Profits down at Barclays, looks to digital and automation to strip out costs

Profile picture for user ddpreez By Derek du Preez April 27, 2016
Interesting times at one of the world’s largest banks. As Barclays plans to sell off its ‘non-core’ assets, it remains focused on cost cutting at the core.

Barclays bank, one of the largest financial institutions in the world, is going through a period of difficult transition as it continues to find its feet following the 2008 financial crisis. As we reported mid-last year, the bank was falling behind its peers and decided to oust then chief executive Antony Jenkins and replace him with American banker Jes Staley.

At the time we noted how Barclays was set to focus on reducing its internal bloat and was likely to begin reducing its headcount by the tens of thousands, through the use of new technologies and automation.

The bank released a weak set of results this week, with profits down year-on-year. But chief executive Staley reaffirmed the banks commitment to cost cutting through the use of digital technologies, alongside the selling off of its non-core assets.

Barclays said that pre-tax profit for the first three months of the year was £793m, down from £1.1bn this time last year.

Earlier this year Barclays split into two core divisions - Barclays UK and Barclays Corporate and International (CI) - following the introduction of new banking regulations to protect consumers. The bank said that these ‘core’ businesses saw profits rise by 18%, but that it’s international ‘non-core’ businesses lost over £800m.

Barclays has plans to sell off these businesses, which are largely based in Europe, Asia and Africa.

However, for the core, the focus is most definitely on stripping out the costs through the use of digital and automation. On a call with analysts this week, Staley and the group’s finance director, Tushar Morzaria, were keen to drive the point home that the business will be unrelenting in its pursuit for lower costs.

More to do

Chief executive Staley told analysts this week that the results reaffirm the bank’s split and that the decision was right to largely focus on the Barclays UK and Barclays CI businesses. He said:

This morning, we have reported the first set of results as a transatlantic consumer corporate and investment bank operating under our new configuration of Barclays UK and Barclays Corporate & International. What they show is that Barclays' core business is performing well, particularly given the current environment.

Our core return on tangible equity is 9.9%. Barclays UK posted an impressive 20.5% return for the first quarter and our businesses, such as consumer, cards & payments and Barclays Corporate International which are exhibiting strong growth. Aggregate performance we're producing today in Barclays core continues to show the potential power of the Group once it is unshackled from the drag of non-core which is what we said on March 1.

Our corporate & investment bank did a very good job on the revenue line in the quarter. In fact, I think we had one of the best performances in the industry year on year. But returns are still not where we want them to be and we need to do more on cost in particular to address this which we will.

However, he added that it was important to note that the “direction of travel on costs in the group continues to be downward”. Staley said that Barclays was on track to meet its guidance for the core business cost of £12.8 billion in 2016 and to achieve the longer term goal of a cost-to-income ratio of below 60%.
Although group finance director Morzaria took the opportunity to say that he was still “not satisfied” with the core cost base and that he would be “pushing hard” to explore all avenues to reduce costs further. Technology will be at the centre of this. He said:

Our strategic cost program has and will continue, to deliver structural cost efficiency across the Group. The increased digitalization and automation of processes, the simplification of platforms and the headcount reduction Jes has mentioned, are examples of the actions we're taking to reduce costs.

Barclays UK's strategic focus on innovation and automation and our market-leading position in digital banking, together with cost synergies from the addition of our UK cards business, will create meaningful opportunities for structural cost reduction.

My take

It’s evident from the results this week that there is still a significant amount of work

Eye in blue close-up with finance concept © Daniele Depascale -
to do at Barclays. A lot of what we have heard from the bank in recent months has focused on stripping out staff and costs through the use of automation and digital. Which, given how slow banks have been to respond to new ways of delivering customer services, could be a good thing for those that bank with them.

However, let’s hope that Barclays recognises that whilst stripping out costs can help the bottom line, it needs to be coupled with executing on a technology strategy that simultaneously improves the customer experience. It’s easier than ever for consumers to switch banks and if Barclays doesn’t recognise what else is happening in digital banking, it may well find that stripping out costs isn’t enough to reverse its fortunes.