Barclays sails through global storm profitably

PUBLISHED : Monday, 04 October, 2010, 12:00am
UPDATED : Monday, 04 October, 2010, 12:00am

John Varley is a rare species - a banker who for two years declined to take a bonus despite helping his bank to make profits throughout the global financial crisis.

Varley, group chief executive of Barclays, the third-largest bank in Britain, helped steer the lender to a GBP6.1 billion (HK$74.86 billion) pre-tax profit in 2008, followed by a GBP11.64 billion pre-tax profit last year. It reported a combined GBP25 billion profit for the three-year period until the middle of this year.

'Shareholders of many banks, including Barclays, had a hard time as they saw the value of their stocks fall,' said Varley, explaining why he and bank president Bob Diamond decided to give up their bonuses in 2008 and 2009 despite Barclays staying in the black and not needing government help during the crisis. Before the crisis, he had taken a GBP1.425 million bonus in 2007.

'We have to bear in mind the banking industry as a whole made many mistakes leading up to the crisis,' Varley said at the bank's Hong Kong office during a recent visit to the city. 'We wanted to give a clear signal to our shareholders that we understood and recognised that they have had a difficult period. We decided to give up our bonuses.'

But will he give up this year's bonus? 'This year is not yet over,' he quips, adding the board will decide if he is given any bonus.

Born and raised in Britain, Varley was trained as a lawyer but turned to banking in the early 1980s. He joined Barclays in 1982, climbing to chief executive in September 2004. He is no stranger to Hong Kong either, and was based in the city as head of Barclays' then investment banking business from 1989 to 1991 before heading back to London.

The 54-year-old banker and father of two last month declared he would retire next March. Diamond will succeed him. 'In 2003, when I was told I would be the next chief executive of Barclays the following year, I thought seven years would be a sensible term. I decided to step down on my 55th birthday, and I will be 55 in spring next year.'

Varley wants to assure customers that Barclays will not change with the shake-up so he has been touring Hong Kong and the mainland to meet clients. He and Diamond have worked together for a long time and are responsible for the bank's current business strategy that helped maintain the high-growth story even during the global financial crisis.

In 2000-02, the average profit before tax for Barclays was GBP3.25 billion, with most coming from the retail and commercial banking business in Britain. It has since almost doubled to average GBP6.25 billion for the past three years - despite the generally grim global financial scenario.

'We have achieved significant profit growth by diversifying our business lines and geographically over the past seven years,' he says.

The bank has diversified through mergers and acquisitions as well as through organic growth. It took over Lehman Brothers' North American business after Lehman collapsed at the peak of the financial crisis in late 2008. It has also bought into financial companies to expand in African and European markets.

In the first half of this year, only 35 per cent of Barclays' profit came from Britain, compared with 80 per cent in 2000-02. The US, Africa and Asia are its major profit contributors now.

It has also evolved from its traditional retail and commercial banking role to include wealth management and investment banking businesses.

Varley says it was because of this diversification that the bank could protect itself from the financial crisis. 'Such a diversification policy will not change with the change of leadership at Barclays. It is important for our clients to understand our strategy and services won't change.'

Since Diamond is an investment banker, some have speculated that Barclays will eventually focus more on investment banking. But Varley rejects this notion. 'It is wrong to think that Bob's responsibility has been narrow. He has experience and leadership in running different banking businesses lines,' he says.

The bank has also diversified its shareholder base in the past seven years to add more American, Chinese and Japanese investors to its original British shareholder base. Among the list of new shareholders is China Development Bank, which in 2007 took a 3.1 per cent stake in Barclays.

'Some mainland customers put their trust in us because of the alliance with China Development Bank. This relationship is helping Barclays expand in the Chinese market. A global bank can't ignore China. In the Greater China region, we have a headcount of over 1,000. We would like to do more in China.'

During the financial crisis, Barclays laid off thousands of staff worldwide but is now back in a hiring mode. It has 147,000 staff worldwide, higher than the whittled-down staff strength of 143,000 in 2009.

'We have been recruiting again, particularly in Asia and here in Hong Kong, where we are establishing our equity research team, expanding investment banking and our wealth business,' Varley says.

Why did you become a banker?

I studied law and practised for a few years. I did that because I wanted to be a good son. My father was a lawyer and his father was a lawyer. But my heart was never in law. I like the financial world. I joined a merchant bank in the early 1980s and liked it right away.

What are the best and the worst decisions you have ever made?

One of my best decisions was to work outside Britain and take up international roles. I lived in Hong Kong between 1989 and 1991 to look after the Asian business. This was my first leadership role and I enjoyed it. My family loves Hong Kong. Another good decision was when I became chief executive, I made sure I would have as much daily contact as possible with customers, since it is important for me to know what people want. It is also important to let clients know we regard them as important. One of my regrets is that I have not spent enough time in Asia as I went back to Britain after leaving Hong Kong in 1991. Asia was very exciting and I regret not having stayed longer.

What mistakes did banks make that led to the financial crisis?

There was far too much cheap funding and easily available money. There was a great demand on banks to help people find high-yielding products. This led to too much leverage in the industry. The new banking regulation, Basel III, is a very important attempt to prevent the same mistakes from recurring.

Was Barclays' decision to pull back from the ABN Amro takeover in 2007 a stroke of luck or a wise decision?

That wasn't luck. We had our eyes open. We should not fall in love with mergers and acquisitions, we have to keep a very cool head. We were cautious and we decided not to change our bid to win the deal. When bank prices started falling in the latter part of 2007, we decided to pull out.

How did Barclays survive the financial crisis? Did you lose sleep then?

Knowing your risk and managing your risk. We told our colleagues there were three major things they should focus on during the crisis - staying close to customers, managing risks and maintaining strategic momentum. It is all back to basics. I always sleep well.

What is the outlook for the banking industry?

There will be more consolidation. In the US and Europe, the banking industry is fragmented as each has more than 1,000 banks. There is likely to be a lot of consolidation, not least with the internet as a big driver. This provides opportunities for Barclays as we have a trusted brand and physical footprint around the world.

Do you agree governments should force banks to split up to prevent them from becoming too big to fail?

There should be a debate on that. If we look at the past 100 years, there is no evidence of a correlation between the size of a corporate and being too big or too small to fail. In the past 100 years, the more broadly based banks have been able to cope with the stresses and downturns better than narrowly based banks. We think our broadly based model is the right one.

Do you have hobbies?

I like sport, particularly table tennis. I play with my children and my colleagues. I also like bird watching.