Barclays’ investment banking dilemma is back
Rupak Ghose
Two months ago, I wrote that despite Barclays' share price surging, it was too early for it to claim victory. There was still much work to be done and a decent performance in the markets business – essentially trading and financing – in the first half of 2025 had covered up weakness in the investment bank.
Its third-quarter results illustrated another tale of two cities, with the share price roaring, thanks to the strong performance of the retail bank, not to mention some hefty new share buybacks.
But this sugar high may be distracting from the returns coming from the investment bank and the perennial question of whether Barclays can run a full-service investment bank like its US peers or whether that unit is a drag on the group.
What stood out about the third-quarter results in the investment bank is a significant underperformance versus the US peer group across all products. This was particularly stark in ECM, DCM and M&A but also, for the first time this year, Barclays' equity trading desk was a major laggard. Even in its core strength of FICC, Barclays lagged US peers slightly.
Quarterly results can be volatile but looking at LSEG data for 2025 to late October, Barclays' league table rankings have fallen across virtually all areas. In its core strength of DCM, it has fallen from sixth to ninth in investment-grade issuance and from sixth to seventh in high-yield issuance.
Competitive player?
At its investor day 18 months ago, Barclays highlighted how it was too dependent on DCM and needed to bulk up in ECM and M&A, ready for the shift out of debt transactions and towards equity dealmaking. And yet, despite having made management changes and invested in those businesses with a firm commitment to being a competitive player in the all-important US market, there is very little evidence of momentum – at least not yet.
More worrying than the wide chasm in dealmaking fees last quarter versus US peers is the pipeline. Bank of America is sitting on what might be the largest M&A fee ever when the merger of railroad operators Union Pacific and Norfolk Southern closes in around a year’s time. The jumbo Electronic Arts transaction was dominated by JP Morgan and Goldman Sachs, rather than a wide array of investment banks. In the US$17bn take-private of healthcare firm Hologic by Blackstone and TPG, the advisers were Goldman Sachs and Citigroup.
Monster revenues
The big US banks all had monster dealmaking revenues last quarter and look to be pulling away from the pack. They are also more aggressive than ever in providing financing. Adding in the long-established specialist M&A firms like Evercore and Centerview and the US is a tough place for Barclays to compete.
In its global markets business, Barclays saw a significant decline in revenues from what it refers to as "intermediation" (essentially trading – ie, everything that isn't financing) from the second quarter and a slight decline versus the third quarter of 2024. Financing revenues, on the other hand, were up around 20% year on year and were nearly half the global markets division’s revenues. This percentage is a lot higher than its competitors.
Stable and durable
Like its US peers, Barclays is keen to highlight that financing is a more stable and durable revenue stream than intermediation revenues, which can be driven by market volatility and movements. But Barclays' business here skews much more towards highly leveraged fixed income hedge funds and doesn’t have the same bread and butter equity financing revenues that the top US banks have. Much of the financing revenues within its markets business comes from private credit players and not just hedge funds.
Having bought Lehman Brothers’ US business in 2008, Barclays' equities business has long been nicely skewed towards the much larger and more profitable US market. But unlike fixed income, where Adeel Khan led a revival of the franchise around a strong flow credit trading business, Barclays has struggled to grow in equities in recent years.
Yes, the first half of this year was much better, with Barclays' equities revenues outpacing US peers, albeit from a low base and if adjusting for a one-off gain a year earlier. But once again the third-quarter performance of flattish year-on-year growth stands in stark contrast to US peers that were up more than 20%.
And just like with ECM and M&A, it’s hard not to wonder what the underlying profitability of Barclays' equities business is. These are scale businesses and in the third quarter, Barclays' equities revenues of £689m were a fraction of the US$4.1bn and US$3.7bn that Morgan Stanley and Goldman Sachs generated, respectively.
In the world of trading, the big are getting bigger, both among the investment banks and also trading firms like Jane Street, Hudson River Trading and Citadel Securities.
The questions about the future shape and scale of Barclays’ investment bank have not gone away. Of late, shareholders have ignored the issue but with the bank’s valuation multiple still cheap versus peers it may again rise up the agenda soon.
Rupak Ghose is a former financials research analyst