Legacy of bad debt is home to roost

THE FURORE over Andrew Buxton's role in Barclays might never have happened if the bank had remained as profitable as it was during its heyday in the 1980s. In 1988 it produced pre-tax profits of pounds 1.4bn, making it Britain's most profitable bank. Since then it has plunged with bewildering speed into loss, confusion and demoralisation - and a lack of confidence in top management, writes Richard Thomson.

Barclays carved an erratic course during the 1980s. Under the chairmanship of Sir Timothy Bevan, it reduced its lending early in the decade as other banks increased theirs. It thus missed out on much of the mid-Eighties boom that made other banks rich. Then, under Sir John Quinton, it accelerated its lending around 1990, when the rest of the sector was cutting back.

Until two years ago, however, it remained highly profitable, with a reputation for good management. It was to Barclays that the Bank of England turned to find a high-calibre senior executive to take over the chief executive role at Midland Bank, appointing Brian Pearse, Barclays' finance director.

But the past three years have undermined Barclays' reputation. Unnoticed by shareholders throughout the last decade, the bank had a rather higher level of bad debts than its competitors, suggesting credit controls were not strong enough. With the onset of recession and the fall in the property market, however, bad debts have run out of control.

The most serious problems go back to a pounds 922m rights issue in 1988. After raising the money, Barclays plunged into a lending binge which nearly doubled its loan portfolio and pushed its lending to the property sector up to pounds 8.5bn, the largest exposure of any of the clearing banks. Many of these loans have returned to haunt Barclays. It is a leading lender to ill- starred Canary Wharf in Docklands. It has substantial loans to Heron, Speyhawk, Mountleigh and other ailing or collapsed property groups.

Late last year it emerged that Barclays had loans worth pounds 440m to Imry, the largest single exposure to a property company by any UK bank. The market was stunned by the size of the loan, at least half of which Barclays is expected to lose, and again questioned the quality of the bank's top management.

At the six-month stage last year, the bank announced bad debt provisions of pounds 1bn and profits of only pounds 55m. It is expected to make another pounds 1bn provision in the second half and may announce a loss for the year as well as a dividend cut. Many analysts, moreover, believe it has provided about pounds 1bn less than it needs against bad debts. Its share price has slumped.

Morale at Barclays has sunk to a new low, as the bank intends to slash 18,000 jobs from an 80,000-strong workforce to cut costs by 1995. It also rejected its staff's pay claim for 1993 on the first day of negotiations last week.

Sir John Quinton, only the second non-family chairman, took some of the blame for the bank's troubles and stepped down early, at the end of last year. In a recent interview, he criticised the tradition of promoting 'family' members, saying it prevented many talented non-family executives from rising to board level. Many believe this partly explains the lack of heavyweights among Barclays senior management.

Barclays hoped the matter would end with Sir John's departure, but worried shareholders objected that Mr Buxton had been a senior executive and then managing director during the 1980s and early 1990s. He therefore had to be at least partly accountable for the errors. Inevitably, they questioned his competence to be both chairman and chief executive.

Given the seriousness of its problems, Barclays is likely to limp through 1993 with little improvement in its performance. The bank hopes to see a recovery coming through in 1994, however, and has set a longer-term target of a 15 per cent return on equity. In the meantime, in the eyes of shareholders, Mr Buxton and his managers remain on trial.