There were no nasties lurking in Wednesday’s interim figures beyond the usual parade of provisions, including another £600m for mis-selling payment protection insurance (PPI). This was Barclays’ best half-year for a while. Targets for capital and leverage ratios in 2016 have been reached already. The former chief executive will collect a payoff of at least £2.5m to ease the bruising to his ego but, by the standard of these things, he’s entitled to feel miffed.
A need for greater dynamism was the semi-official explanation for his exit. But, if that’s the path Barclays wants to tread, John McFarlane, newly installed as executive chairman, needs to improve his own game.
He came bearing two ambitions, neither of which could be described as game-changing. The first is to reduce Barclays’ cost-to-income ratio from 70% to the mid-50s. Nice if it happens, but McFarlane offered few details. He expects the number of staff to fall but dodged the questions of where, when and how many. If, instead, higher revenues are supposed to do the hard work, the wait may be long. McFarlane sees some opportunities for “above market” growth but stated plainly: “We are not going to be a growth stock.”
The second ambition is to “accelerate” (a favourite word) the sell-off of non-core assets. These stand at £57bn and the plan is to reduce the figure to £20bn in 2017. Again, that’s fine as far as it goes, but the prices at which the assets depart also matter. A seller in a hurry usually forfeits some negotiating clout.
Meanwhile, the future size of Barclays’ investment bank remains in the air. McFarlane is “very pleased” with its recent progress. On the other hand, he says “it’s not our obligation” to build a European investment banking champion and he agreed that the American titans are eating the Europeans’ lunch. A slimmer Barclays can live on a lower-calorie diet but there’s a danger that, once you’ve retreated from your global ambitions, you end up chasing morsels.
To be fair to McFarlane, he’s been in the executive hot seat for only three weeks, so it would be wrong to expect a fully formed plan to improve shareholders’ lot. Yet the share price has improved 10% since Jenkins’s downfall. Why? Maybe McFarlane’s Scots growl just conveys greater determination than Jenkins’s soporific slogans. Other than that, though, what’s changed?
GSK’s medicine takes effect
In the first five years of Sir Andrew Witty’s reign, GlaxoSmithKline came fourth in a 10-strong Big Pharma club in terms of total returns to shareholders. Over the past 18 months, the company has been bottom of the class.
Last year’s profit warning, which followed a bribery scandal in China, triggered a wider loss of confidence in Witty’s remodelling of GSK. Investors could see, up close, the damaging impact on sales from the arrival of generic competition to its key asthma drug, Advair. But it was harder to believe that a three-part asset shuffle with Novartis could provide compensating growth. Many wondered whether the dividend, the stock’s main appeal, would survive another setback.
Such worries won’t disappear overnight but they look smaller after Wednesday’s first-half numbers. Sales and profits were slightly ahead of City forecasts and Witty can now make the important boast that growth from new pharmaceuticals, meaning those launched in the past three years, are more than offsetting the declines from Advair.
There is also a hint that the product pipeline, containing 40 potential drugs and vaccines in later-stage development, could do better. Witty has announced a research and development event in November, GSK’s first in a decade. One assumes he thinks he’ll have something interesting to say.
If so, 2015 ought to mark a turning point. Earnings per share will be whacked at a “high-teen percentage rate” this year but then it’s supposed to be double-digit increases all the way until 2020. It should be possible: vaccines and consumer products, both boosted by the deals with Novartis, are fundamentally stable. For believers in the dividend, the yield is 5.8%. Not bad.
Christine Lagarde, managing director of the International Monetary Fund, is a politician at heart and may hope to be again. But isn’t the IMF supposed to be a body that believes in market forces?
Instead, Lagarde offered an extraordinarily generous view of the Chinese authorities’ efforts to prop up local share prices on Wednesday. Observers should not be surprised that China wants to prevent “disorderly functioning” of its markets, she said. This, apparently, is “the duty of central authorities”.
Really? China is shovelling state funds into a market where prices are still up 70% year-on-year and the state-owned media is desperately trying to encourage citizens into these dangerous waters. The job of the IMF, surely, is to point out that such measures will only damage outsiders’ long-term confidence in China.
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