News Column

Barclays takes axe to investment banking

May 9, 2014

In its statement to the London Stock Exchange, the bank said, "Barclays will be repositioned, simplified and rebalanced to improve returns significantly.

"Barclays will be a focused international bank, with four core businesses:

Personal and Corporate Banking: a combination of most of our leading UK Retail, Corporate and Wealth businesses to take advantage of infrastructure cost synergies to deliver good returns

Barclaycard: a high returning business with strong and diversified international growth potential

Africa Banking: a longer term growth business with distinct competitive advantages

Investment Bank: an origination led and returns focused business, delivering Banking, Equities, Credit and certain Macro products to our clients in a more capital efficient way."

Barclays announced the creation of Barclays Non-Core although commentators were as one in calling this 'a bad bank'. This unit groups together those assets which do not fit the strategic objectives or returns criteria underlying CEO Antony Jenkins second strategic review in two years.

Barclays will look to exit or run down these assets over time. Barclays Non-Core consists of c.GBP 115 billion of risk weighted assets (RWAs), including GBP 59bn of Transform Exit Quadrant Assets held at year end 2013) with associated leverage exposure of c.GBP 400bn.

Barclays is targeting a reduction in non-core RWAs to c.GBP 50bn, and leverage exposure to c.GBP 180bn, by the end of 2016, with the drag on Group Return on Equity reduced to Europe retail), down from c.6 per cent in 2013. Preservation of net tangible asset value will be a priority as Barclays seeks to reduce the return on equity drag from the non-core unit. Barclays also expects to be able to accrete capital at the Group level over the period to 2016.

The bank's core businesses account for c.GBP 320bn of 2013 RWAs, with the core Investment Bank expected to represent no more than 30 per cent of the Group total by 2016, compared to just over 50 per cent now. Personal and Corporate Banking, Barclaycard and Africa Banking account for the majority of the Group's RWAs in core Barclays. Plans for the Investment Bank will result in gross headcount reductions of around 7,000 by 2016 across core and non-core. The overall 2014 Group gross headcount reduction has been increased to 14,000.

Antony Jenkins said, "This is a bold simplification of Barclays. We will be a focused international bank, operating only in areas where we have capability, scale and competitive advantage.

"In the future, Barclays will be leaner, stronger, much better balanced and well positioned to deliver lower volatility, higher returns, and growth.

"My goal is unchanged: to create a Barclays that does business in the right way, with the right values, and delivers the returns that our shareholders deserve.  However, the way in which we will achieve this is different. 

"Today we are setting out how we will reach that goal and create the 'Go-To' bank for our customers and clients, our colleagues and our shareholders."

Eric Bommensath, co-head of Barclays' investment bank, will run Barclays Non-Core. Tom King, Bommensath's co-head, takes over sole responsibility for what remains of the investment bank within Barclays.

Warwick Business School Assistant Professor of Finance Lei Mao commented, "Almost all European banks are not performing well in fixed incomes like bonds and in currencies and commodities, but Barclays' loss of revenue in this sector is the most significant, with it falling by 41 per cent.

"The response of Barclays to cut its investment bank section is timely. Barclays is not likely to reverse the diminishing trend of this business as the whole market is on a downturn because of uncertainty over interest rates and electronic trading taking over.

"Also by significantly shrinking the size of its investment bank Barclays is adapting to the changing market conditions and will save a huge amount in wages for the shareholders.

"Barclays focusing on the retail banking sector is a smart move. As the UK economy slowly improves, the prospects in the retail banking sector look good and this is a safe area for Barclays to spend its effort to increase revenue.

"Bundling its investment bank assets and its European continental business into a 'bad' bank is another sensible decision. The purpose of such a strategy is to shield the good assets – the retail banking business in UK and Africa - from the bad assets that will be bundled into the bad bank. As a result, the high risk in these bad assets will not negatively impact the good assets. The bad bank may not perform well, or may even fail, but Barclays wants to make sure that these possible outcomes will not contaminate its core retail banking sector."

Warwick Business School Professor of Practice Jon Rushman, a former Barclays investment banker, added, "Barclays' retreat from investment banking rang the death knell for its aspirations to be a global force in investment banking. That should be a reason for sadness for anyone who likes to see British companies being successful in the wider world. Perhaps only when the British company involved is an investment bank could talk of retreat be received so appreciatively by the general public. "Barclays acquired the US operations of Lehman Brothers for no more than the cost of a data centre and at a stroke it had become an investment banking colossus encompassing world class equities and fixed-income capability. "Barclays for the most part avoided the worst of the fall-out from the financial crisis. By raising capital privately - albeit sometimes unconventionally - it was able to avoid any injection of British taxpayers' money and thus kept its shareholders' interests relatively intact. Crucially, it was able to keep its operations free from political control. Anyone in doubt about the desirability of this should compare the business performance of Barclays with that of RBS from 2007 onwards.  "However, government influence comes in many forms. Frustration with the lavish pay awarded to senior staff and outrage with Barclays' involvement in the LIBOR scandal made a wholesale change of management unavoidable. The new management team have been right on message, ditching talk of global investment banking and talking about a simpler Barclays, something a British public can feel warm and fuzzy about. "Yet the equities businesses Barclays acquired from Lehman Brothers are among the most profitable in the group and there is no mention of scaling those down. Indeed, it would be an amazing act of self-harm to acquire such a great franchise and then not give it what it needs to succeed. Some senior managers have recently left that part of the business and time will tell if that is just natural job turnover or a sign of a lack of commitment on the part of Barclays' board. I sincerely hope and believe that Barclays' board is committed to making Barclays the best business it can be. "Some of the commentary surrounding the strategy update had the feel of schadenfreude as the investment bankers get their just deserts. Perhaps it is associations with Bob Diamond, Barclays' ex-CEO, which has polarised British public opinion about Barclays so much. "Despite what we may dislike about a person's style we British should be wary of our tendency to be comfortable with the mediocre."

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Source: CPI Financial

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