Outlook: Middleton banks on cost cutting

LARGE BOTTOM-LINE exceptional charges have become so much an everyday part of clearing bank announcements that it is often hard to know whether profits are rising or falling. Barclays hasn't even needed the excuse of a new chief executive (it is still looking for one of those) to announce its latest kitchen sink exercise - pounds 400m of exceptional costs all to achieve an annual saving of pounds 200m.

With Royal Bank of Scotland circling, Barclays' acting chief executive, Sir Peter Middleton, had to do something to show there's life in the old carcass yet, and this presumably is it. He seems to be saying that Barclays doesn't need a consolidating merger to achieve the repeated rounds of big cost cuts the City these days demands of our leading companies. Leave off, he's telling Sir George Mathewson at RBS. We can deliver the required earnings growth all by ourselves. Is what he has announced enough, or is it even appropriate?

Traditional clearing banks are facing a profound period of change. No industry is untouched by the technological revolution now sweeping the world, but nowhere are its effects likely to be more far reaching than in financial services. Clearing banks also face a separate challenge. Traditionally, their purpose has been to act as a collector of retail savings to lend to corporations and business.

Today, with the development of highly sophisticated wholesale markets, these functions no longer need to be linked. Indeed, it may even be inappropriate to do so. No British bank has yet followed the logic of these developments to demerge or sell its corporate lending activity, but they all know that their future, to the extent that they have one, lies chiefly as general providers of retail financial services, with corporate lending very much a low margin add on.

Success in these markets will require very low costs, which new technologies make possible, and very high levels of customer service. From a standing start, Egg took 1 per cent of the British deposit market in just six months with its high interest bearing account. As it happens, this seems to have cost its parent company, Prudential, an arm and a leg, but it shows just how dangerous and precarious the new environment is going to be for traditional bankers.

So the banks are slashing their costs to catch the new entrants. Yesterday's numbers from Barclays look big but, if anything, they are some way behind the bank's main competitors. Barclays' cost to income ratio is still poor set against others. Cost cuts worth just pounds 200m a year may be too little too late.

On the other side of the ledger, Barclays needs to improve customer service by an order of magnitude. It seems unlikely that taking 6,000 people out of the workforce is going to help matters much on this front. Barclays may know the short-term impact on the bottom line, but it has no more idea than the rest of us what the long-term consequences might be. If it is to reduce the quality and level of customer service, then its ultimate effect will be strongly negative.

Centrally imposed head count reduction, which is what this smacks of, rarely helps matters very much. By alienating customers, it can often prove counterproductive. To be effective, cost cutting has to come from the bottom up. Who knows? Maybe that is what this programme is, but the odds on Barclays surviving as an independent bank continue to look no more than evens.