Barclays said it needs to step up investment in its trading platforms to revive its markets business, after admitting it has let slip a technology edge it had five years ago.
Barclays’ markets revenue in the third quarter slumped 31% from a year ago to £977m, with weakness in all areas. That was a steeper fall than at its US rivals (see previous page).
The British bank’s macro revenues fell 40% and in credit the decline was 22%, for a combined drop of 34%. Equities revenues fell 24% from a year ago to £350m, its weakest quarter for two years. Banking fees, which includes M&A advisory and equity and debt underwriting, were £607m in the latest quarter, down 6% from a year ago.
The weak trading results dragged Barclays’ shares 6% lower on Thursday as investors feared a turnaround in its investment bank had stalled. “The investment bank does the damage,” said Ian Gordon, analyst at Investec.
Barclays chief executive Jes Staley said staff will feel it in the pocket and bonuses were slashed for the third quarter, thanks to a more flexible compensation structure.
“We will not hesitate to use that flexiblity,” Staley said. The performance cost charge for the corporate and investment bank was cut by 25% in the third quarter compared to a year ago, he said.
Staley pinpointed four “drivers” to get the markets business firing again, including increasing spending on technology.
“Five years ago, Barclays had one of the leading technology trading platforms, whether it was in fixed income or equities or foreign exchange. We let that investment slip and we are going to re-engage investing in our trading platform,” Staley told reporters on a conference call after the results.
Staley cited a new rates trading platform rolled out in August as an example. It has partnered with Broadway Technology and launched a client trading capability for package trading on the platform last week. It said package trading is a crucial part of the US dollar interest rate swaps market, and the bank executed a US$2.6bn package trade for one client on the platform.
A new management team for markets has been put in place and Staley said other drivers to rebuild the business include reallocating about £20bn of risk-weighted assets from the corporate loan book to higher return areas, which was previously announced.
He said he also intends to add balance sheet leverage of £50bn in the markets business over the next couple of quarters, and to expand some products and services. That will be in areas that have little risk associated with them, such as repo financing or investment-grade securities, he said.
But Staley and investment bank boss Tim Throsby are also encouraging bankers to take more risk, after years of being risk-averse. Indeed, the bank is considering pushing deeper into riskier distressed debt trading and structured credit products in the US, including collateralised debt obligations, Bloomberg reported.
The changes for the markets business are part of a broader plan to improve Barclays’ profitability. Staley set new targets to lift return on tangible equity (RoTE) to 9% in 2019 and 10% or more in 2020.
Barclays’ RoTE was a negative 1.4% in the first nine months of this year, or positive 7.1% excluding losses from the sale of its African business and UK insurance mis-selling compensation. The corporate and investment bank’s RoTE was 8.4%, compared with 9.4% for UK retail and 19.3% for the consumer, cards and payments business.
Barclays reported a pre-tax profit of £1.1bn for the third quarter, up 32% from a year ago, thanks to lower costs and reduced litigation expenses.