Summary

What should Barclays do to regain its glory?Pramod Jindal

MBA Candidate 2013pramod.jindal13@rotman.utoronto.ca

001 647 773 4032

Barclays is a major global financial service provider

• Barclays is a major global financial services provider engaged in retail banking, credit cards, corporate and investment banking and wealth management with an extensive international presence.

• Listed on NYSE (BCS- ADR) and LON (BARC)• Consistently in news for LIBOR and PPI scandals

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Total Revenue $48 B

Net Income $4.6 B

Market Cap $52 B

Core Tier 1 Ratio 11%

Return on Equity 5.8%

No of Employees 141,000

No of Countries 58

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Barclays PLC’s eight business segments contributed net revenues of $48 billion in 2011

• PPI policies have been sold alongside loans to repay people's borrowings if their income fell because of illness or unemployment

• PPI profit margins 85% (higher than home or car insurance) and Banks aggressively mis-sold these expensive, inefficient and ineffective policies

• May 2011, court ruled that customers could claim compensation on PPI policies dating back many years. This was expected to allow 3 million people to make claims totalling £4.5 B, but now expected to be about £10 B

• In Oct 2012, Barclays sets aside £700 M apart from £1.3B provisioned already

• By Oct 2012, Barclays had received 19,522 claims(highest in UK) followed by Lloyd’s 9,493

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Payment Protection Insurance (PPI) Scandal

London Interbank Offered Rate (LIBOR) Scandal

• LIBOR is the rate at which banks lend to each other in London

• Used to price financial instruments worth over $350 T

• A crucial indicator of the creditworthiness and liquidity of the banks

• Managed and calculated by British Banker’s Association(BBA), a self-regulated trade union

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Average of the

remaining rates = LIBOR

Submissions arrive at an undisclosed location of Thompson

ReutersBritish

Banker’s Association

representative removes the

highs and lows (outliers)

Banks submit the inter-bank borrowing

rates

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Reported launch of

investigations by SEC, US

Dept. of Justice, CFTC

Concerns raised whether

submissions for LIBOR truly reflected

bank borrowing costs

The WSJ published that submissions for LIBOR

were significantly below than those for Credit-

default insurance

BARC agreed to $453M

settlement with CFTC, US DOJ and UK FSA

Nov 2007 May 2008 March 2011 June 2012 Dec 2012

UBS agreed to $1.5 B

settlement with CFTC, US DOJ,

UK FSA and SWISS FMSA

LIBOR Scandal: A Chronology

“I am sorry. I am disappointed and I am angry. There was absolutely no need for the behavior that was exhibited”Bob Diamond, Former Barclays CEO to UK Parliament

“Barclays has gone from heroes to zeroes”Tim Peat, Managing Director, Barclays

“Barclays falsely reported the rates and the reported rates had a pervasive pattern” Gary Gelsner, Chairman, Commodities Futures Trading Commission

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• Multiple law-suits and investigations in over 7 countries for 20+ banks

• LIBOR oversight handed to UK FSA

• Questions raised over

• Integrity, ethics of banking and capital markets

• Self regulation

• Role of regulators and Bank of England

• Aggressive culture of risk taking

• Credibility of financial system

• Bloomberg CEO Dan Doctoroff pitched to the European Parliament to develop BIOR (Bloomberg Interbank Offered Rate) that would use data from transactions such as market-based quotes for CDS transactions and corporate bonds

• YouGov Poll: 70% of the pollsters thought banks were driven by greed, while half of those questioned agreed that British banks had lower ethical standards than other major UK businesses such as manufacturers, pharmaceutical or retailers

Fallouts of LIBOR Scandal on Banking Industry

• CEO Bob Diamond and Chairman Marcus Agius forced to resign

• Fine of $453M (about 10% of annual profits)

• $4.5B of market cap erased after Barclays admitted to wrongdoings

• YouGov Poll

• Barclays brand suffered more harm than oil company BP did for the 2010 Gulf of Mexico oil spill

• 12% of Barclays customers polled were considering moving their main current account to another bank

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Fallouts of LIBOR Scandal on Barclays

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Reasons cited for scandals

Reliance on bailouts

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Or the reasons not cited?

Risk taking

mentality

Capital market= senior

management

Inheritance of a failed

(Lehman) culture

Structured to promote risk

taking

Insane performance

targets

Too big to manage

Ineffective Risk Management

Huge reliance on

capital markets

Porous Chinese

Walls

• Disappointing empirical evidence for banks– Most financial institutions caught in scandals have disappeared

(Barings Bank, Lehman Brothers, Drexel Burnham etc.)

• However, most major British banks have been engaged some sort of scandals (NatWest/Royal Bank of Scotland: serious computer glitches, HSBC: money laundering , JP Morgan: London Whale, Lloyds: employee fraud)

• There exist non-financial firms that were able to earn back the lost glory by fixing the core problem and not resorting to cosmetic changes– Maple Leaf Foods (Listeria breakout)– Dow Chemical (Bhopal gas tragedy)– Shell Oil (Brent spar)– BP (Gulf of Mexico spill)

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How can Barclays rebuild itself?

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Integrative solution to business problem

Changing hiring

strategies

Retail bankers to occupy senior

positions

Promoting risk-averse and

conservative culture

Include liabilities clause

Align employees’ goals with the

bank’s

Improve transparency,

visibility, accountability

and oversight in business lines

Capping prop trading

Payback BOE FLS funds

Effective Chinese walls

Embrace BASEL III & Dodd Frank

Capping Capital Market business

Leadership training for senior managers

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• Context: Barclays’s reputation has been tarnished by PPI and LIBOR scandals• Problem Statement: What should Barclays do to regain its glory?• Proposed solution: Barclays needs to address core business issues and not

resort to cosmetic changes• Major Insights

– Most financial institutions caught in scandals either didn’t survive or continue to suffer– Barclays is not the only British Bank facing the issue– Multiple examples of non-financial companies winning back the reputation by addressing

core problems– Barclays can stage a timely comeback through execution of the integrative solution

Summary