Jermey Warner's Outlook: Barclays strikes more upbeat message

A challenge too far for Carr at Cadbury?; Jack Lyons? Dead? Surely not; Measured response from Darling
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The Independent Online

Don't believe all the doom and gloom you read in the press on the future of banking and the economy. That's the message from John Varley, chief executive of Barclays. Despite the sub-prime meltdown, profits at Britain's third largest bank remain relatively buoyant with the outlook, though not exactly upbeat, characterised as a good deal better than the bombed-out share price would suggest.

Mr Varley doesn't want to be seen as having his head buried in the sand. The banking sector remains in a thick fog of uncertainty, with still acute shortages of liquidity and confidence at rock bottom. Yet people are still borrowing and spending, the corporate sector by the standards of past downturns is in fine fettle, and stock market concern over capital adequacy and earnings sustainability seem to him to be overdone.

To underline the point, Mr Varley committed himself to an average annual rate of growth over the next four years in economic profit – that is profits after the cost of capital, risk and acquired goodwill – of 5 to 10 per cent. That doesn't mean he'll achieve such a target this year. Even his ever optimistic lieutenant at Barclays Capital, Bob Diamond, would find that a big ask. But though the goal is challenging, he believes it should be possible to make up for any shortfall later on as the banking system recovers.

In the meantime, Barclays is upping the dividend, and sees in the current turbulence excellent opportunities for bolt-on acquisitions achieved at knockdown prices. These aren't the remarks and actions of a chief executive who thinks that any time soon he's going to have to hand round the begging bowl for more capital. To the contrary, Mr Varley believes he's already got all the capital he needs for planned balance-sheet growth.

Are these reassuring noises, which are likely to be repeated by Royal Bank of Scotland when it announces results next week, going to convince investors? Mr Varley thinks three things need to happen before confidence is restored to the banking sector, allowing share prices to recover.

One is greater clarity of writedowns, which should be delivered by the current reporting season. A second is improved liquidity, which has again deteriorated in recent weeks and may need to be addressed with further central bank action. A third is to find a long-term solution to the monolines, the bond insurers whose parlous state hangs like a dark cloud over large parts of the credit markets.

As for capital, Mr Varley points out that his tier-one ratio is actually higher than it was a year ago at 7.8 per cent, despite a 20 per cent growth in weighted assets. At 5.1 per cent, the closely watched core equity ratio is only marginally below target and well above regulatory minimums.

Tangible equity to assets is below the level regarded as safe in the US, but Mr Varley argues the measure is largely irrelevant to Barclays and anyway will quite rapidly be restored through normal cash flows. The body language is not that of a man who feels under any kind of regulat-ory pressure to raise more capital. Either Mr Varley is living on planet Zog, or the markets have got it completely wrong on Barclays. We'll see.

A challenge too far for Carr at Cadbury?

Raised eyebrows in the City over the decision to anoint Roger Carr as the next chairman of Cadbury Schweppes. Given the recent disaster of Mitchells & Butlers, brought low by financial engineering gone wrong, this might not have seemed like the best of times to be giving him yet another FTSE 100 chairmanship.

Mitchells & Butlers is, of course, no longer in the FTSE 100, having been booted out as a result of the hedging disaster – and in any case, Mr Carr intends to stand down from the pubs and restaurants group as soon as the strategic review is complete in May – but Centrica, where Mr Carr is also chairman, very much is.

Under the combined code, you were not meant to hold down two FTSE 100 chairmanships simultaneously. This may always have been an unduly prescriptive arrangement, so much so that the Financial Reporting Council recently bowed to pressure to have it dropped, yet it was there for a purpose in that maintaining good governance and an orderly ship might seem challenging enough even when the charge is just one FTSE 100 company, let alone two. The Mitchells & Butlers fiasco seems rather to prove the point.

Subsequent to the M&B meltdown, Cadbury took soundings from its top 10 shareholders to gauge Mr Carr's continued acceptability and only one raised possible concerns. This was not about Mr Carr's suitability as such, but rather to question whether it was appropriate to appoint him so soon after the lambasting he had received over M&B.

There are plenty of challenges to address at Cadbury too. Some shareholders are still decidedly grumpy over the company's failure to act in time to take advantage of the boom in private equity last year and offload its US drinks business for a bumper price.

With credit conditions now much tougher, the company is being forced to go the less immediately value-creative route of a simple demerger. Tougher credit conditions also mean less room for balance-sheet leverage, putting paid to the hoped-for special dividend to accompany the demerger. To cap it all, the reference to margin improvement in yesterday's results was decidedly vague, and has disappointed analysts looking for a more defined progression to the "mid-teens" target of four years out.

Still, at least Cadbury is on an improving trend, with now excellent top-line growth and significant margin enhancement to match, despite its lack of definition. Hershey and Wm Wrigley are going the other way. Can Mr Carr hope to hold down both Centrica and Cadbury? He may eventually have to choose between them.

Jack Lyons? Dead? Surely not

My goodness. Sir Jack Lyons, or just simple Jack Lyons as he became in later years, has died. To believe his lawyers at the Guinness trial nearly two decades ago, he should have been dead for years.

After his conviction for taking part in the Guinness shares fraud, they produced all kinds of medical evidence to show that he was at death's door. It worked. He was the only one of the four on trial that day who wasn't sent to jail.

Mr Lyons – he was later stripped of his knighthood as if this was somehow a greater punishment than imprisonment – was in truth always a minor, bit-part player in the Guinness affair. The police couldn't believe their luck when a knight of the realm cropped up with a cameo part. Yet, like the others, he somehow believed he was above the law and casually stole from the company as if this was everyday practice for the burghers of Campden Hill.

Later, he moved to Florida where, in apparently robust health, he continued to use his title as if nothing had happened. Despite the bladder cancer, respiratory problems, poor heart and high blood pressure complained of at his trial, Mr Lyons eventually lived on into his 90s. Hey ho.

Measured response from Darling

Alistair Darling may have got much wrong over Northern Rock, but one thing he is getting right is his refusal to be bamboozled into an extreme regulatory over-reaction to the current crisis. The response so far to the obvious weaknesses in the system exposed by Northern Rock and the wider problems of credit markets has been relatively measured, and he's resisted wilder calls for the markets to be brought to heel through a regulatory crackdown. It is essential he maintains this stance, and indeed gets this message out to the wider international community.

The Northern Rock debacle has done the City's reputation abroad much harm. The last thing it needs now is a Sarbanes-Oxley-type response. Thankfully, there was no hint of it in yesterday's Bill to nationalise Northern Rock. The powers it gives the Government to intervene in similar circumstances are only a backstop until more satisfactory resolution arrangements are brought in later on.

j.warner@independent.co.uk

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