Barclays expected to slash bonus pot to a 10-year low

Feb 15 2010 by Peter McCusker, The Journal

THE start of the bank reporting season and more key economic data should leave investors with plenty to ponder this week.

Barclays’ bonus plans have been the source of intense speculation ahead of the bank’s annual figures tomorrow.

It is thought Barclays is preparing to slash the proportion of revenues paid out for pay and bonuses to its lowest level for 10 years. The group is said to be cutting its so-called compensation ratio for 2009 to 38%, down from 44% the previous year.

This is despite expectations for a near-70% leap in pre-tax profits to £10.3bn in 2009.

The banking giant has been a clear UK winner from the financial crisis after avoiding state support and benefiting from the profitability of its Barclays Capital investment banking arm. This division has seen a full year of trading from the US business of bankrupt Lehman Brothers, bought in 2008, as well as Government support measures which boosted investment banking revenues across the board.

Despite the reported drop in compensation ratio, Barclays is likely to take inevitable flak over the size of individual bonuses at BarCap.

There has been political action on both sides of the Atlantic to soothe public outrage in recent months. US banks have led the way by reducing bonuses as a share of revenues.

Barclays has signed up to international G20 rules on pay reforms which recommend clawback clauses and deferral over a number of years.

And in evidence to MPs earlier this week, chief executive John Varley admitted that in future, “we will be judged on two things, one is how we lend and the other is how we pay”.

Barclays’ comments on the UK outlook will also be of interest, after the bank said a recovering global economy would likely see bad debt charges for the year come in lower than forecast.

Impairment losses are expected to be around the bottom end of the range of the £9 to £9.6bn range flagged up by the company. Profits at Barclaycard have also improved despite higher bad debt losses.

An inflation spike above 3% in January is set to trigger a letter from the Bank of England to the Chancellor when official figures are released on Tuesday.

The Bank has warned of a temporary surge in prices due to a return to the 17.5% VAT rate and higher petrol costs.

Governor Mervyn King has indicated that he will have to write to Alistair Darling explaining why inflation rose 1% above target last month.

And in its latest inflation report, the Bank warned consumer prices could rise further – up to 3.5% – before falling below the 2% target. The Consumer Prices Index (CPI) measure of inflation increased in December to 2.9% – a bigger-than-expected figure that prompted speculation of an earlier interest rate rise.

But the Bank’s recent forecasts indicated the cost of borrowing is unlikely to rise.

Even with rates held at 0.5% and no unwinding of its £200bn quantitative easing programme (QE), Bank forecasts still predict CPI will be below target, at around 1.8%, due to the economic slack created by the recession.

The inflation report could also show a split in opinion over policymakers’ decision to freeze interest rates and pause the QE scheme.

Six quarters of decline came to an end in the last quarter of 2009 with an upturn of 0.1% and the Bank has subsequently reduced growth forecasts.

The inflation report warned the extent of future Government belt tightening remained a key uncertainty over its predictions – which are based on existing policy and cannot take into account the likely direction after this year’s general election.

But the extent of the challenge will be illustrated on Thursday, with the release of the latest official borrowing figures by the Office for National Statistics.

State borrowing is predicted to reach a record £178bn this year as tax incomes have dwindled in the recession while spending on unemployment benefits have increased. January typically enjoys a seasonal surplus, thanks to income and corporation tax inflows, leading to a £1bn repayment.