Barrett rides the rate cycle

THE biggest development at Barclays in 2001 was the sharp increase in the bank's provisions against bad and doubtful debts. These are up 35% to £1.2bn. But, in the context of the group's results, this hardly matters since profits before tax are 9% higher at £3.6bn.

So how did chief executive Matt Barrett achieve this miracle in what has broadly been a disastrous year for the world economy and corporate Britain?

As we know, 2001 was a buoyant year for Britain's consumers. Barclays' investment in capturing ever-greater shares of the personal banking market is paying off, with Woolwich and Barclaycard chipping in strongly.

Against all the odds, in a year when investment banking struggled and equity prices fell around the world, Barclays Capital (the fixed interest arm) and Barclays Global Investors (its asset management company) also performed better than expected.

To understand how banks can ride the economic cycle, all one has to do is look at the interest rate spread - the difference between what Barclays pays its depositors and the interest rate it charges customers. Barclays says this narrowed to 2.53% over the financial year from 2.6% in 2000.

Over the same 12 months, however, the Bank of England's base rate dropped from 6% to 4%, which meant that, as the year went by, Barclays paid progressively less for its deposits.

In other words, it passed only a minuscule amount of the interest rate cuts on to customers and instead took the chance to raise its profits. Interest rate income rose by just under £1bn to £6.1bn, as a result of the bank's ability to maintain margins while putting on new business.

It is better if banks do report strong profits in hard times, since no one wants to be a shareholder or depositor in a bank that has insufficient capital to withstand the whirlwind.

It is nevertheless clear that Barclays, through its domination of the credit card business at Barclaycard, does let inertia rule and passes on the minimum of interest rate cuts to its customers. Only in the mortgage market, where there are so many more players, has genuine price competition developed.

In a weaker bank, there would be worries about the rise in provisions. Barclays acknowledges that the larger part of the higher provisions are in business banking and Barclays Capital, reflecting the difficulties in the manufacturing sector and the deterioration in international loan quality as seen at Enron and elsewhere.

Barclays prides itself on having seen the Argentine crisis coming and run down its exposure. This is another case of the pass-the-parcel finance of which Sir Howard Davies of the Financial Services Authority recently warned.

The buck may not stop with Barclays, but there should be no mistake, it will be landing at an insurance group or investment bank near you.

Shareholders can be grateful to Barrett. He has brought a degree of order where there was chaos and managed to make some of the lesser parts of the business perform better. With a bit of luck, the impending share split will help to keep the stock attractive to ordinary investors.

Marshall law
THE last time that an FTSE board of directors went to the trouble of putting out a statement reiterating its confidence in the chairman and denying that a search was on for a replacement was last spring when Sir Iain Vallance was under fire at British Telecom.

Within weeks, Vallance, though not due to retire until July 2002, was on his way out and Sir Christopher Bland was bustling around BT's City headquarters demanding change at all levels.

It is now Lord Marshall, the executioner-in-chief at BT and also at Invensys, who finds himself under pressure. BA insists that shareholders have not expressed any disquiet to them and that all the executive and non-executive directors (bar one who could not be reached) are behind the latest statement of 'confidence and support' for Marshall. The £250,000-a-year BA non-executive chairman plans to hang on to July 2004, when he will be 70.

Watchers of the industry must be wondering why he is going so soon. His illustrious predecessor, Lord King - Mrs Thatcher's favourite businessman - managed to hang on in the chair at BA until he was 75. So Marshall is a mere stripling in the post.

Shareholders nursing enormous losses can console themselves with the thought that Marshall's fee as chairman, his various BA pensions and free first-class travel rights around the world remain intact. What could be more agreeable?