What is Barclays going to do with its investment bank? More to the point, when are we going to find out? Pertinent questions remain as we near the end of the first quarter, especially since the so-called Transform project has been in play for over a year now. We still don’t have concrete answers beyond the broadly positive (although in fairness consistent) messaging around the importance of the investment bank to the group. But in the circumstances, the silence around the detail grows more deafening by the day.
All eyes are on group CEO Antony Jenkins and on where his reviews – and reviews of reviews – will lead the house that Bob built. The investment bank’s cost-income ratio is running above 70% and the division has a negative return-on-equity in the order of 2.4% against its 10.5% imputed cost-of-equity. That’s not a good position to be in and it’s going to take a hard slog and a good tail wind to get those numbers where they need to be.
Following his ”death spiral” comments justifying chunky bonuses to his Wall Street operatives, Jenkins is firmly under the spotlight and speculation about what he might do with the investment bank is sky-high. Delays in delivering a detailed plan just give an impression of uncertainty, indecision … or perhaps anxiety at the likely consequences.
Given the size of Barclays’ investment bank relative to the group and its stature as one of the few that still espouses global ambitions, what happens next remains a key industry talking point that continues equally to animate people within the bank as it does competitors and industry watchers.
I don’t envy Jenkins’ task. He has to figure out how to right-size and orient the investment bank to push its ROE to the right side of its COE, while creating a competitive and sustainable business model – all while the industry morphs into a new order. But the longer it takes to announce a desired end-game, the more the doubts and the nay-saying grow.
Fundamental re-appraisal
The issue goes way beyond Jenkins’ ability to cut costs and the speed at which that happens – it’s a more fundamental re-appraisal of what Barclays is and claims to be in investment banking. It’s about business selection, taking tough steps to implement a strategy and providing transparency to stakeholders. Whatever Jenkins does next, he knows he needs to tread carefully. The investment bank generated 38% of group revenues in 2013 and Jenkins sorely needs that revenue to hit group-wide targets.
Sure, the investment bank used more than half of group CRD IV risk-weighted assets to achieve that in 2013, but the exit strategy for non-core RWAs will right that imbalance to some extent. Legacy assets in the “Exit Quadrant” portfolios were cut by £40bn in 2013 – £17bn in the investment bank plus £23bn of derivative efficiencies.
But you can’t build a business around optimisation; it has a finite life-cycle and is most definitely a tactic rather than a strategy. The key determinant of success for the bank remains not just the quantum but perhaps more importantly the provenance of future revenues.
No repeat of 2013
Jenkins was fortunate in that the 17% year-on-year decline in FICC revenues last year was more than offset by a 22%-plus increase in equities and prime services in a frothy year for stocks (though the increase in investment banking revenues was modest despite the uptick in ECM and signs of a thawing of M&A activity). On a proportional basis, FICC made 60% of the IB revenue pie, with equities and IB making up the rest in pretty much equal share. Can Jenkins pin his hopes on a similar dynamic in 2014 and beyond? I wouldn’t have thought so.
Apart from anything else, it’s hard to know where or how the bank’s FICC business will end up in 2014 and beyond in an environment of multiple moving targets. For a start, Barclays is “repositioning” the emerging markets and commodities components of FICC because, while it considers them attractive, it doesn’t rate their ability to generate a sustainable ROE above COE. Repositioning is one of those words that can mean anything but most equate it with downsizing in some form.
One thing’s for sure: those two businesses didn’t make it into the bank’s “invest and grow” quadrant (i.e. attractive markets with high ability to generate positive ROE/COE) so the bank will cut any aspiration to maintain a global full-service offering here and will create a support offering outside of core FICC for core clients only. That will mean more headcount losses.
If those offerings are being slimmed down, let’s not forget it’s amid an environment of continued pullback in global FICC – which did make it into the ”invest and grow” quadrant. But it’s also in an environment where Barclays is consolidating its FICC franchise into what it calls top-tier products. In short, this is not the time to project any up-tick on global FICC revenues or Barclays’ ability to grow market share. FICC revenues look like they’re going in one direction: and it’s not up.
That means that equities and prime services will have to do a lot of heavy lifting to keep the revenue line pointing in the right direction. That’s a big ask, especially since European and Asian equities are also being repositioned and being actively cut back. Note too that European and Asian IB are also being ”’repositioned” (and let’s face it; Barclays is largely irrelevant in the latter) while North American and UK equities and IB are being prioritised for investment.
So where does that leave the firm? With a full-service dual-axis US/UK offering moving towards marginal or skeleton offerings around that axis to meet the needs of core clients in those two jurisdictions, aka a “follow your client” model. That seems a perfectly reasonable strategy to pursue, especially given the proportion of global wallet that the US and UK generate. But global it ain’t.
Say it how it is
Why can’t Jenkins come out and state that publicly he’s building a dual-track investment bank and just say he’s ditching the rest? The bank seems hell-bent on persisting with this notion of being global when that’s long since been seen as a statement of bravado rather than fact. In a presentation last year, Jenkins said Barclays was “one of a small group of global investment banks gaining share at low incremental cost”. That doesn’t fit the reality of today, especially where European banks in general and Barclays and Deutsche in particular are losing FICC market share to US rivals.
“Sure, Jenkins could look to sell or IPO his full-service Wall Street investment bank. But that would be a short-sighted objective”
In parallel with ditching pretty much everything that doesn’t feed the US/UK full-service business model, Jenkins should also ditch the language he’s been using around the investment bank to articulate this more nuanced aspiration. He’s fully sloganised Barclays as the “Go-To” bank as an integral part of the way the outcome of Transform is articulated. But that’s categorically not what he’s turning the investment bank into.
Barclays is doing exactly what every other bank is doing: focusing its attention on being in the leading pack of banks servicing a slimmed-down set of core clients, Jenkins needs to adapt his slogan to be “the Go-To bank for clients we care about”.
Sell out?
There has been chat that Barclays might or even should ditch its investment bank altogether and focus on retail and commercial banking product lines. While I’m sure retail man Jenkins would personally love that, it’s not a viable or realistic option.
It’s not just that Jenkins is hamstrung by an investment bank that’s just too big to lose at the moment. From a business perspective, he will be bearing in mind that while investment banking is suffering now from the effects of a more testing regulatory and market structure environment, a turn in the business cycle and an acclimatisation to the new order combined with an up-tick in client confidence could render the business a much more valuable commodity.
Barclays is currently ranked eighth in global IB fee revenue year-to-date, according to Thomson Reuters/Freeman data, with a market share of 4.37%. That puts it firmly in the leading pack. Ninth-ranked UBS is way behind; while Barclays is running the three banks ahead of it (Deutsche Bank, Citigroup and Credit Suisse) pretty close. In the US, Barclays ranks seventh (sixth in 2013) and in EMEA, fourth (ninth in full-year 2013).
Sure, Jenkins could look to sell or IPO his full-service Wall Street investment bank. But that would be a short-sighted objective. Beyond the revenue ramifications, who would buy it? Incumbents would end up with massive overlap, and there just doesn’t seem to be anyone in that second tier of the premier league who would want to step up to the plate at this point in the economic, business and regulatory cycle, save perhaps for one or other of the Canadian banks that already have pretty decent US investment banking franchises. But it’s a stretch.
Even if Jenkins was tempted by the cash infusion a sale would generate, he would only be recognising a terminal – and likely low-ball – value that would kill a significant recurring revenue stream in one of his two core markets dead in its tracks. He can’t afford to do that at this point. Nor should he.