COMMENT : A watershed in the big banks' thinking
"It is still too early to strike up the band. But there are ever more encouraging signs that the big British clearers really have learned some of the hard lessons of their past profligacies"
Wednesday 09 August 1995
Yesterday, he was able to mark another milestone on the road to recovery with news of a share buy-back. Financially, Barclays is now in such a healthy condition that it can afford to think about shrinking its capital. This is not a phenomenon confined to Barclays, of course. Sir Brian Pitman, chairman of Lloyds, has also referred to the need to do something about the "problem" of excess capital. To a greater or lesser extent, most banks are "suffering" from it.
It is still too early to strike up the band. But there are ever more encouraging signs that the big British clearers really have learned some of the hard lessons of their past profligacies. Even if they wanted to go hell for leather in the lending markets, there are not enough lending opportunities in today's virtuous economic recovery to sustain such a strategy. Banks must therefore learn to burn their money in a different manner.
Barclays may describe its plan for a share buy-back as modest, but there is no doubt that it marks a watershed in big bank management thinking. This is not just because it will be the first by a UK high street bank, but because of the smack of prudent financial management it carries with it. With the notable exception of Lloyds, the big UK banks appear in the past to have found it virtually impossible to resist the lures of letting the good times roll too far and too fast.
These days, the rhetoric is measured, and the emphasis is on quality. Better to let the loan book shrink than risk another bad debt, is the order of the day. New age bankers like Mr Taylor are only part of the explanation. It is also a strategy which is dictated by the times. The banks would find it hard in today's patchy recovery to give free rein to their baser instincts of old.
Nonetheless, the share buy-back marks a turning point in Barclays' affairs. Turning its back on the traditional dash-for-growth approach, the bank has opted for cautious management of its capital, returning some of the surplus to shareholders. That this is through a buy-back rather than a special dividend may be a disappointment to the stock market, but it is of little relevance. Having historically been massive consumers of capital, the banks are turning themselves into generators of it.
Barclays, because it is generating more cash than most of its competitors, is the best placed to adopt this approach. The other major candidate would be the TSB, and Sir Brian Pitman, Lloyds' chairman said recently that his bank may also go down this path.
When Martin Taylor joined Barclays nearly two years ago as chief executive, he proclaimed his intention of breaking the bank out of its boom-to-bust tradition. He seems to be succeeding, but as we all know, getting the ship back on an even keel is one thing; taking it forward once more is another.
More power to the Chancellor's elbow
When the Bundesbank last cut rates at the end of March, it helped stave off a further rise in UK rates by putting an end to the slide in sterling. Now, the smoke signals coming from the German central bank's Frankfurt fortress suggest that further cuts are coming. This will add more power to Kenneth Clarke's elbow; but it won't bring to an end his monthly arm- wrestling with Eddie George over the latter's call for higher rates.
A modest easing in the German repo rate - the rate at which banks bid for central bank funds - is widely expected today. While this is not earth shattering, it will represent the first reduction in rates for four months. There is also increasing confidence that the Bundesbank will move before long to bring down the discount rate as well, if not tomorrow, then in early September. Yet while the prospect of German interest rate cuts may assist the Chancellor, it does not resolve the UK interest rate dilemma.
The latest industrial output figures suggest that GDP may turn out to be stronger in the second quarter than the first estimate. If this is so, it will be an inversion of the outcome for the first quarter, when it turned out to be weaker, as the Chancellor alone predicted.
The impasse between Ken and Eddie looks set to continue until more conclusive evidence about the strength - or weakness - of the economy emerges.
Learning to deal with shareholder muscle
If there was ever a salutary lesson on the dangers of the heavy-handed exercise of shareholder power, then Saatchi & Saatchi - or Cordiant, as we must now call the advertising group - is it. Most of those who participated in the extraordinary series of misjudgements which led to Maurice Saatchi's departure are unrepentant, despite the subsequent loss of shareholder value.
Institutional investors ought to use their votes in the interests of the policy holders and pension contributors they represent, the argument goes. If management is out of line, too high-handed, unresponsive to the concerns of the shareholder, then it is the fiduciary responsibility of investors, particularly large institutional ones, to act. There is a caveat, however, and it concerns those businesses whose assets walk out of the door every night. No business is as dependent on its key managers as advertising. Unlike manufacturing, publishing or even commercial banking, the prospects for an advertising agency are only as good as the contacts, the vision and the imagination of its people.
That is one lesson of the Saatchi and Saatchi affair. As the company's half-year results confirm, Cordiant is not yet out of the woods. When institutional investors helped push Maurice Saatchi out last year, rejecting his demands for a princely remuneration package and criticising his lavish expense account, they pushed the holding company into near-crisis.
Mr Saatchi set up a rival shop, won clients away and extracted a settlement of pounds 3.1m from the hapless Cordiant for himself and other departing executives. Cordiant's share price dropped, revenues declined and margins narrowed.
The lesson is not perhaps a very salubrious one. But it might be better for activist institutions to shy away from volatile, people businesses and concentrate on those where the application of a little pressure is not so powerfully destructive. It may well be that advertising agencies, the ultimate people businesses, are unsuited to public company status.
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