Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 130 - 139)




  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 yourselves?
  (Mr Dalton) I am Bill Dalton, Chief Executive of HSBC PLC.
  (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 of Barclays.

  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".

Mr Beard

  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.

Mr Fallon

  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" means.

  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 years—very good years—out 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 premise.

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