The Business Of

Banking | Barclays | What Are Their Margins?

Morning All!

So, yesterday we dug into how Barclays makes money. And we saw that Barclays’ largest revenue generator is ‘net interest income’. We saw that the bank had £546bn in deposits in 2022 and gave 73% of those deposits out as loans. And we saw that the interest rate Barclays received on those loans was considerably higher than the interest rate they paid on their deposits. Which is absolutely vital for any bank to make money!

But that’s enough with revenues. Today, let’s turn our attention to costs and look at what costs are involved in Barclays’ business model! Let’s start with a split of Barclays’ cost structure in 2022.

And from looking at the chart, it appears to be a similar story to Goldman. Just over half of Barclays costs are its people! However, as we’ll see in just a moment, it’s not quiteee the same as what we saw at Goldman. So, without further ado, let’s dive in!

More Employees, But Less Pay Per Employee!

Okay, so let’s talk about salaries and bonuses. And I know what you’re thinking. At Goldman Sachs we saw the average employee expense/employee was a mammoth $312k. I’ve just told you that Barclays spend even more of their revenue on staff. So Barclays are going to have a similarly mammoth staff costs/employee ratio… right?

Well, not quite! As we can see from the chart below, Barclays’s staff costs per employee (blue line) was ‘only’ £106k in 2022. Quite a way behind the $312k we saw at Goldman. And actually, this difference is one of the smallest it’s ever been! Back in 2007, pre-GFC, Barclays spent on average £56k/employee. Whilst Goldman were dishing out $569k!

So, what’s going on here? Are Barclays M&A bankers and ECM bankers getting paid substantially less than their Goldman peers? Well, no that’s not what’s happening! Barclays investment bankers will be getting paid a very similar amount to what Goldman investment bankers get paid. The real difference here is that the majority of Goldman’s employees are on investment banking-style wages. Whilst a much smaller proportion of Barclays employees are!

What do I mean? Well, Barclays had ~87k employees in 2022 (vs ~49k for Goldman). And a whopping ~20k of them were in India – of which a vast majority will be call centre workers! Remember, whilst Goldman Sachs does predominantly investment banking, market making and asset management. Barclays does a lot of retail banking… and this involves a lot of customer service! Setting up accounts for customers, providing assistance for the customers who’ve forgotten their password, guiding the customers who don’t know how to find their bank statements, etc, etc.

However, despite having to deal with us customers who can’t remember our passwords, do these call centre workers get paid like investment bankers? Unfortunately not! As the screenshot below indicates, the average UK call centre worker at Barclays makes ~£18-25k per year.

So, to sum up - why is Goldman’s staff costs/employee so much higher than Barclays? Because (i) Barclays have lots more employees due of the higher level of customer support needed, and (ii) these employees are paid far less than what their investment banking counterparts make! Let’s move on!

Less Branch, More Cloud

Alrighty, so we’ve looked at employee costs. The next cost line we’ll look at is what Barclays call infrastructure costs. And there’s two main types of ‘infrastructure’ – physical infrastructure (e.g. buildings) and digital infrastructure (e.g. the cloud and other funky things). Let’s start off by looking at the less funky side – the buildings!

Okay, so to get us started, let’s compare Barclays’ physical infrastructure with Goldman’s. In 2022, Goldman Sachs had ~60 offices globally. And the company’s retail bank, Marcus, was purely online – there were no physical branches. Whereas, when it comes to Barclays, there are plenty of branches! If you’re a Barclays customer, I’m sure you would’ve been in one of the branches pictured below!

Now, the interesting thing to note here is that these branches are becoming less and less useful. Because whilst I just said that most Barclays’ customers will have been in a Barclays branch… I’m a Barclays customer and I can’t remember the last time I was in a Barclays branch! There’s just no need anymore! If I want to get my bank statement, I can get it sent to my email. If I want a loan, I can apply for it through the Barclays website. And if I have an urgent request, I can ask a Barclays call centre worker via video chat!

So, what has this meant for branches? Well, it’s meant a huge reduction in them! As the chart below shows, the number of Barclays branches in the UK has absolutely plummeted from 2,061 branches in 2004 to 481 branches in 2022! A 77% drop!

Now I know what you’re thinking. 77% less branches. That must be so much money saved on rent, utilities, etc. Infrastructure costs must have dropped loads! Well, whilst that would be a good guess, that’s not quite what’s happened.

As the chart below shows us, despite the declining number of branches, Barclays’ infrastructure costs has stubbornly stayed at ~14% of revenue over the last 10 years.

And the reason for this is because whilst physical infrastructure costs are on the decline, digital infrastructure costs are on the rise! Barclays, like other banks, have been investing more and more of their money into making sure that their digital services are secure (check out this article on cybersecurity) and cost-effective (check out this article on cloud investments).

I won’t go into too much depth on these tech components. For those interested, I recommend giving those articles a read. Let’s crack on!

Naughty, Naughty!

Alrighty, the final cost I want to look before we wrap up is litigation and conduct costs. Now, like we saw in the US pharmaceutical industry, banks do occasionally get themselves into a bit of hot water…

In 2015, Barclays found themselves in quite a lot of hot water as they were caught up in a FX manipulation scandal. The bank was fined a whopping $2.4 billion! 8 employees were fired. And other banks like JP Morgan, Citi and UBS were also caught up in the case too. To read more about the scandal, you can check out this article!

And then in 2018, Barclays agreed pay a ~£2 billion settlement for the inappropriate sale of mortgage backed securities back during the global financial crisis. Now, £2 billion is a lot of money. To put it into context, Barclays’ revenues in 2018 were ~£21bn, so that £2bn fine wiped out ~10% of revenues!

Now, I just want to reiterate, litigation and conduct costs aren’t limited to Barclays. Pretty much every bank has had run ins with the regulators. And this link here shows you some of the biggest fines ever dished up to banks by regulators over the years! That mortgage backed securities debacle during the global financial crisis appears a few times on that list!

Credit Impairments Driving Profitability!

Alright, so to wrap up, let’s look at what Barclays’ EBT margin looks like after we take into account all those costs we just saw. And from the chart below, we can see that things look pretty good for Barclays in 2022. The bank had a solid 28% EBT margin and it’s been on a steady rise since 2012.

But I have a question – what caused margins to fall so much during 2007-2012? And then pick up again so much since then?

Well, there’s a couple of reasons. But the main factor was the huge rise in credit impairments that Barclays had from 2007-2012. And we mentioned this last series when we looked at The Business Of Credit Cards. When credit card holders default on their credit card loans, who ends up being huge losers from this? The credit card issuers! Because sometimes, they’re not able to recover any of what the credit card holder owes them.

And this is what happened to Barclays post the global financial crisis in 2007-08. A huge proportion of the loans they gave to customers (both mortgages and credit card loans) were unable to be paid back as the economy went into a recession and people lost their jobs. And this meant Barclays had to take huge losses on these loans!

The chart below shows us how credit impairments fluctuated as a % of revenue between 2004-2022! And we can see a strong correlation between this chart and the EBT margin chart earlier. During 2007-2012, when credit impairments were very high, EBT margin was low. And as credit impairments have died down again, the EBT margin has risen (except the COVID year!)

Okay, so very last thing for today. And this is something that I said we’d cover 2 weeks ago! It’s the question of – why are we looking at EBT (Earnings Before Tax) margin for Goldman Sachs and Barclays and not EBIT (Earnings Before Interest and Tax) margin like we have for every other company on TBO?

Well, let’s think about it. EBIT margin is another word for operating margin – the kind of profitability a business can achieve after we account for their operating costs. And for most businesses, we don’t include interest in these calculations because interest isn’t a part of their operations. For example, Netflix have debt that they pay interest on. But this debt isn’t a part of Netflix’s operations, it’s a part of how they finance their operations. Whereas for Barclays, interest is a part of their operations! We saw yesterday, that interest expense, interest income, and thus net interest income, were a huge part of Barclays operations! And so, because interest is so important for banks, (and is a part of their operations), the usual practice is to look at their EBT margin rather than their EBIT margin. Hope that makes sense!

8th Nov 2023

Nigel Jacob CFA