Profile: Naguib Kheraj, Barclays' non-accountant CFO

At 41, and already the chief financial officer of one of the ten largest companies in the UK, Naguib Kheraj is motoring.

Kheraj has been CFO of Barclays since January 2004, having stepped up from the position of chief executive at Barclays Private Clients, and having headed up Barclays Private Equity business as well.

He says he wouldn’t mind going back there. ‘I wouldn’t rule it out [going for a chief executive role], but I think it’s unlikely. It’s more likely I would do something more akin to what I’ve done in the past, which has been to go back to advising on transactions or working in private equity. I don’t have any firm views at the moment.’

Once a banker, always a banker, perhaps. And as a banker, there might be some who would question why he has become a finance director. It is not, of course, uncommon for FDs and CFOs to be non-accountants, but surely it helps? He doesn’t see it as that important. ‘I think what’s important is that you need to be financially literate and understand accounting.’

When he first took on a finance role, as CFO at Salomon Brothers Europe at the tender age of 28, he had previously worked in the corporate finance team.

‘I was clearly very financially literate. I knew a lot about funding and how to perform financial analysis and strategy and planning. I didn’t know much about controls and regulation and the IT required in financial reporting and I didn’t know much about managing tax risk, so I had to learn all of those on the job. Actually, it was a lot more complicated than I ever thought. I hadn’t thought enough about these things,’ Kheraj admits.

Having worked on the finance side for long enough now to grasp the intricacies of those fields, there can be few better places to be now than Barclays.

With banks scoring record profits year on year (so high that their critics are calling for some kind of windfall tax), there’s a lot of money to be made as an executive there. Barclays made £4.5bn in pre-tax profits last year, up 20% on 2003, and Kheraj took home £1.5m, plus around £400,000 in share options.

Kheraj might ponder whether he could make more back in private equity, but he can’t be too concerned.

What he is concerned about is international financial reporting standards, his discontent mirroring other rumblings in the finance director world over the usefulness and cost-effectiveness of the new rules.

‘Because of IAS39 and all of the complexity of the rules on derivatives it has affected banks more than other companies. Even if you have only a small insurance business, the changes to insurance accounting are also pretty significant under IFRS. The combination was a very complex element to implement. I think people underestimated how much work was involved in being able to comply, how much it would cost and the complications of being able to interpret financial results that have arisen as a consequence.’

How has it impacted Barclays? ‘We’ve spent £50m on our IFRS convergence plan over the past couple years and that’s a lot of money. We had a lot of people spending a lot of time on this, and our results are more difficult to interpret now than they were,’ Kheraj says.

His comments, coming from such a senior CFO, will give Sir David Tweedie and other standards-setters something to think about.

He also has some advice for HM Revenue & Customs, which is currently indicating that it’s about time that boards of big companies came to terms with tax, and appreciated the risks involved with it.

‘Tax has always been an important issue. If the tax rate is 30%, then 30% of your bottom line is a big number. You’ve got to spend a lot of time focusing on it. The more complex your business becomes, the more complex your tax planning needs to be to ensure you don’t have a much higher tax rate by accident.’

IFRS has posed particular problems in this area too. ‘Tax has generally followed the accounting profit. A lot of adjustments in the transition to IFRS have an impact in tax, so this year it got a lot more complex.’

Ultimately, HMRC’s initiatives to highlight tax risks for boards may be unnecessary, he says. ‘HM Revenue & Customs is keen to make sure tax is on the boardroom agenda, but it always has been.’

So what does he make of suggestions that banks might be hit with a windfall tax?

‘I don’t think it’s a serious concern. I think there’s a commonality of interest between the government and the financial services sector in the UK, a big contributor of both corporation tax and income tax of employees who work in the industry. I think arbitrary changes to tax or regulation could result in the UK being a less competitive place to locate important parts of the financial services industry. The government understands that it is in the country’s interest to have strong and profitable banks,’ he says.

So what’s going on at Barclays otherwise? Where is the growth coming from, and where are the risks?

Kheraj is keen to push Barclays’ South African venture – its purchase of a majority stake in the Amalgmated Bank of South Africa. The move was greeted with somewhat superficial taunts about Barclays’ record of investing in South Africa during Apartheid, worries that Kheraj dismisses, focusing on the business argument.

‘South Africa is a growth market. It’s not the only growth market we’re interested in, but the economy is doing well and is expected to continue doing so,’ he says.

‘Within that, financial services is growing rapidly. There’s a growing middle class in South Africa and it’s a well-regulated, well-governed financial system with reliable financial information and good returns. We were able to buy into one of the top franchises at a very attractive price. We think we’ll do well in South Africa – we have a long association and our brand is very well respected as a result of that.’

There has been a frenzy of worries about bad debts in the UK hitting the retail bank’s profits, concerns he also plays down.

‘The increase in bad debts that people have written about is very concentrated in the retail as opposed to the wholesale sector. In Business banking and Barclays Capital, the credit losses have actually been very low this year and stayed low for the past few years. Conditions have been very good. The place where there has been strain is in the credit card business and unsecured personal lending. In overall terms, it’s not such a big deal for us.’

Retail banking in the UK, he says, makes up only 20% of the profits overall.

With any highly-profitable business, there is always speculation about potential buyers. In Barclays’ case, rumour has it that Citigroup is waiting to pounce – but Kheraj believes a bid is unlikely.

‘I think some of the speculation is poorly informed because we have a market value of £37bn. There are not many companies that could take over a business that size. I’m not surprised to see the chatter because in an industry where you may see some consolidation, if you looked at the other big banks we have one of the most attractive portfolios in the banking industry.

‘We would be among the most desirable partners in the industry. We are growing well and would be attractive to a lot of people, but we have attractive prospects on a stand-alone basis.’

Banking Is not what it was

Kheraj, unfortunately, does not take a starring role in Liar’s Poker, Michael Lewis’s lively account of investment banking at Salomon Brothers in the 1980s.

But he does remember those days, when he was at the investment bank, and although he says banking is not what it was, there is an element of truth to the half-outraged, half-nostalgic portrait of an adrenalin-fuelled atmosphere painted by Lewis: ‘It’s an entertaining book designed for non-bankers. Clearly there’s journalistic license in it, but I think in general it’s right to say that business has become more grey and less interesting in the past 20 years. I don’t think you’d find a big company today where you would have the sort of characters and behaviours that you read about in Liar’s Poker.

Kheraj was, he admits, one of the ‘corporate financiers who wore jackets and looked self-important and went to long lunches’.

The kind of behaviour that went on then is no longer, he argues.

‘Twenty years ago there was lots of inappropriate behaviour. It wasn’t uncommon in city dealing rooms for people to have stripograms come for birthdays. You never see that today and it was always completely inappropriate.’

But Kheraj does lament some of the other developments that have rendered business more faceless. He admits not all are a good thing.

One of the most appalling business behaviours in Liar’s Poker, of course, involved dumping billions of pounds of bonds on the market to make the market think something had gone wrong, and then buying them back 10 minutes later in order to make a huge profit on the transaction.

In other words, what Citigroup did not so long ago.

‘I think that was on a different scale, though,’ he says, somewhat defensive
about Salomon.

Did anyone actually play Liar’s Poker? ‘By repute they did,’ he says. ‘People tell me that stuff happened but I don’t think it was common to gamble the kind of stakes talked about in the book.’