Examination of Witnesses (Questions 130
TUESDAY 14 MAY 2002
130. Good morning, gentlemen and everyone. I
guess there are bigger queues here today than there are in any
high street bank. It is good to see. May I ask you to introduce
(Mr Dalton) I am Bill Dalton, Chief Executive of HSBC
(Mr Goodwin) I am Fred Goodwin. I am Chief Executive
of the Royal Bank of Scotland Group.
(Mr Ellwood) I am Peter Ellwood. I am the Chief Executive
of Lloyds TSB Group.
(Mr Barrett) I am Matthew Barrett, Chief Executive
131. Welcome. It is very good to have you here
this morning. As you all know, since the Cruickshank reported
two years ago and the Competition Commission's proposals have
been produced, there is a high degree of interest in what the
banks and you as the Big Four in particular are going to do in
light of that. Have you made contact and had discussions with
the Director General of Fair Trading and what will your submissions
be before the end of the six-month period?
(Mr Dalton) Yes, there has been contact. I have not
been involved personally, but people from the bank have been in
contact with the Director General, submissions have been made
and progress is being made on the remedies suggested by the Commission.
(Mr Goodwin) Similarly, we have been in contact with
the Director General and we are in the process of discussions
at the moment going through some of the considerations around
the Commission's proposals.
(Mr Ellwood) We are in exactly the same situation.
132. A lot has been made of what has been termed
the excessive profits which you have made and the Competition
Commission has stated that over the past three years you have
made £725 million excessive profits. I know that in your
submissions to us you do not accept the methodology of that, indeed
you make reference to other sectors of the economy which would
be deemed to be making higher excessive profits as a result of
that. You do know that the Director General of Fair Trading has
looked at those figures and Sir Bryan Carsberg, the former Chairman
of the International Accounting Standards Board has looked at
them and he said that they are very fair figures. May I ask why
it seems that you are out of line with many people in terms of
the perception regarding profits?
(Mr Goodwin) Picking up one point, what Sir Bryan
Carsberg actually said was that overall the methodology was appropriate
but in a number of areas where judgement had been applied, he
did recognise that different judgements could have been applied
which would in turn impact on the findings in terms of the quantum
of the excess profit, of the existence of excess profit. Quite
a number of people would similarly take issue with the methodology
which has been applied, so I do not think we are in any sense
in a minority; we are not alone in thinking that the methodology
is inappropriate so I would not necessarily agree that we are
out on our own. The Competition Commission have used the methodology
and Sir Bryan has commented on it, but there are other views of
other bodies which would be similar to our own.
Chairman: The Chancellor in his statement
in the Commons quoted Sir Bryan Carsberg, "... the framework
adopted by the Commission is sound and would be accepted as appropriate
by most independent experts".
133. Sir Bryan concluded, "I think it is
very unlikely that I would have reached conclusions that differed
significantly from those of the Commission and I am clear that
the conclusions of the Commission do not fall outside a range
of reasonable conclusions".
(Mr Goodwin) He highlights the fact that there is
a range of outcomes. As you get into the range of outcomes, quite
marked fluctuations are possible. You just have to look at a range
the Commission has reported as a figure. So as to amounts involved,
it is quite important that we get to the right amount.
134. It does seem quite a wide range. It says
you are making excess profits of £725 million, but in your
submissions to us you are all very robust in knocking that down
and saying no way are you making any excess profits.
(Mr Ellwood) It depends to a large extent over what
period of time that is taken. Our concern really is that figures
have been looked at over the last three years or so and during
those three years we made about 26 per cent post tax return on
equity. However, the figures involved included a provision for
bad and doubtful debts of about 0.8 per cent per annum. If you
actually look at the cycle, which is our main argument, then over
the 12-year cycle the return on equity is about 13 per cent, very
close indeed to the cost of equity. The bad and doubtful debt
over that cycle is about two per cent rather than 0.8 per cent.
That is really where we have the major disagreement: it is about
the timing, the length of the cycle, rather than picking the very
best three years we have had for quite a long time.
135. Could we hear from Barclays on this? The
specific figure in the Competition Commission report is that small
and medium-sized enterprises were overcharged by £725 million
over three years. What is your figure?
(Mr Barrett) I reject it completely.
136. Do you say it is nought?
(Mr Barrett) I do not know what "excess profits"
137. You do not?
(Mr Barrett) If the underlying assumption is that
anything exceeding the cost of equity and a one or two per cent
premium above it by definition constitutes excess profits, that
is in my opinion, completely flawed. If that test were applied,
just to give you a few data points, 22 out of 38 industry sectors
in the UK would be excessively profitable, that is more than half
the companies. The excess profits of those companies would have
been £24 billion in the year 2000 alone. This would be 33
per cent of the profits of all listed companies in the UK. If
you then took that out and put a market value on it, you would
destroy about £550 billion of equity value in the markets,
or about £25,000 per household and destroy about 20 per cent
of the value of all pension funds. The way we at Barclays regard
the cost of equity, if those are the table stakes, is that we
do not even count profit until we subtract the cost of equity.
That is what we call economic profit. I do not accept it. If you
look at it over the cycle, to have picked three very good yearsvery
good yearsout of a cycle and ignored the fact that there
were many years where this business was losing money, there were
many years where it did not cover the cost of equity and there
are these years where they were very, very good and were at the
peak of the cycle, I agree that taking three years out of the
context of the whole cycle was a flawed methodology. I do not
accept that the methodology is sound and based on either good
economics or fair economics.
138. Is it sound to compare yourself with other
elements of British business? You are the ones who are providing
the fuel for small businesses generally.
(Mr Barrett) Yes.
139. You are providing the key commodity they
need, which is money and the Commission's finding is that you
are overcharging for providing that service.
(Mr Barrett) The Commission actually stated that the
service was good, customers were satisfied, coverage was very
good, there was no denial of the oxygen of credit and terms were
reasonable but the banks were making too much money. I found that
an odd quote. The issue is that if you come at it from the point
of view that you are by definition making too much money if you
are exceeding the cost of equity, then I reject that as an ingoing