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Less Barc, more bite

31 Oct 2012 By George Hay, Dominic Elliott

Barclays needs a decisive, UBS-style change of direction. While rivals like Deutsche Bank and Credit Suisse saw revenue in fixed income, currencies and commodities spike in the third quarter, Barclays’ normally strong FICC business underperformed. Worse, the results also included two fresh regulatory probes. It shows why new chief executive Antony Jenkins should consider changes as radical in tone as UBS’s root-and-branch restructuring.

First, Barclays needs to see off its external threats. The latest regulatory investigations, which focus on American power trading and possible offences under the U.S. foreign corrupt practices act, can be added to probes into Libor, Serious Fraud Office scrutiny of the bank’s Qatari capital-raising in 2008, a review of the bank’s culture, and fallout from the mis-selling of products to retail customers. Jenkins shouldn’t just roll over if authorities are targeting Barclays as a soft target. But there is probably more benefit than usual in agreeing swift settlements.

Then Jenkins must also decide whether Barclays has the right model. Its performance is far from acceptable. Neither European retail banking nor the overall corporate banking division are achieving the group’s 11.5 percent cost of equity. But the real problem is the investment bank, which accounts for half of Barclays’s risk-weighted assets. New Basel III regulations will significantly reduce the investment bank’s current 14 percent return on equity.

A Deutsche Bank-style cost-cutting exercise in the investment bank without wider structural change looks a non-starter. To meet the investment bank’s cost of capital Jenkins would have to cut its cost:income ratio to 51 percent, 20 percentage points less than 2011, according to Morgan Stanley. Instead, he could cut areas where Barclays is either subscale or making low Basel III returns: structured credit, securitised products and emerging markets in FICC, and Asian equities. This kind of slimmer investment bank could make its Basel III cost of capital by 2014, Morgan Stanley reckons.

Jenkins could ram home his reforms with a big move on pay. Fortunately, the investment bank is already considering cutting its compensation ratio to the mid-to-low 30 percent range, compared to 39 percent now, according to two people familiar with the situation – although plans to up base salaries in lieu of bonuses could backfire. If Jenkins can use annual results in February to combine pay, cultural and structural change, Barclays can turn a corner from the Bob Diamond era.


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