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First cut isn’t the deepest

31 October 2011 By George Hay, Margaret Doyle

Barclays’ latest numbers add up to a curate’s egg. In a terrible third quarter for investment banks, Barclays did relatively well. But by the end of September, chief executive Bob Diamond had already axed 3,500 posts – 500 more than previously expected for the whole year. That’s inauspicious for rivals.

Barclays Capital, the UK lender’s investment banking unit, held up creditably in the three months to Sept. 30. Equities were the big loser, suffering a 40 percent revenue decline quarter-on-quarter, against the sector’s 14 percent. The flagship fixed income, currencies and commodities division beat expectations. Revenue here fell 16 percent to 1.4 billion pounds, against an average 41 percent industry decline so far.

And yet Diamond is managing Barclays defensively. He has slashed 2,100 jobs since June alone, and expects the reductions to continue. BarCap will not be immune – it was the only part of Barclays where pre-tax profits fell. Indeed, a bias towards cutting expensive BarCap staff would explain why Diamond is now bullish about exceeding his 1 billion pound cost savings target.

Barclays has other plus points. Its retail bank continues to recover as bad debts recede: pre-tax profits for the first nine months of 2011 rose 55 percent compared to the same period in 2010. Meanwhile, the Independent Commission on Banking’s report in September was a dog that didn’t bark. Its overall impact on group costs will be just 1 billion pounds, according to a person familiar with the situation.

This may be why Diamond feels bullish enough not to follow peers and slash profitability goals. But meeting his targeted 13 percent return on equity in 2013 will largely depend on the euro zone. Exposure to troubled sovereigns has been slashed but is still 18 percent of core Tier 1 capital, and Barclays has over 45 billion pounds of retail and corporate lending to Spain and Italy. If these economies tank, pushing the ROE beyond its current 8.1 percent will grow tougher.

The bottom line is that Diamond is cutting even though his bank is gaining share. For those investment banks that are ceding ground, 2012 is shaping up to be a stinker.


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