in maturities of one to three years and £2bn in under one-year maturities.
Secured funding
Barclays funds securities based on liquidity profile throughout and saw some benefit from a flight to qualitycharacteristics. Limits are in financial markets. Nevertheless, Barclays, like its peers, was affected by the increased volatility and impairedplace for each security asset class reflecting liquidity in financial markets. During this period the Group’s balance sheet expanded due to:cash and financing markets for these assets. Approximately 80% of assets funded in repurchase and stock loan transactions are fundable within central bank facilities (excluding Bank of England Emergency facilities and the Federal Reserve Primary Dealer Credit Facility).
Liquidity risk to secured funding is also mitigated by:
– |
|
– |
|
– |
|
Readily available liquidity
Substantial resources are maintained to offset maturing deposits and debt. These readily available assets are sufficient to absorb stress level losses of liquidity from unsecured as well as contingent cash outflows, such as collateral requirements on ratings downgrades. The sources of liquidity and contingent liquidity are from a wide variety of sources, including deposits held with central banks and unencumbered securities.
In addition, the Group maintains significant pools of securitisable assets.
Table 1: Expected Net Cash Inflows/(Outflows) on a Behavioural Basis |
| ||||||||
Up to 1 yr £bn | 1-3yrs £bn | 3-5yrs £bn | Over 5 yrs £bn | ||||||
As at 31.12.08 | 20 | 34 | 14 | (95 | ) |
Note
a | MBS includes only agency mortgages. ABS includes private label issuance of |
Table 2: Global Retail and Commercial Banking Deposit Balances | ||||||||||
As at 31.12.08 £bn | As at 30.06.08 £bn | As at 31.12.07 £bn | As at 30.06.07 £bn | As at 31.12.06 £bn | ||||||
Total customer deposits | 235 | 218 | 211 | 200 | 190 |
Barclays Annual Report 2008 | 113 |
Risk management
Barclays operates a centralised capital management model, considering both regulatory and economic capital.
The Group’s capital management objectives are to:
– | Maintain sufficient capital resources to meet the minimum regulatory capital requirements set by the FSA and |
– | Maintain sufficient capital resources to support the Group’s risk appetite and economic capital requirements. |
– | Support the Group’s credit rating. |
– | Ensure locally regulated subsidiaries can meet their minimum capital requirements. |
– | Allocate capital to businesses to support the Group’s strategic objectives, including optimising returns on |
Treasury Committee manages compliance with the Group’s capital management objectives. The Committee reviews actual and forecast capital demand and resources on a monthly basis. The processes in place for delivering the Group’s capital management objectives are:
– | Establishment of internal targets for capital demand and ratios |
– | Managing capital ratio sensitivity to foreign exchange rate movements |
– | Ensuring local entity regulatory capital adequacy |
– | Allocating capital to the Group’s strategic medium-term plan |
– | Economic capital management |
In addition to the processes above, the Risk Oversight Committee and the Board Risk Committee annually review and set risk appetite (see page 65) and analyse the impacts of stress scenarios (see page 66) in order to understand and manage the Group’s projected capital adequacy.
114 | Barclays Annual Report 2008 |
Risk management
Capital risk management
Internal targets
To support its capital management objectives, the Group sets internal targets for its key capital ratios. Internal targets are reviewed regularly by Treasury Committee to take account of:
– | Changes in forecast demand for capital caused by accessing new business opportunities, including mergers and acquisitions |
– | Flexibility in debt capital issuance and securitisation plans |
– | The |
These liquidity demands were
– | Changes in forecast demand for capital from unanticipated drawdown of committed facilities or as a result of deterioration in the credit quality of the Group’s assets |
– | Changes in forecast profits and other capital resources |
– | Changes to capital resources and forecast demand due to foreign exchange rate movements. |
Managing capital ratio sensitivity to foreign exchange rate movements
The Group has capital resources (capturing investments in subsidiaries and branches, intangible assets, minority interests and debt capital) and risk weighted assets denominated in non-Sterling currencies. Changes in foreign exchange rates result in changes in the Sterling equivalent value of non-Sterling denominated capital resources and risk weighted assets. As a result, the Group’s regulatory capital ratios are sensitive to foreign exchange rate movements.
The Group’s hedge strategy is to minimise the volatility of all successfullycapital ratios whilst taking into account the impact on hedging of non-Sterling net investments, the cost of hedging, the availability of a suitable foreign exchange market and prevailing foreign exchange rates.
To minimise volatility in the equity ratio, the Group aims over time to maintain the ratio of foreign currency equity capital resources to RWAs the same as the Group’s equity ratio. To create equity capital resources denominated in non-Sterling currencies, the Group leaves some investments in core non-Sterling subsidiaries and branches unhedged. The resultant change in the Sterling value of the investments is captured in the currency translation reserve, resulting in an equity capital movement.
Depending on the value of non-Sterling net investments, it may not always be possible to maintain the ratio, leaving some capital ratio sensitivity to foreign exchange movements.
The proceeds from equity accounted foreign currency preference shares are also used in the equity ratio hedge. If a preference share is redeemed, the cumulative movement in the currency translation reserve will be offset by an equal and opposite movement in other reserves reflecting the revaluation of the preference shares to prevailing foreign exchange rates.
The exposure of the Tier 1 and total capital ratios to foreign exchange rate movements is managed within overall fundingby issuing, where possible, debt capital in non-Sterling currencies such that the ratio of Tier 1 and total capital resources to risk weighted assets is the same as the Group’s Tier 1 and total capital ratios. This is primarily achieved by the issuance of debt capital from Barclays Bank PLC in major currencies, but can also be achieved by subsidiaries issuing capital in local currencies.
Local entity regulatory capital adequacy
The Group manages its capital resources to ensure that those Group entities that are subject to local capital adequacy regulation in individual jurisdictions meet their minimum capital requirements. Local management manages compliance with entities minimum regulatory
capital requirements despite occasional disruptionby reporting to local Asset and Liability Committees with oversight by Treasury Committee, as required.
Injections of accesscapital resources into Group entities are centrally controlled by Treasury Committee, under authorities delegated from the Group Executive Committee. The Group’s policy is for surplus capital held in Group entities to some funding markets. Although term fundingbe repatriated to Barclays Bank PLC in interbank markets substantially disappeared, liquidity remained goodthe form of dividends and/or capital repatriation, subject to local regulatory requirements, exchange controls and tax implications.
Other than as indicated above, the Group is not aware of any material impediments to the prompt transfer of capital resources or repayment of intra-group liabilities when due.
Allocating capital in the Group’s strategic medium-term plan
Capital adequacy and returns on regulatory and economic capital form a key part of the Group’s annual strategic medium-term planning process. Amongst other strategic objectives, the Group seeks to optimise returns on economic and regulatory capital through the planning process. To achieve this, executive management consider returns on risk weighted assets and economic capital when setting limits for Barclays.business capital demand. Executive management will also review the forecast capital ratios to ensure internal targets continue to be met over the medium-term plan.
Barclays diversified portfolioTreasury Committee reviews the limits on capital demand on a monthly basis taking into account actual performance.
Economic capital management
Economic capital is an internal measure of highly marketable securities enabledthe minimum equity and preference capital required for the Group to continue accessingmaintain its credit rating based upon its risk profile.
Barclays assesses economic capital requirements by measuring the repo market. Securitisation accountsGroup risk profile using both internally and externally developed models. The Group assigns economic capital primarily within the following risks: Credit Risk, Market Risk, Operational Risk, Fixed Assets, Private Equity and Pension Risk. Group Risk owns the methodology and policy for a modest proportioneconomic capital while the businesses are primarily responsible for the calculation.
The Group regularly enhances its economic capital methodology and benchmarks outputs to external reference points. The framework reflects default probabilities during average credit conditions, rather than those prevailing at the balance sheet date, thus removing some of the cyclicality from the economic capital calculation. Economic capital for wholesale credit risk includes counterparty credit risk arising as a result of credit risk on traded market exposures. The framework also adjusts economic capital to reflect time horizon, correlation of risks and risk concentrations.
Economic capital is allocated on a consistent basis across all of Barclays businesses and risk activities. A single cost of equity is applied to calculate the cost of risk. Economic capital allocations reflect varying levels of risk.
The total average economic capital required by the Group, as determined by risk assessment models and after considering the Group’s funding soestimated portfolio effects, is compared with the disruptionaverage supply of capital resources to evaluate economic capital utilisation.
The Group’s economic capital calculations form the basis of its Internal Capital Adequacy Assessment Process (‘ICAAP’) submission to the securitisation market has not significantly impacted the Group’s liquidity position.FSA under Pillar 2 of Basel II.
Assessment of liquidityCapital Allocation
Barclays liquidity position remains very strong both for its own paperIn 2008, UK Retail Banking economic capital allocation increased £550m to £3,950m (2007: £3,400m), reflecting mortgage asset growth and paper issued by its sponsored conduits. We have benefited from significant inflows of deposits, increased credit lines from counterparties, increased client flows and continued full funding of our conduits.
The marketsmovements in 2008 have substantially improved with the passing of the year end, and a degree of normality has returned to the term interbank markets. However we expect there to continue to be dislocations through 2008, and we remain vigilant to ensure that our liquidity profile remains strong.
The FSA published a discussion paper in December 2007 setting out draft proposals for a new quantitative framework for regulating liquidity of banks in the UK in the light of the experiences of 2007. We welcome the FSA intention to update the liquidity regime.benchmark house price indices.
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115 |
Risk management
Capital risk management
Barclays Commercial Bank economic capital allocation increased £300m to £3,500m (2007: £3,200m), primarily as a consequence of asset growth with some mitigation from portfolio management activity.
Barclaycard economic capital allocation increased £650m to £2,700m (2007: £2,050m), driven by acquisitions, the redemption of securitisation deals and exposure growth, predominantly in the US.
GRCB – Western Europe economic capital allocation increased £650m to £1,900m (2007: £1,250m), primarily reflecting the weakening of Sterling and underlying lending growth.
GRCB – Emerging Markets economic capital allocation increased £650m to £1,100m (2007: £450m), reflecting broad-based retail and wholesale asset growth across the business, especially in India, UAE and the new markets of Russia and Pakistan.
GRCB – Absa economic capital allocation increased £200m to £1,100m (2007: £900m), reflecting balance sheet growth.
Barclays Capital economic capital allocation increased £3,050m to £8,250m (2007: £5,200m). This was driven by growth in the investment portfolio, deterioration in credit quality, exposure to drawn leveraged finance underwriting positions and an increase in market volatility.
Barclays Global Investors economic capital allocation increased £200m to £400m (2007: £200m). This was primarily driven by an increase in the support for selected cash funds and some increase in proprietary investments.
Barclays Wealth economic capital allocation in 2008 remained unchanged at £500m, despite strong growth on the balance sheet. This was due to the impact of greater geographical diversification and increased levels of collateralisation.
2008 £m | | 2007 £m | | |||
The average supply of capital to support the economic capital frameworka | ||||||
Shareholders’ equity excluding minority interests less goodwillb | 17,650 | 14,150 | ||||
Retirement benefits liability | 1,050 | 1,150 | ||||
Cash flow hedging reserve | 100 | 250 | ||||
Available for sale reserve | 400 | (150 | ) | |||
Gains on own credit | (1,250 | ) | (100 | ) | ||
Preference shares | 5,500 | 3,700 | ||||
Available funds for economic capital excluding goodwill | 23,450 | 19,000 | ||||
Average historic goodwill and intangible assetsb | 9,450 | 8,400 | ||||
Available funds for economic capital including goodwillc | 32,900 | 27,400 |
Operational risk managementNotes
a | Averages for the period will not correspond to period-end balances disclosed in the balance sheet. Numbers are rounded to the nearest £50m for presentational purposes only. |
b | Average goodwill relates to purchased goodwill and intangible assets from business acquisitions. |
c | Available funds for economic capital as at 31st December 2008 stood at £40,150m (2007:£29,200m). |
d | Average EC charts exclude the EC calculated for pension risk (average pension risk for 2008 is £650m compared with £500m in 2007). |
e | Includes Transition Businesses and capital for central function risks. |
f | Includes credit risk loans. |
g | Includes investments in associates, private equity risk, insurance risk and residual value. |
116 | Barclays Annual Report 2008 |
Risk management
Operational risk is the risk of direct or indirect losses resulting from human factors, external events, and inadequate or failed internal processes and systems.
Operational risks are inherent in Barclaysthe Group’s operations and are typical of any large enterprise. Major sources of operational risk include: operational process reliability, IT security, outsourcing of operations, dependence on key suppliers, implementation of strategic change, integration of acquisitions, fraud, human error, customer service quality, regulatory compliance, recruitment, training and retention of staff, and social and environmental impacts.
Barclays is committed to the advanced measurement and management of operational risks. In particular, it has implemented improved management and measurement approaches for operational risk to strengthen control, improve customer service and minimise operating losses. Barclays was granted a Waiver to operate an Advanced Measurement Approach (AMA) under Basel II, which commenced in January 2008.
The Group’s operational risk management framework aims to:
– | Understand and report the operational risks being taken by the Group. |
– | Capture and report operational errors made. |
– | Understand and minimise the frequency and impact, on a cost benefit basis, of operational risk events. |
Barclays works closely with peer banks to benchmark our internal Operational Riskoperational risk practices and to drive the development of advanced Operational Riskoperational risk techniques across the industry. It is not cost effective to attempt to eliminate all operational risks and in any event it would not be possible to do so. Events of small significance are expected to occur and are accepted as inevitable; events of material significance are rare and the Group seeks to reduce the risk from these in a framework consistent with its agreed Risk Appetite.
Barclays has a Group Operational Risk Framework, which is consistent with and part of the Group Internal Control and Assurance Framework. Minimum control requirements have been established for all key areas of identified risk by ‘Principal Risk’ owners (see page 85)65). The risk categories relevant to operational risks are Financial Crime, Financial Reporting, Taxation, Legal, Operations, People, Regulatory Technology and Change.Technology. In addition the following risk categories are used for business risk: Brand Management, Corporate Responsibility, Strategic and Strategic.
Change. Responsibility for implementing and overseeing these policies is positioned throughout the organisation.with Group Principal Risk Owners. The prime responsibility for the management of operational risk and the compliance with control requirements rests with the business and functional units where the risk arises. FrontlineFront line risk managers are widely distributed throughout the Group in business units. They service and support these areas, assisting line managers in managing these risks.
Business Risk Directors in each business are responsible for overseeing the implementation of and compliance with Group policies. Governance and Control Committees in each business monitor control effectiveness. The Group Governance and Control Committee receives reports from the committees in the businesses and considers Group-wideGroup-significant control issues and their remediation.
In the corporate centre,Group Centre, each Principal Risk is owned by a senior individual who liaises with Principal Risk owners within the businesses. In addition, the Operational Risk Director oversees the range of operational risks across the Group in accordance with the Group Operational Risk Framework.
Business units are required to report on both a regular and an event- drivenevent-driven basis. The reports include a profile of the keymaterial risks to their business objectives, control issues of Group-level significance, and operational risk events. Specific reports are prepared on a regular basis for the Group Risk Oversight Committee, the Board Risk Committee and the Board Audit Committee. In particular, the Group Operational Risk Profile and Group Operating Committee Report is provided quarterly to the Group Risk Oversight Committee. The Internal Audit function provides further assurance for operational risk control across the organisation and reports to the Board and senior management.
Barclays Annual Report 2008 | 117 |
Risk management
Operational risk management
Operational risk measurementMeasurement and capital modelling
Barclays applies a consistent approach to the identification and assessment of key risks and controls across all business units. Managers in the businesses use self-assessment techniques to identify risks, evaluate control effectiveness and monitor capability.performance. Business management determines whether particular risks are effectively managed within business risk appetiteRisk Appetite and otherwise takes remedial action. The risk assessment process is consistent with the principles in the integrated framework published by the Committee of Sponsoring Organisations of the Treadway Commission (COSO).
A standard process is used Group-wide for the recognition, capture, assessment, analysis and reporting of risk events. This process is used to help identify where process and control requirements are needed to reduce the recurrence of risk events. Risk events are loaded onto a central database and reported monthly to the Group Operational Risk Executive Committee.
Barclays also uses a database of external public risk events and is a member of the Operational Risk Data Exchange (ORX), an association of international banks that share anonymised loss data information to assist in risk identification, assessment and modelling.
By combining internal data, including internal loss experience, risk and control assessments, key indicators and audit findings, with external loss data and expert management judgement, Barclays is able to generate Key Risk Scenarios (KRSs), which identify the most significant operational risks across the Group. The KRSs are validated at business unit and at Group level to ensure that they appropriately reflect the level of operational risk. It is these thatThese are the main input to our capital model.
Operational risk capital is allocated, on a risk sensitive basis, to business units in the form of economic capital charges, providing an incentive to manage these risks within appetite levels.
118 | Barclays Annual Report 2008 |
Risk management
Operational risk management
Operational Risk Eventsrisk events
A high proportion of Barclays operational risk events have a low financial cost associated with them and a very small proportion of operational risk events have a material impact. Figure 1 shows that in 2007, 79%In 2008, 73% of reported operational loss events had a value of £50,000 or less. Figure 2 shows that thisless (2007: 79%) but accounted for 8% of risk events by count only amounted tothe overall impact (2007: 15% of risk events by value.). In contrast, 2% of the operational risk events had a value of £1m or greater (2007: 2%) but accounted for 50%66% of the overall loss. This was consistent with 2006 risk events and, from our analysis of external data, is in line with industry experience.impact (2007: 50%).
Analysis of Barclays operational risk events in 20072008 by Basel II category, as shown in figure 3,1, highlights that the highest frequency of events occurred in External Fraud (54%(46%) and Execution, Delivery and Process Management (37%(42%). These two areas also accounted for the majority of losses by value (figure 4)2), with Execution, Delivery and Process Management accounting for 52%81% of total operational risk losses and External Fraud accounting for 24%10%. This again was consistentCompared with 2006 internal risk2007 we have seen a reduction in External Fraud and an increase in Execution, Delivery and Process Management events, and, from our analysis of external data, is in line with industry experience.driven mainly by market volatility.
Barclays has been granted a waiver by the UK FSA to apply an Advanced Measurement Approach (AMA) for Group-wide consolidated and solus regulatory capital reporting. Barclays has applied the AMA Group-wide. The two areasAreas where roll-out of AMA is still continuing and where the Standardised approach is currently applied are Banco Austral (Mozambique) andBarclays Bank Mozambique, National Bank of Commerce Limited (Tanzania), and the US Airways card portfolio purchased from Bank of America. Areas where roll-out of AMA is ongoing and where the Standardised ApproachBasic Indicator approach is currently applied.applied are Banco Comercial Angolano, Woolworths Financial Services in South Africa, Barclays Bank PLC Pakistan, Barclays Investment and Loans India Limited, Barclays Bank LLC Russia and the Cash Equity, Municipal Bonds and M&A business acquired from Lehman Brothers. In certain joint ventures and associates, Barclays may not be able to apply the Advanced Operational Risk Framework.
Barclays does not currently use insuranceoffset the expected loss or expected losses to offsetmitigating effect of insurances against its regulatory capital requirement. However, Barclays has applied to the FSA to offset expected loss.
| ||
Risk management
Operational risk management
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119 |
Risk management
Financial crime risk management
Anti-money laundering and sanctions risk
Financial crime risk managementis a category of operational risk. It arises from the risk that the Group might fail to comply with financial crime legislation and industry laws on anti-money laundering or might suffer losses as a result of internal or external fraud, or might fail to ensure the security of personnel, physical premises and the Group’s assets.
Barclays adopts an integrated approach to financial crime risk management. In line with the five-step risk management model, Group Financial Crime Management (GFCM) has the responsibility to direct, assess, control, report and manage/challenge financial crime risks, which are structured into three strands: anti-money laundering (AML) and sanctions; fraud; and security.
Each business unit within Barclays develops its own capability to tackle financial crime, providing regular reporting on performance, incidents and the latest trends impacting business. This integrated model allows us to:
– | Develop a clear profile of financial crime risk across the |
– | Share intelligence, adopt common standards and respond promptly to emerging |
– | Drive forward law enforcement and other |
– | Benchmark ourselves against other financial institutions facing similar |
Anti-money laundering and sanctions risk
The Group assesses the implications of all emerging legal and regulatory requirements that impact it and establishes and operates an AML Risk control framework and associated policies and proceduresminimum standards in respect of AML, terrorist financing, sanctions and sanctions, updating these regularly.bribery and corruption.
ItThe Group operates an AML assuranceoversight programme to ensure a system of effective controls to comply with the overarching policies, providing technical guidance and support to each business unit. This is monitored via conformance testing both at the business units and the Group level. In 2008, Barclays Internal Audit completed a combined global audit of Know Your Customer, AML and Sanctions procedures.
GFCM collates and oversees the preparation of Group-wide management information on AML and sanctions. This information includes risk indicators, such as volumes of suspicious activity reports (SARs) and is supplemented by trend analysis, which highlights high-risk or emerging issues so that prompt action can be taken to address them.
Three committees (the AML Steering Committee, the Sanctions Cross ClusterCross-Cluster Operational Review Board the AML Steering Committee and the Policy Review Forum), review business performance, share intelligence, develop and agree controls, and discuss emerging themes and the implementation status of policies and procedures.
All businesses contribute towards the Group Money Laundering Reporting Officers Annual Report, which is provided to Group Senior Executive Managementsenior executive management and is available to the FSA. Together with regular management information and conformance testing, this report updates senior management with evidence that the Group’s money laundering and terrorist financing risks are being appropriately, proportionally and effectively managed.
During 2007,2008, the Group augmented its AMLsanctions capability implementing third EU money laundering directive, with its guiding principleby issuing a revised Sanctions Policy. This enhances certain areas of a risk-based approach. For AML, this must be proportionate to the perceived risks and threats, including terrorist financing.
A new Group AML Policy, launched in December 2007 and encapsulating the risk-based approach, has further improved the Group’s customer due diligence procedures and standards, transaction monitoring and staff training and awareness.
The Group also implemented EU Regulation 1781/2006, which aims to ensure thorough and robust audit trails concerning electronic transfers. This assists the Group in monitoring its AML and terrorist financing and improves the information available to law enforcement authorities.control such as screening.
Barclays continues to upgrade its sanctions screening capabilities, in line with best international practice and changing regulatory requirements. The Grouprequirements and has invested substantial resources to further enhance its monitoring capabilities in this area and will continue to do so.
Representatives of the Group attend industry fora such as the Wolfsberg Group, the British Bankers Association’s Money Laundering Policy Group (MLPG) and the Money Laundering Advisory Panel (MLAP), to ensure that Barclays is influential in discussing and interpreting new legislation.
In 2008, the Group will review procedurescontinued to ensure compliance with forthcoming legislation concerningfollow developments in the Single European Payments Area (SEPA). Should the US enact current draft legislation outlawing the use of the international, with a view to developing its payments and clearing systems for perceived illegal US internet gaming transactions, further enhancements to payments activity monitoring will follow.accordingly.
120 | Barclays Annual Report | |||||
Risk management
Financial crime risk management
Fraud risk and security risk
The Group establishes and operates a fraud risk control framework which measures overall fraud risk exposure and controls. Together with the Group-wide policies and reporting, this structure directs how fraud is managed.
The Group Financial Crime Management team (GFCM)GFCM is responsible for delivering the overall fraud strategy andGroup Fraud Strategy by providing oversight to Group and Business Unitsbusiness units in order to managethe management of fraud risk.
The strategyGroup Fraud Strategy is designed to:
– | Contain existing risks through effective measurement, monitoring and robust anti-fraud systems, in line with the expansion of the bank |
– | Identify emerging threats in order that effective fraud controls are embedded across the Group |
– | Identify and manage fraud incidents, ensuring regulatory and legal conformance, appropriate escalation and resolution of control issues |
– |
|
GFCM assesses the fraud risk ofacross existing and emerging products, services, processeschannels, and jurisdictionsjurisdictions. It has embedded a robust fraud reporting framework which tracks current exposure to drive down fraud losses as turnover/growth increases. It also represents Barclays at trade, industryidentify risk and Government bodies providing a conduit to maximise the flow of informationensure adequate risk management capability and intelligence. GFCM also provides technical expertise tocontrols.
The Group’s business areas whether to drive through Group solutions or provide assistance with specific incidents and investigations.
Business Units, together with product holders and channelsunits identify their appetite for fraud loss which informs and determines the overall fraud plan. Objectives are then set around these plans.plans and performance is monitored through reporting and oversight via appropriate Governance Committees at both business unit and Group level.
AtBarclays undertakes regular benchmarking performance reviews with relevant peer groups and maintains a business level, fraud risk/loss committees track fraud (and in some cases operational) loss. conduit to ensure a two-way exchange of information and intelligence at government, trade and industry levels.
The Barclays Group Fraud Risk profile is exercisedtracked regularly through the review and challenge of the net losses and key risk metrics; these are then viewed against the overall Fraud Risk Profile (Fraud(at the Fraud Risk Oversight Committee).
FraudAggregated fraud data is reported monthly to senior management both withinmanagement. The performance of the Business Units and to Group who provide a global oversight ofbusiness in combating fraud loss. Fraudlosses is measured against plan for both net and gross losses and in line with the Principal Risk Policy;Policy. Key Risk Indicators (KRIs) are embedded in order that overall exposure can be established.
As a result of this process, fraud performance both at Business Unit and Group level can be measured and appropriate action taken to minimise or track significant issues.
Externally there are ‘in country’ industry-wide forums to which Barclays contributes and in some cases can benchmark performance, controls and current and emerging issues.
Barclays overall reported fraud losses fellincreased in 2007,2008 in line with most ofindustry trends. Whilst industry and proprietary initiatives (online and Chip/PIN) have continued to pay dividends and reduce exposure in some areas, fraud increased in other areas and in geographies that do not have Chip and PIN technology.
In 2008, the reduction coming fromGroup implemented a new global fraud application system aimed at preventing first-party fraud.
Compromised customer details continue to be a significant falls in internet banking fraud. As part of its effortsthreat globally. GFCM continues to enhance security, Barclays offers all its personal customers complimentary internet security software to reduce phishing attacks. The Group has also rolled out two-factor authentication technology using the new PINsentry device to make online transactions more secure. Enhanced transaction profiling has further improved our ability to identify where customer accounts have been targeted by fraudsters and take preventative action to protect funds.
Following the loss of personal data, including bank details, by both
Government agencies and other third parties, data protection and security was a prominent theme in 2007. Barclays treats any incident of this nature with the utmost importance and has workedwork closely with industry and the Government to take stepsother associated bodies to:
|
– | Protect any customer |
– | Develop a standard approach for dealing with accounts that may be impacted by any data compromise or security |
– | Reassure customers and provide points of contact for help and guidance. |
Group Financial Crime Management (GFCM) alsoGFCM manages security risk. Its fundamental objective is to allow Barclays to operate in a safe and secure manner in all existing and potential future markets.
In pursuit of this objective, the Security Risksecurity risk team gathers and shares current threat assessments across business areas, using intelligence from Securitysecurity and Government Agenciesgovernment agencies and ‘in country’in-country teams. It ensures that suitable policies and control systems are in place to protect Group business and that plans to protect high-risk personnel are fit for purpose and in line with accepted best practice.personnel.
Barclays has developed and continues to improve a robust people screeningGroup-wide people-screening process to protect the bankGroup from those people who want to harm the organisation, by either joining as staff members or becoming involved with its operations.
Security Riskrisk is regularly reported by the businesses and reviewed via the Security Risk Management Committee, whose objectives are to:
– | Consider the latest management information and security threat |
– | Drive forward mitigating action to protect the Group from potential |
– | Provide guidance to the design and effectiveness of the overall Barclays Security Risk |
– | Ensure all |
– | Monitor corporate security profiles against the agreed plan, tracking issues in order that remedial action can be |
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121 |
Risk management
Statistical information
Statistical and other risk information
This section of the report contains supplementary information that is more detailed or contains longer histories than the data presented in the discussion. For commentary on this information, please refer to the preceding text (pages 7467 to 85)105).
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.
Credit risk management
Table 1: Risk Tendency by business | ||||
2008 £m | 2007 £m | |||
UK Retail Banking | 520 | 470 | ||
Barclays Commercial Bank | 400 | 305 | ||
Barclaycard | 1,475 | 955 | ||
GRCB – Western Europe | 270 | 135 | ||
GRCB – Emerging Markets | 350 | 140 | ||
GRCB – Absa | 255 | 190 | ||
Barclays Capital | 415 | 140 | ||
Barclays Wealth | 20 | 10 | ||
Head office functions and other operationsa | 5 | 10 | ||
Risk Tendency by business | 3,710 | 2,355 |
Table 2: Loans and advances | ||||
2008 £m | 2007 £m | |||
Retail businesses | ||||
Customers | 201,588 | 162,081 | ||
Total retail businesses | 201,588 | 162,081 | ||
Wholesale businesses | ||||
Banks | 47,758 | 40,123 | ||
Customers | 266,750 | 187,086 | ||
Total wholesale businesses | 314,508 | 227,209 | ||
Loans and advances | 516,096 | 389,290 |
Table 1: Risk Tendency by business (page 78)Note
2007 £m | 2006 £m | |||||||
UK Banking | 775 | 790 | ||||||
UK Retail Banking | 470 | 500 | ||||||
Barclays Commercial Bank | 305 | 290 | ||||||
Barclaycard | 945 | 1,135 | ||||||
International Retail and Commercial Banking | 475 | 220 | ||||||
International Retail and Commercial Banking – excluding Absa | 220 | 75 | ||||||
International Retail and Commercial Banking – Absa | 255 | 145 | ||||||
Barclays Capital | 140 | 95 | ||||||
Barclays Wealth | 10 | 10 | ||||||
Head office functions and other operationsa | 10 | 10 | ||||||
Risk Tendency by business | 2,355 | 2,260 | ||||||
Table 2: Loans and advances
| ||||||||
2007 £m | 2006 £m | |||||||
Retail businesses | ||||||||
Banks | – | – | ||||||
Customers | 164,062 | 139,350 | ||||||
Total retail businesses | 164,062 | 139,350 | ||||||
Wholesale businesses | ||||||||
Banks | 40,123 | 30,930 | ||||||
Customers | 185,105 | 146,281 | ||||||
Total wholesale businesses | 225,228 | 177,211 | ||||||
Loans and advances | 389,290 | 316,561 |
Note
a | Head office functions and other operations comprises discontinued business in transition. |
122 | Barclays Annual Report | |||||
Risk management
Statistical information
Table 3: Maturity analysis of loans and advances to banks | ||||||||||||||||||
At 31st December 2008 | On demand £m | Not more than three months £m | Over three months but not more than six months £m | Over six not more than one year £m | Over one but not | Over three but not | Over five years but not more than ten years £m | Over ten years £m | Total £m | |||||||||
United Kingdom | 127 | 6,474 | 193 | 163 | 232 | – | – | 343 | 7,532 | |||||||||
Other European Union | 1,210 | 10,458 | 54 | 415 | 407 | 50 | 5 | 1 | 12,600 | |||||||||
United States | 1,310 | 11,215 | 7 | 676 | 324 | – | – | 84 | 13,616 | |||||||||
Africa | 584 | 595 | 51 | 1 | 51 | 861 | 8 | 38 | 2,189 | |||||||||
Rest of the World | 1,652 | 6,957 | 201 | 666 | 884 | 943 | 39 | 479 | 11,821 | |||||||||
4,883 | 35,699 | 506 | 1,921 | 1,898 | 1,854 | 52 | 945 | 47,758 |
At 31st December 2007 | On demand £m | Not more £m | Over three more than £m | Over six £m | Over one but not £m | Over three but not £m | Over five £m | Over £m | Total £m | |||||||||
United Kingdom | 796 | 4,069 | 56 | 92 | 114 | 20 | 1 | 370 | 5,518 | |||||||||
Other European Union | 2,977 | 7,745 | 74 | 88 | 95 | 116 | 7 | – | 11,102 | |||||||||
United States | 321 | 5,736 | 95 | 1,255 | 343 | 98 | 5,498 | 97 | 13,443 | |||||||||
Africa | 283 | 1,260 | 131 | 114 | 196 | 439 | 158 | – | 2,581 | |||||||||
Rest of the World | 1,505 | 3,336 | 90 | 1,640 | 512 | 362 | 15 | 19 | 7,479 | |||||||||
Loans and advances to banks | 5,882 | 22,146 | 446 | 3,189 | 1,260 | 1,035 | 5,679 | 486 | 40,123 |
Table 4: Interest rate sensitivity of loans and advances | ||||||||||||
2008 | 2007 | |||||||||||
At 31st December | Fixed rate £m | Variable rate £m | Total £m | Fixed rate £m | Variable rate £m | Total £m | ||||||
Banks | 12,101 | 35,657 | 47,758 | 16,447 | 23,676 | 40,123 | ||||||
Customers | 98,404 | 369,934 | 468,338 | 77,861 | 271,306 | 349,167 |
Table 5: Loans and advances to customers by industry | ||||||||||
At 31st December | 2008 £m | 2007 7£m | 2006 £m | 2005 £m | 2004a £m | |||||
Financial services | 114,069 | 71,160 | 45,954 | 43,102 | 25,132 | |||||
Agriculture, forestry and fishing | 3,281 | 3,319 | 3,997 | 3,785 | 2,345 | |||||
Manufacturing | 26,374 | 16,974 | 15,451 | 13,779 | 9,044 | |||||
Construction | 8,239 | 5,423 | 4,056 | 5,020 | 3,278 | |||||
Property | 22,155 | 17,018 | 16,528 | 16,325 | 8,992 | |||||
Government | 5,301 | 2,036 | 2,426 | 1,718 | – | |||||
Energy and water | 14,101 | 8,632 | 6,810 | 6,891 | 3,709 | |||||
Wholesale and retail, distribution and leisure | 20,208 | 18,216 | 15,490 | 17,760 | 11,099 | |||||
Transport | 8,612 | 6,258 | 5,586 | 5,960 | 3,742 | |||||
Postal and communication | 7,268 | 5,404 | 2,180 | 1,313 | 834 | |||||
Business and other services | 37,373 | 30,363 | 26,999 | 22,529 | 23,223 | |||||
Home loansb | 135,384 | 106,751 | 92,477 | 85,206 | 79,164 | |||||
Other personal | 53,087 | 46,423 | 37,535 | 39,866 | 29,293 | |||||
Finance lease receivables | 12,886 | 11,190 | 10,142 | 9,088 | 6,938 | |||||
Loans and advances to customers excluding reverse repurchase agreements | 468,338 | 349,167 | 285,631 | 272,342 | 206,793 | |||||
Reverse repurchase agreements | n/a | n/a | n/a | n/a | 58,304 | |||||
Loans and advances to customers | 468,338 | 349,167 | 285,631 | 272,342 | 265,097 |
Notes
Table 3: Maturity analysis of loans and advances to banks
At 31st December 2007 | On demand £m | Not more £m | Over three £m | Over six £m | Over one £m | Over three £m | �� | Over five £m | Over £m | Total £m | ||||||||
United Kingdom | 796 | 4,069 | 56 | 92 | 114 | 20 | 1 | 370 | 5,518 | |||||||||
Other European Union | 2,977 | 7,745 | 74 | 88 | 95 | 116 | 7 | – | 11,102 | |||||||||
United States | 321 | 5,736 | 95 | 1,255 | 343 | 98 | 5,498 | 97 | 13,443 | |||||||||
Africa | 283 | 1,260 | 131 | 114 | 196 | 439 | 158 | – | 2,581 | |||||||||
Rest of the World | 1,505 | 3,336 | 90 | 1,640 | 512 | 362 | 15 | 19 | 7,479 | |||||||||
Loans and advances to banks | 5,882 | 22,146 | 446 | 3,189 | 1,260 | 1,035 | 5,679 | 486 | 40,123 |
At 31st December 2006 | On demand £m | Not more £m | Over three £m | Over six £m | Over one £m | Over three £m | Over five £m | Over £m | Total £m | |||||||||
United Kingdom | 524 | 5,211 | 110 | 18 | 43 | 10 | – | 313 | 6,229 | |||||||||
Other European Union | 619 | 7,514 | 90 | 130 | 81 | 78 | 1 | – | 8,513 | |||||||||
United States | 431 | 2,592 | 363 | 2,634 | 5 | 809 | 923 | 1,299 | 9,056 | |||||||||
Africa | 701 | 1,027 | 83 | 91 | 188 | 85 | 44 | – | 2,219 | |||||||||
Rest of the World | 612 | 2,465 | 154 | 191 | 1,278 | 148 | 44 | 21 | 4,913 | |||||||||
Loans and advances to banks | 2,887 | 18,809 | 800 | 3,064 | 1,595 | 1,130 | 1,012 | 1,633 | 30,930 |
Table 4: Interest rate sensitivity of loans and advances
2007 | 2006 | |||||||||||
At 31st December | Fixed rate £m | Variable rate £m | Total £m | Fixed rate £m | Variable rate £m | Total £m | ||||||
Banks | 16,447 | 23,676 | 40,123 | 12,176 | 18,754 | 30,930 | ||||||
Customers | 77,861 | 271,306 | 349,167 | 66,000 | 219,631 | 285,631 |
Table 5: Loans and advances to customers by industry
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
Financial services | 71,160 | 45,954 | 43,102 | 25,132 | 9,872 | |||||
Agriculture, forestry and fishing | 3,319 | 3,997 | 3,785 | 2,345 | 2,115 | |||||
Manufacturing | 16,974 | 15,451 | 13,779 | 9,044 | 7,844 | |||||
Construction | 5,423 | 4,056 | 5,020 | 3,278 | 2,534 | |||||
Property | 17,018 | 16,528 | 16,325 | 8,992 | 6,728 | |||||
Government | 2,036 | 2,426 | 1,718 | – | – | |||||
Energy and water | 8,632 | 6,810 | 6,891 | 3,709 | 3,150 | |||||
Wholesale and retail, distribution and leisure | 17,768 | 15,490 | 17,760 | 11,099 | 9,628 | |||||
Transport | 6,258 | 5,586 | 5,960 | 3,742 | 3,654 | |||||
Postal and communication | 5,404 | 2,180 | 1,313 | 834 | 698 | |||||
Business and other services | 30,363 | 26,999 | 22,529 | 23,223 | 13,913 | |||||
Home loansb | 112,087 | 94,635 | 87,003 | 79,164 | 72,318 | |||||
Other personal | 41,535 | 35,377 | 38,069 | 29,293 | 23,922 | |||||
Overseas customersc | – | – | – | – | 8,666 | |||||
Finance lease receivables | 11,190 | 10,142 | 9,088 | 6,938 | 5,877 | |||||
Loans and advances to customers excluding reverse repurchase agreements | 349,167 | 285,631 | 272,342 | 206,793 | 170,919 | |||||
Reverse repurchase agreements | n/a | n/a | n/a | 58,304 | n/a | |||||
Trading business | n/a | n/a | n/a | n/a | 58,961 | |||||
Loans and advances to customers | 349,167 | 285,631 | 272,342 | 265,097 | 229,880 |
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
b | Excludes commercial property mortgages. |
Barclays Annual Report | ||||
123 |
Table 6: Loans and advances to customers in the UK | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||
Financial services | 26,091 | 21,131 | 14,011 | 11,958 | 8,774 | |||||
Agriculture, forestry and fishing | 2,245 | 2,220 | 2,307 | 2,409 | 1,963 | |||||
Manufacturing | 11,340 | 9,388 | 9,047 | 8,469 | 5,684 | |||||
Construction | 4,278 | 3,542 | 2,761 | 3,090 | 2,285 | |||||
Property | 12,091 | 10,203 | 10,010 | 10,547 | 7,912 | |||||
Government | 20 | 201 | 6 | 6 | – | |||||
Energy and water | 3,040 | 2,203 | 2,360 | 2,701 | 802 | |||||
Wholesale and re tail distribution and leisure | 14,421 | 13,800 | 12,951 | 12,747 | 9,356 | |||||
Transport | 3,467 | 3,185 | 2,745 | 2,797 | 1,822 | |||||
Postal and communication | 1,491 | 1,416 | 899 | 455 | 440 | |||||
Business and other services | 19,589 | 20,485 | 19,260 | 15,397 | 13,439 | |||||
Home loansb | 82,544 | 69,874 | 62,621 | 57,382 | 61,348 | |||||
Other personal | 31,490 | 28,691 | 27,617 | 30,598 | 26,872 | |||||
Finance lease receivables | 3,911 | 4,008 | 3,923 | 5,203 | 5,551 | |||||
Loans and advances to customers in the UK | 216,018 | 190,347 | 170,518 | 163,759 | 146,248 |
Table 6: Loans and advances to customersincluded in the UK
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
Financial services | 21,131 | 14,011 | 11,958 | 8,774 | 7,721 | |||||
Agriculture, forestry and fishing | 2,220 | 2,307 | 2,409 | 1,963 | 1,766 | |||||
Manufacturing | 9,388 | 9,047 | 8,469 | 5,684 | 5,967 | |||||
Construction | 3,542 | 2,761 | 3,090 | 2,285 | 1,883 | |||||
Property | 10,203 | 10,010 | 10,547 | 7,912 | 6,341 | |||||
Government | 201 | 6 | 6 | – | – | |||||
Energy and water | 2,203 | 2,360 | 2,701 | 802 | 1,286 | |||||
Wholesale and retail distribution and leisure | 13,800 | 12,951 | 12,747 | 9,356 | 8,886 | |||||
Transport | 3,185 | 2,745 | 2,797 | 1,822 | 2,579 | |||||
Postal and communication | 1,416 | 899 | 455 | 440 | 476 | |||||
Business and other services | 20,485 | 19,260 | 15,397 | 13,439 | 12,030 | |||||
Home loansb | 71,755 | 64,150 | 58,730 | 61,348 | 61,905 | |||||
Other personal | 26,810 | 26,088 | 29,250 | 26,872 | 21,905 | |||||
Overseas customersc | – | – | – | – | 5,477 | |||||
Finance lease receivables | 4,008 | 3,923 | 5,203 | 5,551 | 5,587 | |||||
Loans and advances to customers in the UK | 190,347 | 170,518 | 163,759 | 146,248 | 143,809 |
The category ‘other personal’ now includes credit cards,above table for the years 2004 to 2007 have been reanalysed between wholesale and retail distribution and leisure, Home loans, and Other personal loans, second liens and personal overdrafts.to reflect changes in classification of assets.
The industry classifications in Tables 5-97-9 have been prepared at the level of the borrowing entity. This means that a loan to the subsidiary of a major corporation is classified by the industry in which the subsidiary operates, even though the parent’s predominant business may be in a different industry.
Table 7: Loans and advances to customers in other European Union countries
IFRS | UK GAAP | |||||||||||||||||||
Table 7: Loans and advances to customers in other European Union countries | Table 7: Loans and advances to customers in other European Union countries | |||||||||||||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | ||||||||||
Financial services | 7,585 | 5,629 | 3,982 | 2,419 | 1,205 | 14,218 | 7,585 | 5,629 | 3,982 | 2,419 | ||||||||||
Agriculture, forestry and fishing | 141 | 786 | 155 | 280 | 147 | 216 | 141 | 786 | 155 | 280 | ||||||||||
Manufacturing | 4,175 | 3,147 | 2,254 | 2,021 | 1,275 | 8,700 | 4,175 | 3,147 | 2,254 | 2,021 | ||||||||||
Construction | 1,159 | 639 | 803 | 716 | 609 | 1,786 | 1,159 | 639 | 803 | 716 | ||||||||||
Property | 2,510 | 2,162 | 3,299 | 344 | 346 | 4,814 | 2,510 | 2,162 | 3,299 | 344 | ||||||||||
Government | – | 6 | – | – | – | 1,089 | – | 6 | – | – | ||||||||||
Energy and water | 2,425 | 2,050 | 1,490 | 940 | 409 | 5,313 | 2,425 | 2,050 | 1,490 | 940 | ||||||||||
Wholesale and retail distribution and leisure | 1,719 | 776 | 952 | 810 | 426 | 2,653 | 1,719 | 776 | 952 | 810 | ||||||||||
Transport | 1,933 | 1,465 | 1,695 | 640 | 566 | 2,603 | 1,933 | 1,465 | 1,695 | 640 | ||||||||||
Postal and communication | 662 | 580 | 432 | 111 | 40 | 962 | 662 | 580 | 432 | 111 | ||||||||||
Business and other services | 3,801 | 2,343 | 3,594 | 3,795 | 1,251 | 5,490 | 3,801 | 2,343 | 3,594 | 3,795 | ||||||||||
Home loansb | 24,115 | 18,616 | 16,488 | 11,828 | 10,334 | 33,644 | 21,405 | 18,202 | 16,114 | 11,828 | ||||||||||
Other personal | 3,905 | 3,672 | 1,909 | 1,369 | 1,769 | 7,247 | 6,615 | 4,086 | 2,283 | 1,369 | ||||||||||
Overseas customersc | – | – | – | – | 438 | |||||||||||||||
Finance lease receivables | 2,403 | 1,559 | 1,870 | 937 | 212 | 3,328 | 2,403 | 1,559 | 1,870 | 937 | ||||||||||
Loans and advances to customers in other European Union countries | 56,533 | 43,430 | 38,923 | 26,210 | 19,027 | 92,063 | 56,533 | 43,430 | 38,923 | 26,210 |
See note under Table 6.
Notes
| ||
Risk management
Statistical information
Table 8: Loans and advances to customers in the United States
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
Financial services | 29,342 | 17,516 | 16,229 | 9,942 | 919 | |||||
Agriculture, forestry and fishing | 2 | 2 | 1 | – | 1 | |||||
Manufacturing | 818 | 519 | 937 | 388 | 341 | |||||
Construction | 18 | 13 | 32 | 139 | 2 | |||||
Property | 568 | 1,714 | 329 | 394 | 1 | |||||
Government | 221 | 153 | 300 | – | – | |||||
Energy and water | 1,279 | 1,078 | 1,261 | 891 | 1,358 | |||||
Wholesale and retail distribution and leisure | 398 | 403 | 794 | 466 | 77 | |||||
Transport | 137 | 128 | 148 | 186 | 468 | |||||
Postal and communication | 2,446 | 36 | 236 | 63 | 153 | |||||
Business and other services | 1,053 | 1,432 | 885 | 1,565 | 220 | |||||
Home loansb | 458 | 349 | 2 | 5,768 | – | |||||
Other personal | 3,256 | 2,022 | 1,443 | 845 | – | |||||
Finance lease receivables | 304 | 312 | 328 | 335 | 33 | |||||
Loans and advances to customers in the United States | 40,300 | 25,677 | 22,925 | 20,982 | 3,573 |
See note under Table 6.
Table 9: Loans and advances to customers in Africa
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
Financial services | 3,472 | 2,821 | 4,350 | 186 | 27 | |||||
Agriculture, forestry and fishing | 956 | 889 | 1,193 | 102 | 201 | |||||
Manufacturing | 1,351 | 1,747 | 1,501 | 313 | 261 | |||||
Construction | 637 | 591 | 1,068 | 76 | 40 | |||||
Property | 2,433 | 1,987 | 1,673 | 87 | 40 | |||||
Government | 967 | 785 | 625 | – | – | |||||
Energy and water | 356 | 156 | 193 | 184 | 97 | |||||
Wholesale and retail distribution and leisure | 1,326 | 1,050 | 2,774 | 165 | 239 | |||||
Transport | 116 | 354 | 394 | 137 | 41 | |||||
Postal and communication | 231 | 241 | 27 | 52 | 29 | |||||
Business and other services | 1,285 | 2,631 | 1,258 | 1,012 | 412 | |||||
Home loansb | 15,314 | 11,223 | 11,630 | 214 | 79 | |||||
Other personal | 6,366 | 2,976 | 4,955 | 190 | 248 | |||||
Finance lease receivables | 4,357 | 4,240 | 1,580 | 41 | 45 | |||||
Loans and advances to customers in Africa | 39,167 | 31,691 | 33,221 | 2,759 | 1,759 |
See note under Table 6.
Table 10: Loans and advances to customers in the Rest of the World
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
Loans and advances | 22,702 | 14,207 | 13,407 | 10,520 | 2,751 | |||||
Finance lease receivables | 118 | 108 | 107 | 74 | – | |||||
Loans and advances to customers in the Rest of the World | 22,820 | 14,315 | 13,514 | 10,594 | 2,751 |
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. The 2004 analysis excludes reverse repurchase agreements. |
b | Excludes commercial property mortgages. |
Barclays Annual Report | ||||
Risk management
Statistical information
Table 8: Loans and advances to customers in the United States | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||
Financial services | 56,006 | 29,342 | 17,516 | 16,229 | 9,942 | |||||
Agriculture, forestry and fishing | – | 2 | 2 | 1 | – | |||||
Manufacturing | 2,171 | 818 | 519 | 937 | 388 | |||||
Construction | 21 | 18 | 13 | 32 | 139 | |||||
Property | 549 | 568 | 1,714 | 329 | 394 | |||||
Government | 336 | 221 | 153 | 300 | – | |||||
Energy and water | 3,085 | 1,279 | 1,078 | 1,261 | 891 | |||||
Wholesale and retail distribution and leisure | 1,165 | 846 | 403 | 794 | 466 | |||||
Transport | 415 | 137 | 128 | 148 | 186 | |||||
Postal and communication | 3,343 | 2,446 | 36 | 236 | 63 | |||||
Business and other services | 2,279 | 1,053 | 1,432 | 885 | 1,565 | |||||
Home loansb | 17 | 10 | 349 | 2 | 5,768 | |||||
Other personal | 7,702 | 3,256 | 2,022 | 1,443 | 845 | |||||
Finance lease receivables | 298 | 304 | 312 | 328 | 335 | |||||
Loans and advances to customers in the United States | 77,387 | 40,300 | 25,677 | 22,925 | 20,982 |
See note under Table 6.
Table 9: Loans and advances to customers in Africa | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||
Financial services | 1,956 | 3,472 | 2,821 | 4,350 | 186 | |||||
Agriculture, forestry and fishing | 817 | 956 | 889 | 1,193 | 102 | |||||
Manufacturing | 1,082 | 1,351 | 1,747 | 1,501 | 313 | |||||
Construction | 2,053 | 637 | 591 | 1,068 | 76 | |||||
Property | 3,485 | 2,433 | 1,987 | 1,673 | 87 | |||||
Government | 1,741 | 967 | 785 | 625 | – | |||||
Energy and water | 118 | 356 | 156 | 193 | 184 | |||||
Wholesale and re tail distribution and leisure | 1,012 | 1,326 | 1,050 | 2,774 | 165 | |||||
Transport | 739 | 116 | 354 | 394 | 137 | |||||
Postal and communication | 293 | 231 | 241 | 27 | 52 | |||||
Business and other services | 4,699 | 1,285 | 2,631 | 1,258 | 1,012 | |||||
Home loansb | 19,018 | 15,393 | 11,223 | 11,630 | 214 | |||||
Other personal | 3,087 | 6,287 | 2,976 | 4,955 | 190 | |||||
Finance lease receivables | 5,130 | 4,357 | 4,240 | 1,580 | 41 | |||||
Loans and advances to customers in Africa | 45,230 | 39,167 | 31,691 | 33,221 | 2,759 |
See note under Table 6.
Table 10: Loans and advances to customers in the Rest of the World | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||
Loans and advances | 37,421 | 22,702 | 14,207 | 13,407 | 10,520 | |||||
Finance lease receivables | 219 | 118 | 108 | 107 | 74 | |||||
Loans and advances to customers in the Rest of the World | 37,640 | 22,820 | 14,315 | 13,514 | 10,594 |
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. The 2004 analysis excludes reverse re purchase agreements. |
Table 11: Maturity analysis of loans and advances to customers
b | Excludes commercial property mortgages. |
Barclays Annual Report 2008 | 125 |
At 31st December 2007 | On demand £m | Not more than three months £m | Over three months but not more than six months £m | Over six months but not more than one year £m | Over one than three | Over three years but not more than five years £m | Over five but not | Over ten years £m | Total £m | |||||||||
United Kingdom | ||||||||||||||||||
Corporate lendinga | 26,557 | 15,737 | 2,453 | 3,834 | 8,474 | 8,358 | 10,718 | 11,643 | 87,774 | |||||||||
Other lending to customers in the United Kingdom | 4,384 | 4,717 | 2,106 | 3,597 | 11,517 | 8,699 | 19,325 | 48,228 | 102,573 | |||||||||
Total United Kingdom | 30,941 | 20,454 | 4,559 | 7,431 | 19,991 | 17,057 | 30,043 | 59,871 | 190,347 | |||||||||
Other European Union | 4,016 | 7,665 | 2,229 | 3,284 | 5,842 | 4,883 | 8,842 | 19,772 | 56,533 | |||||||||
United States | 3,053 | 20,205 | 3,430 | 5,938 | 1,904 | 2,498 | 2,658 | 614 | 40,300 | |||||||||
Africa | 6,806 | 4,243 | 881 | 1,969 | 5,568 | 4,124 | 2,285 | 13,291 | 39,167 | |||||||||
Rest of the World | 1,085 | 9,733 | 1,695 | 859 | 2,223 | 2,586 | 3,685 | 954 | 22,820 | |||||||||
Loans and advances to customers | 45,901 | 62,300 | 12,794 | 19,481 | 35,528 | 31,148 | 47,513 | 94,502 | 349,167 | |||||||||
At 31st December 2006 | On demand £m | Not more than three months £m | Over three six months | Over six £m | Over one £m | Over three but not | Over five but not | Over ten years | Total £m | |||||||||
United Kingdom | ||||||||||||||||||
Corporate lendinga | 22,923 | 13,569 | 2,262 | 2,850 | 7,562 | 8,499 | 8,349 | 10,342 | 76,356 | |||||||||
Other lending to customers in the | 3,784 | 4,427 | 2,110 | 3,586 | 11,937 | 7,459 | 16,358 | 44,501 | 94,162 | |||||||||
Total United Kingdom | 26,707 | 17,996 | 4,372 | 6,436 | 19,499 | 15,958 | 24,707 | 54,843 | 170,518 | |||||||||
Other European Union | 2,137 | 6,254 | 1,744 | 2,869 | 4,783 | 4,397 | 6,565 | 14,681 | 43,430 | |||||||||
United States | 2,489 | 11,630 | 1,689 | 3,402 | 1,949 | 1,871 | 1,464 | 1,183 | 25,677 | |||||||||
Africa | 2,575 | 2,471 | 1,272 | 2,177 | 5,212 | 4,177 | 3,555 | 10,252 | 31,691 | |||||||||
Rest of the World | 86 | 6,377 | 1,015 | 1,020 | 1,116 | 1,465 | 1,800 | 1,436 | 14,315 | |||||||||
Loans and advances to customers | 33,994 | 44,728 | 10,092 | 15,904 | 32,559 | 27,868 | 38,091 | 82,395 | 285,631 |
Table 12: Loans and advances in currencies other than the local currency of the borrower for countries where this exceeds 1% of total Group assets
Table 11: Maturity analysis of loans and advances to customers | ||||||||||||||||||
At 31st December 2008 | On demand £m | Not more than three months £m | Over three months but not more than six months £m | Over six £m | Over one £m | Over three but not | Over five but not | Over £m | Total £m | |||||||||
United Kingdom | ||||||||||||||||||
Corporate lending | 24,790 | 14,715 | 1,574 | 3,259 | 10,585 | 12,372 | 10,495 | 15,876 | 93,666 | |||||||||
Other lending to customers in the | ||||||||||||||||||
United Kingdom | 4,560 | 6,264 | 2,495 | 4,477 | 16,604 | 10,541 | 21,913 | 55,498 | 122,352 | |||||||||
Total United Kingdom | 29,350 | 20,979 | 4,069 | 7,736 | 27,189 | 22,913 | 32,408 | 71,374 | 216,018 | |||||||||
Other European Union | 5,254 | 17,618 | 2,707 | 5,681 | 11,808 | 10,272 | 10,138 | 28,585 | 92,063 | |||||||||
United States | 6,298 | 39,754 | 2,737 | 5,413 | 8,767 | 3,447 | 4,238 | 6,733 | 77,387 | |||||||||
Africa | 8,428 | 2,247 | 1,143 | 1,852 | 4,560 | 4,557 | 5,674 | 16,769 | 45,230 | |||||||||
Rest of the World | 3,832 | 8,150 | 2,167 | 1,545 | 9,267 | 4,008 | 5,666 | 3,005 | 37,640 | |||||||||
Total | 53,162 | 88,748 | 12,823 | 22,227 | 61,591 | 45,197 | 58,124 | 126,466 | 468,338 |
As % of assets | Total £m | Banks and other financial institutions £m | Governments and official institutions £m | Commercial industrial and other private sectors £m | ||||||
At 31st December 2007 United States | 2.1 | 26,249 | 7,151 | 6 | 19,092 | |||||
At 31st December 2006 | ||||||||||
United States | 1.7 | 16,579 | 7,307 | 89 | 9,183 | |||||
At 31st December 2005 | ||||||||||
United States | 2.6 | 24,274 | 15,693 | – | 8,581 |
At 31st December 2007 | On demand £m | Not more than three months £m | Over three more than | Over six not more £m | Over one £m | Over three but not | Over five but not | Over ten years £m | Total £m | |||||||||
United Kingdom | ||||||||||||||||||
Corporate lending | 26,557 | 15,737 | 2,453 | 3,834 | 8,474 | 8,358 | 10,718 | 11,643 | 87,774 | |||||||||
Other lending to customers in the | ||||||||||||||||||
United Kingdom | 4,384 | 4,717 | 2,106 | 3,597 | 11,517 | 8,699 | 19,325 | 48,228 | 102,573 | |||||||||
Total United Kingdom | 30,941 | 20,454 | 4,559 | 7,431 | 19,991 | 17,057 | 30,043 | 59,871 | 190,347 | |||||||||
Other European Union | 4,016 | 7,665 | 2,229 | 3,284 | 5,842 | 4,883 | 8,842 | 19,772 | 56,533 | |||||||||
United States | 3,053 | 20,205 | 3,430 | 5,938 | 1,904 | 2,498 | 2,658 | 614 | 40,300 | |||||||||
Africa | 6,806 | 4,243 | 881 | 1,969 | 5,568 | 4,124 | 2,285 | 13,291 | 39,167 | |||||||||
Rest of the World | 1,085 | 9,733 | 1,695 | 859 | 2,223 | 2,586 | 3,685 | 954 | 22,820 | |||||||||
Loans and advances to customers | 45,901 | 62,300 | 12,794 | 19,481 | 35,528 | 31,148 | 47,513 | 94,502 | 349,167 |
Table 12: Foreign outstandings in currencies other than the local currency of the borrower for countries where this exceeds 1% of total Group assets | ||||||||||
As % of assets | Total £m | Banks and other financial institutions £m | Governments and official institutions £m | Commercial £m | ||||||
At 31st December 2008 | ||||||||||
United States | 3.1 | 63,614 | 16,724 | 2 | 46,888 | |||||
Cayman Islands | 1.2 | 23,765 | 271 | – | 23,494 | |||||
At 31st December 2007 | ||||||||||
United States | 2.1 | 26,249 | 7,151 | 6 | 19,092 | |||||
At 31st December 2006 | ||||||||||
United States | 1.7 | 16,579 | 7,307 | 89 | 9,183 |
At 31st December 2008, 2007 2006 and 2005,2006, there were no countries where Barclays had cross-currency loans to borrowers between 0.75% and 1% of total Group assets.
Note
126 | Barclays Annual Report | |||||
Risk management
Statistical information
Table 13: Off-balance sheet and other credit exposures as at 31st December | ||||||
2008 £m | 2007 £m | 2006 £m | ||||
Off-balance sheet exposures | ||||||
Contingent liabilities | 66,310 | 45,774 | 39,419 | |||
Commitments | 260,816 | 192,639 | 205,504 | |||
On-balance sheet exposures | ||||||
Trading portfolio assets | 185,637 | 193,691 | 177,867 | |||
Financial assets designated at fair value held on own account | 54,542 | 56,629 | 31,799 | |||
Derivative financial instruments | 984,802 | 248,088 | 138,353 | |||
Available for sale financial investments | 64,976 | 43,072 | 51,703 |
Table 14: Notional principal amounts of credit derivatives as at 31st December | ||||||
2008 £m | 2007 £m | 2006 £m | ||||
Credit derivatives held or issued for trading purposesa | 4,129,244 | 2,472,249 | 1,224,548 |
Table 15: Credit risk loans summary | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004b £m | |||||
Impaired loansc | 12,264 | 8,574 | 4,444 | 4,550 | n/a | |||||
Non-accruing loans | n/a | n/a | n/a | n/a | 2,115 | |||||
Accruing loans where interest is being suspended with or without provisions | n/a | n/a | n/a | n/a | 492 | |||||
Other accruing loans against which provisions have been made | n/a | n/a | n/a | n/a | 943 | |||||
Subtotal | 12,264 | 8,574 | 4,444 | 4,550 | 3,550 | |||||
Accruing loans which are contractually overdue 90 days or more as to principal or interest | 2,953 | 794 | 598 | 609 | 550 | |||||
Impaired and restructured loans | 483 | 273 | 46 | 51 | 15 | |||||
Credit risk loans | 15,700 | 9,641 | 5,088 | 5,210 | 4,115 |
Notes
Table 13: Off-balance sheet and other credit exposures as at 31st December
2007 £m | 2006 £m | 2005 £m | ||||
Off-balance sheet exposures | ||||||
Contingent liabilities | 45,774 | 39,419 | 47,143 | |||
Commitments | 192,639 | 205,504 | 203,785 | |||
On-balance sheet exposures | ||||||
Trading portfolio assets | 193,691 | 177,867 | 155,723 | |||
Financial assets designated at fair value held on own account | 56,629 | 31,799 | 12,904 | |||
Derivative financial instruments | 248,088 | 138,353 | 136,823 | |||
Available for sale financial investments | 43,072 | 51,703 | 53,497 |
Table 14: Notional principal amounts of credit derivatives as at 31st December
2007 £m | 2006 £m | 2005 £m | ||||
Credit derivatives held or issued for trading purposesa | 2,472,249 | 1,224,548 | 609,381 | |||
Total | 2,472,249 | 1,224,548 | 609,381 |
Table 15: Credit risk loans summary
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004b £m | 2003 £m | |||||
Impaired loansc | 8,574 | 4,444 | 4,550 | n/a | n/a | |||||
Non-accruing loans | n/a | n/a | n/a | 2,115 | 2,261 | |||||
Accruing loans where interest is being suspended with or without provisions | n/a | n/a | n/a | 492 | 629 | |||||
Other accruing loans against which provisions have been made | n/a | n/a | n/a | 943 | 821 | |||||
Subtotal | 8,574 | 4,444 | 4,550 | 3,550 | 3,711 | |||||
Accruing loans which are contractually overdue 90 days or more as to principal or interest | 794 | 598 | 609 | 550 | 590 | |||||
Impaired and restructured loans | 273 | 46 | 51 | 15 | 4 | |||||
Credit risk loans | 9,641 | 5,088 | 5,210 | 4,115 | 4,305 |
Notes
a | Includes credit derivatives held as economic hedges which are not designated as hedges for accounting purposes. |
b | 2004 does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
c | Includes |
Barclays Annual Report | ||||||
127 |
Table 16: Credit risk loans | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004 a £m | |||||
Impaired loans: b | ||||||||||
United Kingdom | 3,793 | 3,605 | 3,340 | 2,965 | n/a | |||||
Other European Union | 1,713 | 472 | 410 | 345 | n/a | |||||
United States | 4,397 | 3,703 | 129 | 230 | n/a | |||||
Africa | 1,996 | 757 | 535 | 831 | n/a | |||||
Rest of the World | 365 | 37 | 30 | 179 | n/a | |||||
Total | 12,264 | 8,574 | 4,444 | 4,550 | n/a | |||||
Non-accrual loans: | ||||||||||
United Kingdom | n/a | n/a | n/a | n/a | 1,509 | |||||
Other European Union | n/a | n/a | n/a | n/a | 243 | |||||
United States | n/a | n/a | n/a | n/a | 258 | |||||
Africa | n/a | n/a | n/a | n/a | 74 | |||||
Rest of the World | n/a | n/a | n/a | n/a | 31 | |||||
Total | n/a | n/a | n/a | n/a | 2,115 | |||||
Accruing loans where interest is being suspended with or without provisions: | ||||||||||
United Kingdom | n/a | n/a | n/a | n/a | 323 | |||||
Other European Union | n/a | n/a | n/a | n/a | 31 | |||||
Africa | n/a | n/a | n/a | n/a | 21 | |||||
Rest of the World | n/a | n/a | n/a | n/a | 117 | |||||
Total | n/a | n/a | n/a | n/a | 492 | |||||
Other accruing loans against which provisions have been made: | ||||||||||
United Kingdom | n/a | n/a | n/a | n/a | 865 | |||||
Other European Union | n/a | n/a | n/a | n/a | 27 | |||||
United States | n/a | n/a | n/a | n/a | 26 | |||||
Africa | n/a | n/a | n/a | n/a | 21 | |||||
Rest of the World | n/a | n/a | n/a | n/a | 4 | |||||
Total | n/a | n/a | n/a | n/a | 943 | |||||
Accruing loans which are contractually overdue 90 days or more as to principal or interest: | ||||||||||
United Kingdom | 1,656 | 676 | 516 | 539 | 513 | |||||
Other European Union | 562 | 79 | 58 | 53 | 34 | |||||
United States | 433 | 10 | 3 | – | 1 | |||||
Africa | 172 | 29 | 21 | 17 | 1 | |||||
Rest of the World | 130 | – | – | – | 1 | |||||
Total | 2,953 | 794 | 598 | 609 | 550 | |||||
Impaired and restructured loans: | ||||||||||
United Kingdom | 367 | 179 | – | 5 | 2 | |||||
Other European Union | 29 | 14 | 10 | 7 | – | |||||
United States | 82 | 38 | 22 | 16 | 13 | |||||
Africa | – | 42 | 14 | 23 | – | |||||
Rest of the World | 5 | – | – | – | – | |||||
Total | 483 | 273 | 46 | 51 | 15 | |||||
Total credit risk loans: | ||||||||||
United Kingdom | 5,816 | 4,460 | 3,856 | 3,509 | 3,212 | |||||
Other European Union | 2,304 | 565 | 478 | 405 | 335 | |||||
United States | 4,912 | 3,751 | 154 | 246 | 298 | |||||
Africa | 2,168 | 828 | 570 | 871 | 117 | |||||
Rest of the World | 500 | 37 | 30 | 179 | 153 | |||||
Credit risk loans | 15,700 | 9,641 | 5,088 | 5,210 | 4,115 |
Table 16: Credit risk loansNotes
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
Impaired loans:b | ||||||||||
United Kingdom | 3,605 | 3,340 | 2,965 | n/a | n/a | |||||
Other European Union | 472 | 410 | 345 | n/a | n/a | |||||
United States | 3,703 | 129 | 230 | n/a | n/a | |||||
Africa | 757 | 535 | 831 | n/a | n/a | |||||
Rest of the World | 37 | 30 | 179 | n/a | n/a | |||||
Total | 8,574 | 4,444 | 4,550 | n/a | n/a | |||||
Non-accrual loans: | ||||||||||
United Kingdom | n/a | n/a | n/a | 1,509 | 1,572 | |||||
Other European Union | n/a | n/a | n/a | 243 | 143 | |||||
United States | n/a | n/a | n/a | 258 | 383 | |||||
Africa | n/a | n/a | n/a | 74 | 86 | |||||
Rest of the World | n/a | n/a | n/a | 31 | 77 | |||||
Total | n/a | n/a | n/a | 2,115 | 2,261 | |||||
Accruing loans where interest is being suspended with or without provisions: | ||||||||||
United Kingdom | n/a | n/a | n/a | 323 | 559 | |||||
Other European Union | n/a | n/a | n/a | 31 | 29 | |||||
Africa | n/a | n/a | n/a | 21 | 37 | |||||
Rest of the World | n/a | n/a | n/a | 117 | 4 | |||||
Total | n/a | n/a | n/a | 492 | 629 | |||||
Other accruing loans against which provisions have been made: | ||||||||||
United Kingdom | n/a | n/a | n/a | 865 | 760 | |||||
Other European Union | n/a | n/a | n/a | 27 | 35 | |||||
United States | n/a | n/a | n/a | 26 | – | |||||
Africa | n/a | n/a | n/a | 21 | 22 | |||||
Rest of the World | n/a | n/a | n/a | 4 | 4 | |||||
Total | n/a | n/a | n/a | 943 | 821 | |||||
Accruing loans which are contractually overdue 90 days or more as to principal or interest: | ||||||||||
United Kingdom | 676 | 516 | 539 | 513 | 566 | |||||
Other European Union | 79 | 58 | 53 | 34 | 24 | |||||
United States | 10 | 3 | – | 1 | – | |||||
Africa | 29 | 21 | 17 | 1 | – | |||||
Rest of the World | – | – | – | 1 | – | |||||
Total | 794 | 598 | 609 | 550 | 590 | |||||
Impaired and restructured loans: | ||||||||||
United Kingdom | 179 | – | 5 | 2 | 4 | |||||
Other European Union | 14 | 10 | 7 | – | – | |||||
United States | 38 | 22 | 16 | 13 | – | |||||
Africa | 42 | 14 | 23 | – | – | |||||
Total | 273 | 46 | 51 | 15 | 4 | |||||
Total credit risk loans: | ||||||||||
United Kingdom | 4,460 | 3,856 | 3,509 | 3,212 | 3,461 | |||||
Other European Union | 565 | 478 | 405 | 335 | 231 | |||||
United States | 3,751 | 154 | 246 | 298 | 383 | |||||
Africa | 828 | 570 | 871 | 117 | 145 | |||||
Rest of the World | 37 | 30 | 179 | 153 | 85 | |||||
Credit risk loans | 9,641 | 5,088 | 5,210 | 4,115 | 4,305 |
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
b | Includes |
128 | Barclays Annual Report | |||||
Risk management
Statistical information
Table 17: Potential problem loans
Table 17: Potential problem loans | ||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||
United Kingdom | 883 | 419 | 465 | 640 | 658 | |||||
Other European Union | 963 | 59 | 32 | 26 | 32 | |||||
United States | 431 | 964 | 21 | 12 | 27 | |||||
Africa | 140 | 355 | 240 | 248 | 67 | |||||
Rest of the World | 39 | — | 3 | 3 | 14 | |||||
Potential problem loansb | 2,456 | 1,797 | 761 | 929 | 798 |
IFRS | UK GAAP | |||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||
United Kingdom | 419 | 465 | 640 | 658 | 989 | |||||
Other European Union | 59 | 32 | 26 | 32 | 23 | |||||
United States | 964 | 21 | 12 | 27 | 259 | |||||
Africa | 355 | 240 | 248 | 67 | 53 | |||||
Rest of the World | – | 3 | 3 | 14 | 3 | |||||
Potential problem loansb | 1,797 | 761 | 929 | 798 | 1,327 |
Table 18: Interest foregone on credit risk loans
Table 18: Interest foregone on credit risk loans | ||||||||||||
2007 £m | 2006 £m | 2005 £m | 2008 £m | 2007 £m | 2006 £m | |||||||
Interest income that would have been recognised under the original contractual terms | ||||||||||||
Interest in come that would have been recognised under the original contractual terms | ||||||||||||
United Kingdom | 340 | 357 | 304 | 244 | 340 | 357 | ||||||
Rest of the World | 91 | 70 | 52 | 235 | 91 | 70 | ||||||
Total | 431 | 427 | 356 | 479 | 431 | 427 |
Interest income of approximately £195m (2007: £48m, (2006: £72m, 2005: £29m)2006: £72m) from such loans was included in profit, of which £72m (2007: £26m, (2006: £49m, 2005: £20m)2006: £49m) related to domestic lending and the remainder related to foreign lending.
In addition, a further £159m (2007: £113m, (2006: £98m, 2005: £76m)2006: £98m) was recognised arising from impaired loans. Following impairment, interest income is recognised using the original effective rate of interest which was used to discount the expected future cash flows for the purpose of measuring the impairment loss. £54m (2007: £93m, (2006: £88m, 2005: £70m)2006: £88m) of this related to domestic impaired loans and the remainder related to foreign impaired loans.
Table 19: Analysis of impairment/provision charges | |||||||||||||
At 31st December | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | ||||||||
Impairment charge/net specific provisions charge | |||||||||||||
United Kingdom | 1,817 | 1,593 | 1,880 | 1,382 | 1,021 | ||||||||
Other European Union | 587 | 123 | 92 | 75 | 102 | ||||||||
United States | 1,519 | 374 | 12 | 76 | 57 | ||||||||
Africa | 454 | 214 | 143 | 37 | 27 | ||||||||
Rest of the World | 207 | 2 | (53 | ) | 4 | 103 | |||||||
Impairment on loans and advances | 4,584 | 2,306 | 2,074 | 1,574 | 1,310 | ||||||||
Impairment on available for sale assets | 382 | 13 | 86 | 4 | n/a | ||||||||
Impairment on reverse repurchase agreements | 124 | — | — | — | — | ||||||||
Impairment charge | 5,090 | 2,319 | 2,160 | 1,578 | 1,310 | ||||||||
Total net specific provisions charge | n/a | n/a | n/a | n/a | n/a | ||||||||
General provisions (release)/charge | n/a | n/a | n/a | n/a | (206 | ) | |||||||
Other credit provisions charge/(release) | 329 | 476 | (6 | ) | (7 | ) | (11 | ) | |||||
Impairment/provision charges | 5,419 | 2,795 | 2,154 | 1,571 | 1,093 |
Table 19: Analysis of impairment/provision chargesNotes
IFRS | UK GAAP | |||||||||||
At 31st December | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | |||||||
Impairment charge/net specific provisions charge | ||||||||||||
United Kingdom | 1,593 | 1,880 | 1,382 | 1,021 | 1,132 | |||||||
Other European Union | 123 | 92 | 75 | 102 | 37 | |||||||
United States | 374 | 12 | 76 | 57 | 84 | |||||||
Africa | 214 | 143 | 37 | 27 | 21 | |||||||
Rest of the World | 2 | (53 | ) | 4 | 103 | 46 | ||||||
Impairment on loans and advances | 2,306 | 2,074 | 1,574 | n/a | n/a | |||||||
Impairment on available for sale assets | 13 | 86 | 4 | n/a | n/a | |||||||
Impairment charge | 2,319 | 2,160 | 1,578 | n/a | n/a | |||||||
Total net specific provisions charge | n/a | n/a | n/a | 1,310 | 1,320 | |||||||
General provisions (release)/charge | n/a | n/a | n/a | (206) | 27 | |||||||
Other credit provisions charge/(release) | 476 | (6 | ) | (7 | ) | (11) | – | |||||
Impairment/provision charges | 2,795 | 2,154 | 1,571 | 1,093 | 1,347 |
Notes
a | Does not reflect the application of |
b | Includes |
Barclays Annual Report | ||||||
129 |
Table 20: Impairment/provisions charges ratios (‘Loan loss ratios’)
IFRS | UK GAAP | |||||||||
2007 % | 2006 % | 2005 % | 2004 a % | 2003 % | ||||||
Impairment/provisions charges as a percentage of average loans and advances for the year: | ||||||||||
Specific provisions charge | n/a | n/a | n/a | 0.40 | 0.46 | |||||
General provisions charge | n/a | n/a | n/a | (0.07) | 0.01 | |||||
Impairment charge | 0.64 | 0.66 | 0.58 | n/a | n/a | |||||
Total | 0.64 | 0.66 | 0.58 | 0.33 | 0.47 | |||||
Amounts written off (net of recoveries) | 0.49 | 0.61 | 0.50 | 0.40 | 0.48 | |||||
Table 21: Analysis of allowance for impairment/provision for bad and doubtful debts
| ||||||||||
IFRS | UK GAAP | |||||||||
2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | ||||||
Impairment allowance/Specific provisions | ||||||||||
United Kingdom | 2,526 | 2,477 | 2,266 | 1,683 | 1,856 | |||||
Other European Union | 344 | 311 | 284 | 149 | 97 | |||||
United States | 356 | 100 | 130 | 155 | 121 | |||||
Africa | 514 | 417 | 647 | 70 | 79 | |||||
Rest of the World | 32 | 30 | 123 | 90 | 80 | |||||
Specific provision balances | n/a | n/a | n/a | 2,147 | 2,233 | |||||
General provision balances | n/a | n/a | n/a | 564 | 795 | |||||
Allowance for impairment provision balances | 3,772 | 3,335 | 3,450 | 2,711 | 3,028 | |||||
Average loans and advances for the year | 357,853 | 313,614 | 271,421 | 328,134 | 285,963 | |||||
Table 22: Allowance for impairment/provision balance ratios
| ||||||||||
IFRS | UK GAAP | |||||||||
2007 % | 2006 % | 2005 % | 2004 a % | 2003 % | ||||||
Allowance for impairment/provision balance at end of year as a percentage of loans and advances at end ofyear: | ||||||||||
Specific provision balances | n/a | n/a | n/a | 0.62 | 0.77 | |||||
General provision balances | n/a | n/a | n/a | 0.16 | 0.27 | |||||
Impairment balance | 0.97 | 1.05 | 1.14 | n/a | n/a | |||||
Total | 0.97 | 1.05 | 1.14 | 0.78 | 1.04 |
Table 20: Impairment/provisions charges ratios (‘Loan loss ratios’) | |||||||||||
2008 % | 2007 % | 2006 % | 2005 % | 2004a % | |||||||
Impairment/provisions charges as a percentage of average loans and advances for the year: | |||||||||||
Specific provisions charge | n/a | n/a | n/a | n/a | 0.40 | ||||||
General provisions charge | n/a | n/a | n/a | n/a | (0.07 | ) | |||||
Impairment charge | 1.01 | 0.64 | 0.66 | 0.58 | n/a | ||||||
Total | 1.01 | 0.64 | 0.66 | 0.58 | 0.33 | ||||||
Amounts written off (net of recoveries) | 0.61 | 0.49 | 0.61 | 0.50 | 0.40 |
Notes
Table 21: Analysis of allowance for impairment/provision for bad and doubtful debts | ||||||||||
2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | ||||||
Impairment allowance/Specific provisions | ||||||||||
United Kingdom | 2,947 | 2,526 | 2,477 | 2,266 | 1,683 | |||||
Other European Union | 963 | 344 | 311 | 284 | 149 | |||||
United States | 1,561 | 356 | 100 | 130 | 155 | |||||
Africa | 857 | 514 | 417 | 647 | 70 | |||||
Rest of the World | 246 | 32 | 30 | 123 | 90 | |||||
Specific provision balances | n/a | n/a | n/a | n/a | 2,147 | |||||
General provision balances | n/a | n/a | n/a | n/a | 564 | |||||
Allowance for impairment provision balances | 6,574 | 3,772 | 3,335 | 3,450 | 2,711 | |||||
Average loans and advances for the year | 453,413 | 357,853 | 313,614 | 271,421 | 328,134 |
Table 22: Allowance for impairment/provision balance ratios | ||||||||||
2008 % | 2007 % | 2006 % | 2005 % | 2004a % | ||||||
Allowance for impairment/provision balance at end of year as a percentage of loans and advances at end of year: | ||||||||||
Specific provision balances | n/a | n/a | n/a | n/a | 0.62 | |||||
General provision balances | n/a | n/a | n/a | n/a | 0.16 | |||||
Impairment balance | 1.27 | 0.97 | 1.05 | 1.14 | n/a | |||||
Total | 1.27 | 0.97 | 1.05 | 1.14 | 0.78 |
Note
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
130 | Barclays Annual Report | |||||
Risk management
Statistical information
Table 23: Movements in allowance for impairment/provisions charge for bad and doubtful debts | |||||||||||||||
2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||||||||
Allowance for impairment/provision balance at beginning of year | 3,772 | 3,335 | 3,450 | 2,637 | 2,946 | ||||||||||
Acquisitions and disposals | 307 | (73 | ) | (23 | ) | 555 | 21 | ||||||||
Unwind of discount | (135 | ) | (113 | ) | (98 | ) | (76 | ) | n/a | ||||||
Exchange and other adjustments | 791 | 53 | (153 | ) | 125 | (33 | ) | ||||||||
Amounts written off | (2,919 | ) | (1,963 | ) | (2,174 | ) | (1,587 | ) | (1,582 | ) | |||||
Recoveries | 174 | 227 | 259 | 222 | 255 | ||||||||||
Impairment/provision charged against profit b | 4,584 | 2,306 | 2,074 | 1,574 | 1,104 | ||||||||||
Allowance for impairment/provision balance at end of year | 6,574 | 3,772 | 3,335 | 3,450 | 2,711 |
Table 24: Amounts written off | |||||||||||||||
2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||||||||
United Kingdom | (1,514 | ) | (1,530 | ) | (1,746 | ) | (1,302 | ) | (1,280 | ) | |||||
Other European Union | (162 | ) | (143 | ) | (74 | ) | (56 | ) | (63 | ) | |||||
United States | (1,044 | ) | (145 | ) | (46 | ) | (143 | ) | (50 | ) | |||||
Africa | (187 | ) | (145 | ) | (264 | ) | (81 | ) | (15 | ) | |||||
Rest of the World | (12 | ) | — | (44 | ) | (5 | ) | (174 | ) | ||||||
Amounts written off | (2,919 | ) | (1,963 | ) | (2,174 | ) | (1,587 | ) | (1,582 | ) |
Table 25: Recoveries | ||||||||||
2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | ||||||
United Kingdom | 131 | 154 | 178 | 160 | 217 | |||||
Other European Union | 4 | 32 | 18 | 13 | 9 | |||||
United States | 1 | 7 | 22 | 15 | 14 | |||||
Africa | 36 | 34 | 33 | 16 | 4 | |||||
Rest of the World | 2 | — | 8 | 18 | 11 | |||||
Recoveries | 174 | 227 | 259 | 222 | 255 |
Notes
Table 23: Movements in allowance for impairment/provisions charge for bad and doubtful debts
IFRS | UK GAAP | |||||||||||||
2007 £m | | 2006 £m | | 2005 £m | | 2004 a £m | 2003 £m | | ||||||
Allowance for impairment/provision balance at beginning of year | 3,335 | 3,450 | 2,637 | 2,946 | 2,998 | |||||||||
Acquisitions and disposals | (73 | ) | (23 | ) | 555 | 21 | 62 | |||||||
Unwind of discount | (113 | ) | (98 | ) | (76 | ) | n/a | n/a | ||||||
Exchange and other adjustments | 53 | (153 | ) | 125 | (33) | (18 | ) | |||||||
Amounts written off | (1,963 | ) | (2,174 | ) | (1,587 | ) | (1,582) | (1,474 | ) | |||||
Recoveries | 227 | 259 | 222 | 255 | 113 | |||||||||
Impairment/provision charged against profitb | 2,306 | 2,074 | 1,574 | 1,104 | 1,347 | |||||||||
Allowance for impairment/provision balance at end of year | 3,772 | 3,335 | 3,450 | 2,711 | 3,028 | |||||||||
Table 24: Amounts written off
|
| |||||||||||||
IFRS | UK GAAP | |||||||||||||
2007 £m | | 2006 £m | | 2005 £m | | 2004 a £m | 2003 £m | | ||||||
United Kingdom | (1,530 | ) | (1,746 | ) | (1,302 | ) | (1,280) | (1,175 | ) | |||||
Other European Union | (143 | ) | (74 | ) | (56 | ) | (63) | (54 | ) | |||||
United States | (145 | ) | (46 | ) | (143 | ) | (50) | (215 | ) | |||||
Africa | (145 | ) | (264 | ) | (81 | ) | (15) | (13 | ) | |||||
Rest of the World | – | (44 | ) | (5 | ) | (174) | (17 | ) | ||||||
Amounts written off | (1,963 | ) | (2,174 | ) | (1,587 | ) | (1,582) | (1,474 | ) | |||||
Table 25: Recoveries
|
| |||||||||||||
IFRS | UK GAAP | |||||||||||||
2007 £m | | 2006 £m | | 2005 £m | | 2004 a £m | 2003 £m | | ||||||
United Kingdom | 154 | 178 | 160 | 217 | 95 | |||||||||
Other European Union | 32 | 18 | 13 | 9 | 7 | |||||||||
United States | 7 | 22 | 15 | 14 | 10 | |||||||||
Africa | 34 | 33 | 16 | 4 | 1 | |||||||||
Rest of the World | – | 8 | 18 | 11 | – | |||||||||
Recoveries | 227 | 259 | 222 | 255 | 113 |
Notes
a | Does not reflect the application of |
b | Does not reflect the impairment of available for sale assets or other credit risk provisions. |
Barclays Annual Report | 131 |
Table 26: Impairment allowances/provision charged against profit | |||||||||||||||
2008 £m | | 2007 £m | | 2006 £m | | 2005 £m | | 2004a £m | | ||||||
New and in creased impairment allowance/specific provision charge: | |||||||||||||||
United Kingdom | 2,160 | 1,960 | 2,253 | 1,763 | 1,358 | ||||||||||
Other European Union | 659 | 192 | 182 | 113 | 131 | ||||||||||
United States | 1,529 | 431 | 60 | 105 | 85 | ||||||||||
Africa | 526 | 268 | 209 | 109 | 47 | ||||||||||
Rest of the World | 242 | 20 | 18 | 39 | 134 | ||||||||||
5,116 | 2,871 | 2,722 | 2,129 | 1,755 | |||||||||||
Reversals of impairment allowance/specific provision charge: | |||||||||||||||
United Kingdom | (212 | ) | (213 | ) | (195 | ) | (221 | ) | (120 | ) | |||||
Other European Union | (68 | ) | (37 | ) | (72 | ) | (25 | ) | (20 | ) | |||||
United States | (9 | ) | (50 | ) | (26 | ) | (14 | ) | (14 | ) | |||||
Africa | (36 | ) | (20 | ) | (33 | ) | (56 | ) | (16 | ) | |||||
Rest of the World | (33 | ) | (18 | ) | (63 | ) | (17 | ) | (20 | ) | |||||
(358 | ) | (338 | ) | (389 | ) | (333 | ) | (190 | ) | ||||||
Recoveries | (174 | ) | (227 | ) | (259 | ) | (222 | ) | (255 | ) | |||||
Net impairment allowance/specific provision charge b | 4,584 | 2,306 | 2,074 | 1,574 | 1,310 | ||||||||||
General provision (release)/charge | n/a | n/a | n/a | n/a | (206 | ) | |||||||||
Net charge to profit | 4,584 | 2,306 | 2,074 | 1,574 | 1,104 |
Table 26: Impairment allowances/provision charged against profit
Table 27: Total impairment/specific provision charges for bad and doubtful debts by industry | |||||||||||||
2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||||||
United Kingdom: | |||||||||||||
Financial services | 76 | 32 | 64 | 22 | (1 | ) | |||||||
Agriculture, forestry and fishing | 4 | – | 5 | 9 | – | ||||||||
Manufacturing | 118 | 72 | 1 | 120 | 28 | ||||||||
Construction | 15 | 14 | 17 | 14 | 10 | ||||||||
Property | 80 | 36 | 15 | 18 | (42 | ) | |||||||
Energy and water | 1 | 1 | (7 | ) | 1 | 3 | |||||||
Wholesale and retail distribution and leisure | 59 | 118 | 88 | 39 | 66 | ||||||||
Transport | 3 | 3 | 19 | (27 | ) | (19 | ) | ||||||
Postal and communication | – | 15 | 15 | 3 | (1 | ) | |||||||
Business and other services | 234 | 81 | 133 | 45 | 64 | ||||||||
Home loans | 28 | 1 | 4 | (7 | ) | 17 | |||||||
Other personal | 1,178 | 1,187 | 1,526 | 1,142 | 894 | ||||||||
Finance lease receivables | 21 | 33 | – | 3 | 2 | ||||||||
1,817 | 1,593 | 1,880 | 1,382 | 1,021 | |||||||||
Overseas | 2,767 | 713 | 194 | 192 | 289 | ||||||||
Impairment/specific provision charges | 4,584 | 2,306 | 2,074 | 1,574 | 1,310 |
IFRS | UK GAAP | |||||||||||||
2007 £m | 2006 £m | 2005 £m | 2004 a £m | 2003 £m | ||||||||||
New and increased impairment allowance/specific provision charge: | ||||||||||||||
United Kingdom | 1,960 | 2,253 | 1,763 | 1,358 | 1,373 | |||||||||
Other European Union | 192 | 182 | 113 | 131 | 57 | |||||||||
United States | 431 | 60 | 105 | 85 | 118 | |||||||||
Africa | 268 | 209 | 109 | 47 | 33 | |||||||||
Rest of the World | 20 | 18 | 39 | 134 | 47 | |||||||||
2,871 | 2,722 | 2,129 | 1,755 | 1,628 | ||||||||||
Reversals of impairment allowance/specific provision charge: | ||||||||||||||
United Kingdom | (213 | ) | (195 | ) | (221 | ) | (120) | (146 | ) | |||||
Other European Union | (37 | ) | (72 | ) | (25 | ) | (20) | (13 | ) | |||||
United States | (50 | ) | (26 | ) | (14 | ) | (14) | (24 | ) | |||||
Africa | (20 | ) | (33 | ) | (56 | ) | (16) | (10 | ) | |||||
Rest of the World | (18 | ) | (63 | ) | (17 | ) | (20) | (2 | ) | |||||
(338 | ) | (389 | ) | (333 | ) | (190) | (195 | ) | ||||||
Recoveries | (227 | ) | (259 | ) | (222 | ) | (255) | (113 | ) | |||||
Net impairment allowance/specific provision chargeb | 2,306 | 2,074 | 1,574 | 1,310 | 1,320 | |||||||||
General provision (release)/charge | n/a | n/a | n/a | (206) | 27 | |||||||||
Net charge to profit | 2,306 | 2,074 | 1,574 | 1,104 | 1,347 | |||||||||
Table 27: Total impairment/specific provision charges for bad and doubtful debts by industry
|
| |||||||||||||
IFRS | UK GAAP | |||||||||||||
2007 £m | 2006 £m | 2005 £m | 2004 a £m | 2003 £m | ||||||||||
United Kingdom: | ||||||||||||||
Financial services | 32 | 64 | 22 | (1) | 13 | |||||||||
Agriculture, forestry and fishing | – | 5 | 9 | – | (3 | ) | ||||||||
Manufacturing | 72 | 1 | 120 | 28 | 79 | |||||||||
Construction | 14 | 17 | 14 | 10 | (23 | ) | ||||||||
Property | 36 | 15 | 18 | (42) | (3 | ) | ||||||||
Energy and water | 1 | (7 | ) | 1 | 3 | 13 | ||||||||
Wholesale and retail distribution and leisure | 118 | 88 | 39 | 66 | 38 | |||||||||
Transport | 3 | 19 | (27 | ) | (19) | 100 | ||||||||
Postal and communication | 15 | 15 | 3 | (1) | 1 | |||||||||
Business and other services | 81 | 133 | 45 | 64 | 76 | |||||||||
Home loans | 1 | 4 | (7 | ) | 17 | 9 | ||||||||
Other personal | 1,187 | 1,526 | 1,142 | 894 | 757 | |||||||||
Overseas customersc | – | – | – | – | 66 | |||||||||
Finance lease receivables | 33 | – | 3 | 2 | 9 | |||||||||
1,593 | 1,880 | 1,382 | 1,021 | 1,132 | ||||||||||
Overseas | 713 | 194 | 192 | 289 | 188 | |||||||||
Impairment/specific provision chargesc | 2,306 | 2,074 | 1,574 | 1,310 | 1,320 |
The category ‘other‘Other personal’ now includes credit cards, personal loans, second liens and personal overdrafts.
The industry classifications in Tables 27, 28 and 29 have been prepared at the level of the borrowing entity. This means that a loan
to the subsidiary of a major corporation is classified by the industry in which the subsidiary operates, even though the parent’s predominant business may be in a different industry.
Notes
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
b | Does not reflect the impairment of available for sale assets , reverse repurchase agreements or other credit risk provisions. |
132 | Barclays Annual Report 2008 |
Risk management
Statistical information
Table 28: Allowance for impairment/specific provision for bad and doubtful debts by industry | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004a | ||||||||||||||||
£m | % | £m | % | £m | % | £m | % | £m | % | |||||||||||
United Kingdom: | ||||||||||||||||||||
Financial services | 81 | 1.2 | 103 | 2.7 | 67 | 2.0 | 26 | 0.8 | 7 | 0.3 | ||||||||||
Agriculture, forestry and fishing | 1 | 0.0 | 5 | 0.1 | 17 | 0.5 | 12 | 0.3 | 4 | 0.2 | ||||||||||
Manufacturing | 185 | 2.8 | 65 | 1.7 | 85 | 2.5 | 181 | 5.2 | 37 | 1.7 | ||||||||||
Construction | 18 | 0.3 | 16 | 0.4 | 16 | 0.5 | 13 | 0.4 | 6 | 0.3 | ||||||||||
Property | 114 | 1.7 | 54 | 1.4 | 26 | 0.8 | 24 | 0.7 | 26 | 1.2 | ||||||||||
Energy and water | 1 | 0.0 | 1 | – | – | – | 18 | 0.5 | 23 | 1.0 | ||||||||||
Wholesale and retail distribution and leisure | 43 | 0.7 | 102 | 2.7 | 81 | 2.4 | 99 | 2.9 | 70 | 3.3 | ||||||||||
Transport | – | 0.0 | 11 | 0.3 | 24 | 0.7 | 32 | 0.9 | 55 | 2.6 | ||||||||||
Postal and communication | 33 | 0.5 | 25 | 0.7 | 12 | 0.4 | 2 | 0.1 | 13 | 0.6 | ||||||||||
Business and other services | 236 | 3.6 | 158 | 4.2 | 186 | 5.6 | 102 | 3.0 | 105 | 4.9 | ||||||||||
Home loans | 46 | 0.7 | 15 | 0.4 | 10 | 0.3 | 50 | 1.4 | 58 | 2.7 | ||||||||||
Other personal | 2,160 | 32.9 | 1,915 | 50.8 | 1,953 | 58.6 | 1,696 | 49.2 | 1,265 | 58.9 | ||||||||||
Finance lease receivables | 29 | 0.4 | 56 | 1.5 | – | – | 11 | 0.3 | 14 | 0.7 | ||||||||||
2,947 | 44.8 | 2,526 | 67.0 | 2,477 | 74.3 | 2,266 | 65.7 | 1,683 | 78.4 | |||||||||||
Overseas | 3,627 | 55.2 | 1,246 | 33.0 | 858 | 25.7 | 1,184 | 34.3 | 464 | 21.6 | ||||||||||
Total | 6,574 | 100.0 | 3,772 | 100.0 | 3,335 | 100.0 | 3,450 | 100.0 | 2,147 | 100.0 |
See note under Table 27.
| ||||
Risk management
Statistical information
Table 28: Allowance for impairment/specific provision for bad and doubtful debts by industry
IFRS | UK GAAP | |||||||||||||||||||
2007 | 2006 | 2005 | 2004a | 2003 | ||||||||||||||||
£m | % | £m | % | £m | % | £m | % | £m | % | |||||||||||
United Kingdom: | ||||||||||||||||||||
Financial services | 103 | 2.7 | 67 | 2.0 | 26 | 0.8 | 7 | 0.3 | 12 | 0.5 | ||||||||||
Agriculture, forestry and fishing | 5 | 0.1 | 17 | 0.5 | 12 | 0.3 | 4 | 0.2 | 5 | 0.2 | ||||||||||
Manufacturing | 65 | 1.7 | 85 | 2.5 | 181 | 5.2 | 37 | 1.7 | 58 | 2.6 | ||||||||||
Construction | 16 | 0.4 | 16 | 0.5 | 13 | 0.4 | 6 | 0.3 | 7 | 0.3 | ||||||||||
Property | 54 | 1.4 | 26 | 0.8 | 24 | 0.7 | 26 | 1.2 | 3 | 0.1 | ||||||||||
Energy and water | 1 | – | – | – | 18 | 0.5 | 23 | 1.0 | 27 | 1.2 | ||||||||||
Wholesale and retail distribution and leisure | 102 | 2.7 | 81 | 2.4 | 99 | 2.9 | 70 | 3.3 | 52 | 2.3 | ||||||||||
Transport | 11 | 0.3 | 24 | 0.7 | 32 | 0.9 | 55 | 2.6 | 103 | 4.6 | ||||||||||
Postal and communication | 25 | 0.7 | 12 | 0.4 | 2 | 0.1 | 13 | 0.6 | 15 | 0.7 | ||||||||||
Business and other services | 158 | 4.2 | 186 | 5.6 | 102 | 3.0 | 105 | 4.9 | 121 | 5.4 | ||||||||||
Home loans | 15 | 0.4 | 10 | 0.3 | 50 | 1.4 | 58 | 2.7 | 55 | 2.5 | ||||||||||
Other personalb | 1,915 | 50.8 | 1,953 | 58.6 | 1,696 | 49.2 | 1,265 | 58.9 | 1,359 | 60.9 | ||||||||||
Overseas customersc | – | – | – | – | – | – | – | – | 24 | 1.1 | ||||||||||
Finance lease receivables | 56 | 1.5 | – | – | 11 | 0.3 | 14 | 0.7 | 15 | 0.7 | ||||||||||
2,526 | 67.0 | 2,477 | 74.3 | 2,266 | 65.7 | 1,683 | 78.4 | 1,856 | 83.1 | |||||||||||
Overseas | 1,246 | 33.0 | 858 | 25.7 | 1,184 | 34.3 | 464 | 21.6 | 377 | 16.9 | ||||||||||
Total | 3,772 | 100.0 | 3,335 | 100.0 | 3,450 | 100.0 | 2,147 | 100.0 | 2,233 | 100.0 |
See note under Table 27.
Table 29: Analysis of amounts written off and recovered by industry
Amounts written off for the year | Recoveries of amounts previously written off | |||||||||||||||||||||||||||||||||||||||
IFRS | UK GAAP | IFRS | UK GAAP | Amounts written off for the year | Recoveries of amounts previously written off | |||||||||||||||||||||||||||||||||||
2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2003 £m | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | 2008 £m | 2007 £m | 2006 £m | 2005 £m | 2004a £m | |||||||||||||||||||||
United Kingdom: | ||||||||||||||||||||||||||||||||||||||||
Financial services | 6 | 13 | 2 | 7 | 14 | 1 | – | 1 | 3 | 12 | 88 | 6 | 13 | 2 | 7 | 4 | 1 | – | 1 | 3 | ||||||||||||||||||||
Agriculture, forestry and fishing | 5 | 8 | 3 | 2 | – | 2 | 1 | – | 1 | 1 | 6 | 5 | 8 | 3 | 2 | – | 2 | 1 | – | 1 | ||||||||||||||||||||
Manufacturing | 83 | 73 | 47 | 79 | 126 | 7 | 21 | 11 | 30 | 8 | 53 | 83 | 73 | 47 | 79 | 8 | 7 | 21 | 11 | 30 | ||||||||||||||||||||
Construction | 23 | 17 | 15 | 13 | 19 | 3 | 2 | 1 | 2 | 14 | 19 | 23 | 17 | 15 | 13 | 2 | 3 | 2 | 1 | 2 | ||||||||||||||||||||
Property | 16 | 23 | 4 | 2 | 5 | 10 | 6 | 1 | 69 | 1 | 27 | 16 | 23 | 4 | 2 | 2 | 10 | 6 | 1 | 69 | ||||||||||||||||||||
Energy and water | – | 1 | 22 | 9 | 15 | – | 2 | – | 2 | – | 1 | – | 1 | 22 | 9 | – | – | 2 | – | 2 | ||||||||||||||||||||
Wholesale and retail distribution and leisure | 109 | 120 | 85 | 55 | 45 | 12 | 14 | 25 | 7 | 5 | 137 | 109 | 120 | 85 | 55 | 7 | 12 | 14 | 25 | 7 | ||||||||||||||||||||
Transport | 13 | 11 | 29 | 44 | 5 | 1 | 10 | 15 | 1 | 10 | 13 | 11 | 29 | 44 | 1 | 1 | 10 | 15 | ||||||||||||||||||||||
Postal and communication | 3 | 5 | 15 | 2 | 1 | – | – | – | 1 | – | 3 | 3 | 5 | 15 | 2 | – | – | – | – | 1 | ||||||||||||||||||||
Business and other services | 83 | 124 | 83 | 96 | 58 | 22 | 17 | 14 | 16 | 11 | 153 | 83 | 124 | 83 | 96 | 10 | 22 | 17 | 14 | 16 | ||||||||||||||||||||
Home loans | 1 | – | 2 | 19 | 11 | 1 | 7 | 4 | 5 | 3 | 4 | 1 | – | 2 | 19 | 1 | 1 | 7 | 4 | 5 | ||||||||||||||||||||
Other personal | 1,164 | 1,351 | 992 | 948 | 790 | 96 | 107 | 92 | 65 | 38 | 960 | 1,164 | 1,351 | 992 | 948 | 88 | 96 | 107 | 92 | 65 | ||||||||||||||||||||
Overseas customersb | – | – | – | – | 82 | – | – | – | – | – | ||||||||||||||||||||||||||||||
Finance lease receivables | 24 | – | 3 | 4 | 4 | – | – | 1 | 1 | 1 | 53 | 24 | – | 3 | 4 | 8 | – | – | 1 | 1 | ||||||||||||||||||||
1,530 | 1,746 | 1,302 | 1,280 | 1,175 | 154 | 178 | 160 | 217 | 95 | 1,514 | 1,530 | 1,746 | 1,302 | 1,280 | 131 | 154 | 178 | 160 | 217 | |||||||||||||||||||||
Overseas | 433 | 428 | 285 | 302 | 299 | 73 | 81 | 62 | 38 | 18 | 1,405 | 433 | 428 | 285 | 302 | 43 | 73 | 81 | 62 | 38 | ||||||||||||||||||||
Total | 1,963 | 2,174 | 1,587 | 1,582 | 1,474 | 227 | 259 | 222 | 255 | 113 | 2,919 | 1,963 | 2,174 | 1,587 | 1,582 | 174 | 227 | 259 | 222 | 255 |
See note under Table 27.
NotesNote
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
Barclays Annual Report | 133 |
Table 30: Total impairment allowance/(provision) coverage of credit risk loans | ||||||||||
2008 % | 2007 % | 2006 % | 2005 % | 2004a % | ||||||
United Kingdom | 50.7 | 56.6 | 64.2 | 64.6 | 68.1 | |||||
Other European Union | 41.8 | 60.9 | 65.1 | 70.1 | 60.9 | |||||
United States | 31.8 | 9.5 | 64.9 | 52.8 | 57.0 | |||||
Africa | 39.5 | 62.1 | 73.2 | 74.3 | 68.4 | |||||
Rest of the World | 49.2 | 86.5 | 100.0 | 68.7 | 71.9 | |||||
Total coverage of credit risk loans | 41.9 | 39.1 | 65.6 | 66.2 | 66.9 | |||||
Total coverage of credit risk loans excluding ABS CDO Super Senior exposure | 48.0 | 55.3 | 65.6 | 66.2 | 66.9 |
Table 30: Total impairment allowance/(provision) coverage of credit risk loans
IFRS | UK GAAP | ||||||||||
2007 | 2006 | 2005 | 2004 | a | 2003 | ||||||
% | % | % | % | % | |||||||
United Kingdom | 56.6 | 64.2 | 64.6 | 68.1 | 74.2 | ||||||
Other European Union | 60.9 | 65.1 | 70.1 | 60.9 | 71.4 | ||||||
United States | 9.5 | 64.9 | 52.8 | 57.0 | 39.2 | ||||||
Africa | 62.1 | 73.2 | 74.3 | 68.4 | 54.5 | ||||||
Rest of the World | 86.5 | 100.0 | 68.7 | 71.9 | 94.1 | ||||||
Total coverage of credit risk loans | 39.1 | 65.6 | 66.2 | 66.9 | 71.5 | ||||||
Total coverage of credit risk loans excluding ABS CDO Super Senior exposure | 55.6 | 65.6 | 66.2 | 66.9 | 71.5 |
Table 31: Total impairment allowance/(provision) coverage of potential credit risk lending (CRLs and PPLs)
IFRS | UK GAAP | ||||||||||
2007 | 2006 | 2005 | 2004 | a | 2003 | ||||||
% | % | % | % | % | |||||||
United Kingdom | 51.8 | 57.3 | 54.6 | 56.5 | 57.7 | ||||||
Other European Union | 55.1 | 61.0 | 65.9 | 55.6 | 65.0 | ||||||
United States | 7.6 | 57.1 | 50.4 | 52.3 | 23.4 | ||||||
Africa | 43.4 | 51.5 | 57.8 | 43.5 | 39.9 | ||||||
Rest of the World | 86.5 | 91.0 | 67.6 | 65.9 | 90.9 | ||||||
Total coverage of potential credit risk lending | 33.0 | 57.0 | 56.2 | 56.0 | 54.6 | ||||||
Total coverage of potential credit risk lenders excluding ABS CDO Super Senior exposure | 49.0 | 57.0 | 56.2 | 56.0 |
| 54.6 |
Table 31: Total impairment allowance/(provision) coverage of potential credit risk lending (CRLs and PPLs) | ||||||||||
2008 % | 2007 % | 2006 % | 2005 % | 2004a % | ||||||
United Kingdom | 44.0 | 51.8 | 57.3 | 54.6 | 56.5 | |||||
Other European Union | 29.5 | 55.1 | 61.0 | 65.9 | 55.6 | |||||
United States | 29.2 | 7.6 | 57.1 | 50.4 | 52.3 | |||||
Africa | 37.1 | 43.4 | 51.5 | 57.8 | 43.5 | |||||
Rest of the World | 45.5 | 86.5 | 91.0 | 67.6 | 65.9 | |||||
Total coverage of potential credit risk lending | 36.2 | 33.0 | 57.0 | 56.2 | 56.0 | |||||
Total coverage of potential credit risk lenders excluding ABS CDO Super Senior exposure | 39.6 | 47.7 | 57.0 | 56.2 | 56.0 |
Allowance coverage of credit risk loans and potential credit risk loans excluding the drawn ABS CDO Super Senior exposure decreased to 55.6%48.0% (31st December 2006: 65.6%2007: 55.3%) and 49.0%39.6% (31st December 2006: 57.0%2007: 47.7%), respectively. The decrease in these ratios reflected a change in the mix of credit risk loans and potential credit risk loans: unsecured retail exposures, where the recovery outlook is relatively low, decreased as a proportion of the total as the collections and underwriting processes were improved. Secured retail and wholesale and corporate exposures, where the recovery outlook is relatively high, increased as a proportion of credit risk loans and potential credit risk loans.
Allowance coverage of ABS CDO Super Senior credit risk loans was low relative to allowance coverage of other credit risk loans since substantial protection against loss is also provided by subordination and hedges. On ABS CDO Super Senior exposures, the combination of subordination, hedging and writedowns provide protection against loss levels to 72% on US sub-prime collateral as at 31st December 2007.Note
Note
a | Does not reflect the application of IAS 32, IAS 39 and IFRS 4 which became effective from 1st January 2005. |
134 | Barclays Annual Report | |||||
Risk management
Supervision and regulation
The Group’s operations, including its overseas offices, subsidiaries and associates, are subject to a significant body of rules and regulations includingthat are a condition for authorisation to conduct banking and financial services business and constrain business operations. These include reserve and reporting requirements and conduct of business regulations. These requirements are imposed by the relevant central banks and regulatory authorities.authorities that supervise the Group in the jurisdictions in which it operates. The requirements reflect global standards developed by, among others, the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions. They also reflect requirements derived from EU directives.
In the UK, the FSA is the independent body responsible for the regulation of deposit taking, life insurance, home mortgages, general insurance and investment business. The FSA was established by the Government and it exercises statutory powers under the Financial Services and Markets Act 2000.
Barclays Bank PLC is authorised by the FSA to carry on a range of regulated activities within the UK and is subject to consolidated supervision.supervision by the FSA. In its role as supervisor, the FSA seeks to ensure the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers. The FSA’s continuing supervision of financial institutions authorised by it is conducted through a variety of regulatory tools, including the collection of information from statistical and prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy.
The FSA adopts a risk-based approach to supervision. The starting point for supervision of all financial institutions is a systematic analysis of the risk profile for each authorised firm. The FSA has adopted a homogeneous risk, processes and resourcing model in its approach to its supervisory responsibilities (known as the ARROW model) and the results of the risk assessment are used by the FSA to develop a risk mitigation programme for a firm. The FSA also promulgates requirements that banks and other financial institutions are required to meet on matters such as capital adequacy, limits on large exposures to individual entities and groups of closely connected entities, liquidity and rules of business conduct. Certain of these requirements derive from EU directives as described below.
Banks, insurance companies and other financial institutions in the UK are subject to a single financial services compensation scheme (the Financial Services Compensation Scheme) where an authorised firm is unable or is likely to be unable to meet claims made against it because of its financial circumstances. Different levels of compensation are available to eligible claimants depending upon whether the protected claim is in relation to a deposit, a contract of insurance or protected investment business and certain types of claims are subject to maximum levels of compensation. Most deposits made with branches of Barclays Bank PLC within the European Economic Area (EEA) which are denominated in Sterling or other EEA currencies (including the euro)Euro) are covered by the Scheme. Most claims made in respect of designated investment business will also be protected claims if the business was carried on from the UK or from a branch of the bank or investment firm in another EEA member state. The arrangements for compensating depositors and for dealing with failed banks are currently subject to consultation by the UK Tripartite Authorities – HM Treasury, the FSA and the Bank of England. The Government has committed to presenting proposals for legislation to Parliament on these matters in the course of 2008.
Outside the UK, the Group has operations (and main regulators) located in continental Europe, in particular France, Germany, Spain, Switzerland, Portugal and Italy (local central banks and other regulatory authorities); Asia Pacific (various regulatory authorities including the Hong Kong Monetary Authority, the Financial Services Agency of Japan, the Australian Securities and Investments Commission , the Monetary Authority of Singapore, the China Banking Regulatory Commission and the Reserve Bank of India); Africa and the Middle East (various regulatory authorities including the South African Reserve Bank and the Financial Services Board and the regulatory authorities of the United Arab Emirates) and the United States of America (the(including the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission).
In Europe, the UK regulatory agenda is considerably shaped and influenced by the directives emanating from the EU. A number of EU directives have recently been implemented, for example the Capital Requirements Directive and the Markets in Financial Instruments Directive (‘MiFID’). These form part of the European Single Market programme, an important feature of which is the framework for the regulation of authorised firms. This framework which continues to evolve, is designed to enable a credit institution or investment firm authorised in one EU member state to conduct banking or investment business through the establishment of branches or by the provision of services on a cross-border basis in
other member states without the need for local authorisation. Barclays operations in Europe are authorised and regulated by a combination of both home (the FSA) and host regulators.
Barclays operations in South Africa, including Absa Group Limited, are supervised and regulated by the South African Reserve Bank (SARB) and the Financial Services Board (FSB). SARB oversees the banking industry and follows a risk-based approach to supervision whilst the FSB oversees the non-banking financial services industry and focuses on enhancing consumer protection and regulating market conduct.
In the United States, Barclays PLC, Barclays Bank PLC, and certainBarclays’ US banking subsidiaries and branches of the Bank are subject to a comprehensive regulatory structure involving numerous statutes, rules and regulations. Barclays branch operationsBank PLC’s branches in New York and Florida are licensed by, and subject to regulation and examination by, their respective licensing authorities, the New York State Banking Department and the Florida Office of Financial Regulation. Barclays Bank PLC also operates a federal agency in California that is licensed by and subject to regulation and examination by the OCC. Barclays Global Investors, NA is a federally-charteredfederally chartered trust company subject to regulation and examination by the OCC. Barclays Bank Delaware is a Delaware-chartered commercial bank subject to regulation and examination by the Federal Deposit Insurance Corporation and the Delaware State Banking Commissioner. In addition, the FRB is the primary US federal regulator for the New York and Florida branch operationsbranches and also exercises regulatory authority over Barclays other US operations. The regulation of Barclays and its US branches andbanking subsidiaries imposes restrictions on the activities of thoseBarclays, including its US banking subsidiaries and Barclays Bank PLC’s US branches and subsidiaries.agencies, as well as prudential restrictions, such as limits on extensions of credit by the Barclays Bank PLC’s US branches and agencies and the US banking subsidiaries to a single borrower and to Barclays subsidiaries and affiliates.
The licensing authority of each US branch has the authority, in certain circumstances, to take possession of the business and property of Barclays Bank PLC located in the state of the office it licenses. Such circumstances generally include violations of law, unsafe business practices and insolvency. As long as Barclays Bank PLC maintains one or more federal branches or agencies, the OCC also has the authority to take possession of the US operations of Barclays Bank PLC under similar circumstances, and this federal power may pre-empt the state insolvency regimes that would otherwise be applicable to Barclays Bank PLC’s state-licensed branches. As a result, if the OCC exercised its authority over the US agency of Barclays Bank PLC pursuant to federal law in the event of a Barclays Bank PLC insolvency, all of Barclays Bank PLC’s US assets would most likely be applied first to satisfy creditors of its US branches and agencies as a group, and then made available for application pursuant to any UK insolvency proceeding.
In addition to the direct regulation of Barclays US banking offices, Barclays US operations subject Barclays to regulation by the FRB under various laws, including the International Banking Act of 1978 and the Bank Holding Company Act of 1956 (BHC Act). Barclays PLC, Barclays Bank PLC and Barclays Group US Inc. are bank holding companies registered with the FRBFRB. Each has elected to be treated as well asa financial holding companiescompany under the BHC Act. Financial holding companies may engage in a broader range of financial and related activities than are permitted to banking organizationsorganisations that do not maintain financial holding company status, including underwriting and dealing in all types of securities. To maintain the financial holding company status of each of Barclays PLC, Barclays Bank PLC and Barclays Group US Inc., Barclays Bank PLC is required to meet or exceed certain capital ratios and to be deemed to be “well managed”. and Barclays Bank Delaware and Barclays Global Investors, NA must also meet certain capital requirements and be deemed to be “well managed” and. Barclays Bank Delaware must also have at least a “satisfactory” rating under the Community Reinvestment Act of 1977.
Barclays is required to obtain the prior approval of the FRB before acquiring, directly or indirectly, the ownership or control of more than 5% of any class of voting securities of any US bank or bank holding company. Under current FRB policy, Barclays is required to act as a source of financial strength for Barclays Bank Delaware. This policy could, among other things, require Barclays to inject capital into any of its US banking subsidiaries if they become undercapitalised. A major focus of US governmental policy relating to financial institutions in recent years has been combating money laundering and terrorist financing and enforcing compliance with US economic sanctions. Regulations applicable to US operations of Barclays Bank PLC and its subsidiaries impose obligations to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to ensure compliance with US economic sanctions against designated foreign
Barclays Annual Report 2008 | 135 |
countries, nationals and others. Failure of a financial institution to maintain and implement adequate programmes to combat money laundering and terrorist financing or to ensure economic sanction compliance could have serious legal and reputational consequences for the institution. See Financial Statement Note 36 for further discussion of competition and regulatory matters.
Another recent focus of US governmental policy relating to the financial services sector generally has been on disclosure and sales practices relating to the sector’s subprime mortgage and other lending.
Barclays investment banking operations are subject to regulations that cover all aspects of the securities business, including:
– | Sales Methods |
– | Trade practices among broker-dealers |
– | Use and safekeeping of customers’ funds and securities |
– | Capital structure |
– | Record-keeping |
– | The financing of customers’ purchases |
– | Procedures for compliance with US securities law |
– | The conduct of directors, officers and employees |
Barclays Capital Inc. and the other subsidiaries that conduct these operations are regulated by a number of different government agencies and self-regulatory organizations, including the Securities and Exchange Commission and the Financial Institution Regulatory Authority (FINRA). Depending upon the specific nature of a broker-dealer’s business, it may also be regulated by some or FINRA.all of the New York Stock Exchange (NYSE), the Municipal Securities Rulemaking Board, the US Department of the Treasury, the Commodities Futures Trading Commission and other exchanges of which it may be a member. In addition, the US states, provinces and territories have local securities commissions that regulate and monitor activities in the interest of investor protection. These regulators have available a variety of sanctions, including the authority to conduct administrative proceedings that can result in censure, fines, the issuance of cease-and-desist orders or the suspension or expulsion of the entity or its directors, officers or employees.
Barclays subsidiaries in the US are also subject to regulation by applicable federal and state regulators of their activities in the asset management, investment advisory, mutual fund and mortgage lending businesses.
Regulatory Developments
In the wake of the financial crisis there will be regulatory change that will have a substantial impact on all financial institutions, including the Group. The full extent of this impact is not yet clear. Programmes to reform the global regulatory framework were agreed first by G8 Finance Ministers in April 2008 and subsequently by G20 Heads of Government in November 2008. In the EU, Finance Ministers agreed a roadmap for regulatory reform in May 2008. There is a substantial degree of commonality to these programmes covering issues of capital and liquidity regulation, risk management and accounting standards. These programmes will be further developed and implemented in 2009.
In the UK, in response to the financial crisis, the Chairman of the FSA has been requested by the Chancellor of the Exchequer to undertake a review of banking regulation. The Chancellor has indicated that he will be presenting a White Paper on the supervision of banking in spring 2009 with the expectation that proposals for legislation will be presented to Parliament. He has also commissioned Sir David Walker to review the corporate governance of the UK banking industry. The results of this review are expected before the end of 2009. The FSA has re-examined its regulatory requirements and processes, substantially increasing regulatory capital requirements in October 2008. It has also been undertaking a Supervisory Enhancement Programme that will increase both the resources devoted to supervision and the intensity of supervision.
On 21st February 2009, the Banking Act 2009 came into force which provides a permanent regime to allow the FSA, the UK Treasury and the Bank of England (the ‘Tripartite Authorities’) to resolve failing banks in the UK. The Banking Act aims to balance the need to protect depositors and prevent systemic failure with the potentially adverse consequences that using powers to deal with those events could have on private law rights, and, as a consequence, wider markets and investor confidence.
These powers, which apply regardless of any contractual restrictions, include (a) power to issue share transfer orders pursuant to which there may be transferred to a commercial purchaser or Bank of England entity, all or some of the securities issued by a bank. The share transfer order can extend to a wide range of ‘securities’ including shares and bonds issued by a UK Bank (including Barclays Bank PLC) or its holding company (Barclays PLC) and warrants for such and (b) the power to transfer all or some of the property, rights and liabilities of the UK bank to a purchaser or Bank of England entity. In certain circumstances encumbrances and trusts can be over-reached. Power also exists to override any default provisions in transactions otherwise affected by these powers. Compensation may be payable in the context of both share transfer orders and property appropriation. In the case of share transfer orders any compensation will be paid to the person who held the security immediately before the transfer, who may not be the encumbrancer.
The Banking Act also vests power in the Bank of England to override, vary or impose contractual obligations between a UK bank or its holding company and its former group undertakings (as defined in the Banking Act), for reasonable consideration, in order to enable any transferee or successor bank of the UK bank to operate effectively. There is also power for the Treasury to amend the law (save for a provision made by or under the Banking Act) by order for the purpose of enabling it to use the special resolution regime powers effectively, potentially with retrospective effect. The Banking Act also gives the Bank of England statutory responsibility for financial stability in the UK and for the oversight of payment systems.
Amendments are being made to the EU framework of directives, including to the Capital Requirements Directive and to the Directive on Deposit Guarantee Schemes. Further amendments to EU regulatory requirements are likely as the EU develops its response to the financial crisis, including the structure of the regulatory system in Europe as proposed in the report of a high-level Commission group published on 25 February 2009.
In the United States, the FDIC has established a Temporary Liquidity Guarantee Program (TLGP) for eligible institutions including, among others, US bank holding companies and FDIC-insured depository institutions, unless they opted out. Under the TLGP, the FDIC will insure the entire amount of non-interest bearing transaction account deposits of eligible institutions until December 31, 2009 and certain senior unsecured debt of eligible institutions issued before June 30, 2009.Barclays Bank Delaware and Barclays Group US, Inc. are eligible to participate in the TLGP, and they have opted in. Barclays PLC and Barclays Bank PLC, as non-US banks or bank holding companies, are not eligible to participate in the TLGP. The US Department of the Treasury has invested approximately $250 billion in the capital of US depository institutions and depository institution holding companies through a Capital Purchase Program authorized under the US Emergency Economic Stabilization Act of 2008 and is expected to continue to make capital investments under the authority of this act. Barclays, as a non-US institution, is not eligible for capital investments by the US Treasury under existing programs.
Another recent focus of US governmental policy relating to the financial services sector generally has been on disclosure and sales practices relating to the sector’s subprime mortgage and other lending.
In addition, in the United States, as elsewhere, recent market disruptions and economic conditions have led to numerous proposals for changes and significant increases in the regulation of the financial services industry. However, given the current environment and status of such proposals, it is difficult to determine the nature and form of any regulation that may arise in the United States from any such proposals.
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138 | ||||||||
Directors’ report | ||||||||
Corporate governance report | ||||||||
Remuneration report | ||||||||
Accountability and audit |
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1.Marcus1. Marcus Agius
Group Chairman (Age 61)(Age 62)
Marcus has an extensive background in banking, having worked at Lazard from 1972 to 2006. He also has experience of chairing large organisations, including BAA plc and Lazard in London. Marcus is Senior Independent Director of the British Broadcasting Corporation (BBC).
Term of officeMarcus joined the Board on 1stin September 2006 as a non-executive Director and succeeded Matthew Barrett aswas appointed Group Chairman fromon 1st January 2007. Marcus iswas last re-elected by shareholders at the senior non-executiveAGM in 2007, following his appointment.
Independent On appointment
External appointments Senior Independent Director of the BBC and was Chairman of Lazard in London and a Deputy Chairman of Lazard LLC until 31st Decembersince 2006. He was formerly Chairman of BAA PLC, a position he held from 2002 until December 2006. Marcus is Trustee to the Board of the Royal Botanic Gardens, Kew andKew. Chairman of The Foundation and Friends of the Royal Botanic Gardens, Kew. Marcus isChairman of Lazard in London and Deputy Chairman of Lazard LLC until 2006. Chairman of BAA plc until 2006.
Committee membership Chairman of the Board Corporate Governance and Nominations Committee and a membersince January 2007. Member of the Board HR and Remuneration Committee.Committee since January 2007.
2.David2. David Booth
Non-executive Director (Age 53)(Age 54)
David joined the Board on 1st May 2007. He became a member of the Board Risk Committee on 1st January 2008. He currently manages his own venture capital investments, having retired from the Management Committee of Morgan Stanley in 1997. David was employed by Morgan Stanley from 1982 to 1992, and again from 1995 to 1997. He held various positions there, including Head of Government Bond Trading, Head of Mortgage Trading, Sales and Finance and Head of Global Operations and Technology. In 1992-93, he
Term of office David joined the Board in May 2007. David was President and alast re-elected by shareholders at the AGM in 2008, following his appointment.
Independent Yes
External appointments Director of Discount Corporation of New York. In 1994-95, he was a consultant to Morgan Stanley regarding the relocation of its New York City headquarters. David is also aEast Ferry Investors, Inc., Trustee of the Brooklyn Botanic Garden andGarden. Chair of itsthe Brooklyn Botanic Garden Investment Committee. Various positions at Morgan Stanley & Co. until 1997. Discount Corporation of New York until 1993.
3.SirCommittee membership Member of the Board Risk Committee since January 2008.
3. Sir Richard Broadbent
Senior Independent Director (Age 54)(Age 55)
Sir Richard joinedhas experience of both the Boardprivate and public sector having worked in September 2003.high-level banking roles and the Civil Service. He was appointed Senior Independent Director on 1st September 2004. Sir Richard is Chairman of Arriva PLC and was previously the Executive Chairman of HM Customs and Excise from 2000 to 2003. He2003 and was formerly a member of the Group Executive Committee of Schroders PLC and a non-executive Director of the Securities Institute. Sir Richard is Chairman of Arriva PLC.
Term of office Sir Richard joined the Board in September 2003 and was appointed Senior Independent Director on 1st September 2004. Sir Richard was last re-elected by shareholders at the AGM in 2006.
Independent Yes
External appointments Chairman of Arriva PLC since 2004. Executive Chairman of HM Customs and Excise until 2003. Former Group Executive Committee member of Schroders PLC. Non-executive Director of the Securities Institute until 1995.
Committee membership Chairman of the Board Risk Committee andsince January 2006 (member since April 2004). Chairman of the Board HR and Remuneration Committee. He is also a memberCommittee since January 2007 (member since April 2004). Member of the Board Corporate Governance and Nominations Committee.Committee since September 2004.
4.Leigh4. Leigh Clifford, AO
Non-executive Director (Age 60)(Age 61)
Leigh joinedis Chairman of Qantas Airways Limited. He previously worked for the Board on 1st October 2004. He joined Rio Tinto in 1970 andGroup, where he was a Director of Rio Tinto PLC from 1994 and Rio Tinto Limited from 1995 and was Chief Executive of the Rio Tinto Group from 2000 until May 2007.
Term of office Leigh joined the Board in October 2004. Leigh was appointed tolast re-elected by shareholders at the AGM in 2007.
Independent Yes
External appointments Chairman of Qantas Airways Limited since November 2007. Member of the Bechtel Board of Counsellors insince May 2007 and as a non-executive2007. Senior Adviser to Kohlberg Kravis Roberts & Co since January 2009. Director of Qantas Airways in Septemberthe Murdoch Children’s Research Institute. Board Member of the National Gallery of Victoria Foundation. Chief Executive of Rio Tinto until 2007. He became ChairmanDirector of Qantas in November 2007. He is a memberFreeport-McMoran Copper & Gold Inc. until 2004.
Committee membership Member of the Board HR and Remuneration Committee and a membersince July 2005. Member of the Barclays Asia Pacific Advisory Committee.
5.Fulvio5. Fulvio Conti
Non-executive Director (Age 60)(Age 61)
Fulvio joined the Board on 1st April 2006. Fulvio is currently Chief Executive Officer and General Manager of Enel SpA, the Italian energy group, a positionwhere he has held since May 2005. He becamewas previously Chief Financial Officer from 1999-2005. Fulvio has held a number of Enel SpA in 1999. Fulvio was formerlyhigh-level financial roles, including Chief Financial Officer and General Manager of Telecom Italia and between 1996 and 1998 was General Manager and Chief Financial Officer of
Ferrovie dello Stato, the Italian national railway. From 1991 to 1993 heHe was also head of the accounting, finance and control department of Montecatini and was subsequently in charge of finance at Montedison-Compart, overseeing the financial restructuring of the group. He has been a non-executiveheld positions in finance and operations in various affiliates of Mobil Oil Corporation in Italy and Europe.
Term of office Fulvio joined the Board in April 2006. Fulvio was last re-elected by shareholders at the AGM in 2008.
Independent Yes
External appointments Chief Executive of Enel SpA since 2005. Director of AON Corporation since January 2008. Fulvio is a memberChief Financial Officer and General Manager of Telecom Italia until 1999. General Manager and Chief Financial Officer of Ferrovie dello Stato until 1998.
Committee membership Member of the Board Audit Committee.
6.Dr Daniël CronjéCommittee since September 2006.
Non-executive Director (Age 61)
Daniël joined the Board on 1st September 2005 following the acquisition by Barclays of a majority stake in Absa, where he was Chairman. Daniël joined Absa in 1987 and was formerly Deputy Chief Executive and Group Chief Executive until 1997. He joined Volkskas in 1975 and held various positions in Volkskas Merchant Bank and Volkskas Group. Daniël retired as Chairman of Absa on 1st July 2007 and from the Absa Board on 31st July 2007. He is currently a Director of TSB Sugar RSA Limited and Sappi Limited. He is a member of the Board Risk Committee. Daniël does not intend to seek re-election at the 2008 Annual General Meeting and will therefore leave the Board at the conclusion of the Annual General Meeting in April 2008.
7.Professor6. Professor Dame Sandra Dawson
Non-executive Director (Age 61)(Age 62)
Sandra joined the Board in March 2003. She is currently KPMG Professor of Management Studies at the University of Cambridge and has been Master of Sidney Sussex College, Cambridge since1999. She is also a Trustee and Director of Oxfam, and is a member of the UK-India Round Table, the Advisory Board of UK India Business Council and Chair of the Executive Steering Committee of the Advanced Institute of Management. Until September 2006,Cambridge. Sandra was Director of the Judge Business School at Cambridge a positionuntil September 2006 and she had held since 1995. Sandra has held a range of non-executive posts in organisations including Rand Europe (UK), JP Morgan Fleming Claverhouse Investment Trust and Riverside Mental Health Trust. She was also a member
Term of office Sandra joined the Senior Salaries Review Board. She is a memberBoard in March 2003. Sandra will retire from the Board at the 2009 AGM in April.
Independent Yes
External appointments KPMG Professor of Management Studies, University of Cambridge since 1995. Master of Sidney Sussex College, Cambridge since 1999. Director and Trustee of Oxfam since 2006. Deputy Vice Chancellor, University of Cambridge since 2008. Chairman, Executive Steering Committee, ESRC Advanced Institute of Management. Director of Cambridge Econometrics until 2007. Director of Judge Business School, University of Cambridge until 2006. Director of Rand Europe (UK) until 2004. Director of JP Morgan Fleming Claverhouse Investment Trust until 2003.
Committee membership Member of the Board Audit Committee.Committee since August 2003.
8.Sir7. Sir Andrew Likierman
Non-executive Director (Age 64)(Age 65)
Sir Andrew joinedis Chairman of the Board on 1st September 2004. He was previouslyNational Audit Office, having held a number of public roles in the financial services sector, including Managing Director, Financial Management, Reporting and Audit and Head of the Government Accountancy Service at HM Treasury. He is Professor of Management Practice in Accounting at the London Business SchoolTreasury and a non-executive Director of the Bank of England. Sir Andrew is also Dean of the London Business School where he was formerly a non-executive Directorpreviously Professor of Management Practice in Accounting. He has been at the London Business School from 1974-1976, 1979-1993 and since 2004.
Term of office Sir Andrew joined the Board in September 2004. Sir Andrew was last re-elected by shareholders at the AGM in 2007.
Independent Yes
External appointments Dean of the London Business School since January 2009. Chairman of MORI Group Limited. He is also a non-executivethe National Audit Office since December 2008. Director of the Institute for Government since September 2008. Chairman of Applied Intellectual Capital Inc. until 2008. Non-executive Director of the Bank of England until 2008. Non-executive Director and Vice-Chairman of the Tavistock and Portman NHS Trust until 2008. Non-executive Director and non-executive Chairman of Applied Intellectual Capital PLC. Sir Andrew is a memberthe MORI Group until 2005. Managing Director, Financial Management, Reporting and Audit and Head of the Government Accountancy Service at HM Treasury until 2004.
Committee membership Member of the Board Audit andCommittee since September 2004. Member of the Board Risk Committees.Committee since September 2004.
9.Sir8. Sir Michael Rake
Non-executive Director (Age 60)(Age 61)
Sir Michael was appointed to the Board with effect from 1st January 2008. He also became a member of the Board Audit Committee. Sir Michael is a former Chairman of KPMG International and is currently Chairman of BT Group plcPLC and Chairman of the UK Commission for Employment and Skills. Sir Michael previously worked at KPMG from 1974-2007 where he worked for a number of years in Continental Europe and the Middle East. He is also awas Senior Partner of the UK firm from 1998-2000 and Chairman of KPMG International from 2002-2007.
Term of office Sir Michael joined the Board in January 2008. Sir Michael was last re-elected by shareholders at the AGM in 2008, following his appointment.
IndependentYes
External appointments Chairman of BT Group PLC since 2007. Director of The McGraw-Hill Companies and the Financial Reporting Council. Sir Michael wasCouncil since 2007. Chairman of the UK Commission for Employment and Skills since 2007. Director of the McGraw-Hill Companies since 2007. Chairman of KPMG International until 2007. Chairman of Business in the Community from 2004 tountil 2007.
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10.SirCommittee membership Member of the Board Audit Committee since January 2008. He will succeed Stephen Russell as Chairman of the Board Audit Committee in March 2009.
9. Sir Nigel Rudd, DL
Deputy Chairman
Non-executive Director(Age 61) (Age 62)
Sir Nigel joined the Board in February 1996 and was appointed Deputy Chairman on 1st September 2004. He is non-executive Chairman of Pendragon PLC and BAA Limited. He is also Deputy Chairman of Invensys plc and a non-executive Director of BAE Systems PLC and Sappi Limited. He was formerly Chairman of Alliance Boots PLC.
Term of office Sir Nigel joined the Board in February 1996 and was appointed Deputy Chairman in September 2004. Sir Nigel will retire from the Board at the 2009 AGM in April.
Independent Yes
External appointments Chairman of Pendragon PLC a position he heldsince 1989. Non-executve Director and Deputy Chairman of Invensys plc since January 2009. Chairman of Alliance Boots PLC until June 2007. He is a memberDirector of Pilkington PLC until 2006. Director of Kidde PLC until 2003.
Committee membership Member of the Board Corporate Governance and Nominations Committee and also chairssince October 2001. Chairman of the Group’sBarclays Brand and Reputation Committee.
11.Stephen10. Stephen Russell
Non-executive Director(Age 62) (Age 63)
Stephen joined the Board in October 2000 on completion of the acquisition of Woolwich PLC. He was Chief Executive of Boots Group PLC from 2000 until 2003, having worked for Boots since 1967. StephenHe has held a number of non-executive positions and is currently a non-executive Director of Network Rail and Network Rail Infrastructure Limited. He is a trustee of St. John’s Ambulance and Tommy’s the Baby Charity, and is on the Council of Nottingham University. HeUniversity and is Chairman of Business Control Solutions Group.
Term of office Stephen joined the Board in October 2000 on completion of the acquisition of Woolwich PLC. Stephen was last re-elected by shareholders at the AGM in 2007.
Independent Yes
External appointments Non-executive Director of Network Rail as a non-executive Director insince September 2007 and became2007. Trustee of St John’s Ambulance since 2005. Chairman of Business Control Solutions Group in October 2007. Stephen issince 2005. Trustee of Tommy’s the Baby Charity since 2003. Member of the Council of Nottingham University since 2003. Chief Executive of Boots Group PLC until 2003.
Committee membership Chairman of the Board Audit Committee and is a membersince April 2003 (member since October 2000). He will be succeeded by Sir Michael Rake as Chairman of the Board Risk andAudit Committee in March 2009. Member of the Board Corporate Governance and Nominations Committees.Committee since September 2004. Member of the Board Risk Committee since October 2001 (Chairman from September 2004-December 2005).
12.Sir11. Sir John Sunderland
Non-executive Director(Age 62) (Age 63)
Sir John joined the Board on 1st June 2005. He has beenwas Chairman of Cadbury Schweppes PLC since May 2003. Sir John joined Cadbury Schweppesuntil July 2008 having worked at Cadbury’s in 1968 and was appointedvarious roles, including that of Chief Executive, in September 1996.since 1968. He is Deputy President of the Chartered Management Institute, and Deputy President of the CBI, having retired as President on 31st December 2006. He is a former President of both ISBA (the Incorporated Society of British Advertisers) and the Food and Drink Federation. Sir John is a Director of the Financial Reporting Council, an Adviser to CVC Capital Partners, an Association Member of BUPA and a Governor of both Reading and Aston University Councils.
Term of office Sir John joined the Board in June 2005. Sir John was last re-elected by shareholders at the AGM in 2008.
Independent Yes
External appointments Deputy President of the Chartered Management Institute since 2008 (President 2007-2008). Director of the Financial Reporting Council since 2004. Adviser to CVC Capital Partners. Association Member of BUPA. Governor, Aston University Council. Governor, Reading University Council. Chairman of Cadbury Schweppes PLC until July 2008. Deputy President of the CBI to June 2008 (member since 2003 and President until December 2006). President of ISBA (the Incorporated Society of British Advertisers) until 2005. President of the Food and Drink Federation until 2005. Non-executive Director of the Rank Group PLC until 2006. Former Advisory Board Member of Trinsum Group and an AssociationGroup.
Committee membership Member of BUPA. He is a memberthe Board Corporate Governance and Nominations Committee since September 2006. Member of the Board HR and Remuneration and Board Corporate Governance and Nominations Committees.Committee since July 2005.
13.Patience12. Patience Wheatcroft
Non-executive Director(Age 56) (Age 57)
Patience was appointed to the Board on 1st January 2008. Anan established financial journalist and national newspaper editor, Patience is a formerhaving worked as Editor ofThe the Sunday Telegraph from 2006 to 2007 and was Business and City Editor ofThe Timesbetween 1997 and 2006. from 1997-2006. She is a non-executive Director of Shaftesbury PLC, a member of the UK/India Round Table and a member of the British Olympic Association Advisory Board. She is also a member of the Council of the Royal Albert Hall and Chair of the Forensic Audit Panel.
Term of office Patience joined the Board in January 2008. Patience was last re-elected by shareholders at the AGM in 2008 following her appointment.
14.JohnIndependent Yes
External appointments Non-executive Director of Shaftesbury PLC since 2008. Member of the UK/India Round Table. Member of the British Olympic Association Advisory Board since 2007. Member of the Council of the Royal Albert Hall. Chair of the Forensic Audit Panel since 2008. Editor of the Sunday Telegraph until 2007. Business and City Editor of The Times until 2006.
Committee membership Member of the Barclays Brand and Reputation Committee.
13. John Varley
Group Chief Executive
Executive Director and Chairman of Executive Committee(Age 51) (Age 52)
John was appointed as Group Chief Executive of Barclays on 1st September 2004, prior to which he had been Group Deputy Chief Executive from 1st January 2004. He joined Barclays in 1982 and has held various positions across the Group, including the position of Group Finance Director from 2000 until the end of 2003. John joined the Executive Committee in September 1996 and was appointed to the Board in June 1998. He was Chief Executive of Retail Financial Services from 1998 to 2000 and Chairman of the Asset Management Division from 1995 to 1998. John is a non-executive Director of AstraZeneca PLC. He is also Chairman of Business Action on Homelessness, President of the Employer’s Forum on Disability, Honorary President of the UK Drug Policy Commission and a member of the International Advisory Panel of the Monetary Authority of Singapore.
Term of office John is also a non-executivejoined the Executive Committee in September 1996 and was appointed to the Board in June 1998. John was last re-elected by shareholders at the AGM in 2007.
External appointments Non-executive Director of AstraZeneca PLC.PLC since 2006. Non-executive Director of British Grolux Investments Limited since 1999. Chairman of Business Action on Homelessness since 2006. President of the Employer’s Forum on Disability since 2005. Honorary President of the UK Drug Policy Commission since 2007. Member of the International Advisory Panel of the Monetary Authority of Singapore since 2006.
15.Robert14. Robert E Diamond Jr
President, Barclays PLC and CEO, Investment Banking and Investment Management
Executive Director and member of Executive Committee(Age 56) (Age 57)
Bob was appointed President of Barclays and became an executive Director on 1st June 2005. He is responsible for the Investment Banking and Investment Management business of the Barclays Group.Group, comprising of Barclays Capital, Barclays Global Investors and Barclays Wealth. He has been a member of the Executive Committee since September 1997. He joined Barclays in July 1996 from CSFB,previously worked for Morgan Stanley and CS First Boston, where he was Vice-Chairman and Head of Global Fixed Income and Foreign Exchange.
Term of office Bob iswas appointed President of Barclays PLC and became an executive Director in June 2005. He has been a member of the Barclays Executive Committee since September 1997. Bob was last re-elected by shareholders at the AGM in 2006, following his appointment.
External appointments Chairman of Old Vic Productions PLC.PLC since September 2007.
16.Gary Hoffman
Group Vice-Chairman
Executive Director(Age 47)
Gary was appointed as Group Vice-Chairman in July 2006. He was formerly Chairman of UK Banking and of Barclaycard and prior to that was Chief Executive of Barclaycard. He joined the Board on 1st January 2004. As Group Vice-Chairman, Gary is accountable on the Board for a range of responsibilities including Corporate Sustainability, Public Policy, Equality and Diversity, leading the Group’s response to the FSA’s Treating Customers Fairly initiative, chairing the Group’s Governance and Control Committee and franchise health with customers, employees and communities. Gary joined the Group in 1982. Gary is also a non-executive Director of Trinity Mirror PLC.
17.Christopher15. Christopher Lucas
Group Finance Director
Executive Director and member of Executive Committee(Age 47) (Age 48)
Chris has worked across financial services for most of his career, including three years in New York as Head of the US Banking Audit Practice of PricewaterhouseCoopers LLP. Chris joined the Board on 1st April 2007. Chris cameBarclays from PricewaterhouseCoopers LLP, where he was UK Head of Financial Services and Global Head of Banking and Capital Markets. He was Global Relationship Partner for Barclays for the 1999-20041999–2004 financial years and subsequently held similar roles for other global financial services organisations.
Term of office Chris has worked across financial services for mostwas appointed Group Finance Director and became a member of the Executive Committee in April 2007. Chris was last re-elected by shareholders at the AGM in 2007, following his career, including three years in New York asappointment.
External appointments UK Head of the USFinancial Services and Global Head of Banking Audit Practiceand Capital Markets of PricewaterhouseCoopers LLP.LLP until 2006.
18.Frederik16. Frederik (Frits) Seegers
Chief Executive, Global Retail and Commercial Banking
Executive Director and member of Executive Committee(Age 49) (Age 50)
Frits was appointed as Chief Executive ofis responsible for the Global Retail and Commercial Banking and became an executive Director on 10th July 2006. He is responsible for allbusiness of the Barclays retail and commercial banking operations globally, includingGroup, which includes UK Retail Banking, Barclays Commercial Bank, International RetailBarclaycard, GRCB – Western Europe, GRCB – Emerging Markets and Commercial Banking and Barclaycard. He is also a non-executive Director of Absa Group Limited.GRCB – Absa. Frits joined the BoardBarclays from Citigroup where he previously held a number of senior positions latterlyover the 17 years he worked there. Most recently, he was CEO Global Consumer Group with a remit covering all retail operations in Europe, the Middle East and Africa. He was also a member of the Citigroup Operating Committee and the Citigroup Management Committee.
He was CEO of Consumer Banking for Asia Pacific, covering 11 consumer markets, between 2001 and 2004. Under his leadership, this region was the fastest growing part of Citigroup. Frits was a non-executive Director of Absa Group Limited from 2006 until February 2009.
19.Paul Idzik
Chief Operating Officer
MemberTerm of Executive Committee(Age 47)office
Paul Frits joined the Board and the Executive Committee and becamein July 2006. Frits was last re-elected by shareholders at the AGM in 2007, following his appointment.
External appointments Chief Operating Officer in November 2004. He is also Chairman of the Group Operating Committee. Paul was formerly Chief OperatingExecutive Officer of Barclays Capital. He joined Barclays Capital in August 1999 following a career with Booz Allen & Hamilton, where he was a partner and senior member of the Financial Institutions Practice.Citigroup International PLC until 2006.
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139 |
Profit Attributable
The profit attributable to equity shareholders of Barclays PLC for the year amounted to £4,417m,£4,382m, compared with £4,571m£4,417m in 2006.2007.
Dividends
As announced on 13th October 2008, in the light of the new capital ratios agreed with the Financial Services Authority (FSA) and in recognition of the need to maximise capital resources in the current economic climate, the Board concluded that it would not be appropriate to pay a final dividend for 2008. The finalBoard intends to resume dividend payments in the second half of 2009, at which time it is intended to pay dividends quarterly. The interim dividend for the year ended 31st December 2007 of 22.5p per ordinary share of 25p each and 10p per staff share of £1 each have been agreed by the Directors. The final dividends will be paid on 25th April 2008 in respect of the ordinary shares registered at the close of business on 7th March 2008 and in respect of the staff shares so registered on 31st December 2007. With the interim dividends of 11.5p per ordinary share and of 10p per staff share that werewas paid on 1st October 2007,2008 and the total distribution for 20072008 is 11.5p (2007: 34.0p (2006: 31.0p) per ordinary share and 20p (2006: 20p) pershare). The staff share.shares were re-purchased by the Company during the year. The dividends for the year absorbhave absorbed a total of £2,253m (2006: £1,973m)£915m (2007: £2,253m).
Dividend Reinvestment Plan
Ordinary shareholders may have their dividends reinvested in Barclays PLC ordinary shares by participating in the Dividend Reinvestment Plan. The plan is available to all ordinary shareholders provided that they do not live in, and are not subject to the jurisdiction of, any country where their participation in the plan would require Barclays or The Plan Administrator to take action to comply with local government or regulatory procedures or any similar formalities. Any shareholder wishing to obtain details of the plan and a mandate form should contact The Plan Administrator to Barclays at Aspect House, Spencer Road, Lancing BN99 6DA. Those wishing to participate for the first time in the plan should send their completed mandate form to The Plan Administrator so as to be received by 4th April 2008 for it to be applicable to the payment of the final dividend on 25th April 2008. Existing participants should take no action unless they wish to alter their current mandate instructions, in which case they should contact The Plan Administrator.
Share Capital
DuringAt the year Barclays PLC purchased2008 Annual General Meeting, shareholders approved the creation of Sterling, Dollar, Euro and Yen preference shares (‘preference shares’) in order to provide the marketGroup with more flexibility in managing its capital resources. As at 27th February 2009 (the latest practicable date for cancellation 299,547,510 of its ordinaryinclusion in this report) no preference shares of 25p each, at a total cost of £1,802,173,355, inhave been issued.
In order to minimise the dilutive effect on existing shareholders of the issuance of 336,805,556 ordinary shares in 2007, at the start of 2008 the Company purchased in the market for cancellation 36,150,000 of its ordinary shares of 25p each, at a total cost of 336,805,556 Barclays ordinary£171,923,243 (this was in addition to the 299,547,510 shares to Temasek Holdings and China Development Bank. These transactions represent 4.5%purchased for cancellation in 2007). During 2008 the Company purchased all of its staff shares in issue, following approval for such purchase being given at the issued share capital2008 Annual General Meeting, at 31st December 2007.a total cost of £1,023,054. As at 27th February 2008 (the latest practicable date for inclusion in this report),2009, the Company had an unexpired authority to repurchase shares up to a maximum of 645.1 million984,960,000 ordinary shares.
The issued ordinary share capital was increased by 65.5m1,772m ordinary shares during the year2008. In addition to those issued as a result of the exercise of options under the Sharesave and Executive Share Option Schemes. Schemes during the year, the following share issues took place:
– | On 4th July 2008, the Company issued 168.9 million new ordinary shares in a firm placing to Sumitomo Mitsui Banking Corporation. |
– | On 22nd July 2008, the Company issued 1,407.4 million new ordinary shares following a placing to Qatar Holding LLC, Challenger Universal Limited (a company representing the beneficial interests of His Excellency Sheikh Hamad Bin Jassim Bin Jabr Al-Thani, the chairman of Qatar Holding LLC, and his family), China Development Bank, Temasek Holdings (Private) Limited and certain leading institutional shareholders and other investors, which shares were available for clawback in full by means of an open offer to existing shareholders. Valid applications under the open offer were received from qualifying shareholders in respect of approximately 267 million new ordinary shares in aggregate, representing 19.0% of the shares offered pursuant to the open offer. Accordingly, the remaining 1,140.3 million shares were allocated to the various investors with whom they had been conditionally placed. |
– | On 18th September 2008, the Company issued 226 million new ordinary shares to certain institutional investors. |
– | During the period 27th November 2008 to 31st December 2008, 33,000 ordinary shares were issued following conversion of Mandatorily Convertible Notes at the option of their holders. |
At 31st December 20072008 the issued ordinary share capital totalled 6,600,181,8018,371,830,617 shares. Ordinary shares represent 99.99%100% of the total issued share capital and Staff shares represent the remaining 0.01% as at 31st December 2007.2008.
The Barclays PLCCompany’s Memorandum and Articles of Association, a summary of which can be found in the Shareholder Information section on pages 269-270,305-309, contain the following details, which are incorporated into this report by reference:
– | The structure of the Company’s capital, including the rights and obligations attaching to each class of shares. |
– | Restrictions on the transfer of securities in the Company, including limitations on the holding of securities and requirements to obtain approvals for a transfer of securities. |
– | Restrictions on voting rights. |
– | The powers of the Directors, including in relation to issuing or buying back shares in accordance with the Companies Act 1985. It will be proposed at the |
– | Rules that the Company has about the appointment and removal of Directors or amendments to the Company’s Articles of Association. |
Employee Benefit Trusts (‘EBTs’) operate in connection with certain of the Group’s Employee Share Plans (‘Plans’). The Trustees of the EBTs may exercise all rights attached to the shares in accordance with their fiduciary duties other than as specifically restricted in the relevant Plan governing documents. Further informationThe trustees of the EBTs have informed the Bank that their normal policy is to abstain from voting in respect of the Barclays shares held in trust. The trustees of the Sharepurchase EBT may vote in respect of Barclays shares held in the Sharepurchase EBT, but only at the discretion of the participants. The trustees will not otherwise vote in respect of shares held in the Sharepurchase EBT.
Mandatorily Convertible Notes
On 27th November 2008, Barclays Bank PLC issued £4,050m of 9.75% Mandatorily Convertible Notes (MCNs) maturing on 30th September 2009 to Qatar Holding LLC, Challenger Universal Limited and entities representing the beneficial interests of HH Sheikh Mansour Bin Zayed Al Nahyan, a member of the Royal Family of Abu Dhabi and existing institutional shareholders and other institutional investors. If not converted at the holders’ option beforehand, these instruments mandatorily convert to ordinary shares of Barclays PLC on 30th June 2009. The conversion price is £1.53276 and, after taking into account MCNs that were converted on or before 31st December 2008, will result in the issue of 2,642 million new ordinary shares.
If there is a change of control of Barclays PLC following a takeover bid, Barclays PLC must (so far as legally possible) use all reasonable endeavours to cause the corporation which then controls Barclays PLC to execute a deed poll providing that the holders of the MCNs shall have the right (during the period ending on 30th June 2009) to convert the MCNs into, and to receive on a mandatory conversion, as the case may be, the class and amount of shares and other securities and property receivable upon such a takeover by the holders of the number of ordinary shares as would have been issued on conversion of the MCNs had such MCNs been converted immediately prior to the completion of such takeover.
The issue of new ordinary shares or certain other securities and rights of the Company, at any time during the period commencing on 27th November 2008 and ending on the EBTs’ voting policy candate on which a holder exercises its optional conversion right or on the mandatory conversion date, at a price (the ‘Future Placing Price’) lower than the then current conversion price will (subject to exceptions for ordinary shares issued pursuant to employee share schemes, under the warrants or as a result of certain corporate events) result in a downward adjustment to the conversion price (subject to a minimum conversion price of the then par value per ordinary share (currently 25 pence)) so that it equals the Future Placing Price. The conversion price will also be foundsubject to adjustment if the Company distributes an extraordinary dividend or if certain dilutive events occur, including bonus issues, rights issues or an adjustment to the nominal value or redenomination of the ordinary shares.
140 | Barclays Annual Report 2008 |
Warrants
On 31st October 2008 Barclays PLC issued, in conjunction with a simultaneous issue of Reserve Capital Instruments issued by Barclays Bank PLC, warrants to subscribe for up to 1,516.9 million new ordinary shares at a price of £1.97775 to Qatar Holding LLC and HH Sheikh Mansour Bin Zayed Al Nahyan. The warrants may be exercised at any time up to close of business on page 132.31st October 2013.
If there is a change of control of Barclays PLC following a takeover bid, Barclays PLC must (so far as legally possible) use all reasonable endeavours to cause the corporation which then controls Barclays PLC to execute a deed poll providing that the holders of the warrants shall have the right (during the period in which the warrants are exercisable) to exercise the warrants into the class and amount of shares and other securities and property receivable upon such a takeover by the holders of the number of ordinary shares as would have been issued on exercise of the warrants had such warrants been exercised immediately prior to the completion of such takeover.
The warrants contain provisions for the adjustment of the gross number of ordinary shares in the event of the occurence of certain dilutive events including, amongst others, extraordinary dividends, bonus issues, alterations to the nominal value of ordinary shares and rights issues.
Conversion of the outstanding MCNs and exercise of the Warrants in full would result in the issue of a further 4,159,167,571 new ordinary shares. The resultant shareholdings of Qatar Holding LLC and HH Sheikh Mansour Bin Zayed Al Nahyan, if the MCNs and Warrants they each hold were converted or exercised in full and taking into account existing holdings of Barclays shares, would represent approximately 12.8% and 16.5%, respectively, of the enlarged Barclays PLC issued ordinary share capital.
Substantial Shareholdings
Substantial shareholders do not have different voting rights from those of other shareholders. As at 27th February 2008,2009, the Company had been notified under Rule 5 of the Disclosure and Transparency Rules of the FSA of the following holdings of voting rights in its shares:
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Substantial shareholders do not have different voting rights from thoseNo. of other shareholders. As at 27th February 2008, the Company had been notified that Lloyds TSB Group Plc held voting rights over 329,648,746 of its ordinary shares amounting to 5.01% of the Company’s total voting rights, as shown above.
Qatar Holding LLC | 522,755,622 | 6.4 | % | ||
Axa S.A. | 460,195,183 | 5.5 | % | ||
Legal & General Group plc | 330,460,896 | 4.1 | % |
Board Membership
The membership of the Boards of Directors of Barclays PLC and Barclays Bank PLC is identical and biographical details of the Board members are set out on pages 112138 and 113.139.
Chris Lucas joined the Board as Group Finance Director on 1st April 2007 and Naguib Kheraj left the Board on 31st March 2007.
David Booth joined the Board as a non-executive Director on 1st May 2007 and Patience Wheatcroft and Sir Michael Rake were appointed as non-executive Directors with effect from 1st January 2008. Simon Fraser will join the Board as a non-executive Director with effect from 10th March 2009, subject to regulatory approvals. Dr Danie Cronjé left the Board on 24th April 2008 and Gary Hoffman left the Board on 31st August 2008.
Retirement and Re-election of Directors
In accordance with its Articles of Association, one-third (rounded down) ofAs announced on 18th November 2008, at the 2009 AGM all Directors of Barclays PLC are required to retire by rotation at each Annual General Meeting (AGM), together with Directors appointed by the Board since the last AGM. The retiring Directors are eligible towill stand for re-election. In addition,re-election, with the UK Combined Code on Corporate Governance (the Code), recommends that every Director should seek re-election by shareholders at least every three years.
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The Directors retiring by rotation at the 2008 AGM and offering themselves for re-election are Fulvio Conti, Gary Hoffman and Sir John Sunderland.exception of Sir Nigel Rudd retires annually as recommended by the Code and is offering himself for re-election. In addition, David Booth, Sir Michael Rake and Patience Wheatcroft,Professor Dame Sandra Dawson, who were appointed as Directors since the last AGM, will be offering themselves for re-electionretire at the 2008 AGM. Danie Cronjé is retiring atconclusion of the 2009 AGM and isare not offering himselfthemselves for re-election.
Directors’ Interests
Directors’ interests in the shares of the Group on 31st December 20072008 are shown on page 142.pages 164 and 166.
Directors’ Emoluments
Information on emoluments of Directors of Barclays PLC, in accordance with the Companies Act 1985 and the Listing Rules of the United Kingdom Listing Authority, is given in the Remuneration reportReport on pages 128157 to 142172 and in Note 4243 to the accounts.
Directors’ Indemnities
The Board believes that it is in the best interests of the Group to attract and retain the services of the most able and experienced Directors by offering competitive terms of engagement, including the granting of indemnities on terms consistent with the applicable statutory provisions. Qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006) were accordingly in force during the course of the financial year ended 31st December 20072008 for the benefit of the then Directors and, at the date of this report, are in force for the benefit of the Directors in relation to certain losses and liabilities which they may incur (or have incurred) in connection with their duties, powers or office.
Activities
Barclays PLC Group is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. The Group operates through branches, offices and subsidiaries in the UK and overseas.
Community Involvement and Charitable Donations
Barclays has an extensive community programme covering many countries around the world. The Group provides funding and support to over 7,1407,000 charities and voluntary organisations, ranging from small, local charities, like Passage (UK), to international organisations like the Red Cross. We also have a very successful employee programme which in 20072008 saw more than 43,70057,000 employees and pensioners worldwide taking part in Barclays-supported volunteering, giving and fundraising activities. Further information on our community involvement is given on pages 5853 and 60.54.
The total commitment for 20072008 was £52.4m (2006: £46.5m)£52.2m (2007: £52.4m). The Group committed £38.9m£27.7m in support of the community in the UK (2006: £39.6m)(2007: £38.9m) and £13.5m£24.5m was committed in international support (2006: £6.9m)(2007: £13.5m). The UK commitment includes £30.4m£19.6m of charitable donations (2006: £35.2m)(2007: £30.4m).
Political Donations
The Group did not give any money for political purposes in the UK nor did it make any donations to EU political organisations or incur any EU political expenditure during the year.
Absa Group Limited, in which the Group acquired a majority stake in 2005, made donations totalling £170,142£186,589 in 2007 (2006: £212,729)2008 (2007: £170,142) in accordance with its policy of making political donations to the major South African political parties as part of their Democracy Support Programme. Donations are made to supportparties with more than three seats in the developmentNational Parliament as confirmed by the Independent Electoral Commission. Support for the deepening of democracy in South Africa.Africa remains paramount for the new government. The Group made no other political donations in 2007.2008.
At the AGM in 2007,2008, shareholders gave a limited authority for Barclays Bank PLC and its subsidiaries to make political donations and incur political expenditure, within an agreed limit, as a precautionary measure in light of the wide definitions in The Political Parties, Elections and Referendumsthe Companies Act 2000.2006. This was similar to an authority given by shareholders in 2006.2007. This authority, which has not been used, expires at the conclusion of the AGM held this year, or, if earlier, 26th July 2008. 30th June 2009.
The Companies Act 2006 largely restates the provisions of The Political Parties, Elections and Referendums Act 2000. The risk of inadvertently breaching the Companies Act 2006 remains, and the Directors consider it prudent to seek a similar authority from shareholders. A resolution to authorise Barclays PLC and its subsidiaries
to make EU political donations and incur EU political expenditure up to a maximum aggregate sum of £125,000 is therefore being proposed at the Barclays PLC 20082009 AGM.
Employee Involvement
Barclays is committed to ensuring that employees share in the success of the Group. StaffColleagues are encouraged to participate in share option and share purchase schemes and have a substantial sum invested in Barclays shares.
Employees are kept informed of matters of concern to them in a variety of ways, including the corporate news magazines, intranets, briefings and mobile phone SMS messaging. These communications help achieve a common awareness among employees of the financial and economic factors affecting the performance of Barclays.
Barclays is also committed to providing employees with opportunities to share their views and provide feedback on issues that are important to them. An annual Employee Opinion Survey is undertaken across Global Retail and Commercial Banking and Group Centre with results being reported to the Board and the Board HR and Remuneration Committee, all employees and to our European Works Council, Africa Forum, Unite (Amicus section), our recognised union in the UK.UK and other recognised unions worldwide. Roadshows and employee forums also take place.
In addition, Barclays undertakes regular and formal Group, business unit and project specific consultations with Unite (Amicus section).our recognised trade unions and works councils internationally.
Diversity and Inclusion
The diversity agenda at Barclays seeks to include customers, colleagues and suppliers. Our objective is to recruit and retain the best people, regardless of (but not limited to) race, religion, age, gender, sexual orientation or disability. We strive to ensure our workforce reflects the communities in which we operate and the international nature of the organisation. We recognise that diversity is a key part of responsible business strategy in support of our increasingly global business.
Barclays is committed to providing additional support to employees with disabilities and making it easier for them to inform us of their specific
BarclaysAnnual Report 2008 | 141 |
requirements, including the introduction of a dedicated intranet site and disability helpline. Through our Reasonable Adjustments Scheme, appropriate assistance can be given, including both physical workplace adjustments, and relevant training and access to trained mentors is also provided for disabled employees. A wide range of recruitment initiatives have been taken to increase the number of people with disabilities working in Barclays.
Health and Safety
Barclays is committed to ensuring the health, safety and welfare of our employees and to providing and maintaining safe working conditions. Barclays regards legislative compliance as a minimum and, where appropriate, we seek to implement higher standards. Barclays also recognises its responsibilities towards all persons on its premises, such as contractors, visitors and members of the public, and ensures, so far as is reasonably practicable, that they are not exposed to significant risks to their health and safety.
Barclays regularly reviews its Statement of Health and Safety Commitment, issued with the authority of the Board and which applies to all business areas in which Barclays has operational control. In this statement Barclays commits to:
demonstrate personal leadership that is consistent with this commitment; |
provide the appropriate resources to fulfil this commitment; |
carry out risk assessments and take appropriate actions to mitigate the risks identified; |
consult with our employees on matters affecting their health and safety; |
ensure that appropriate information, instruction, training and supervision are provided; |
appoint competent persons to provide specialist advice; and |
review Barclays Health and Safety Group Process and the Statement of Commitment, at regular intervals. |
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Directors’ report
Barclays monitors its health and safety performance using a variety of measurements on a monthly basis and the Board HR and Remuneration Committee receives annual reports on health and safety performance from the Human ResourceResources Director. As part of its Partnership Agreement with Unite (Amicus section), Barclays currently funds full time Health and Safety Representatives.
Creditors’ Payment Policy
Barclays values its suppliers and acknowledges the importance of paying invoices, especially those of small businesses, in a timely manner. It is the Group’s practice to agree terms with suppliers when entering into contracts. We negotiate with suppliers on an individual basis and meet our obligations accordingly. The Group does not follow any specific published code or standard on payment practice.
Paragraph 12(3) of Schedule 7 of the Companies Act 1985 requires disclosure of trade creditor payment days. Disclosure is required by the Company, rather than the Group. The Group’s principal trading subsidiary in the UK is Barclays Bank PLC, the accounts for which are prepared in accordance with International Financial Reporting Standards. The components for the trade creditor calculation are not easily identified. However, by identifying as closely as possible the components that would be required if Schedule 4 of the Companies Act 1985 applied, the trade creditor payment days for Barclays Bank PLC for 20072008 were 2724 days (2006: 28(2007: 27 days). This is an arithmetical calculation and does not necessarily reflect our practice, which is described above, nor the experience of any individual creditor.
Essential business contracts
There are no persons with whom the Group has contractual or other arrangements that are considered essential to the business of the Group.
Research and Development
In the ordinary course of business, Barclays develops new products and services in each of its business units.
Financial Instruments
The Group’s financial risk management objectives and policies, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used, and the exposure to market risk, credit risk and liquidity risk are set out in pages 6167 to 92113 under the headings, ‘Barclays approach to risk management’, ‘Credit Risk Management’, ‘Market risk management’, ‘Liquidity Risk Management’ and ‘Derivatives’ and in Note 14 and Notes 4546 to 4849 to the accounts.
Events after the Balance Sheet Date
On 3rd March2nd February 2009, Barclays completed the acquisition of PT Bank Akita, which was announced initially on 17th September 2008, Barclays entered into an agreement with Petropavlovsk Finance (Limited Liability Society) to acquire 100% following the approval
of the Russian bank, Expobank, for a considerationCentral Bank of approximately $745m (£373m). The transaction is expectedIndonesia. On 17th February 2009, Barclays announced that Barclays Capital will discontinue operations at its EquiFirst subsidiary due to close in summer 2008 after the receiptmarket environment and strategic direction of appropriate regulatory approvals. Expobank focuses principally on Western Russia, with a substantial presence in Moscow and St Petersburg. Founded in 1994, it has grown rapidly and comprises a blend of retail and commercial banking, operating 32 branches and dealing with a range of corporate and wholesale clients. As at 31st December 2007, Expobank had net assets of $186m (£93m).the Group.
The Auditors
The Board Audit Committee reviews the appointment of the external auditors, as well as their relationship with the Group, including monitoring the Group’s use of the auditors for non-audit services and the balance of audit and non-audit fees paid to the auditors. More details on this can be found on pages 122198 and 123199 and Note 9 to the accounts. Having reviewed the independence and effectiveness of the external auditors, the Committee has recommended to the Board that the existing auditors, PricewaterhouseCoopers LLP, be reappointed. PricewaterhouseCoopers LLP have signified their willingness to continue in office and ordinary resolutions reappointing them as auditors and authorising the Directors to set their remuneration will be proposed at the 20082009 AGM.
So far as each of the Directors are aware, there is no relevant audit information of which the Company’s auditors are unaware. Each of the Directors has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. For these purposes, ‘relevant audit information’ means information needed by the Company’s auditors in connection with preparing their report.
The Annual General Meeting and
Class Meeting of Ordinary Shareholders
The Barclays PLC AGM will be held at The Queen Elizabeth II Conference Centre on Thursday 24th23rd April 2008.2009. The Notice of AGM is included in a separate document sent to shareholders with this report. A summary of the resolutions being proposed at the 20082009 AGM is set out below:
Ordinary Resolutions
– | To receive the Directors’ and Auditors’ Reports and the audited accounts for the year ended 31st December |
– | To approve the Directors’ Remuneration Report for the year ended 31st December |
– | To re-elect the following Directors: |
– | Simon Fraser |
– | Marcus Agius |
– | David Booth |
– | Sir Richard Broadbent |
– | Richard Leigh Clifford |
– | Fulvio Conti |
– | Robert E Diamond Jr |
– | Sir |
– | Christopher Lucas |
– | Sir Michael Rake |
– | Stephen Russell |
– | Frederik Seegers |
– | Sir John Sunderland |
– | John Varley |
– | Patience Wheatcroft |
– | To reappoint PricewaterhouseCoopers LLP as auditors of the Company. |
– | To authorise the Directors to set the remuneration of the |
– | To authorise Barclays PLC and its subsidiaries to make |
– | To authorise an increase in the Company’s authorised share capital. |
– | To renew the authority given to the Directors to allot securities. |
Special Resolutions
– | To renew the authority given to the Directors to allot equity securities for cash other than on a pro-rata basis to shareholders and to sell treasury shares. |
– | To renew the Company’s authority to purchase its own shares. |
– | To |
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A Class Meeting of ordinary shareholders will be held at the conclusion of the AGM to consider an extraordinary resolution approving the creation of preference shares.
This is only a summary of the business to be transacted at the meetingsmeeting and you should refer to the Notice of Shareholder MeetingsAGM for full details.
By order of the Board
Lawrence Dickinson |
Company Secretary |
Barclays Annual Report | ||||
Corporate governance
Corporate governance report
Group Chairman’s Introduction
I am pleased to report to you on the activities of the Board and its Committees over the past 12 months, my first year as Group Chairman. It has been an eventful and busy year but we have continued to apply the high standards of corporate governance that we set both for ourselves as a Board and for our Company.
Since I last reported to you, there have been a number of changes to the Board. Chris Lucas succeeded Naguib Kheraj as Group Finance Director in April 2007 and we have significantly strengthened the independent non-executive presence on the Board with the appointments of David Booth, Sir Michael Rake and Patience Wheatcroft.
Weduring 2008. Our report below onsets out how we have complied in 2007 with the UK Combined Code on Corporate Governance (the Code). We are committed to promoting good corporate governance. We seek and also gives further details of the matters that the Board and its principal Committees have considered over the year.
The year proved to be extremely challenging for the financial services industry as increasing vulnerabilities exposed in the global financial system created a period of exceptional instability.
During October 2008, it became clear that an industry-wide solution to the risks of systemic failure in the UK financial services sector was needed. The outcome of discussions between the UK’s FSA and all UK banks was that we, along with many of our competitors, were required to raise additional equity and Tier 1 capital to take our capital ratios well beyond the levels we had previously agreed with our regulators (the ‘Capital Raising’).
On 31st October 2008, Barclays announced the Capital Raising. In the extraordinary circumstances leading up to that announcement, the Board had choices to make – choices not available to all banks. These choices entailed exceptionally difficult judgements made in market circumstances where from one day to the next nothing could be taken for granted.
These choices included retaining independent control of the business in undertaking the recapitalisation required by the authorities; recapitalising the business in one market operation well in advance of the June 2009 deadline set by the authorities; and effecting a recapitalisation under which all shareholders were not afforded their pre-emption rights.
The Board did not take any of these decisions lightly: its governance processes were rigorous. It met frequently, debated the issues at length, heard differing views and arguments, sought external advice and consulted representative shareholder bodies. The decisions it made were reached in the interests of shareholders as the Board, in the circumstances at the forefronttime, perceived them to be. These included forming judgements about the earnings per share and return on capital consequences of global best practicethe Capital Raising for existing shareholders.
The Board believes that the decisions made have resulted in the Group being able to maintain its strategic momentum. The Directors deeply regret, however, that the Capital Raising denied Barclays then existing shareholders their full rights of pre-emption with respect to the ordinary shares issued. The Directors recognise that there is a high level of unhappiness on the part of some shareholders that the principle of pre-emption was breached, with consequent dilution of shareholdings and that, were it not to avoid the risk of destabilising the Company or the system, more of them may have voted against the enabling resolution at the General Meeting on 24th November 2008.
The Directors wish to place on record both their appreciation of the support received from shareholders in difficult circumstances in completing the Capital Raising and to respond, in a timely fashion,re-affirm their fundamental commitment to corporate governance developments. To gain a greater understandingthe principle of pre-emption. The Board is clear that the corporate governance framework within Barclays I encourage youextraordinary circumstances which they were required to read ‘Corporate Governance in Barclays’, which is available from our website.deal with were so unusual as to be effectively unique.
Marcus Agius |
Group Chairman |
Statements of Compliance
UK Combined Code on Corporate Governance
As Barclays is listed on the London Stock Exchange, we comply with the UK Combined Code on Corporate Governance (the Code). The Code was revised in June 2006 and the revised Code applied to Barclays with effect from 1st January 2007.Code. For the year ended 31st December 2007,2008, we have complied with the relevant provisions set out in section 1 of the Code and applied the principles of the Code as described in this report.
NYSE Corporate Governance Rules
Barclays has American Depositary Receipts listed on the New York Stock Exchange (NYSE) and is thereforealso subject to the NYSE’s Corporate Governance rules (NYSE Rules). As a non-US company listed on the NYSE, weWe are exempt from most of the NYSE Rules, which domestic US companies must follow. Wefollow, because we are a non-US company listed on the NYSE. However, we are required to provide an Annual Written Affirmation to the NYSE of our compliance with the applicable NYSE Rules and must also to disclose any significant ways in whichdifferences between our corporate governance practices differ fromand those followed by domestic US companies listed on the NYSE. As our main listing is on the London Stock Exchange, we follow the UK’s Combined Code. Key differences between the Code and NYSE Rules and the Code are set out later in this report.
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143 |
Corporate governance report
Corporate Governance Frameworkgovernance framework
The overallGroup operates within a comprehensive governance framework, within which the Group operates is set out above.in the diagram below. Details of the Group’s risk management framework can be found on pages 6562 to 96.66.
The Board managesis responsible for managing the Company on behalf of its shareholders and each Director must act in a way that he or she considers promotes the shareholders. In order to runlong-term success of the business effectively,Company for the benefit of those shareholders as a whole. The Board also ensures that an appropriate balance between promoting long-term growth and delivering short-term objectives is achieved. The Board delegates responsibility for the day-to-day management of the Company to the Group Chief Executive, who is then responsible for ensuring that the business is operating effectively. The Group Chief Executive is supported by the Executive Committee, which he chairs. Thechairs, and the Executive Committee is supported by variousa number of management committees, including the Disclosure Committee. Details of the Disclosure Committee are set out on page 125. The rest of this154. This report describes the way in whichsets out how the Board and its Committees operatework within the governance framework.framework and corporate governance guidelines.
The terms of reference for each of the principal Board Committees are available from the Corporate Governance section at:http://www.aboutbarclays.com
There arehas eight scheduled Board meetings each year. One ofStrategy is reviewed regularly at these meetings and there is normally a day and a half off-siteoffsite meeting to consider and approve the Group’s strategy for the purposesnext year. In addition to the scheduled Board meetings in 2008, 23 additional Board meetings were held during the year. The purpose of consideringthese meetings was to discuss the difficult market conditions that existed during the year and approvingin particular the Group’s strategy.three equity capital raising transactions that were undertaken: the £4.5bn Placing and Open Offer in July (the ‘Open Offer’), the £701m Placing in September (the ‘Placing’) and the issue of £4.05bn in Mandatorily Convertible Notes, £3bn in Reserve Capital Instruments by Barclays Bank PLC and warrants for new ordinary shares in November (the ‘Capital Raising’). There were 12 Board meetings held in October and November specifically to discuss the Capital Raising. There were also eight meetings of the Board Finance Committee, to which the Board delegated authority to approve certain aspects of the capital raising transactions and the acquisition of Lehman Brothers North American businesses. The Board Finance Committee comprises the Group Chairman, the Group Chief Executive and at least two independent non-executive Directors, typically the Deputy Chairman and Senior Independent Director.
These additional Board meetings, which were called at short notice, had attendance of 78% for the Open Offer (May-July 2008), 85% for the acquisition of the Lehman Brothers North American businesses (September 2008) and 90% for the Capital Raising (October-November 2008). Attendance at the Board Finance Committee was 100%. Those Directors who were unable to attend any meeting were briefed separately on the discussions at the meetings and their views were sought.
We arrange scheduled Board and Committee meetings at least a year in advance. All Directors are expected to attend each meeting and the attendance at scheduled Board meetings is set out on page 149. All Directors are provided with background papers and relevant information in advance of each meeting. If a Director is unable to attend a meeting because of exceptional circumstances, he or she will still receive the supporting papers and will usually discuss with the Chairman of the meeting any matters they wish to raise to ensure their views are given due consideration. The Group Chairman usually meets privately with the non-executive Directors, beforewithout the executive Directors or any senior management present, ahead of each scheduled Board meeting in order to brief them on the business of the meeting and identifymeeting. These meetings give the non-executive Directors an opportunity to advise the Chairman if they have any shared areas of concern. In additionparticular questions they wish to the scheduled Board meetings in 2007, there were a further 13 Board meetings held in relation to the proposed merger with ABN AMRO and ten meetings of a specially appointed Committee of the Board (the ‘Transaction Committee’), comprising theraise. The Group Chairman, Group Chief Executive Deputy Chairman and Senior Independent Director, which was establishedCompany Secretary are always available for the purpose of overseeingDirectors to discuss any issues relating to the proposed merger with ABN AMRO and considering various aspects of the proposed transaction. Attendance at the additional Board meetings which were often called at short notice, was 88.1%. Attendance ator other matters. In 2008, all Directors contributed the Transaction Committee was 100%.
Scheduled Board and Committee meetings are arranged well in advanceappropriate amount of time needed to ensure, as far as possible, that Directors can managefulfil their time commitments. All Directors are provided with supporting papers and relevant information for each meeting and are expected to attend, unless there are exceptional circumstances that prevent them from doing so. Attendance at the scheduled Board meetings is set out on page 121.responsibilities. Reasons for non-attendance are generally prior business, personal commitments or personal commitments. In the event that a Director is unableillness. Given market conditions in 2008, several meetings had to be rearranged at short notice and it was not always possible for all Directors to attend a meeting, they will still receiveon the papers for the meeting and will normally discuss any matters they wish to raise with the Chairman of the meeting to ensure their views are taken into account. In addition, all Directors are able to discuss any issues with the Group Chairman and Group Chief Executive at any time. In the case of Leigh Clifford, who was unable to attend two meetings of the Board HR and Remuneration Committee in 2007 because of other commitments, including his relocation to Australia following his retirement as Chief Executive of Rio Tinto, he received the papers for the meetings he was unable to attend and provided comments to the Committee Chairman ahead of both meetings. In 2007, all Directors contributed the time necessary to discharge their responsibilities to the Board.revised date.
The Group Chairman works closely withand the Company Secretary work together to ensuremake sure that the information communicated to the Board is accurate, timely and clearclear. This applies in advance of regular, scheduled Board meetings and in exceptional circumstances between those meetings. Timely communication of information flowswas particularly important this year, given the need for the Board to the Board. Supporting papers for scheduled meetings are distributed the week before each meeting.respond to rapidly changing circumstances. Directors may also have secure access to electronic copies of meeting papers and other key documents quickly and securely via a dedicated Directors’ Intranet. Examples includeintranet, which includes past and current Board and Committee papers, reports, minutes, press coverage, analyst reports and material from trainingbriefing sessions. All Directors have access to theThe services of the Company Secretary and his team and canare available to all Directors. Directors may also take independent professional advice on request, at the Company’s expense.
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The Board
Role of the Board
UnderDirectors are required, by UK company law, Directors mustto act in a way they consider, in good faith, would be most likely to promote the success of Barclays for the benefit of the shareholders as a whole. In doing so, the Directors must have regard (amongst other matters) to:
– | the likely consequences of any decision in the |
– | the interests of Barclays employees; |
144 | Barclays Annual Report 2008 |
– | the need to foster Barclays business relationships with suppliers, customers and others; |
– | the impact of Barclays operations on the community and the environment; |
– | the desirability of Barclays maintaining a reputation for high standards of business conduct; and |
– | the need to act fairly as between shareholders of Barclays. |
The role and responsibilities of the Barclays Board are set out in ‘Corporate Governance in Barclays’, which encompass theis available on our website atwww.aboutbarclays.com.
The duties of Directors, described above, are set out in Corporate Governance in Barclays.form part of their role and responsibilities. The Board is responsible to shareholders for creating and delivering sustainable shareholder value throughvalue. In order to achieve this it must establish the management of the Group’s businesses. It therefore determines the goalsobjectives and policies of the Group tothat will deliver such long-term value, providingvalue. The Board sets the overall strategic direction and ensures it is delivered within aan appropriate framework of rewards, incentivesreward, incentive and controls. The Board aims to ensure that management strikes an appropriate balance between promoting long-term growth and delivering short-term objectives.control.
TheAnother key responsibility of the Board is also responsible for ensuringto ensure that management maintains a system of internal control that provides assurance of effective and efficient operations, internal financial controls and compliance with law and regulation. In carrying out this responsibility, theThe Board has regard to what is appropriate forconsiders the Group’s business and reputation and ensures that the controls in place are appropriate to the materiality of the financial and other risks inherent in the business and the relative costs and benefits of implementing specific controls.
The Board has its powers set out in a formal schedule of matters reserved for the Board’s decision. A summary of the matters reserved for the Board is also the decision-making body for all otherset out opposite. These are matters of such importance as to be of significancethat are significant to the Group as a whole because of their strategic, financial or reputational implications or consequences. There is a formal scheduleThe Schedule of matters reserved forMatters Reserved to the Board’s decision, which is summarised in the panel above right.Board was reviewed and updated during 2008 to ensure it remains appropriate.
The chart below leftFigure 1 illustrates how the Board allocatedspent its time at its eightthe scheduled Board meetings during 2007. If the additional meetings relating to the proposed merger with ABN AMRO are taken into account, 49% of the Board’s time2008.
Activities in 2007 was spent on M&A. A typical Board2008
Typically, at each meeting, receives reports from the Group Chief Executive and Group Finance Director and will also be presented with an update onreport to the execution of strategy inBoard and one or two of the main businesses and functions. It willor functions also receivepresents an update on the progress of implementing the strategy. The Board also receives reports from each of the principal Board Committees and may also receive a reportreports from the Company Secretary on any relevant corporate governance matters.
Summary of matters reserved for
Summary of Matters Reserved to the Board
Corporate governance Corporate governance report The Board allocated its time at scheduled Board meetings during 2008 as follows:
Adverse market conditions during 2008 led to the Board holding an additional 23 meetings during the year. These additional meetings discussed the impact of market conditions on performance, liquidity, the three capital raisings that were undertaken during the year and the acquisition of Lehman Brothers North American businesses. Ongoing and regular communication with the Board was vital during this period, a principle that had been established during the potential ABN AMRO acquisition in 2007. If the additional meetings relating to the capital raisings are taken into account, the Board spent 33% of its time on capital management. The capital raising that was announced on 31st October 2008 in response to the new higher capital targets which the FSA set for all UK Banks was the subject of considerable discussion. Seven Board meetings and three Board Finance Committee meetings were held during October to discuss the new requirements and Barclays response. The Board had to take some key decisions during this period, in particular:
These decisions were only taken by the Board after rigorous discussion and having sought external advice. They were taken in the long-term interests of all shareholders. Board structure and composition The roles of the Group Chairman and Group Chief Executive are separate. In line with the recommendations of the Code, there is a strong independent element on the Board and at least half the Board are independent non-executive Directors. At the date of this report, the Board is comprised of the Group Chairman, four executive Directors and 11 non-executive Directors. The balance of the Board is illustrated by Figure 2. The Group Chairman’s main responsibility is to lead and manage the Although the
Nominations Committee, is considering both the
In addition, non-executive Directors have a responsibility to constructively challenge and The Charter of Expectations, including role profiles for key Board positions, is available from:
Sir Nigel Rudd continued in the role of The Board Corporate Governance and Nominations Committee is responsible for reviewing the structure, composition and balance of the Board and its principal Committees and In line with the
Independence of non-executive Directors The Code sets out circumstances that may be relevant to the Board in determining whether each non-executive Director is independent. Barclays Charter of Expectations sets out specific criteria, which the Board
Corporate governance Corporate governance report
The Board considers non-executive Director independence on an annual basis, as part of each Director’s performance review. The Board Corporate Governance and Nominations Committee and subsequently the Board reviewed the independence of non-executive Directors in early
The Code suggests that length of tenure is a factor that should be considered when determining whether a Director continues to be independent. As recommended by the Code, it is our policy that any Director who serves for more than nine years should seek annual re-election by shareholders and that all Directors subject to re-election should undergo a rigorous performance evaluation. |
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As a result of the annual performance review, the Board concluded that Sir Nigel Rudd and Dr Cronjé both continuecontinues to demonstrate the essential characteristics of independence expected by the Board. The Board continues to be regularly refreshed and the Board considers Sir Nigel’s length of service, and histhe resulting experience and knowledge of Barclays is viewed by the Boardhe has gained, as being especially valuable,valuable. This proved particularly as only one other non-executive Directorhelpful during the difficult market conditions in 2008. Sir Nigel has servedstood for more than six yearsre-election annually at each AGM since 2005. Sir Nigel will, however, retire at the 2009 AGM and the Board continues to be regularly refreshed.is not seeking re-election.
All Directors must report any changes in their circumstances to the Board and the Board reserves the right to terminate the appointment of a non-executive Director if there are any material changes in their circumstances that may conflict with their commitments as a Barclays Director or that may impact on their independence. Under UK company law, a Director must now seek authorisation before taking up any position with another company that conflicts, or may possibly conflict, with the Company’s interests. Barclays Articles of Association contain provisions to allow the Directors to authorise situations of potential conflicts of interest so that a Director is not in breach of his/her duty under company law. All existing external appointments for each Director were considered and authorised by the Board in September 2008 and additional external appointments have been authorised at subsequent Board meetings following notification to the Company Secretary. Each authorisation is set out in a Conflicts Register. The Board Corporate Governance and Nominations Committee is responsible for conducting an annual review of the Conflicts Register and confirming to the Board that, where relevant, conflicts have been dealt with appropriately, and that the process for dealing with them is operating effectively.
Conflicts of Interest The following Directors’ Duties on Conflicts of Interest set out in the Companies Act 2006 (the Act) came into force on 1st October 2008: – a duty not to accept benefits from third parties; – a duty to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company (situational conflicts); and – a duty to disclose any interest in a proposed or existing transaction or arrangement with the company (transactional conflicts). Barclays Articles of Association were amended at the 2008 AGM to allow the Directors to authorise situational conflicts as permitted by the Act. It is the responsibility of each Director to comply with the Act and Directors are required to notify Barclays in writing of any new situational or transactional conflicts. They are also required to consider the interests of their connected persons in case they amount to an indirect interest. Details of the potential conflict are submitted to the next Board meeting and the Directors, excluding the Director to whom the potential conflict relates, must carefully consider each potential conflict of interest before it is authorised, if appropriate. |
Barclays Annual Report | ||||||
Board and Committee Membership and Attendance
The table below sets out attendance of Directors at scheduled Board and Committee meetings in 2007.2008.
Independent | Board | Board Audit Committee | Board HR & Remuneration Committee | Board Corporate Governance & Nominations Committee | Board Risk Committee | |||||||
Number of scheduled meetings | 8 | 8 | 4 | 2 | 4 | |||||||
Group Chairman | ||||||||||||
Marcus Agius | OA | 8 | – | 4 | 2 | – | ||||||
Executive Directors | ||||||||||||
John Varley (Group Chief Executive) | ED | 8 | – | – | – | – | ||||||
Robert E Diamond Jr | ED | 8 | – | – | – | – | ||||||
Gary Hoffman | ED | 8 | – | – | – | – | ||||||
Chris Lucas (joined the Board 1st April 2007) | ED | 6 | – | – | – | – | ||||||
Frits Seegers | ED | 8 | – | – | – | – | ||||||
Naguib Kheraj (left the Board 31st March 2007) | ED | 2 | – | – | – | – | ||||||
Non-executive Directors | ||||||||||||
David Booth (joined the Board 1st May 2007) | I | 5 | – | – | – | – | ||||||
Sir Richard Broadbent (Senior Independent Director) | I | 8 | – | 4 | 2 | 4 | ||||||
Leigh Clifford | I | 7 | – | 2 | – | – | ||||||
Fulvio Conti | I | 7 | 6 | – | – | – | ||||||
Dr Danie Cronjé | I | 8 | – | – | – | 4 | ||||||
Professor Dame Sandra Dawson | I | 8 | 8 | – | – | – | ||||||
Sir Andrew Likierman | I | 8 | 8 | – | – | 4 | ||||||
Sir Nigel Rudd (Deputy Chairman) | I | 8 | – | – | 2 | – | ||||||
Stephen Russell | I | 8 | 8 | – | 2 | 4 | ||||||
Sir John Sunderland | I | 8 | – | 4 | 2 | – |
Independent | Scheduled Board | Additional Board | Board Audit Committee | Board HR & Remuneration Committee | Board Corporate Governance & Nominations Committee | Board Risk Committee | ||||||||
Number of meetings held | 7 | 23 | 10 | 5 | 2 | 4 | ||||||||
Group Chairman | ||||||||||||||
Marcus Agius | OA | 7 | 23 | – | 5 | 2 | – | |||||||
Executive Directors | ||||||||||||||
John Varley (Group Chief Executive) | ED | 7 | 23 | – | – | – | – | |||||||
Bob Diamond | ED | 7 | 22 | – | – | – | – | |||||||
Gary Hoffman (left the Board 31st August 2008) | ED | 5 | 7 | – | – | – | – | |||||||
Chris Lucas | ED | 7 | 23 | – | – | – | – | |||||||
Frits Seegers | ED | 6 | 20 | – | – | – | – | |||||||
Non-executive Directors | ||||||||||||||
David Booth | I | 7 | 22 | – | – | – | 4 | |||||||
Sir Richard Broadbent (Senior Independent Director) | I | 7 | 21 | – | 5 | 2 | 4 | |||||||
Leigh Clifford | I | 7 | 13 | – | 4 | – | – | |||||||
Fulvio Conti | I | 7 | 17 | 9 | – | – | – | |||||||
Dr Danie Cronjé (left the Board 24th April 2008) | I | 2 | – | – | – | – | 1 | |||||||
Professor Dame Sandra Dawson | I | 7 | 21 | 10 | – | – | – | |||||||
Sir Andrew Likierman | I | 7 | 18 | 8 | – | – | 4 | |||||||
Sir Michael Rake | I | 6 | 21 | 7 | – | – | – | |||||||
Sir Nigel Rudd (Deputy Chairman) | I | 7 | 20 | – | – | 2 | – | |||||||
Stephen Russell | I | 6 | 13 | 10 | – | 2 | 3 | |||||||
Sir John Sunderland | I | 7 | 20 | – | 4 | 1 | – | |||||||
Patience Wheatcroft | I | 7 | 22 | – | – | – | – |
Key
OA | Independent on appointment |
ED | Executive Director |
I | Independent non-executive Director |
Board Committees
In order forCertain responsibilities of the Board are delegated to carryBoard Committees to assist the Board in carrying out its functions and to ensure independent oversight of internal control and risk management, certain aspectsmanagement. Membership of its role are delegated to Board Committees whoseis recommended to the Board by the Board Corporate Governance and Nominations Committee, which reviews Committee composition and balance regularly to ensure the Committees are refreshed. All members of principal Board Committees are non-executive Directors. TheDirectors, although the Chairman is a member of the Board HR and Remuneration Committee. Each Board Committee’s terms of reference set out the specific matters for which delegated authority has been given are set out in each Board Committee’sgiven. These terms of reference, which are available on our website, are reviewed annually.
The Board has delegated authority to four principal Board Committees:
– | Board Audit Committee |
– | Board Risk Committee |
– | Board Corporate Governance and Nominations Committee |
– | Board HR and Remuneration Committee |
The Board appoints Committee members on the recommendation of the Board Corporate Governance and Nominations Committee, which regularly reviews Committee composition and balance and the need for refreshment. The number of scheduled meetings held and attendance at the Committee meetings is set out above in ‘Board and Committee Membership and Attendance’. The activities of the Board Committees report on their activitiesare set out on the following pages.pages 149 to 154.
The terms of reference for each of the principal Board Committees are available from the Corporate Governance section at:www.aboutbarclays.com.
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Corporate governance
Corporate governance report
Board Audit Committee
Stephen Russell (Chairman)
Fulvio Conti
Professor Dame Sandra Dawson
Sir Andrew Likierman
Sir Michael Rake (from 1st January 2008)
Secretary: Lawrence Dickinson
The Board Audit Committee terms of reference are available from the Corporate Governance section at:http://www.aboutbarclays.com.
ThereIn addition to the members of the Committee, there are a number of regular attendees at each meeting, including themeeting. The Group Chief Executive, Group Finance Director, Barclays Internal Audit Director, BarclaysGroup Risk Director, BarclaysGroup General Counsel and the lead external audit partner.partner normally attend all scheduled Board Audit Committees. The Board Audit Committee members usually meet privately before each meeting to raise any concerns with the Chairman of the meeting and they also meet with the external auditors and the Barclays Internal Audit Director, without management present, as partat the end of most Committee meetings. Sir Andrew Likierman continued incontinues to fulfil his role as the ‘financial expert’ as defined by the US Sarbanes-Oxley Act of 2002 and, has ‘recent and relevant financial experience’ as recommended by the Code, as a result of his accountancy background and his career with HM Treasury. SinceTreasury, has ‘recent and relevant financial experience’ as recommended by the year end,Code. Sir Michael Rake a formerwill succeed Stephen Russell as Chairman of the Committee in March 2009. Sir Michael has significant audit experience having worked at KPMG from 1972-2007 where he was Chairman of KPMG International has been appointed a member of the Committee.from 2002-2007.
Barclays Annual Report 2008 | 149 |
Corporate governance
Corporate governance report
Activities in 20072008
The chart belowFigure 5 illustrates how the Committee spentallocated its time in 2007.2008. During 2007,2008, the Committee:
– | considered the information it would require during the coming year to enable it to discharge its responsibilities; |
– | considered the significant changes in financial markets and economic conditions and the impact on the areas of focus for the Committee; |
– | reviewed the Annual Report and Accounts and half-year Results and Interim Management Statements; |
– | reviewed in detail the valuations of Barclays Capital’s credit market exposures, reviewing mark-to-market valuations and accounting for derivatives and assessing the overall quality of earnings; |
– | reviewed the Group’s accounting policies and, in particular, the accounting for leveraged loans; |
– | considered control issues of Group level significance for different areas of the business; |
– | received reports on the control environment in each of the following |
– | reviewed the effectiveness and independence of the Group statutory auditor; |
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– | considered the provision of non-audit services by the Group statutory auditor – more details can be found in the |
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– | received reports from the external and internal auditors; |
– | monitored the performance of the Internal Audit function; |
– | reviewed the Global Internal Audit Plan; |
– |
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The Committee also received regular updates during 2007 on:
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In February 2008, the Committee reviewed its activities in 2007 against its terms of reference and concluded that it had discharged the responsibilities delegated to it under those terms of reference.
Non-audit services policy
The Committee takes seriously its responsibility to put in place safeguards to auditor objectivity and independence. It has therefore established a policy on the provision of services by the Group’s statutory auditor. The Policy describes the circumstances in which the Auditor may be permitted to undertake non-audit work for the Group. The Committee oversees compliance with the Policy and considers and approves requests to use the Auditor for non-audit work. Allowable non-audit services require pre-approval before they can be carried out. For allowable services, the Committee has pre-approved all assignments where the expected fee does not exceed £100,000, or £10,000 in the case of certain taxation services. Any assignment where the expected fee is above the relevant threshold requires specific approval from the Committee or a member of the Committee. The Company Secretary and his team deal with day-to-day administration of the Policy, facilitating requests for approval by the Committee. The Committee receives a report at each meeting on the non-audit services provided by the Auditor and the Policy is reviewed by the Committee annually. Details of the services that are prohibited and allowed are set out below.
Services that are prohibited include:
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Allowable services that may be approved include:
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Approval of financial statements
Barclays has in place a strong governance process to support its framework of disclosure controls and procedures. That process, in which the Board Audit Committee plays a key role, is illustrated below.
The membership of the Disclosure Committee and its role is set out on page 125. The Legal and Technical Review Committee is an accounting, legal and regulatory compliance committee, which is responsible for reviewing the Group’s financial reports and disclosures and for ensuring they have been subject to adequate verification. Meetings are attended by the Group’s external US lawyers and auditors. This governance process ensures that there is sufficient opportunity for both management and the Board to review and challenge the Group’s financial statements and other significant disclosures before publication. It also provides assurance for the certifications made by the Group Chief Executive and Group Finance Director as required under the Sarbanes-Oxley Act 2002 and recommended by the Turnbull Guidance on Internal Control. Further details of the Group’s system of internal control and an assessment of its effectiveness may be found on page 143.
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Board Audit Committee Chairman’s Statement
We Our areas of focus in 2008 were dominated by the continuing disruption to the credit markets and financial services sector as a whole. In early 2008, we held a separate session of the Committee on accounting for and valuation of derivatives and complex financial instruments and also reviewed the Group’s valuation methodology for these instruments. The latter comprises trading desk evaluation supported by independent price testing and benchmarking, followed by a review by Finance and Risk and by the external auditor. When considering the Group’s preliminary and half-year results and interim management statements, we spent a significant amount of time reviewing the disclosures around and the fair value of Barclays Capital’s credit markets exposures, including asset backed securities and leveraged credit positions. As part of the approval of each results statement, we reviewed the fair value of the credit market exposures and the form and content of the disclosures. The review of the credit market exposure valuations included a review of marks by key asset categories, movements in exposures (including sales/paydowns) and a review of underlying collateral by vintage and rating. The Committee received at both the half-year and year-end and before each Interim Management Statement a specific presentation from Barclays Capital’s Chief Operating Officer and discussed the valuations with the Group Finance Director, Group Risk Director and, importantly, the Group’s external auditors. Reassurance was sought from independent Group control functions such as Risk and Finance, and the external auditors, that the individual marks were appropriate. The Committee was reassured that there were no significant variations between the prices at which assets were sold and the underlying marks. The Committee was content that the markets and models to which the valuations are marked are sufficiently robust to enable reliable and relevant valuations to be determined. We also reviewed the controls around Barclays Capital’s complex financial instruments, as well as reviewing the overall control environment at Barclays Capital. The Committee has sought to learn lessons from events at our peers, receiving reports on the circumstances surrounding losses experienced at Société Générale and UBS. We discussed the overall impact of market conditions and the challenging financial markets on the remit of the Committee and this will help shape our agenda for 2009. In the second half of the year, as the financial crisis started to evolve into a global economic downturn, the Committee directed increasing attention at the deepening economic downturn, reviewing the key controls by which consequent risk can be managed. As a result, impairment measurement, fraud controls, collections activities and day-to-day credit controls and security documentation are receiving increased scrutiny from the Committee. During the year we also received additional presentations and reports on the impact of the acquisition of the Lehman Brothers North | American businesses in September 2008, including an initial assessment of the risks and controls in that business and a report on the impact of the acquisition on financial reporting. In reviewing the Internal Audit Plan for 2009, we also challenged management to make sure that the Internal Audit function is appropriately resourced for the challenges ahead and is directing its attention on areas likely to come under pressure in the expected downturn. Impairment numbers continue to be closely reviewed by the Committee. It reviews a paper prepared by the Risk function, which examines impairment on a business-by-business basis. It examines closely any amendments or overrides to models, compares trends and impairment levels with peers and seeks independent reassurance from the external auditor. Our reviews of the control environment in each of our businesses in The As Chairman of the
Stephen Russell Chairman of the Board Audit Committee
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150 | Barclays Annual Report 2008 |
– | considered the effectiveness of the Group’s internal controls over financial reporting; |
– | received regular reports on ‘Raising Concerns’, including whistleblowing; |
– | considered the Fraud Risk Control Framework; and |
– | reviewed its Terms of Reference to satisfy itself that they enable the Committee to fulfill its responsibilities. |
The Committee also received regular updates during 2008 on:
– | Basel II |
– | MiFID |
– | Sarbanes-Oxley |
– | Sanctions compliance |
In February 2009, the Committee reviewed its activities in 2008 against its terms of reference and concluded that it had discharged the responsibilities delegated to it under those terms of reference.
Approval of financial statements
Barclays has a strong governance process in place to support its framework of disclosure controls and procedures. That process, in which the Board Audit Committee plays a key role, is illustrated in Figure 6.
The Legal and Technical Review Committee is an accounting, legal and regulatory compliance committee, which is responsible for reviewing the Group’s financial reports and disclosures to ensure that they have been subject to adequate verification and comply with legal and technical requirements. Meetings are attended by the Group’s auditors and US lawyers. The membership of the Disclosure Committee and its role is set out on page 154. The membership of the Executive Committee and its role is set out on pages 153 and 154.
This governance process is in place to ensure both management and the Board are given sufficient opportunity to review and challenge the Group’s financial statements and other significant disclosures before they are made public. It also provides assurance for the Group Chief Executive and Group Finance Director when providing certifications as required under the Sarbanes-Oxley Act 2002 and recommended by the Turnbull Guidance on Internal Control. Further details of the Group’s system of internal control and an assessment of its effectiveness may be found on page 173.
Non-Audit Services Policy The Committee takes seriously its responsibility to put in place safeguards to auditor objectivity and independence. It has therefore established a policy on the provision of services by the Group’s statutory auditor. The Policy describes the circumstances in which the auditor may be permitted to undertake non-audit work for the Group. The Committee oversees compliance with the Policy and considers and approves requests to use the auditor for non-audit work. Allowable services are pre-approved up to £100,000, or £10,000 in the case of certain taxation services. The Company Secretary and his team deal with day-to-day administration of the Policy, facilitating requests for approval by the Committee. The Committee receives a report at each meeting on the non-audit services provided by the auditor and the Policy is reviewed by the Committee annually. Details of the services that are prohibited and allowed are set out below. Services that are prohibited include: – bookkeeping – design and implementation of financial information systems – appraisal or valuation services – actuarial services – internal audit outsourcing – management and Human Resource functions – broker or dealer, investment adviser or investment banking services – legal, expert and tax services involving advocacy Allowable services that the Committee will consider for approval include: – statutory and regulatory audit services and regulatory non-audit services – other attest and assurance services – accountancy advice and training – risk management and controls advice – transaction support – taxation services – business support and recoveries – translation services |
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151 |
Corporate governance
Corporate governance report
Board Risk Committee
Sir Richard Broadbent (Chairman)
David Booth (from 1st January 2008)
Dr Danie Cronjé (to 24th April 2008)
Sir Andrew Likierman
Stephen Russell
Secretary: Lawrence Dickinson
Risk is a key parameter of Barclays business. Accordingly, the Board has established a Board Risk Committee to provide Board level monitoring and oversight of all Barclays risk activities.
The Board Risk Committee’sCommittee terms of reference are available from the Corporate Governance section at:http://www.aboutbarclays.com.
In addition to its members,the Members of the Committee, all meetings are usually attended by the Group Finance Director and the BarclaysGroup Risk Director. Attendees at meetings may also include Barclays Internal Audit Director, BarclaysGroup General Counsel and the Barclays external auditor, as well as other senior executives, who joinalso attend meetings of the Board Risk Committee, where appropriate.
The Board recognises that risk is a key parameter for specific topics.the business.
The Board Risk Committee provides monitoring and oversight of all Barclays risk activities. During 2008, the Committee received presentations and updates on key aspects of the external market conditions to ensure it was able to maintain an appropriate level of oversight and report effectively to the Board.
ApproachActivities in 2008
The Committee approachesmet four times in 2008 and Figure 7 shows how the Committee allocated its task primarily by:time at those meetings. During 2008, the Committee:
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In addition, the Committee:
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– | reviewed in greater detail the process around setting annual Risk Appetite to establish the effectiveness of the process in responding to significant changes in economic and market conditions; |
– | reviewed the programme of actions being taken Group-wide to mitigate risk in view of deteriorating economic conditions in our major markets, such as the UK, US, South Africa and Spain; |
– | reviewed the Risk Appetite for the Group for 2009 and made recommendations to the Board; and. |
– | received updates on |
Activities in 2007
The Committee requested at the end of 2006 that the US mortgage business be reviewed early in the year as one of the key risk issues. This was presented in March 2007 and included an analysis of stress loss scenarios under adverse market conditions. Management took decisions during the first half of 2007 to reduce limits in this business and, given the volatility in the credit markets during 2007, the Committee subsequently received regular reports on market conditions.
During 2007, the Committee also reviewed, in depth, leveraged credit and asset backed securities markets, including the Group’s counterparty exposures. It considered whether there were any signs of material contagion in other markets in which the Group operates. The Committee examined how the Group’s risk controls and stress limits had operated in the prevailing market conditions and was satisfied that risk controls had operated as anticipated. The Committee reviewed the impact on impairment and mark-to-market positions and the impact on the Group’s balance sheet of the market conditions. The Committee also monitored progress in meeting the new capital regime introduced under Basel II and continued to review the retail credit experience.
The chart below left shows how the Committee allocated its time at its meetings in 2007.
Board Risk Committee Chairman’s Statement 2008 was a challenging year for risk management and this was reflected in the work of the Committee, which is detailed below. Particular areas worthy of note were: – The Committee monitored the Group’s sub-prime exposures throughout the year. The reduction in limits and scale of the sub-prime business in 2007 reduced the impact of the crisis, although substantial write-downs were still required during 2008, reflecting a further deterioration in the markets and underlying performance of the assets. – The Committee also monitored the Group’s exposure to other areas affected by the crisis, including other asset-backed securities, commercial mortgages and monoline insurers. – The Committee reviewed and compared the write-downs being taken in the sub-prime and related areas with those being taken by the industry. – The Committee monitored carefully the Group’s overall risk exposure in the light of the anticipated worsening in economic conditions and reviewed management plans to manage and mitigate the effects of the expected downturn in multiple markets. – The Committee also monitored the capital position throughout the year relative to regulatory requirements and the Group’s overall risk appetite. Several steps were taken throughout the year to strengthen the capital base prior to the events of October 2008 when the regulator changed the capital requirements for banks, requiring a further and substantial capital raising. – The Committee played an active role in informing Board debate about Risk Appetite and capital planning for 2009. |
Sir Richard Broadbent |
Chairman of the Board Risk Committee |
5th March 2009 |
In March 2008,2009, the Committee will review its activities in 20072008 against its terms of reference.
More information on risk management and the internal control framework can be found in the Risk management report on pages 6557 to 73.136.
152 | Barclays Annual Report 2008 |
Board Corporate Governance and
Nominations Committee
Marcus Agius (Chairman)
Sir Richard Broadbent
Sir Nigel Rudd
Stephen Russell
Sir John Sunderland
Secretary: Lawrence Dickinson
The Board Corporate Governance and Nominations Committee terms of reference are available from the Corporate Governance section at:http://www.aboutbarclays.comwww.aboutbarclays.com.
The meetings are also attended by the Group Chief Executive.
Activities in 20072008
The chart below rightFigure 8 shows how the Committee allocated its time at its meetings in 2007.2008. During 2007,2008, the Committee:
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monitored the progress of the action plan arising from the |
– | reviewed the corporate governance disclosures for the |
– | reviewed and updated Corporate Governance in Barclays and the Charter of Expectations; and |
– | reviewed succession plans for the Executive Committee and the position of Group Chief Executive. |
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The Committee also received updates on:
– | the status of the Companies Act 2006 and, in particular, the new statutory statement of Directors’ |
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During 2007,2008, the Committee reviewed the composition of the Board and its principal Committees at each of its meetings. Following those deliberations, the Committee recommended to the Board that Sir Michael Rake succeed Stephen Russell as Chairman of the appointments of David Booth (May 2007),Board Audit Committee with effect from March 2009. No new Directors were appointed to the Board during 2008, other than Sir Michael Rake and Patience Wheatcroft, (January 2008) aswho joined the Board with effect from 1st January 2008.
Given that Sir Nigel Rudd and Professor Dame Sandra Dawson will be retiring from the Board at the 2009 AGM and Stephen Russell will be retiring in October 2009 on completion of nine years’ service, the Committee also discussed both Board size and future Board composition and, in particular, given the continuing crisis in the world financial services industry, the type of skills and experience required in new non-executive Directors.
In the case of David Booth,early 2009, the Committee had concluded that a non-executive Director with US banking experience would bring the skills and experience to the Board that had been lost on the retirement of Robert Steel as a non-executive Director in late 2006. In the case of Sir Michael Rake, the Committee sought a non-executive Director with a financial and auditing background. Patience Wheatcroft has extensive experience of institutional fund management should be sought and, with the highest levelsassistance of business and politics, which will bring additional valuable skills and a wider perspective to the Board. When considering appointments, the Committee typically engages external search consultants, who are providedSimon Fraser was identified as a candidate with a specification of the skills and experience required, to assist with identifying potential candidates, although candidates may be recommended to the Committee from other sources. Each of David Booth, Sir Michael Rake and Patience Wheatcroftdesired experience. He met with members of the Board Corporate Governance & Nominations Committee priorand his appointment was recommended to the Committee considering their appointmentsBoard, who approved his appointment as a Director. Simon will join the Board on 10th March 2009, subject to regulatory approvals.
Pursuant to an agreement entered into between Barclays and recommendations being madeChina Development Bank (CDB) in August 2007 for the subscription of Barclays ordinary shares, CDB retain the right to nominate a non-executive Director to the Board.Board of Barclays but did not take up this right during 2008.
In January 2008,2009, the Committee reviewed its activities in 20072008 against its terms of reference and concluded that it had discharged the responsibilities delegated to it under those terms of reference.
Board HR and Remuneration Committee
Sir Richard Broadbent (Chairman)
Marcus Agius
Leigh Clifford
Sir John Sunderland
Secretary: Patrick Gonsalves
The Board HR and Remuneration Committee terms of reference are available from the Corporate Governance section at:http://www.aboutbarclays.com
The Committee’s independent advisers, from Towers Perrin MGMCAdditional information on the role and Kepler Associates, attended 2 meetings and 1 meetingactivities of the Committee respectivelycan be found in 2007.the Remuneration Report on pages 157 to 173, including the Group’s revised philosophy on remuneration, an explanation of the Group’s remuneration arrangements and a description of the framework for future decisions in this area.
Activities in 20072008
The chart belowFigure 9 shows how the Committee allocated its time at its meetings in 2007. 2008. The Committee held additional meetings in November 2008 and January 2009, as a result of the rapidly changing economic environment and the intense scrutiny from regulators and other interested parties that the issue of remuneration has received.
During 2007,2008 the Committee:
– |
|
– | reviewed executive compensation; |
– |
|
– |
|
– | reviewed global staff benefits; |
– | monitored the implementation of the talent agenda; |
– | reviewed the |
The Committee received updates on:
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– |
|
– |
|
– |
|
In February 2008, theThe Committee reviewedreceived valuable support and advice from its activities in 2007 against its terms of referenceindependent advisers, Towers Perrin MGMC and concluded that it had discharged the responsibilities delegated to it under those terms of reference.Kepler Associates.
Detailed information on the role and activities of the Committee can be found in the Remuneration Report on pages 128 to 142.
Management
Executive Committee
The executive Directors bear the responsibility (underUnder the leadership of the Group Chief Executive)Executive, the executive Directors are responsible for managing the Group’s business and making and implementingexecuting operational decisions and running the Group’s business.decisions. The Executive Committee supports the Group Chief Executive. ItExecutive and it meets fortnightlyevery fortnight to develop strategiesdiscuss strategy development and policies to recommend to the Board and to implement approved strategy.Board. The Executive Committee is also responsible for implementing approved strategy and is supported by other Committees, including the Disclosure Committee.
Executive Committee
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Annual Report 2008
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Corporate governance
Corporate governance report
Executive Committee |
John Varley (Chairman) Bob Diamond Chris Lucas Frits Seegers |
Disclosure Committee
The Disclosure Committee is chaired by Chris Lucas, the Group Finance Director. Members include the Company Secretary, BarclaysGroup General Counsel, Head ofDirector, Investor Relations, BarclaysGroup Risk Director, Head ofBarclays Corporate Affairs Director, Group Financial Controller and Barclays Treasurer. The Committee:
– | considers and reviews the preliminary and |
– | considers Interim Management Statements released to the Stock |
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The Committee reports to the Executive Committee and also reports to the Board Audit Committee.Committee, documenting its conclusions about the effectiveness of the design and operation of the disclosure controls and procedures. This forms part of the combined assurance given to the
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Corporate governance
Corporate governance report
Board Audit Committee together with the report on the Turnbull Review of Internal Controls recommended by the Code.
Board Effectiveness
Performance Review
An annualThe Code recommends that an evaluation of the effectiveness of the Board and Committee effectivenessits Committees is conducted as recommended by the Code.annually. The evaluation in 20062007 was independently facilitated by Egon Zehnder International. All Directors were sent a questionnaire to complete and return to Egon Zehnder International and comprised a questionnaire, supplemented bythese were discussed in individual interviews, andwhich included peer reviews.review. The following actions were setagreed for 2007:2008:
– |
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Training on risk issues was provided in April 2007 and feedback sought from the participants. The time allocated to Board meetings has been increased to allow for extended debate and discussion. The Board Corporate Governance and Nominations Committee monitored the progress of the action plan during 2007 and are satisfied with the steps taken to tackle the issues highlighted by the evaluation.
The 2007 evaluation was again independently facilitated by Egon Zehnder International. The evaluation took the form of detailed questionnaires completed by each Director, individual interviews and peer evaluation of fellow Directors. The results of the evaluation were presented to the Board in February 2008 and continued to demonstrate the improving trend since the current process of evaluation was adopted in 2004. The Board concluded that the Board and the principal Board Committees continue to operate effectively. Minor enhancements were recommended around:
minor enhancements around the form and content of Board papers and presentations; and |
– |
|
The 2008 evaluation was again independently facilitated by Egon Zehnder International and took the form of detailed questionnaires, which were completed by each Director, individual interviews and peer evaluation of fellow Directors. As in previous years, the evaluation covered the following areas:
– | Group performance; |
– | Strategy and performance objectives; |
– | Reporting to shareholders/stakeholders; |
– | Structure, people, succession planning and remuneration; |
– | Decision-making process; |
– | Information flows; |
– | Board structure and composition; |
– | Board roles and responsibilities; |
– | Board and Management relationships; |
– | Board meetings; and |
– | Board Committees. |
The results of the evaluation were presented to the Board in December 2008. The results from the overall review showed a continuation of the five-year trend of improving scores and the Board concluded that the Board and the principal Board Committees continue to operate effectively in terms of communication, information flows and Directors’ participation and engagement, particularly during the period of difficult market conditions in 2008. The Directors recognised however, and were disappointed, that Group performance has not met shareholder expectations and acknowledged that they are accountable to shareholders for their stewardship of the Group during the exceptional events of 2008.
From the results of the 2008 evaluation, action points and issues that were discussed included:
– | continued focus on the Board’s calendar of business |
– | refinements to the Board’s calendar of business, including additional time to be spent on items such as compensation strategy and |
– | the overall size and composition of |
– | refinements to the process for evaluating the performance of individual Directors. |
The Board Corporate Governance and Nominations Committee will recommendhas agreed an action plan to the Board to deliver theseprogress improvements in 2008.2009.
TheIn terms of individual Director performance, the Group Chairman will holdheld private meetings with each Director to discuss thenon-executive Directors in early 2009 so that individual and general results and to agree areas for developmentcould be discussed. Development plans relating to their own individual performance. Feedback on the Group Chairman’s performance was provided to thewere agreed. The Senior Independent Director who discussed the resultsmet privately with the other non-executive Directors and the Group Chief Executive before meetingto discuss feedback he received on the Group Chairman’s performance. These results were then shared with the Group Chairman.
TrainingDirector Development and Business Awareness
A three part trainingcomprehensive development and awareness programme is in place for Directors. This comprises:
– | an induction |
– |
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Induction
All new Directors receive an information pack thatinduction presentation, which explains those disclosures they are obliged to make to the Company to comply with various laws and regulations. A presentation is given to all new Directors, which outlines their responsibilities as a Director of a global, listed company and provides an overview of the Group and its businesses. EachAn information pack, that gives details of the disclosures that Directors are obliged to make to the Company to comply with various laws and regulations, is also provided to each new Director. A personal induction programme is scheduled with each new Director then has a tailored induction programme toso that they can further familiariseacquaint themselves with the Group and its businesses. This takes the form ofEach new Director attends sessions with each of the executive Directors and the heads of the main Group functions, andwhich includes opportunities to visit operational sites to meet with senior management and employees. Once they have completed the firstThe second part of their induction and have a good overview of the Group, they then have furtherprogramme includes additional sessions with the executive Directors and senior managers from each of the principalGroup’s main business units to gain aprovide the new Director with detailed and in depthin-depth understanding of their business, which includesthose businesses. The sessions focus on the challenges, opportunities and risks that are faced by each. Marcus Agiuseach business unit. Sir Michael Rake and David BoothPatience Wheatcroft undertook their induction training in 2007. A reportprogrammes during 2008.
In 2008, non-executive Directors were asked to complete a questionnaire and give feedback on topics on which they would like to receive additional briefings. Two in-depth briefing sessions were arranged during 2008 on impairment recognition and forecasting and on Barclays Capital’s traded products, including asset-backed securities, credit default swaps and collateralised debt obligations.
The Board and the Group Chairman’s induction programme is set out inBoard Audit and Board Risk Committees received further briefings to ensure they were kept up to date with the panel above.changing global economic conditions, including updates on capital management, presentations on asset-backed securities and liquidity risk, mark-to-market valuations and briefing material to support the various capital raising proposals and acquisition of the Lehman Brothers North American businesses.
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Barclays businesses and operations
During 2007, two off-site2008, one Board meetings were held. In March, themeeting was held off-site. The Board met atin China in September and received presentations on the New York offices ofeconomic and political outlook in China and met key Barclays Capital, where Directors were given a tour ofstaff working in the site, including the trading floor, and had the opportunityAsia-Pacific region.
154 | Barclays Annual Report 2008 |
Group Chief Executive, John Varley, helped to meet with staff, senior management and major clients. In September, the Board met at the London office of Barclays Wealth.
launch UK National Branch Week was held in September, where over 300by visiting the Coventry High Street branch. During the course of the week, around 400 senior executives from the Group went back to the floor to find out whatexperience first hand the successes and challenges employeescolleagues in the branches are facing atfacing. Each day had a theme including raising the sharp endprofile of Barclays product range, employee benefits, the business.importance of customer service, personal development and charity fundraising. A number of Directors participated and worked alongside cashiers, personal bankers and co-ordinators for the day. To keep them informed of issues relevant
John Varley also spent time giving presentations to front line employees andcolleagues on the Group’s capital raising proposals. He kept colleagues up to date with newson how market conditions were affecting Barclays and the decisions the Board was taking in respect of the capital raising options that were available. All colleagues were invited to attend the presentations in person or via conference call and John Varley answered questions raised by colleagues from around the Group, Directors receive copies of The Globe, the magazine for employees.world.
External matters
Directors are regularly briefed on market opinion and receive copies of analyst research and press commentary. Attendance atFurther briefing material on market conditions was sent to Directors during 2008 and Directors continue to receive relevant publications to keep them up to date with changing market opinion. Directors are invited to attend results presentations analyst rehearsals and corporate governance receptions enables Directors to meet with analysts and investors to enhance their awareness of market sentiment and the views of major shareholders.sentiment.
External speakers were invited to brief the Board in 2007 on the global economic outlook. All Directors were made aware in 2007 of their responsibilities under the FSA’s Prospectus Rules in connection with the proposed merger with ABN AMRO. A number of briefings were given to the Board on the changes being introduced by the Companies Act 2006 and, in particular, the new statutory statement of Directors’ Duties, to ensure that Directors are aware of their responsibilities. Guidance was provided to management and to the Board on the desired content of supporting Board and Committee papers, to ensure that Directors are provided with sufficient information to allow them to have regard to (amongst others) the stakeholders of the Group and the long term consequences of any decisions they make.
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Statement on US Corporate Governance Standards
The statement required by NYSE is set out below.
Director independence
Under the NYSE Rules require the majority of the Board shouldto be independent. Under the
The Code requires at least half of the Board (excluding the Chairman) is required to be independent. The NYSE Rules contain detailed tests for determining whether a Director independence,is independent, whereas the Code requires the Board to determine whether each Director is independent in character and judgement and sets out criteria that may be relevant to that determination. We follow the Code’s recommendations as well as developing best practices among other UK public companies. Our Board annually reviews theThe independence of our non-executive Directors takingis reviewed by the Board on an annual basis and it takes into account the guidance in the Code and the criteria we have established for determining independence, which are described on page 120.pages 147 and 148.
Board Committees
We have a Board Corporate Governance and Nominations Committee and a Board HR and Remuneration (rather than Compensation) Committee, both of which are broadly comparablesimilar in purpose and constitution to thosethe Committees required by the NYSE Rules and whose terms of reference comply with the Code’s requirements. BeyondAs the fact thatGroup Chairman was independent on appointment, the Code permits him to chair the Board Corporate Governance and Nominations Committee is chaired by the Chairman of the Board and that the Chairman isbe a member of the Board HR and Remuneration Committee, both of which are permitted by the Code,Committee. Except for these appointments, both Committees are composed solely of non-executive Directors, whom the Board has determined to be independent. We follow the Code recommendation that a majority of the Nominations Committee should be independent non-executive Directors, whereas the NYSE Rules state that the Committee must be composed entirely of independent Directors. We comply with the NYSE Rules regarding the obligation to have a Board Audit Committee that meets the requirements of Rule 10A-3 of the US Securities Exchange Act, including the requirements relating to the independence of Committee members. In April 2007,2008, we made an Annual Written Affirmation of our compliance with these requirements to the NYSE. The Code also requires us to have a Board Audit Committee comprised solely of independent non-executive Directors. WeHowever, we follow the Code recommendations, rather than the NYSE Rules however, regarding the responsibilities of the Board Audit Committee, although both are broadly comparable. We also have a Board Risk Committee, comprised of independent non-executive Directors, which considers and discusses policies with respect to risk assessment and risk management.
Corporate Governance Guidelines
The NYSE Rules require domestic US companies to adopt and disclose corporate governance guidelines. There is no equivalent recommendation in the Code. TheCode but the Board Corporate Governance and Nominations Committee has however, developed corporate governance guidelines, entitled Corporate‘Corporate Governance in Barclays,Barclays’, which have been approved and adopted by the Board.
Code of Ethics
The NYSE Rules require that domestic US companies adopt and disclose a code of business conduct and ethics for Directors, officers and employees. Rather than a single consolidated code as envisaged in the NYSE Rules, we have a number of ‘values based’ business conduct and ethics policies which apply to all employees. In addition, we have adopted a Code of Ethics for the Group Chief Executive and senior financial officers as required by the US Securities and Exchange Commission.
Shareholder approval of equity-compensation plans
The NYSE listing standards require that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to those plans. We comply with UK requirements, which are similar to the NYSE standards. TheHowever, the Board however, does not explicitly take into consideration the NYSE’s detailed definition of what are considered ‘material revisions’.
Relations with Shareholders
Institutional investors
The Board’s priorities includeA key priority for the Board in 2008 was communicating with shareholders, particularly ahead of the General Meeting in November 2008, and also afterwards in order to provide further details to shareholders on the key decision points during the capital raising process. In the normal course of events, the Board aims to keep them wellshareholders up to date and informed about how the Company’s prospectsCompany is performing and its strategy, and staying abreast ofwhilst ensuring that it listens to the viewsopinions of major shareholders. To achieve this, executiveshareholders and takes their views on board. Executive Directors and senior executives hold group and one to one meetings with major investors.investors to ensure we are communicating effectively. Analyst research notes are distributed to Directors and our corporate brokers provide annualregular feedback to the Board. The Investor Relations team organise roadshows, seminars, conferences, presentations and other activities that enable the Directors to interact with investors. Prior to each AGM, theThe Group Chairman, Senior Independent Director and Company Secretary haveconduct a series of meetings with the corporate governance representatives of our major institutional shareholders.shareholders ahead of each AGM. Meetings were held with our major institutional shareholders to discuss the capital raising proposals.
Private shareholders
The Board has also tried to keep private shareholders up to date with information about the capital raising proposals during 2008. In June 2008, the Group Chairman sent a letter to shareholders regarding the Open Offer, which took place in July. Personalised forms were also sent to shareholders with a question and answer booklet to help explain the details of the Open Offer and how to complete the forms. Further documents were available on the Group’s website and sent to shareholders on request. In November, the Group Chairman sent a letter to shareholders and Notice of General Meeting, which set out the details of the Capital Raising that required shareholder approval. A follow-up letter was also sent to shareholders to inform them of developments and to advise shareholders that all Directors would offer themselves for re-election at the 2009 AGM and that the executive Directors had all agreed to waive their bonus for 2008. An open letter to shareholders, clients, customers and colleagues from the Group Chairman and Group Chief Executive was released to the London Stock Exchange on 26th January 2009 ahead of the publication of the annual results announcement on 9th February 2009.
The change in the law nowthat allows us to communicate electronically with our shareholders unless they advise us that they prefer to receive paper. We have given shareholders a choice of how to receive shareholder communications going forward and those that receive documents electronically will have access to shareholder documents as soon as they are published. These new arrangements will enablehas enabled us to use less paper, which benefits the environment and lowers distribution costs for the Group. All shareholder documents are available electronically as soon as they are published but shareholders can still receive communications in paper format if they wish. This year we will continue to post the Annual Review, Notice of Shareholder MeetingsMeeting and proxy forms to all shareholders.
We encourage shareholders to hold their shares in Barclays Sharestore, where shares are held electronically in a cost-effective and secure environment. OurShareholders can use our e-view service enables shareholders to receive their shareholder documents electronically. Itelectronically and they can also gives shareholdersuse this service to get immediate access to information relating to their personal shareholding and dividend history. ParticipantsE-view participants can also change their details and dividend mandates online and receive dividend tax vouchers electronically.
Barclays Annual Report 2008 | 155 |
Corporate governance
Corporate governance report
Shareholder MeetingsAnnual General Meeting/General Meeting
The 20072008 AGM was held on 26th24th April 20072008 at theThe Queen Elizabeth II Conference Centre in London. In accordance with best practice, all resolutions were considered on a poll and the results were made available on our website the same day. 54 percent52.9% of the shares in issue were voted and all resolutions were approved. All Directors are encouraged to attend the AGM and are available to answer shareholder questions. All Directors attended the 20072008 AGM, with the exception of Leigh Clifford,Dr Danie Cronjé, who as Chief Executive of Rio Tinto, was attending that company’s AGM andretiring from the Board meeting in Australia on that day. A class meeting of ordinary shareholders was also held on 24th April 2008 for shareholders to consider the resolution of the AGM that created new preference share classes. 50.5% of the shares in issue were voted and the resolution was approved by shareholders.
An extraordinaryA general meeting (EGM)(GM) was held on 14th September 2007,24th November 2008, at our head office inExCel London, where shareholders were asked to approve resolutions in connection with the proposed merger with ABN AMRO. 58 percentCapital Raising proposals. 60.8% of the shares in issue were voted on a poll and all resolutions were approved. The results of the poll were made available on our website on the same day. The Group Chairman, Senior Independent Director and a majorityall of the executive Directors and four non-executive Directors, including the Senior Independent Director, Deputy Chairman and Board Audit Committee Chairman, attended the EGM. The EGM was followed by a Class Meeting of ordinary shareholders, at which 57 percent of the ordinary shares in issue were voted on a poll and the resolution was approved.GM.
The 20082009 AGM will be held on 24th23rd April 20082009 at theThe Queen Elizabeth II Conference Centre in London. The AGM will be followed by a Class Meeting of ordinary shareholders. The Notice of Shareholder MeetingsMeeting is enclosed with this Annual Report as a separate document. The resolutions will be considered on a poll and the results will be available on our website on 24th23rd April 2008.2009.
Signed on behalf of the Board
Marcus Agius
Group Chairman
7th5th March 20082009
156 | Barclays Annual Report | |||||
Corporate governance
Remuneration reportCorporate governance
Remuneration Report
Statement from the Chairman of the Board HR and Remuneration Committee (the Committee)
Context
The disruption in the capital markets that commenced in 2007 deepened in 2008 resulting in one of the most challenging years ever for the global financial services sector. As 2008 closed it was clear that the depth of the financial crisis was so severe that a significant global economic downturn was unavoidable. The extent to which remuneration structures may have played a role in contributing to the financial crisis was still being debated and under scrutiny as this statement was written. Whatever outcomes prevail it is certain the remuneration structures will be different in the future.
As a consequence of events, the Committee commenced its deliberations for the 2008 performance year earlier than usual and met more times than is typical. The agenda rapidly developed into two work streams: first, the immediate decisions for 2008; and, second, the long-term shape of remuneration. Work continues on the latter and will extend into 2009. Our guiding principle throughout all decisions has been ‘pay for performance’.
2008
Barclays delivered profit of £6,077m, 14% lower than 2007. Although profitability, on an absolute and relative basis, compares favourably across the sector, several features of performance resulted in a more severe reduction in variable remuneration:
1. | The significant under performance of the share price and the absolute reduction in market capitalisation (£20bn in 2008) |
2. | The decision not to pay a final dividend for 2008 |
3. | The significantly lower absolute performance and weaker earnings in Barclays Capital |
The variable pay for the Group reduced 48% relative to 2007. Accountability rests at the most senior levels and key factors relating to executive Directors include:
– | zero annual performance bonus for 2008 |
– | no salary increases for 2009 |
– | executive Directors who have long-term performance shares due to be released in 2009 shall agree that these be deferred for a further two years and subject to additional financial performance over that period. |
– | the total 2009 long-term awards are 64% lower than last year, with no awards for the Chief Executive and President. |
An assessment of Barclays remuneration structures and how well the calibration had worked during this stressed period shows significant alignment with shareholders:
– | the existing long-term performance share plan award cycles (2007/09 and 2008/10) are not expected to vest |
– | the cumulative effect of delivering significant proportions of remuneration in Barclays shares (which are typically held on a long- term basis) has resulted in the executive Directors’ share interests decreasing in value by an aggregate of £63m in 2008, which when added to the decrease of £32m in 2007 totals £95m for the two year period |
– | the value of employee interests in shares under Barclays employee share plans has decreased over 2007 and 2008 by approximately £2bn. |
Future of Remuneration
The Committee commenced a review of remuneration during 2008. The objective of the review was to assess how the pay for performance culture and alignment with shareholders could be strengthened further. As the review advanced it became clear that the mandate ought to be extended to incorporate a broader industry wide review of remuneration. So far the Committee has:
– | revised the remuneration policy (see page 158) to accentuate risk management and the role of behaviours in the determination of remuneration |
– | increased the shareholding requirements for executive Directors (from 1x to the higher of 2x times base salary or average total annual cash compensation over the prior three years) |
– | announced a new plan in the first quarter of 2009 for approximately 15,000 employees to significantly increase the proportion of remuneration paid over multiple years. |
The review is continuing and will address detailed remuneration plans and proposals which will be developed during 2009. The challenge for the industry is to use this period to develop robust remuneration structures that balance commercial enterprise with risk in the interests of all stakeholders.
Barclays will be engaged in extensive dialogue and consultation with shareholders in developing its new proposals. An update on progress will be provided at the AGM.
Report
The following report of the Committee provides further explanation of the current remuneration governance and arrangements for executive Directors and is divided into the following sections:
– | Committee remit, members and advisers |
– | Remuneration policy and governance |
– | Executive Directors’ remuneration |
– | Non-executive Directors’ remuneration |
– | Former Directors’ remuneration |
– | Share plan descriptions |
The Committee unanimously recommends that you vote at the 2009 AGM to approve the Remuneration Report as all Directors will be doing with their own Barclays shares.
On behalf of the Board
Sir Richard Broadbent |
Chairman, Board HR and Remuneration Committee |
5th March 2009 |
Barclays Annual Report 2008 | 157 |
Remuneration Report
Board HR and Remuneration Committee remit and membership
The Committee provides governance and strategic oversight of executive and all other employee remuneration, Barclays Human Resource activities and senior management development. The Committee’s terms of reference are available in the Corporate Governance section of the Barclays Investor Relations website (www.aboutbarclays.com)http://www.aboutbarclays.com.
The Committee meets a minimum of fourmet formally five times a year. Marcus Agius became a member of the Committee on 1st January 2007. Marcus Agius was considered independent (for the purposes of the Combined Code) on his appointment as Chairman of the Board. All other Committee members are independent non-executive Directors.
The Committee’s objective in relation to remuneration is to ensure that it incentivises excellence in business and personal performance and enables the Group to attract and retain employees of ability and experience.
The Committee aims to achieve this by:
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The Committee’s work is supported by independent professional advice from Kepler Associates, who were re-appointed in 2007, and Towers Perrin MGMC who were appointed in 2007.
In relation to HR and senior management development, the Committee’s objective is to ensure that the Group’s people resources are managed to maximise business performance, support the long-term success and growth of the business and protect the welfare of all employees.
The Committee aims to achieve this by:
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Barclays employee remuneration is performance based. Important context to this report and the disclosures that follow is provided below:
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The Committee takes seriously its commitment to clear and comprehensive disclosure. This report details the remuneration of the individual Directors who served Barclays in 2007. Barclays Remuneration Policy remains unchanged, including the commitment to transparency and to policies and programmes that serve well the interests of shareholders.
The Committee unanimously recommends that you vote to approve the report at the 2008 AGM.
Signed on behalf of the Board
Sir Richard Broadbent
Chairman, Board HR and Remuneration Committee
7th March 2008
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Board HR and Remuneration Committee Members
During 2007, the Committee comprised both independent non-executive Directors andduring 2008. After each formal meeting the Chairman of the Committee presented a report to the full Board. MembershipA report on the Committee’s activities is set out on page 153 as part of the Corporate Governance Report.
The members of the Committee, was as follows:
are Sir Richard Broadbent (Chairman)
, Marcus Agius
(Group Chairman), Leigh Clifford
and Sir John Sunderland
Sunderland.
The non-executive Directors who wereare Committee members wereare considered by the Board to be independent of management and free from any business or other relationship that could materially affect the exercise of their independent judgement. The constitution and operation of the Committee complies with the Provisions on the Design of Performance Related Remuneration in the Combined Code adopted by the Financial Reporting Council.
Marcus Agius was appointed as a member of the Committee with effect from 1st January 2007.
The Chairman of the Committee presents a report of each meeting to the full Board.
Advisers to the Committee
The Committee’s work is supported by independent professional advice. The Committee has access to independent consultants to ensure that it receives independent advice. Advisers are appointed byreviews the Committee for specific work, as necessary,appointment of advisers each year. Towers Perrin MGMC and are required to disclose to the Committee any potential conflict of interest.
In 2007, Kepler Associatesawere both re-appointed by the Committee in 2008. Deloitte LLP also advised the Committee. Any potential conflicts of interest the advisers may have are disclosed to provide independent advicethe Committee. In addition to advising the Committee, members on remuneration matters. Towers Perrin MGMCawere appointed to provide advice provided remuneration benchmarking data and Deloitte LLP and its affiliates also provided remuneration benchmarking data, tax, regulatory, information technology risk, pensions , corporate finance and consulting services to the Committee in 2007, primarily in relation to the provision of remuneration for employees below Board level and in the global financial services industry.Barclays Group.
The Group Chief Executive, the Human Resources Director and, as necessary, members of the Executive Committee, also advise the Committee, supported by their teams. They are notNo employee of Barclays Group is permitted to participate in discussions or decisions of the Committee relating to their own remuneration. The Human Resources Director is responsible for providing professional support to line management in HR policy and operations and for monitoring compliance with prescribed policy and programmes across Barclays. The Human Resources Director is not a Board Director and is not appointed by the Committee.
Remuneration Policy
Barclays policy is to use remuneration to drive a high-performance culture. Executive Directors can expect outstanding remuneration if performance is outstanding and below median remuneration for below median performance. This philosophy applies to remuneration policies and practices for all employees inDuring the Group. Theyear the Committee considers remuneration levels across the Group when determining remuneration for executive Directors.
The aims ofrevised the Barclays Remuneration Policy arePolicy. The revised policy is to:
1. Attract and retain those people with the ability, experience and skill to deliver the strategy.
2. Create a direct and recognisable alignment between the rewards and risk exposure of shareholders and employees, particularly executive Directors and senior management.
3. Incentivise employees to deliver sustained performance consistent with strategic goals and appropriate risk management, and to reward success in this.
4. Deliver compensation that is affordable and appropriate in terms of value allocated to shareholders and employees.
5. Encourage behaviour consistent with the principles that guide Barclays business:
i) | Winning together |
– |
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ii) | Best People |
– | Developing talented colleagues and |
– |
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iii) | Customer and Client Focus |
– |
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Executive Directors’ remuneration – alignment of interests with shareholders
Figure 1 shows the aggregate total direct remuneration of the executive Directors for 2007 and 2008 (as shown in Table 1) compared to the indicative fair value movements on the executive Directors’ aggregate share based remuneration and beneficial interests in Barclays shares from 1st January 2007 to 31st December 2008 (as shown in Table 7). The performance of Barclays share price has been shown for context. The chart shows that the executive Directors’ interests have decreased in value by £95m over 2007 and 2008 as a consequence of the movement in Barclays share price.
158 |
Annual Report 2008 |
iv) | Pioneering |
– | Driving new ideas, especially those that make Barclays |
– |
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– |
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The graph below shows the value, at 31st December 2007, of £100 invested in Barclays on 31st December 2002 compared with the value of £100 invested in the FTSE 100 Index. The other points plotted are the values at intervening financial year ends. The FTSE 100 Index is the index of the 100 largest UK quoted companies by market capitalisation. It is a widely recognised performance comparison for large UK companies such as Barclays and this is why it has been chosen as a comparator to illustrate Barclays TSR. The graph shows that, at the end of 2007, a hypothetical £100 invested in Barclays on 31st December 2002 would have generated a total return of £63, compared with a gain of £95 if invested in the FTSE 100 Index.
Remuneration for executive Directors
Remuneration for the executive Directors comprises:
v) | Trusted |
– |
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– |
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– |
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The Committee keeps the remuneration policy and arrangements, as detailed in this Report, under review to ensure that Barclays programmes remain competitive and provide appropriate incentive for performance.
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Remuneration Policy Governance
Notes
To ensure appropriate operation of the remuneration policy, the Committee has established frameworks for the governance of remuneration in the Global Retail and Commercial Banking and Investment Banking and Investment Management businesses and for the Group as a whole. These frameworks will be reviewed in 2009. The current frameworks set out key financial ratios
achieved by Barclays and its competitors and have been used by the Committee to inform its decision-making process when approving aggregate remuneration spend, including bonus and long-term incentive expenditure, strategic investment for new hires, and the remuneration arrangements of any employee with annual total remuneration equal to or in excess of £750,000.
Schedule 7A ofFor all individual remuneration decisions made by the Companies Act 1985 requires thatCommittee, including those for executive Directors, the graph shows TSR for the five years ending with the relevant financial year.
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Corporate governance
Remuneration report
The Committee reviews the elementseach element of remuneration relative to the policies stated in this reportperformance and to the practice of other comparable organisations. Remuneration is benchmarked against the markets in which we compete for talent. This includes benchmarking against other leading international banks and financial services organisations, and other companies of similar size to Barclays in the FTSE 100 Index.
The component parts for each executive Director are detailed inGiven the tables accompanying this report.
Themateriality of Barclays pension arrangements, the Committee guideline that executive Directors should hold, as a minimum, the equivalent of one times their base salary in Barclays shares, including shares held under award through ESAS, was met by all executive Directors.
Each element of remuneration is important and hasoperates a specific roleframework for the management of pensions to ensure proper oversight. The Global Retirement Fund Governance Framework is operated to ensure best practice in achieving the aimsrespect of regulatory compliance, governance, investment and administration. Details of the remuneration policy. The combined potential remuneration from bonus and PSP outweighs the other elements, and is subject to personal and Group performance, thereby placing the majority of total remuneration at risk.
Of the key elements of remuneration (salary, annual performance bonus, ESAS and PSP), salary made up a maximum of 30% of the 2007 remunerationpension arrangements in place for executive Directors are set out on page 164 and 1.4%for other employees on page 160.
As required by Part 3 of Schedule 7A of the Companies Act 1985, the Group’s auditors, PricewaterhouseCoopers LLP, have audited the information contained in respectTables 1b, 3, 5, 10, 11, 14, 16, 18, 19, 20, 21, 22 and 23 on pages 162 to 168.
Total Shareholder Return
Figure 2 shows the value, at 31st December 2008, of Robert E Diamond Jr’s arrangements, which reflects general practice£100 invested in Barclays on 31st December 2003 compared with the value of £100 invested in the investment bankingFTSE 100 Index. The other points plotted are the values at intervening financial year ends. The FTSE 100 Index is a widely recognised performance comparison for large UK companies and investment management industry.this is why it has been chosen as a comparator to illustrate Barclays TSR. The remaining proportiongraph shows that, at the end of 2008, a hypothetical £100 invested in Barclays on 31st December 2003 would have generated a total loss of £59, compared with a gain of £18 if invested in the key compensation elements for executive Directors is at risk. The relative weighting summarised in this paragraph does not include pension and benefits.FTSE 100 Index.
The
Barclays Annual Report 2008 | 159 |
Corporate governance
Remuneration Report
Executive Director’s Pay
Table 1 explains the purpose of each element of remuneration and shows executive Directors’ remuneration for 2008 and 2007.
Base Salaries
The executive Directors is summarisedwill receive no base salary increase in the table below and discussed in greater detail in the sections that follow.2009.
|
Base salary at 31st Dec 2008 £000 | Base salary at 1st April 2009 £000 | Date of previous increase | ||||
Executive Directors | ||||||
John Varley | 1,100 | 1,100 | 1st April 2008 | |||
Robert E Diamond Jr | 250 | 250 | 1st March 1999 | |||
Chris Lucas | 650 | 650 | 1st April 2008 | |||
Frits Seegers | 700 | 700 | n/a |
Table 1a: Executive Directors’ annual remuneration | ||||||||
Element | Purpose | Delivery | Programme | When normally received/ awarded | ||||
To reflect the market value of the individual and their role | – Cash – Monthly – Pensionable | – Reviewed annually, with | Paid in year | |||||
Annual performancebonus | To incentivise the delivery of annual goals at the Group, business division and individual levels | – –
ESAS
– Non-pensionable | – Based on annual business unit performance, performance of the Group as a whole and | Normally paid in the following financial year | ||||
Sub-total of the above | ||||||||
Deferred share award (ESAS) | To align annual performance with shareholder value and increase retention | – At least 25% of annual performance bonus recommended as deferred share awards under ESAS – Non-pensionable | – Discretionary awards of shares to be deferred for three to five years. No performance condition on release, as a deferred share award – 20% bonus shares releasable after three years, a further 10% after five years – Dividends normally accumulated during deferral period | Normally awarded in the following financial year | ||||
Long-term incentive (PSP) | To reward the creation of above median, sustained growth in shareholder value and Economic Profit (EP) performance | –
vest after three years, subject to performance conditions – Non-pensionable | – Discretionary awards – Participation reviewed annually – Barclays performance over three years determines the
| Normally awarded in | ||||
Total direct remuneration | Total of the above | |||||||
Pension | To provide a market competitive post-retirement benefit | – Deferred cash or cash allowance – Monthly | – Non-contributory, defined benefit scheme and/or defined contribution scheme, or cash allowance in lieu of pension contributions | Paid or accrued during year | ||||
Other benefits | To provide market competitive benefits | – Benefit in kind, or cash allowance – Non-pensionable | – Benefits include private medical, insurance life and disability cover, accommodation overseas when required for business purposes, use of company owned vehicle or cash equivalent and tax advice | Received during year | ||||
Sub-total in accordance with Companies Act 1985 | Total of Salary, Annual Cash Bonus, Other Benefits and Pension Cash Allowance |
160 | Barclays Annual Report 2008 |
Annual Cash Bonus and Deferred Share Awards
No annual cash bonuses or deferred share awards have been awarded to executive Directors for 2008. The maximum bonus opportunity for executive Directors is normally 250%, but is tailored to the relevant market.
Long-term incentives
PSP Vesting in 2008
The PSP awards made in 2005, due for release in March 2008 lapsed in full as the performance condition was not met.
As disclosed in the 2007 Report and Accounts, in March 2008 Robert E Diamond Jr received a cash payment of £7.425m and an award of shares deferred for one year under ESAS of £7.425m, detailed on pages 162 to 163 from the Retained Incentive Opportunity 2005-2007 in which he participated.
PSP awards due to vest in 2009
For the PSP awards made in relation to the 2006-2008 cycle, the TSR condition was not met and the EP condition was partially met. As a result, awards that are scheduled to vest in March 2009 (at the absolute discretion of the PSP trustee) are due to vest at 1.4 75 times the initial award (maximum is 3 times). This represents approximately 9% of the maximum value of the number of shares that could vest at the share price at award.
After consultation with the Remuneration Committee, the executive Directors intend to write to the PSP trustee to request that it defers the exercise of its discretion to re lease shares to them under the 2006-2008 awards for a further two year period. At the end of that period it is intended that the PSP trustee considers the re lease of the shares, subject to continued employment and a financial performance condition to be agreed and assessed by the Committee.
The maximum number of shares re leasable at the end of the two year period will be 1.475 times the initial award; there will be no opportunity to receive shares in excess of this number (except for any dividend shares that may be awarded at the PSP trustee’s discretion).
Proposed awards in 2009
It is proposed that Chris Lucas and Frits Seegers are awarded a performance share plan award in 2009.
The number of shares awarded to date and the performance conditions relating to each award are set out on pages 162 and 163.
The PSP awards are shown in Table 1b at the fair value of the re commended awards.
Table 1b: Executive Directors’ annual remuneration | ||||||||||||||||
John Varley | Robert E Diamond Jr | Chris Lucas | Frits Seegers | |||||||||||||
2008 £000 | 2007 £000 | 2008 £000 | 2007 £000 | 2008 £000 | 2007 £000 | 2008 £000 | 2007 £000 | |||||||||
Salary | 1,075 | 975 | 250 | 250 | 638 | 450 | 700 | 700 | ||||||||
Annual performance bonus (cash) | 0 | 1,425 | 0 | 6,500 | 0 | 450 | 0 | 1,313 | ||||||||
Total cash | 1,075 | 2,400 | 250 | 6,750 | 638 | 900 | 700 | 2,013 | ||||||||
Deferred share award (ESAS) | 0 | 618 | 0 | 11,375 | 0 | 195 | 0 | 569 | ||||||||
Fair value of long- term incentive (PSP) award | 0 | 1,200 | 0 | 3,000 | 800 | 800 | 1,600 | 1,600 | ||||||||
Total direct remuneration | 1,075 | 4,218 | 250 | 21,125 | 1,438 | 1,895 | 2,300 | 4,182 | ||||||||
Pension (or cash allowance) | Member of pension scheme. See page 164 | Member of pension scheme. See page 164 | Member of pension scheme. See page 164 | Member of pension scheme. See page 164 | 159 | 113 | 175 | 175 | ||||||||
Other benefits | 23 | 18 | 66 | 14 | 18 | 22 | 27 | 24 | ||||||||
Sub-total in accordance with Companies Act 1985 | 1,098 | 2,418 | 316 | 6,764 | 815 | 1,035 | 902 | 2,212 |
Barclays Annual Report 2008 | 161 |
Corporate governance
Remuneration Report
Share Plans
Barclays operates a number of share plans to align the interests of executive Directors with shareholders. The following tables summarise the interests of each executive Director in each plan and the relevant performance conditions for outstanding PSP cycles. The interests shown are the maximum number of shares that may be received under each plan. Executive Directors do not pay for any share plan award.
During 2008, the number of shares under each award or option has been increased in accordance with the rules by 2.68% and option exercise prices per share have been correspondingly reduced to reflect the impact of the capital raising in July. No other adjustments were made for capital raisings during the year.
Summary descriptions of principal share plans operated by Barclays are shown on pages 169-172.
Table 3: Long-term plans and deferred share plans | |||||||||||||
Number of shares under award/option 1st January 2008 (maximum) | Awarded in year (maximum) | Market price on award date | Adjusted weighted average exercise price | Number released/ exercised | |||||||||
John Varley | |||||||||||||
PSP 2005-2007 | 426,135 | – | £ | 5.30 | – | – | |||||||
PSP 2006-2008 | 461,244 | – | £ | 6.75 | – | – | |||||||
PSP 2007-2009 | 491,130 | – | £ | 7.08 | – | – | |||||||
PSP 2008-2010 | – | 791,208 | £ | 4.25 | – | – | |||||||
ISOP | 920,000 | – | – | £ | 4.29 | – | |||||||
Sharesave | 3,638 | – | – | £ | 4.70 | – | |||||||
ESAS | 344,711 | 135,715 | £ | 4.25 | – | (23,214 | ) | ||||||
Robert E Diamond Jr | |||||||||||||
PSP 2005-2007 | 156,249 | – | £ | 5.30 | – | – | |||||||
PSP 2006-2008 | 2,306,208 | – | £ | 6.75 | – | – | |||||||
PSP 2007-2009 | 2,803,548 | – | £ | 7.08 | – | – | |||||||
PSP 2008-2010 | – | 1,978,020 | £ | 4.25 | – | – | |||||||
ISOP | 560,000 | – | – | £ | 4.42 | – | |||||||
ESOS | 100,000 | – | – | £ | 3.97 | – | |||||||
RIO cash release | – | – | – | – | – | ||||||||
BGI EOP | 100,000 | – | – | £ | 20.11 | – | |||||||
ESAS | 4,863,749 | 4,131,868 | £ | 4.25 | – | (2,131,463 | ) | ||||||
Chris Lucas | |||||||||||||
PSP 2007-2009 | 248,730 | – | £ | 7.08 | – | – | |||||||
PSP 2008-2010 | – | 527,472 | £ | 4.25 | – | – | |||||||
Sharesave | 3,638 | – | – | £ | 4.70 | – | |||||||
ESAS | 69,091 | 42,857 | £ | 4.25 | – | (34,546 | ) | ||||||
Frits Seegers | |||||||||||||
PSP 2006-2008 | 473,184 | – | £ | 6.30 | – | – | |||||||
PSP 2007-2009 | 409,278 | – | £ | 7.08 | – | – | |||||||
PSP 2008-2010 | – | 1,054,944 | £ | 4.25 | – | – | |||||||
Sharesave | 3,390 | – | – | £ | 4.70 | – | |||||||
ESAS | 231,383 | 125,000 | £ | 4.25 | – | (80,221 | ) |
Changes to Group ChairmanNumbers shown for ESAS above represent provisional allocations that have been awarded. Numbers shown as aggregate ESAS amounts also include shares under option as at 31st December 2008. Nil cost options are normally granted under mandatory ESAS awards at the third anniversary of grant and executive Directors
Marcus Agius was appointed Group Chairman with effect from 1st January 2007.
Marcus Agius receives a feeare exercisable (over initial allocation and two-thirds of £750,000 (inclusive of Director’s fees). He is also eligiblebonus shares) typically for private health insurance.two years. The minimum time commitment is equivalent to 60%aggregate exercise price of a full time role. Marcus Agiusnil cost option is not eligible to participate in Barclays bonus and share incentive plans, nor will he participate in Barclays pension plans or receive any pension contributions. The letter of appointment provides for a notice period of 12 months from Barclays and six months from Marcus Agius.
Naguib Kheraj ceased to be an executive Director on 31st March 2007. Naguib Kheraj was succeeded by Chris Lucas, who was appointed to the position of Group Finance Director with effect from 1st April 2007. The key terms of executive Directors’ service contracts are£1 (further detail is included on page 133.169). At the fifth anniversary of the provisional allocation
Base Salarythe nil cost options normally lapse and the shares under provisional allocation (including bonus shares) are released at the discretion of the ESAS trustee. In 2008, nil cost options were granted to Mr Varley over 91,213 shares. Nil cost options (granted in 2003) lapsed during the year. Mr Varley held 63,447 nil cost options under ESAS as at 1st January 2008, and 146,282 as at 31st December 2008. The first and last exercise dates were 13th March 2006 and 7th March 2010 respectively.
The annual base salaries for the current executive Directors are shown in the table below:
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In respect of John Varley and Chris Lucas, having regard to the levels of salary and total compensation in comparable organisations, the Committee approved an increase to base salary effective from 1st April 2008.
Notes
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| Performance measure | Target | |||
Annual Bonus and ESAS
The maximum bonus opportunity for executive Directors is tailored to the relevant market; this is typically 250% of base salary. The annual bonus is based on a qualitative and quantitative assessment of performance (including EP and PBT results) with the quantitative assessment comprising the majority. EP and PBT are considered to be good measures of value creation for shareholders.
ESAS is a deferred share award plan which operates in conjunction with the annual Barclays Group cash bonus plans (and various other cash long-term incentive plans operated by Barclays Group companies). Currently, for executive Directors, typically 75% of the annual bonus is delivered as cash. A recommendation may be made to the ESAS trustee that the remaining 25% is delivered as an award under ESAS (‘Mandatory ESAS award’).
In addition, executive Directors may request that any cash bonus, to which they may have otherwise become entitled, be granted as an additional award under ESAS (‘Voluntary ESAS award’).
Both Mandatory and Voluntary ESAS awards will normally include additional shares called bonus shares with a value of up to 30% of the bonus amount awarded in shares. The ESAS trustee may apply dividends it receives on shares held in trust in purchasing additional Barclays shares which may also be released to participants.
A Mandatory ESAS award is a provisional allocation of Barclays shares which does not give rise to any right or interest in those shares. Normally, under a Mandatory ESAS award, the ESAS trustee grants participants the right to call for the shares plus two-thirds of any bonus shares, in the form of a nil-cost option following the third anniversary of the award date. If this right is not exercised, the ESAS trustee may, following the fifth anniversary, release all the Barclays shares including all bonus shares and dividend shares to the participant.
Awards under Voluntary ESAS are granted in the form of a nil-cost option which is a right to acquire Barclays shares which will become fully exercisable after five years.
Neither the exercise of nil-cost options granted under Mandatory or Voluntary ESAS nor the release of Barclays shares under award is subject to performance conditions. As ESAS is a deferred share award plan, it would not be appropriate to attach a performance condition to options or awards.
If an executive ceases to be employed he may forfeit his award depending on why he leaves.
PSP
The PSP was approved by shareholders at the 2005 AGM and replaced the ISOP as the main performance linked share incentive plan. PSP awards to date have been granted in the form of provisional allocations of Barclays shares which do not give a participant any right to acquire, or an interest in, shares until such time as the PSP trustee decides to release the shares to the participant (i.e. when the PSP awards vest). Participants do not pay to receive an award or to receive a release of shares. Performance share awards are communicated to participants as an initial allocation. Normally, the maximum expected value of an award at the date of grant will be the higher of 150% of base salary or 75% of base salary and target bonus. ‘Expected value’ is a single value for the award at grant which takes account of the various possible performance and vesting outcomes, although it is Barclays performance over a three-year period which determines the final number of shares that may be released to participants. Dividend shares may also be released in respect of the vested shares.
Awards normally vest on the third anniversary of the date of grant, if and to the extent that the performance conditions are satisfied. Note that:
|
PSP |
| 50% of award calibrated against TSR | 33% of maximum award released | |||
50% of award calibrated against Cumulative EP over the three year performance period |
33% of maximum award released for |
| 50% of award calibrated against TSR | As above | ||||
50% of award calibrated against Cumulative EP over the |
33% of maximum award released for |
2006-2008 | 50% of award calibrated against TSR | As above | ||||
50% of award calibrated against Cumulative EP over the three year performance period | 33% of maximum award released for | |||||
2005-2007 | 100% of award calibrated against TSR | As above |
The peer group for the TSR element of the 2007 award, as for the 2006 award, isa:
162 |
Annual Report 2008 |
For PSP, at the end of each performance period, independent confirmation is provided to the Committee of the extent to which each performance condition has been met. Relative Total Shareholder Return (TSR) and Cumulative Economic Profit (EP) were selected in 2005 as performance measures to support the Group’s long-term goals.
All awards and releases are recommended by the Committee and are subject to trustee discretion.
The trustees may also release dividend shares to participants which represent accumulated dividends (net of withholding) in respect of shares under award.
During 2008 Barclays highest share price was £5.06 and the lowest was £1.27. The share price at year end was £1.53.
Cash released | Market price | Number lapsed in 2008 | Adjustment due to open offer | Adjusted number of shares under award/option at 31st December 2008 (maximum) | Vested number of shares under option | Value of release/ exercise | End of three year PSP performance period, or first exercise/ scheduled release date | Last exercise/ scheduled release date | |||||||||||
– | – | (426,135 | ) | – | – | – | – | 31/12/07 | 16/06/08 | ||||||||||
– | – | – | 12,360 | 473,604 | – | – | 31/12/08 | 21/03/09 | |||||||||||
– | – | – | 13,164 | 504,294 | – | – | 31/12/09 | 22/03/10 | |||||||||||
– | – | – | 21,204 | 812,412 | – | – | 31/12/10 | 20/03/11 | |||||||||||
– | – | – | 24,655 | 944,655 | 944,655 | – | 18/05/03 | 22/03/14 | |||||||||||
– | – | – | 97 | 3,735 | – | – | 01/11/14 | 01/05/15 | |||||||||||
– | £ | 4.56 | – | 12,255 | 469,467 | – | £ | 0.1m | 13/03/06 | 20/03/13 | |||||||||
– | – | (156,249 | ) | – | – | – | – | 31/12/07 | 16/06/08 | ||||||||||
– | – | – | 61,806 | 2,368,014 | – | – | 31/12/08 | 21/03/09 | |||||||||||
– | – | – | 75,138 | 2,878,686 | – | – | 31/12/09 | 22/03/10 | |||||||||||
– | – | – | 53,010 | 2,031,030 | – | �� | – | 31/12/10 | 20/03/11 | ||||||||||
– | – | – | 15,008 | 575,008 | 575,008 | – | 12/03/04 | 22/03/14 | |||||||||||
– | – | (100,000 | ) | – | – | – | – | 14/08/01 | 13/08/08 | ||||||||||
£7.425m | – | – | – | – | – | £ | 7.42m | 06/02/08 | 15/03/08 | ||||||||||
– | – | – | – | 100,000 | 100,000 | – | 26/03/07 | 26/03/14 | |||||||||||
– | £ | 4.56/£4.57 | – | 183,958 | 7,048,112 | – | £ | 9.74m | 28/02/06 | 20/03/13 | |||||||||
– | – | – | 6,666 | 255,396 | – | – | 31/12/09 | 22/03/10 | |||||||||||
– | – | – | 14,136 | 541,608 | – | – | 31/12/10 | 20/03/11 | |||||||||||
– | – | – | 97 | 3,735 | – | – | 01/11/14 | 01/05/15 | |||||||||||
– | £ | 4.45 | – | 2,075 | 79,477 | – | £ | 0.16m | 31/03/08 | 20/03/13 | |||||||||
– | – | – | 12,684 | 485,868 | – | – | 31/12/08 | 04/08/09 | |||||||||||
– | – | – | 10,968 | 420,246 | – | – | 31/12/09 | 22/03/10 | |||||||||||
– | – | – | 28,272 | 1,083,216 | – | – | 31/12/10 | 20/03/11 | |||||||||||
– | – | – | 90 | 3,480 | – | – | 01/11/12 | 01/05/13 | |||||||||||
– | £ | 2.91 | – | 9,550 | 285,712 | – | £ | 0.23m | 29/06/07 | 20/03/13 |
Mr Diamond’s Retained Incentive Opportunity (RIO) reached the end of its performance period on 31st December 2007. Vesting was based on Barclays Capital’s cumulative EP over the three-year performance period (which exceeded the £2bn threshold at which the maximum potential value would vest). This value of the RIO award was awarded 50% in cash and 50% in shares, deferred for one year under ESAS. The ESAS number shown as awarded in the year to
Mr Diamond includes the deferred share element of his Retained Incentive Opportunity (1,631,868 shares). No bonus shares are attributable to this award. The cash release made in the year is also shown in the table above.
Mr Varley and Mr Diamond received 6,047 and 172,264 dividend shares respectively from the ESAS released during the year (share price on release date was £4.56).
TSR Peer group constituents | ||||||||
UK | Mainland Europe | US | Underpin | Actual performance | ||||
HBOS, | ||||||||
HSBC, | ||||||||
Lloyds TSB, | ||||||||
Royal Bank of Scotland | Banco Santander, BBVA, BNP Paribas, Deutsche Bank, UBS | Citigroup, JP Morgan Chase | Cumulative EP over performance period must exceed cumulative EP over previous three years | To be determined at vesting in March 2011 | ||||
– | ||||||||
As above | As above | To be determined | ||||||
– | at vesting in March 2010 | |||||||
As above | As above | Performance condition | ||||||
partially met | ||||||||
– |
The performance scales for the TSR and EP elements of the 2007 award are as shown in the two charts below:
Notes
As above |
As above |
condition not met |
Barclays Annual Report | ||||||
163 |
Corporate governance
Remuneration reportReport
EP comprises profit after taxPensions
Chris Lucas and minority interests lessFrits Seegers receive a capital charge.cash allowance of 25% of salary in lieu of joining a Group pension scheme.
Independent confirmation is provided to the Committee as to whether a performance condition has been met.
Each year a review of the Group’s share-based long-term incentives (currently the PSP) is undertaken to check that the structure and performance conditions remain appropriate in respect of the Group’s business objectives and best market practice. The 2007 review included consideration of eligibility criteria. The outcome of the review was that participation in the PSP should be restricted to executive Directors, members of the Executive Committee, Executive Committee direct reports and other key senior positions. Developing a link to Barclays share price is important and therefore, as individuals below these levels become more highly remunerated, some of their remuneration may be delivered as an award of Barclays shares (to be known as Incentive Shares). Participants would not be eligible for a release of shares until the third anniversary and the release of Incentive Shares would not be subject to performance conditions. It is intended that a new employee share plan will be established under which Incentive Shares will be granted. No Board Directors will be eligible to participate in this plan and awards will be settled using only existing Barclays shares.
ISOP
ISOP (Incentive Share Option Plan) has not been used for awards to executive Directors since 2004. Details of ISOP awards held by executive Directors can be found on page 141. Awards in 2003 and 2004 under ISOP include financial metrics or thresholds which were adjusted where necessary to neutralise the effect of the introduction of IFRS.
The main performance condition was TSR relative to a peer group of 11 other major international banks, combined with an EP threshold. Awards have now vested, as set out in the table on page 141.
Retained Incentive Opportunity
Robert E Diamond Jr received an award in February 2008 under the Retained Incentive Opportunity. This award was subject to performance criteria based on the delivery of EP at Barclays Capital over the period 2005 to 2007. The performance measure applied was cumulative EP performance of Barclays Capital during the period 1st January 2005 to 31st December 2007. In order to achieve the maximum value award under the Retained Incentive Opportunity, Barclays Capital had to successfully generate a cumulative EP of £2bn over the performance period. EP was chosen as this is an appropriate measure to align the interests of the participant with those of shareholders andJohn Varley is a good measuremember of value creation for shareholders.
Details of the award which was made to Robert E Diamond Jr are on page 139.
Sharesave
All eligible employees including executive Directors may participate in Sharesave. Sharesave is an HMRC (Her Majesty’s Revenue and Customs) approved all-employee share option plan. HMRC does not permit performance conditions to be attached to the exercise of Sharesave options. Under Sharesave, participants are granted options over Barclays shares. Each participant may save up to £250 per month to purchase Barclays shares at a discount. For the 2007 grant, the discount was 20% of the market value of a share at the time the option was granted. Sharesave is also offered to employees in Spain and Ireland. Following the 2007 invitation, a total of 40,621 employees in the UK, Spain and Ireland were participants in Sharesave with 72.4 million shares under option. Details of options held by executive Directors are on page 140.
Sharepurchase
Sharepurchase was introduced in January 2002. It is an HMRC approved all-employee share plan. Sharepurchase is open to all eligible employees including executive Directors. Under Sharepurchase, participants are able to purchase up to £1,500 worth of Barclays shares each year, which, if kept in trust for five years, can be withdrawn from Sharepurchase tax-free. Any shares in Sharepurchase will earn dividends in the form of additional shares, which must normally be held by the trustee on behalf of the participant for no less than three years.
To encourage employee ownership of Barclays shares, Barclays matches, share for share, up to the first £600 each participant invests in Sharepurchase in each tax year. Matching shares must normally be held by the trustee on behalf of the participant for no less than three years.
At 31st December 2007, 23,097 employees were participants in Sharepurchase, with a total of 12.9 million shares held on their behalf by the Sharepurchase trustee.
Dilution Limits
The outstanding awards under ISOP and Sharesave are intended to be satisfied by the issue of new Barclays shares or through treasury shares within the limits agreed by shareholders when these plans were approved. These limits comply with the Association of British Insurers’ guidelines restricting dilution from employee share plans. The overall limits under the guidelines are that no more than 10% of a company’s issued share capital may be used in any ten-year period. Up to 5% may be used for executive share plans. Shares in Barclays Global Investors UK Holdings Limited issued as a result of option exercises under the BGI EOP also count towards these limits. As at 31st December 2007, Barclays headroom under these limits, i.e. the amount remaining available for issue, was 4.2% and 1.5% respectively.
Employees’ Benefit Trusts (EBTs)
The trustees of the Barclays EBTs grant awards under ESAS and PSP over existing Barclays shares which they have purchased in the market. The trustees of the Barclays EBTs have informed the Bank that their normal policy is to abstain from voting in respect of the Barclays shares held in trust.
The trustees of the Sharepurchase EBT may vote in respect of Barclays shares held in the Sharepurchase EBT, but only at the direction of the participants. The trustees will not otherwise vote in respect of shares held in the Sharepurchase EBT.
Pensions
All Group pension arrangements are managed in accordance with the Global Retirement Fund Governance Framework to ensure best practice in respect of regulatory compliance, governance, investment and administration. The framework is overseen by the Committee.
Pension benefits for executive Directors are provided through defined benefit plans, defined contribution plans, unfunded unapproved retirement benefit arrangements, cash or a combination of these. The pension benefit applicable will depend on the date an executive Director was appointed and their individual situation. Annual performance related bonuses are not included in pensionable salary.
The Group’s closed UK defined benefit pension scheme. This non-contributory arrangement provides a pension benefit of which John Varley and Gary Hoffman are members, is a non-contributory scheme. Benefits are provided on leaving servicetwo thirds of his pensionable salary at the normal retirement age of 60. Should he retire at 55, an unreduced pension age (60) by reference to the executive Director’s length of service, normally by reference to 1/60th60% of pensionable salary for each year of pensionable service (John Varley’s pension accrual is provided through the scheme in accordance with his service contract as set out in the noteswould be provided. There were no changes to the pensions table on page 136).
pension arrangements for Mr Varley during the year. His increase in pension of £83,000 during the year relates to accrual under the scheme. The Group’s closed UK defined benefit pension arrangementscheme also provides, that,whilst in the event ofemployment, a death before retirement, a cash lump sum of up to four times salary is paid together with ain service dependant’s pension of 50% of the pension that would have been payable if employment had the member remained in active servicecontinued until their normal pension age. For deathMr Varley also has a defined contribution benefit of £549,816 as at 31st December 2008 in retirement,respect of a dependant’s pension is payable of approximately 50% ofprevious transfer from a freestanding AVC.
Robert E Diamond Jr participates in the member’s pension at the date of death, not taking into account commutation of any cash lump sum at the time of the member’s retirement. If a member is granted a deferred pension that has not yet come into payment, the widow/widower receives a pension of 50% of the deferred pension payable. Where applicable, children’s pensions are payable, usually up to the age of 18. Enhanced benefits may be payable if it is determined that a member is unable to work as a result of serious ill-health.
The Group’s US non-contributory defined benefit arrangement, ofarrangements which Robert E Diamond Jr is a member, providesprovide a benefit at age 65 of 1/60th of final average pensionable pay plus 0.3% of final average pensionable pay in excess of the US Internal Revenue Service’s covered compensation limit
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for each year of pensionable service (upup to a maximum of 30 years).years. In line with current market practice, final average pensionable pay in the US includes salary and an element of bonus subjectup to overalla current combined maximum of US$350,000. The benefits are provided through the US defined benefit plan limits. In(a funded arrangement), and the event ofUS Restoration Plan (an unfunded arrangement). The scheme also provides a member’s death before retirement, ain service spouse’s pension of approximately 50% of the member’s pension that would have been payable had the member taken early retirement occurred on the date of death, is payable. On death after retirement, a spouse’s pension of 50% of the pension in payment is payable. In addition, enhanced benefits are payable if the member qualifies for disability benefits.death.
The US Restoration Plan, of which Robert EMr Diamond Jr is also a member, is an unfunded unapproved arrangement which restores reductions in the benefits provided through the approved US plan resulting from the application of relevant compensation and benefit limitations under the US Internal Revenue Code. Robert E Diamond Jr participates in this plan on similar terms to other Barclays senior executives participating in US benefit plans.
Robert E Diamond Jr also participates in the Barclays Bank PLC 401K Thrift Savings Plan and Thrift Restoration Plan, which are both defined contribution plans. The company contributions in 2008 amounted to £11,745 (US$21,859).
Table 5 sets out the pension benefits of the executive Directors.
Pension accrued during the year represents the change in accrued pension during the year (including inflation at the prescribed rate of 5% (U K)). Pensions paid from the UK final salary section of the applicable
fund are reviewed annually and increase by a minimum of the increase in the retail prices index (capped at 5%), subject to the scheme rules.
The transfer values have been calculated in a manner consistent with the Retirement Benefit Scheme – Transfer Values (GN11) published by the Institute of Actuaries, and the Faculty of Actuaries. During 2008, the independent UK Retirement Fund Trustee changed the transfer value basis for all members. The change reflected different mortality assumptions and a lower discount rate. This contributed £1.4m of the increase in transfer value of John Varley’s pension during the year.
Other benefits
Executive Directors are provided with benefits including private medical insurance, life and disability cover, the use of a company-owned vehicle or the cash equivalent, tax advice and accommodation overseas when required for business purposes. These benefits are available on similar terms to othereach executive Director. No Director has an expense allowance.
Shareholding guideline
The Committee guideline that executive Directors should hold, as a minimum, the equivalent of one times their base salary in Barclays senior executivesshares, including shares awarded under ESAS, was met by all executive Directors at 31st December 2007. During the year the Committee increased this guideline to the higher of two times salary or one-third of total remuneration for the last three years. Executive Directors have five years from their appointment to meet this guideline and a reasonable period to build up to the guideline again, if it is not met because of a share price fall. Table 6 shows the executive Directors’ shareholdings. Table 7 shows the indicative change in value of the US.executive Directors’ total share interests during 2008.
Where appropriate, cash allowances are provided
Table 5: Pension provision
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Age at 31st December | Completed years of service | Accrued £000 | Pension accrued during 2008 (including increase for inflation) £000 | Pension accrued during 2008 (excluding inflation) £000 | Accrued December £000 | Transfer value of December £000 | Transfer December £000 | Increase in transfer value during the year £000 | Annual cash in lieu of pension £000 | |||||||||||
John Varley | 52 | 26 | 489 | 83 | 59 | 572 | 9,463 | 12,328 | 2,865 | – | ||||||||||
Robert E Diamon Jr | 57 | 12 | 38 | 7 | 5 | 45 | 214 | 280 | 66 | – | ||||||||||
Chris Lucas | 48 | 1 | – | – | – | – | – | – | – | 159 | ||||||||||
Frits Seegers | 50 | 2 | – | – | – | – | – | – | – | 175 |
Table 6: Interests in shares of Barclays PLC at 31st December 2008 | ||||||||
At 1st January 2008 | At 31st December 2008 | |||||||
Beneficial | Non- beneficial | Beneficial | Non- beneficial | |||||
Executive Directors | ||||||||
John Varley | 470,650 | – | 593,266 | – |
Table 6: Interests in shares of Barclays PLC at 31st December 2008 | |||||||||
At 1st January 2008 | At 31st December 2008 | ||||||||
Beneficial | Non- beneficial | Beneficial | Non- beneficial | ||||||
Robert E Diamond Jr | 3,402,192 | – | 5,866,965 | – | |||||
Chris Lucas | 38,003 | – | 76,038 | – | |||||
Frits Seegers | 699,870 | – | 897,747 | – | |||||
Table 7: Indicative change in value of executive Director total share interests | |||||||||
Indicative £m | Change in holdings £m | Indicative £m | Indicative 2008 £m | ||||||
Executive Directors | |||||||||
John Varley | 7.1 | 1.4 | 2.5 | (6.0 | ) | ||||
Robert E Diamond Jr | 50.9 | 22.3 | 23.5 | (49.7 | ) | ||||
Chris Lucas | 1.0 | 1.0 | 0.7 | (1.3 | ) | ||||
Frits Seegers | 6.2 | 2.6 | 2.8 | (6.0 | ) |
Beneficial interests include shares held either directly, or through a nominee, their spouse, and children under 18. They include any interests held through Sharepurchase. Non-beneficial interests include any
interests in shares where the executive Director holds the legal, but not beneficial interest. In addition to the shares above Mr Diamond also holds 200,000 shares in Barclays Global Investors UK Holdings Limited. Mr Seegers has granted a third party bank security over 896,346 of the ordinary shares he holds. Mr Seegers retains beneficial ownership of these shares. He also holds 1,000 ordinary shares in Absa Group Limited. Note 45 provides further information on Directors and officers shareholdings. There were no changes to the interests of executive Directors in lieushares of being ableBarclays PLC in the period 31st December 2008 to join27th February 2009.
Share interests are beneficial interests plus share plan interests including any initial or provisional allocations and vested awards under ESAS, PSP, ISOP, ESOS and Sharesave.
164 | Barclays Annual Report 2008 |
Performance Linked Remuneration
Each element of remuneration is important and has a Group pension arrangement. Chris Lucas, Naguib Kheraj and Frits Seegers received such cash allowancesspecific role in 2007.
Inachieving the event that an executive Director builds up pension benefits close to, or in excessaims of the HMRC Lifetime Allowance,remuneration policy. The combined potential remuneration from annual performance bonus and PSP outweighs the executive Directorother elements, and is eligiblesubject to opt for a cash allowance insteadpersonal and Group performance, thereby placing the majority of continued pension accrual. The allowance given is no more thanpotential remuneration at risk.
Table 8 shows the costaverage proportions of fundingfixed and variable pay over the existing pension benefit.last three years.
Table 8: Variable remuneration average over the last three years (or since joining) |
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Variable | |||||||||
Fixed | Cash | Shares | |||||||
Executive Directors | |||||||||
John Varley | 57 | % | 19 | % | 24 | % | |||
Robert E Diamond Jr | 2 | % | 39 | % | 59 | % | |||
Chris Lucas | 38 | % | 12 | % | 49 | % | |||
Frits Seegers | 22 | % | 25 | % | 53 | % |
Service ContractsNon-executive Directors
David Booth
Sir Richard Broadbent (Senior Independent Director)
Leigh Clifford
Fulvio Conti
Dr Danie Cronjé (left the Board 24th April 2008)
Professor Dame Sandra Dawson
Sir Andrew Likierman
Sir Michael Rake
Sir Nigel Rudd (Deputy Chairman)
Stephen Russell
Sir John Sunderland
Patience Wheatcroft
Key
OA | Independent on appointment | |
ED | Executive Director | |
I | Independent non-executive Director |
Board Committees
Certain responsibilities of the Board are delegated to Board Committees to assist the Board in carrying out its functions and to ensure independent oversight of internal control and risk management. Membership of Board Committees is recommended to the Board by the Board Corporate Governance and Nominations Committee, which reviews Committee composition and balance regularly to ensure the Committees are refreshed. All members of principal Board Committees are non-executive Directors, although the Chairman is a member of the Board HR and Remuneration Committee. Each Board Committee’s terms of reference set out the specific matters for which delegated authority has been given. These terms of reference, which are available on our website, are reviewed annually.
The Board has delegated authority to four principal Board Committees:
– | Board Audit Committee |
– | Board Risk Committee |
– | Board Corporate Governance and Nominations Committee |
– | Board HR and Remuneration Committee |
The number of meetings held and attendance at the Committee meetings is set out above in ‘Board and Committee Membership and Attendance’. The activities of the Board Committees are set out on the pages 149 to 154.
The terms of reference for each of the principal Board Committees are available from the Corporate Governance section at:www.aboutbarclays.com.
Board Audit Committee
Stephen Russell (Chairman)
Fulvio Conti
Professor Dame Sandra Dawson
Sir Andrew Likierman
Sir Michael Rake
Secretary: Lawrence Dickinson
The Board Audit Committee terms of reference are available from the Corporate Governance section at:www.aboutbarclays.com.
In addition to the members of the Committee, there are a number of regular attendees at each meeting. The Group Chief Executive, Group Finance Director, Barclays Internal Audit Director, Group Risk Director, Group General Counsel and the lead external audit partner normally attend all scheduled Board Audit Committees. The Board Audit Committee members usually meet privately before each meeting to raise any concerns with the Chairman of the meeting and they also meet with the external auditors and the Barclays Internal Audit Director, without management present, at the end of most Committee meetings. Sir Andrew Likierman continues to fulfil his role as the ‘financial expert’ as defined by the US Sarbanes-Oxley Act of 2002 and, as a result of his accountancy background and his career with HM Treasury, has ‘recent and relevant financial experience’ as recommended by the Code. Sir Michael Rake will succeed Stephen Russell as Chairman of the Committee in March 2009. Sir Michael has significant audit experience having worked at KPMG from 1972-2007 where he was Chairman of KPMG International from 2002-2007.
Barclays
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Corporate governance
Corporate governance report
Activities in 2008
Figure 5 illustrates how the Committee allocated its time in 2008. During 2008, the Committee:
– | considered the information it would require during the coming year to enable it to discharge its responsibilities; |
– | considered the significant changes in financial markets and economic conditions and the impact on the areas of focus for the Committee; |
– | reviewed the Annual Report and Accounts and half-year Results and Interim Management Statements; |
– | reviewed in detail the valuations of Barclays Capital’s credit market exposures, reviewing mark-to-market valuations and accounting for derivatives and assessing the overall quality of earnings; |
– | reviewed the Group’s accounting policies and, in particular, the accounting for leveraged loans; |
– | considered control issues of Group |
– | received reports on the |
– | reviewed the effectiveness and independence of the Group
The Committee also received regular updates during 2008 on:
In February 2009, the Committee reviewed its activities in 2008 against its terms of reference and concluded that it had discharged the responsibilities delegated to it under those terms of reference. Approval of financial statements Barclays has a strong governance process in place to support its framework of disclosure controls and procedures. That process, in which the Board Audit Committee plays a key role, is illustrated in Figure 6. The Legal and Technical Review Committee is an accounting, legal and regulatory compliance committee, which is responsible for reviewing the Group’s financial reports and disclosures to ensure that they have been subject to adequate verification and comply with legal and technical requirements. Meetings are attended by the Group’s auditors and US lawyers. The membership of the Disclosure Committee and its role is set out on page 154. The membership of the Executive Committee and its role is set out on pages 153 and 154. This governance process is in place to ensure both management and the Board are given sufficient opportunity to review and challenge the Group’s financial statements and other significant disclosures before they are made public. It also provides assurance for the Group Chief Executive and Group Finance Director when providing certifications as required under the Sarbanes-Oxley Act 2002 and recommended by the Turnbull Guidance on Internal Control. Further details of the Group’s system of internal control and an assessment of its effectiveness may be found on page 173.
Corporate governance Corporate governance report Board Risk Committee Sir Richard Broadbent (Chairman) David Booth Dr Danie Cronjé (to 24th April 2008) Sir Andrew Likierman Stephen Russell Secretary: Lawrence Dickinson The Board Risk Committee terms of reference are available from the Corporate Governance section at:www.aboutbarclays.com. In addition to the Members of the Committee, all meetings are usually attended by the Group Finance Director and Group Risk Director. Barclays Internal Audit Director, Group General Counsel and Barclays external auditor, as well as other senior executives, also attend meetings of the Board Risk Committee, where appropriate. The Board recognises that risk is a key parameter for the business. The Board Risk Committee provides monitoring and oversight of all Barclays risk activities. During 2008, the Committee received presentations and updates on key aspects of the external market conditions to ensure it was able to maintain an appropriate level of oversight and report effectively to the Board. Activities in 2008 The Committee met four times in 2008 and Figure 7 shows how the Committee allocated its time at those meetings. During 2008, the Committee:
In March 2009, the Committee will review its activities in 2008 against its terms of reference. More information on risk management and the internal control framework can be found in the Risk management report on pages 57 to 136.
Board Corporate Governance and Nominations Committee Marcus Agius (Chairman) Sir Richard Broadbent Sir Nigel Rudd Stephen Russell Sir John Sunderland Secretary: Lawrence Dickinson The Board Corporate Governance and Nominations Committee terms of reference are available from the Corporate Governance section at:www.aboutbarclays.com. The meetings are also attended by the Group Chief Executive. Activities in 2008 Figure 8 shows how the Committee allocated its time at its meetings in 2008. During 2008, the Committee:
The Committee also received updates on:
During 2008, the Committee reviewed the composition of the Board and its principal Committees at each of its meetings. Following those deliberations, the Committee recommended to the Board that Sir Michael Rake succeed Stephen Russell as Chairman of the Board Audit Committee with effect from March 2009. No new Directors were appointed to the Board during 2008, other than Sir Michael Rake and Patience Wheatcroft, who joined the Board with effect from 1st January 2008. Given that Sir Nigel Rudd and Professor Dame Sandra Dawson will be retiring from the Board at the 2009 AGM and Stephen Russell will be retiring in October 2009 on completion of nine years’ service, the Committee also discussed both Board size and future Board composition and, in particular, given the continuing crisis in the world financial services industry, the type of skills and experience required in new non-executive Directors. In early 2009, the Committee concluded that a non-executive Director with experience of institutional fund management should be sought and, with the assistance of external search consultants, Simon Fraser was identified as a candidate with the desired experience. He met with members of the Board Corporate Governance & Nominations Committee and his appointment was recommended to the Board, who approved his appointment as a Director. Simon will join the Board on 10th March 2009, subject to regulatory approvals. Pursuant to an agreement entered into between Barclays and China Development Bank (CDB) in August 2007 for the subscription of Barclays ordinary shares, CDB retain the right to nominate a non-executive Director to the Board of Barclays but did not take up this right during 2008. In January 2009, the Committee reviewed its activities in 2008 against its terms of reference and concluded that it had discharged the responsibilities delegated to it under those terms of reference. Board HR and Remuneration Committee Sir Richard Broadbent (Chairman) Marcus Agius Leigh Clifford Sir John Sunderland Secretary: Patrick Gonsalves The Board HR and Remuneration Committee terms of reference are available from the Corporate Governance section at:www.aboutbarclays.com Additional information on the role and activities of the Committee can be found in the Remuneration Report on pages 157 to 173, including the Group’s revised philosophy on remuneration, an explanation of the Group’s remuneration arrangements and a description of the framework for future decisions in this area. Activities in 2008 Figure 9 shows how the Committee allocated its time at its meetings in 2008. The Committee held additional meetings in November 2008 and January 2009, as a result of the rapidly changing economic environment and the intense scrutiny from regulators and other interested parties that the issue of remuneration has received. During 2008 the Committee:
The Committee received valuable support and advice from its independent advisers, Towers Perrin MGMC and Kepler Associates. Management Executive Committee Under the leadership of the Group Chief Executive, the executive Directors are responsible for managing the Group’s business and making and executing operational decisions. The Executive Committee supports the Group Chief Executive and it meets every fortnight to discuss strategy development and policies to recommend to the Board. The Executive Committee is also responsible for implementing approved strategy and is supported by other Committees, including the Disclosure Committee.
Corporate governance Corporate governance report Executive Committee John Varley (Chairman) Bob Diamond Chris Lucas Frits Seegers Disclosure Committee The Disclosure Committee is chaired by Chris Lucas, the Group Finance Director. Members include the Company Secretary, Group General Counsel, Director, Investor Relations, Group Risk Director, Barclays Corporate Affairs Director, Group Financial Controller and Barclays Treasurer. The Committee:
The Committee also considers the content, accuracy and tone of significant other announcements that are proposed to be made in accordance with the FSA’s Disclosure and Transparency Rules. The Committee reports to the Executive Committee and also reports to the Board Audit Committee, documenting its conclusions about the effectiveness of the design and operation of the disclosure controls and procedures. This forms part of the combined assurance given to the Board Audit Committee together with the report on the Turnbull Review of Internal Controls recommended by the Code. Board Effectiveness Performance Review The Code recommends that an evaluation of the effectiveness of the Board and its Committees is conducted annually. The evaluation in 2007 was independently facilitated by Egon Zehnder International. All Directors were sent a questionnaire to complete and return to Egon Zehnder International and these were discussed in individual interviews, which included peer review. The following actions were agreed for 2008:
The 2008 evaluation was again independently facilitated by Egon Zehnder International and took the form of detailed questionnaires, which were completed by each Director, individual interviews and peer evaluation of fellow Directors. As in previous years, the evaluation covered the following areas:
The results of the evaluation were presented to the Board in December 2008. The results from the overall review showed a continuation of the five-year trend of improving scores and the Board concluded that the Board and the principal Board Committees continue to operate effectively in terms of communication, information flows and Directors’ participation and engagement, particularly during the period of difficult market conditions in 2008. The Directors recognised however, and were disappointed, that Group performance has not met shareholder expectations and acknowledged that they are accountable to shareholders for their stewardship of the Group during the exceptional events of 2008. From the results of the 2008 evaluation, action points and issues that were discussed included:
The Board Corporate Governance and Nominations Committee has agreed an action plan to progress improvements in 2009. In terms of individual Director performance, the Group Chairman held private meetings with non-executive Directors in early 2009 so that individual and general results could be discussed. Development plans relating to their own individual performance were agreed. The Senior Independent Director met privately with the other non-executive Directors and the Group Chief Executive to discuss feedback he received on the Group Chairman’s performance. These results were then shared with the Group Chairman. Director Development and Business Awareness A comprehensive development and awareness programme is in place for Directors. This comprises:
Induction All new Directors receive an induction presentation, which explains their responsibilities as a Director of a global, listed company and provides an overview of the Group and its businesses. An information pack, that gives details of the disclosures that Directors are obliged to make to the Company to comply with various laws and regulations, is also provided to each new Director. A personal induction programme is scheduled with each new Director so that they can further acquaint themselves with the Group and its businesses. Each new Director attends sessions with each of the executive Directors and the heads of the main Group functions, which includes opportunities to visit operational sites to meet with senior management and employees. The second part of their induction programme includes additional sessions with the executive Directors and senior managers from each of the Group’s main business units to provide the new Director with detailed and in-depth understanding of those businesses. The sessions focus on the challenges, opportunities and risks that are faced by each business unit. Sir Michael Rake and Patience Wheatcroft undertook their induction programmes during 2008. In 2008, non-executive Directors were asked to complete a questionnaire and give feedback on topics on which they would like to receive additional briefings. Two in-depth briefing sessions were arranged during 2008 on impairment recognition and forecasting and on Barclays Capital’s traded products, including asset-backed securities, credit default swaps and collateralised debt obligations. The Board and the Board Audit and Board Risk Committees received further briefings to ensure they were kept up to date with the changing global economic conditions, including updates on capital management, presentations on asset-backed securities and liquidity risk, mark-to-market valuations and briefing material to support the various capital raising proposals and acquisition of the Lehman Brothers North American businesses. Barclays businesses and operations During 2008, one Board meeting was held off-site. The Board met in China in September and received presentations on the economic and political outlook in China and met key Barclays staff working in the Asia-Pacific region.
Group Chief Executive, John Varley, helped to launch UK National Branch Week by visiting the Coventry High Street branch. During the course of the week, around 400 senior executives from the Group went back to the floor to experience first hand the successes and challenges colleagues in the branches are facing. Each day had a theme including raising the profile of Barclays product range, employee benefits, the importance of customer service, personal development and charity fundraising. A number of Directors participated and worked alongside cashiers, personal bankers and co-ordinators for the day. John Varley also spent time giving presentations to colleagues on the Group’s capital raising proposals. He kept colleagues up to date on how market conditions were affecting Barclays and the decisions the Board was taking in respect of the capital raising options that were available. All colleagues were invited to attend the presentations in person or via conference call and John Varley answered questions raised by colleagues from around the world. External matters Directors are regularly briefed on market opinion and receive copies of analyst research and press commentary. Further briefing material on market conditions was sent to Directors during 2008 and Directors continue to receive relevant publications to keep them up to date with changing market opinion. Directors are invited to attend results presentations to meet with analysts and investors to enhance their awareness of market sentiment. Statement on US Corporate Governance Standards The statement required by NYSE is set out below. Director independence NYSE Rules require the majority of the Board to be independent. The Code requires at least half of the Board (excluding the Chairman) to be independent. The NYSE Rules contain detailed tests for determining whether a Director is independent, whereas the Code requires the Board to determine whether each Director is independent in character and judgement and sets out criteria that may be relevant to that determination. We follow the Code’s recommendations as well as developing best practices among other UK public companies. The independence of our non-executive Directors is reviewed by the Board on an annual basis and it takes into account the guidance in the Code and the criteria we have established for determining independence, which are described on pages 147 and 148. Board Committees We have a Board Corporate Governance and Nominations Committee and a Board HR and Remuneration (rather than Compensation) Committee, both of which are broadly similar in purpose and constitution to the Committees required by the NYSE Rules and whose terms of reference comply with the Code’s requirements. As the Group Chairman was independent on appointment, the Code permits him to chair the Board Corporate Governance and Nominations Committee and be a member of the Board HR and Remuneration Committee. Except for these appointments, both Committees are composed solely of non-executive Directors, whom the Board has determined to be independent. We follow the Code recommendation that a majority of the Nominations Committee should be independent non-executive Directors, whereas the NYSE Rules state that the Committee must be composed entirely of independent Directors. We comply with the NYSE Rules regarding the obligation to have a Board Audit Committee that meets the requirements of Rule 10A-3 of the US Securities Exchange Act, including the requirements relating to the independence of Committee members. In April 2008, we made an Annual Written Affirmation of our compliance with these requirements to the NYSE. The Code also requires us to have a Board Audit Committee comprised solely of independent non-executive Directors. However, we follow the Code recommendations, rather than the NYSE Rules regarding the responsibilities of the Board Audit Committee, although both are broadly comparable. We also have a Board Risk Committee, comprised of independent non-executive Directors, which considers and discusses policies with respect to risk assessment and risk management. Corporate Governance Guidelines The NYSE Rules require domestic US companies to adopt and disclose corporate governance guidelines. There is no equivalent recommendation in the Code but the Board Corporate Governance and Nominations Committee has developed corporate governance guidelines, ‘Corporate Governance in Barclays’, which have been approved and adopted by the Board. Code of Ethics The NYSE Rules require that domestic US companies adopt and disclose a code of business conduct and ethics for Directors, officers and employees. Rather than a single consolidated code as envisaged in the NYSE Rules, we have a number of ‘values based’ business conduct and ethics policies which apply to all employees. In addition, we have adopted a Code of Ethics for the Group Chief Executive and senior financial officers as required by the US Securities and Exchange Commission. Shareholder approval of equity-compensation plans The NYSE listing standards require that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions to those plans. We comply with UK requirements, which are similar to the NYSE standards. However, the Board does not explicitly take into consideration the NYSE’s detailed definition of what are considered ‘material revisions’. Relations with Shareholders Institutional investors A key priority for the Board in 2008 was communicating with shareholders, particularly ahead of the General Meeting in November 2008, and also afterwards in order to provide further details to shareholders on the key decision points during the capital raising process. In the normal course of events, the Board aims to keep shareholders up to date and informed about how the Company is performing and its strategy, whilst ensuring that it listens to the opinions of major shareholders and takes their views on board. Executive Directors and senior executives hold group and one to one meetings with major investors to ensure we are communicating effectively. Analyst research notes are distributed to Directors and our corporate brokers provide regular feedback to the Board. The Investor Relations team organise roadshows, seminars, conferences, presentations and other activities that enable the Directors to interact with investors. The Group Chairman, Senior Independent Director and Company Secretary conduct a series of meetings with the corporate governance representatives of our major institutional shareholders ahead of each AGM. Meetings were held with our major institutional shareholders to discuss the capital raising proposals. Private shareholders The Board has also tried to keep private shareholders up to date with information about the capital raising proposals during 2008. In June 2008, the Group Chairman sent a letter to shareholders regarding the Open Offer, which took place in July. Personalised forms were also sent to shareholders with a question and answer booklet to help explain the details of the Open Offer and how to complete the forms. Further documents were available on the Group’s website and sent to shareholders on request. In November, the Group Chairman sent a letter to shareholders and Notice of General Meeting, which set out the details of the Capital Raising that required shareholder approval. A follow-up letter was also sent to shareholders to inform them of developments and to advise shareholders that all Directors would offer themselves for re-election at the 2009 AGM and that the executive Directors had all agreed to waive their bonus for 2008. An open letter to shareholders, clients, customers and colleagues from the Group Chairman and Group Chief Executive was released to the London Stock Exchange on 26th January 2009 ahead of the publication of the annual results announcement on 9th February 2009. The change in the law that allows us to communicate electronically with shareholders has enabled us to use less paper, which benefits the environment and lowers distribution costs for the Group. All shareholder documents are available electronically as soon as they are published but shareholders can still receive communications in paper format if they wish. This year we will continue to post the Annual Review, Notice of Meeting and proxy forms to all shareholders. We encourage shareholders to hold their shares in Barclays Sharestore, where shares are held electronically in a cost-effective and secure environment. Shareholders can use our e-view service to receive their shareholder documents electronically and they can also use this service to get immediate access to information relating to their personal shareholding and dividend history. E-view participants can also change their details and dividend mandates online and receive dividend tax vouchers electronically.
Corporate governance Corporate governance report Annual General Meeting/General Meeting The 2008 AGM was held on 24th April 2008 at The Queen Elizabeth II Conference Centre in London. In accordance with best practice, all resolutions were considered on a poll and the results were made available on our website the same day. 52.9% of the shares in issue were voted and all resolutions were approved. All Directors are encouraged to attend the AGM and are available to answer shareholder questions. All Directors attended the 2008 AGM, with the exception of Dr Danie Cronjé, who was retiring from the Board on that day. A class meeting of ordinary shareholders was also held on 24th April 2008 for shareholders to consider the resolution of the AGM that created new preference share classes. 50.5% of the shares in issue were voted and the resolution was approved by shareholders. A general meeting (GM) was held on 24th November 2008, at ExCel London, where shareholders were asked to approve resolutions in connection with the Capital Raising proposals. 60.8% of the shares in issue were voted on a poll and all resolutions were approved. The results of the poll were made available on our website on the same day. The Group Chairman, all of the executive Directors and four non-executive Directors, including the Senior Independent Director, Deputy Chairman and Board Audit Committee Chairman, attended the GM. The 2009 AGM will be held on 23rd April 2009 at The Queen Elizabeth II Conference Centre in London. The Notice of Meeting is enclosed with this Annual Report as a separate document. The resolutions will be considered on a poll and the results will be available on our website on 23rd April 2009. Signed on behalf of the Board Marcus Agius Group Chairman 5th March 2009
Remuneration Report Statement from the Chairman of the Board HR and Remuneration Committee Context The disruption in the capital markets that commenced in 2007 deepened in 2008 resulting in one of the most challenging years ever for the global financial services sector. As 2008 closed it was clear that the depth of the financial crisis was so severe that a significant global economic downturn was unavoidable. The extent to which remuneration structures may have played a role in contributing to the financial crisis was still being debated and under scrutiny as this statement was written. Whatever outcomes prevail it is certain the remuneration structures will be different in the future. As a consequence of events, the Committee commenced its deliberations for the 2008 performance year earlier than usual and met more times than is typical. The agenda rapidly developed into two work streams: first, the immediate decisions for 2008; and, second, the long-term shape of remuneration. Work continues on the latter and will extend into 2009. Our guiding principle throughout all decisions has been ‘pay for performance’. 2008 Barclays delivered profit of £6,077m, 14% lower than 2007. Although profitability, on an absolute and relative basis, compares favourably across the sector, several features of performance resulted in a more severe reduction in variable remuneration:
The variable pay for the Group reduced 48% relative to 2007. Accountability rests at the most senior levels and key factors relating to executive Directors include:
An assessment of Barclays remuneration structures and how well the calibration had worked during this stressed period shows significant alignment with shareholders:
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