Peston's Picks

Barclays: Big, beautiful or bad?

• Robert Peston
• 20 Feb 07, 12:51 PM

Just because Barclays generates big and rising profits does not mean it is ripping us off, no matter how grumpy you or I might feel about what we feel is an unjustified bank charge or the length of the queue in a local branch.

An assessment of whether its profits – or those of any company – are excessive depends on an analysis of how much competition it faces and what kind of risks it is running.

So my first instinct is to say hats off to the big blue bird for a 35% jump in pre-tax profits to £7.14bn. Why? Because many of its businesses are global, competitive, complex and risky. So for once why not cheer on a British winner?

It’s hard to argue that there is an absence of competition or risk for its Barclays Capital unit in international investment banking, for example. As for Barclays Global Investors, that’s a jewel of a global asset management and investment services business operating in a highly competitive industry.

Surely most of the medium-size to large companies which buy services from its separate business banking division are big enough and ugly enough to take their custom elsewhere if they’re not satisfied with what Barclays offers.

As for all its international banking businesses, in the event Barclays were making excessive profits in overseas countries, well that would be an issue for the people and governments of those countries (though a reason for Barclays’ shareholders to celebrate).

But there is a “but”. There are critical questions to be asked about how much profit Barclays makes from retail banking, or providing services to small businesses and individuals. This is not a market characterised by savage competition or terrifying risks. There are a handful of serious players and enormous barriers to entry.

British retail banking may not quite be a risk-free utility. But it’s not as far removed from being a utility as most of the banks like to claim.

So there is only one statistic in Barclays results that shocks me: the return it makes from UK retail banking on its so-called “average economic capital” is a remarkable 39%, up from 35% in 2005.

That is an impressive return by any standards. It’s a performance that most hedge funds or investment banks would kill for – and surely Barclays wouldn’t argue that its UK retail banking unit is operating in a marketplace as complex and competitive as those inhabited by hedge funds or investment banks.

Admittedly it excludes the relatively poor returns it makes from Barclaycard – which appears to be in something of a mess (it made a profit of precisely nil in 2006 on the measure called “economic profit” which takes account of the cost of capital employed).

But 39% is pretty sweet for providing millions of us with our current accounts, overdrafts, money transmission services and so on.

If all the British banks are enjoying returns anywhere near that from their domestic operations – and we’ll find that out in the next couple of weeks – then it would be reasonable to ask whether excessive profits are being generated.

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Prescribing prices

• Robert Peston
• 20 Feb 07, 09:07 AM

The OFT recommendations (PDF link) on reforms to the UK drug pricing scheme will divide the pharmaceutical companies. The OFT’s conclusion that reform would release £500m of expenditure that could be used more effectively will concern many of them, if that £500m were reallocated by the NHS to non-drug treatments and services.

However some will welcome the move to what’s called a "value-based" scheme. Put simply, that would relate much more closely what the NHS pays for drugs to the revealed benefits for patients. Schemes of this sort already exist in Sweden, Australia and Canada.

In some cases, that would lead to drug companies receiving higher prices for particularly effective drugs - and would be seen by them as a strong incentive to researching new treatments, because they would have the confidence that they would be properly rewarded for those treatments.

So the OFT doesn’t believe that the UK’s world-leading position in pharmaceuticals would be put at risk by the introduction of this new purchasing system. It ought, in fact, to reward British companies like GlaxoSmithKline or AstraZeneca which set great store by their prowess in developing effective new medicines.

However the OFT’s shocking conclusion - and the one which some drug companies will contest - is that the NHS is paying up to ten times too much for certain medicines as measured by what could be paid for near identical medicines.

The competition watchdog highlights treatments for cholesterol, blood pressure and stomach acid as areas were some drug prices are ludicrously inflated.

The OFT’s most striking statement is that the current pricing system, called the Pharmaceutical Price Regulation Scheme, doesn’t ensure that “the price of medicines reflect the health benefits they bring to patients”.

It’s hard to think of a more savage indictment of the NHS.

Here’s why I’m persuaded the time for reform is probably nigh. Other countries around the world use the NHS’s pricing system as a benchmark for what they pay for drugs. But in many cases, they view the NHS prices as the maximum - and they use them as a basis for negotiating a discount.

This is not to argue that the current system is utterly hopeless. But one of its flaws is that probably relies excessively on GPs to be acutely aware of the different costs to the NHS of near-identical treatments and to prescribe the cheapest.

The OFT found that all sorts of other factors influence GP’s prescribing behaviour. So why put the onus on GPs to prescribe the cheapest drugs? It’s not what they are trained to do or instinctively drawn to do.

Surely it would be better to ensure that all the drugs available to GPs are priced at a level that property reflects their therapeutic efficacy.

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