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Stuck in the middle

1 March 2016 By Dominic Elliott

Barclays’ new strategy falls somewhere between its two old ones. Chief Executive Jes Staley is tacking carefully between the gung-ho approach of former leader Bob Diamond, and the shrink-happy direction of his immediate predecessor Antony Jenkins. In short, it goes like this: sell out of Africa, yet keep the investment bank intact.

Staley has kept faith with the former Barclays Capital, despite it making a return on tangible equity of just 6 percent last year. Barclays wants each of its two newly created units – a UK ring-fenced entity and a corporate and international bank – to make a return on tangible equity of over 10 percent. It can’t be sustainable for returns in Barclays’ other businesses to prop up the broker-dealer unit, as they do now.

Hence a rethink of the investment banking strategy may be necessary unless Barclays strings together several decent quarters. In the first two months of this year, Barclays has apparently maintained its revenue level from the first quarter of 2015, but Staley expects it to post weaker earnings overall when the current three-month period ends. Standing between Barclays and decent returns are a heap of non-tax deductible legal costs. Strip those out, assume a 30 percent tax rate, and the division would have made a return on tangible equity of 9 percent.

But even that is below Barclays’ probable cost of equity. A huge reduction in risk-weighted assets, down by more than a half since the end of 2013, may help – Barclays has to hold less equity as a consequence, so its earnings equate to a higher percentage return. Over the same period, investment banking risk-weighted assets at Deutsche Bank have risen 70 percent. As Deutsche now shrinks, there may be a chance to snatch market share.

Compared with the tangled strategy of rival Tidjane Thiam at Credit Suisse, or the complex sprawl facing Bill Winters at Standard Chartered, Staley’s approach is pleasantly simple. But to work, it relies on the idea that investment banking is a viable business and one that the UK bank can excel in. He hasn’t done enough with this opening salvo to convince investors of either.

 

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