Understanding Company News. Rodney Hobson
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We will report a profit before tax for the year well ahead of the consensus estimate of £5.3bn. The profit is struck after all costs, impairment and market valuations. Whilst it includes a number of individually significant items, it mainly reflects strong operating profit generation.
The profit includes the gains arising from the acquisition of the Lehman Brothers North American business, and also the gain on the sale of our closed life business.
Also included in the 2008 results are some £8bn of gross write downs. These figures demonstrate that although we have been heavily impacted by the credit crunch, our income generation was at a record level in 2008 and has enabled us to withstand this impact and still produce strong profits.
As a result of the capital raising announced on 31st October 2008, our capital base has been substantially strengthened in accordance with the capital plan agreed with the UK Financial Services Authority. We calculate that the capital exceeds the regulatory minimum required by the FSA by an amount equivalent to some £17bn in profit before tax. We confirm that we are not seeking subscription for further capital – either from the private sector or from the UK Government.
Before closing, we should say a word about current trading. Recognising that 2009 is not yet a month old, and that the global economy will remain weak, we can tell you that customer and client activity levels have been high. As a result, we have had a good start to 2009.
This was a kill or cure job. Issuing a highly unusual statement could have spooked the already nervous market; however, if the tactic worked then valuable time had been gained.
Barclays admitted candidly that its Barclays Capital investment arm had run up losses of £8bn, although that would be reduced to £5bn after income and hedging operations were taken into account.
These figures had to be seen in context. They were lower than the equivalent losses admitted by RBS but were higher than Barclays’ own first half figures, so further losses had been incurred in the second half.
The vital ingredient of the open letter was a claim that the bank had £17bn in spare capital over and above the regulatory requirement. It would not therefore be necessary to raise more cash, either from the government or from private investors.
Barclays added that it had made a strong start to 2009 with the performance at the previously struggling Barclays Capital particularly strong.
It was worth watching the Barclays share price on the day of the announcement. It jumped 37.5p to 88.7p by the close, a gain of 73%. However, that was lower than the 98p they traded at before RBS spooked the market and much lower than the 153p at which the Qatari investors had agreed to subscribe for shares.
Figure 1.1: Barclays
Shareholders needed to consider whether they were sufficiently reassured to stay in for long-term recovery or to take the opportunity presented by the share price rise to cut their losses and get out.
Thanks to the frank attitude of the Barclays board, it proved worth staying in as the shares soon powered to 280p, recovering much more quickly than those of its rivals.
Chapter 2. Rules That Companies Must Follow
The European Union tightened its rules in January 2007 with the introduction of its Transparency Directive, so named because it aimed to make quoted companies transparent to shareholders, who would be able to see clearly how well or badly the company was doing. Bad news could not be hidden because investors could, the theory ran, see right through any smokescreens.
The EU, as is its custom, was attempting to harmonise the rules across the continent so that investors could buy shares in companies in any European state confident that the same requirements for openness and fair play were being enforced. This, in the view of the European Commission, would lead to a high level of investor protection throughout the Community.
As is also the way in the EU, it took years to get agreement: the original action plan was published by the European Commission way back in 1999.
To be fair, the outcome was a big improvement on the disparate range of financial reporting requirements previously in existence. The aim was to harmonise the regulations rather than to add to the burden.
Nonetheless, the rules are quite detailed and member states are free to impose additional requirements on companies incorporated in their country. Likewise, individual stock exchanges are able to impose additional requirements on companies whose shares are traded on their markets.
Effect on the UK
Most of the requirements were already pretty much covered on the main market of the London Stock Exchange and, to a lesser extent, on AIM, which is exempt from the directive as it does not, in EU eyes, constitute a proper stock market. Fear not. The LSE imposes strict disclosure requirements on AIM-quoted companies and insists that they appoint an approved nominated adviser to see that they toe the line.
The big change as far as the UK was concerned was to bring in quarterly trading updates rather than the half-yearly pronouncements that typically were issued along with half year and full year results.
The initial proposal was to bring full quarterly reporting, as is the norm in the US. In other words companies would produce accounts every three rather than every six months. There was heavy lobbying against this more onerous requirement on the grounds that it would create an undesirable short term attitude in companies and their shareholders.
Even so, the rules on quarterly statements are still quite detailed, including specifying when they must be published.
The timetable
The Directive says:
An issuer shall make public a statement by its management during the first six month period of the financial year and another statement by its management during the second six month period.
Such statement shall be made in a period between ten weeks after the beginning and six weeks before the end of the relevant six month period.
You need to look at a calendar to grasp the timetable. For a company whose financial year matches the calendar year, it means that interim statements must be issued somewhere between March 5th and May 14th and between September 4th and November 13th.
For those following the traditional financial year to March 31st, the relevant dates are June 10th to August 19th and between October 9th and December 18th.
Don’t worry about the precise dates. The idea is that statements should come out a week or two after the end of the first and third quarters, although the 10-week window is very wide for this purpose.
It means that many companies combine their interim management statement with the issuing of half-yearly or annual results.
When to expect updates
One has to say that companies quoted on the London stock market are playing the game and issuing four reasonably equally spaced trading updates per year. So a company using the calendar year will issue a trading update around March 31st, a second immediately before or after the half year end at June 30th, a third around September 30th and a fourth within days of the full year end at December 31st.
This means you know promptly how the business has performed in each complete quarter.
However, some companies do have leeway to time the updates to suit their particular trading pattern. The most obvious example is in retailing, where companies have traditionally provided an update on how the key Christmas trading period has gone.
There is nothing to stop companies issuing more trading updates