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Thursday, 24 April 2014

Barclays needs to keep the faith in investment banking

THE RESIGNATIONS OF Bob Diamond and Jerry del Missier, and the managed departure in the coming months of Marcus Agius may have provided some relief to those fighting to resolve the eurozone debt crisis, as the astonishing developments at Barclays moved to the top of the market’s gossip agenda.

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

But Spanish 10-year bond yields moving back towards 7% again on Friday and short-dated German bond yields turning negative provided a sharp reminder – if one were needed – that nothing’s essentially changed. Follow-up discussions to the EU Summit have only clouded what were pretty clear takeaways around the creation of a single banking supervisor and the ESM’s direct funding of banks. Not even the ECB’s decision to cut lending rates to 75bp and deposit rates to zero was able to boost sentiment.

Of course, the wider impact of the bank’s monetary moves will only be seen over time. The ECB certainly reduced the incentive to place cash at the ECB, but then again depositing cash with the bank was never an investment option: it reflected a general lack of confidence to lend into the interbank market or to pump credit into the wider economy. The extent to which and the speed at which banks look at shipping money out into alternative options will be a guide to the scale of the lack of confidence out there.

ON THE BARCLAYS news, there’s little left to say that hasn’t already been said. I had already written that Bob Diamond had little option but to resign when the Libor submissions issue blew up in his face. But his decision to do so was still shocking. We still don’t know all the facts – and the rather inane three-hour Treasury Select Committee hearing provided little additional clarity – but was Diamond incompetent or negligent in not knowing all of the facts, as many have said? I think that’s a bit of a stretch. The FSA’s criticisms of the bank’s culture lower down the ranks were certainly attention-grabbing, but at the same time a little vague.

I don’t think we’ll ever really know the real intent behind Paul Tucker’s comments to Diamond about Libor, and whether his comments were inferences, veiled instructions or mere observations. Will we ever know the identity of the fabled senior Whitehall figures? I doubt it. Did Diamond intentionally nuance his conversation with del Missier subsequent to his conversation with Tucker? Or was it all a case of Chinese whispers? Who knows? The speed and vehemence with which ministers, officials and advisers from the previous Labour government have stood up and denied any involvement or knowledge of the Libor issue only suggests … well, involvement.

I don’t think it’ll be too long before Rich Ricci follows Diamond and del Missier out of the door

The remarkable series of episodes has left Barclays employees shell-shocked. Competitors will leap on the turmoil to steal business and market share from Barclays’ investment bank. One of the great tragedies for the firm is that it was continuing to make headway in difficult markets in 2012 from its strong 2011 performance. Year-to-date, the bank ranks sixth in worldwide announced M&A and second in global combined debt and equity underwriting.

IT’LL TAKE BARCLAYS some time to get over its predicament. I don’t think it’ll be too long before Rich Ricci follows Diamond and del Missier out of the door. I also think it’s clear that the new CEO – who, by the way, would want that job given the level of political interference and the depth of anti-bank feeling? – will not come from an investment banking background and there is a growing sense that he or she will distance themselves from the wholesale/institutional side of the business.

The house that Bob built is likely to shrink, particularly as we move closer to enforced ring-fencing in the UK. There is growing talk of the group spinning off the investment bank or shutting down large swathes of it. I think it’s too early to make those kind of Domesday predictions, but I suspect there is a lot of behind-the-scenes pushing from all sides, including from government, for the group to focus more on its retail and consumer businesses.

Of course, these businesses won’t necessarily enhance shareholder returns, but politicians will use any shift in business strategy and focus to win votes and take full advantage of the anti-bank bias they’re helping to propagate in the first place.

I also have my doubts about the sense of moving away from investment banking because it makes so much money for the group. In the first quarter of 2012, Barclays corporate and investment banking made an adjusted pre-tax profit of £1.48bn, almost 61% of the total. Of that, the investment bank made £1.27bn, or 52%.

Shareholders have become vocal about the compensation structures and retuning the incentive models in investment banking, and that’s all fair and reasonable. But if the end-game here is to get the share price back up to where it needs to be, management would be crazy to cut potentially its most promising business line.

Investment banking is attracting higher regulatory charges and the industry is likely to see returns on equity reduced from pre-crisis highs as it morphs into more of an agency-driven business. But Barclays has done a lot of hiring post-Lehman acquisition and is poised to capitalise on any industry upturn assuming it can retain its acquired talent. Having management lose its nerve now would be a huge mistake. They need to keep the faith.

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