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FICCs it now

6 May 2014 By George Hay

Barclays has shown why it needs to “do a UBS.” Both the UK bank and its Swiss peer had a rotten time in their fixed-income trading operations in the first quarter, numbers released on May 6 show. The difference is that Barclays is only just understanding a problem that UBS attacked 18 months ago.

Weakness in fixed income, currencies and commodities (FICC) is a sector-wide theme: year-on-year, JPMorgan’s FICC business fell 21 percent in the first quarter. Barclays’ 41 percent and UBS’ 38 percent drops are worse not only because of peculiarities like reporting in non-dollar currencies and an unfavourable product mix. Both banks’ FICC units are in flux.

For UBS, that’s not surprising. In October 2012, the Swiss bank became the first major investment bank to pull back from offering the full gamut of advisory, fixed income and equities services. Instead of battling volatile market conditions and onerous regulatory FICC capital requirements, it slashed fixed income and reorganised its business to reassert the primacy of its wealth management franchise. The stock re-rated and is now 30 percent higher.

Even though the bank now reckons it could take a year longer to reach its 15 percent return-on-equity target due to regulatory requirements to guard against future litigation risks, the credibility it has built up means its shares shrugged this off. Pledging a special dividend helped.

Being a late starter makes it tough for Barclays to copy UBS. But a UBS-style pullback is harder for the UK bank to implement too. FICC is the biggest and most prestigious part of its investment bank. Even after a 50 percent year-on-year dip in quarterly pretax profit, investment banking still supplied 40 percent of the group total. And Barclays doesn’t have an obvious global business like UBS’ wealth management franchise that it can pivot around.

Still, the latest grisly figures – including a hapless return on equity of only 4.7 percent in investment banking – remove any lingering doubts that change is needed. The UK lender’s strategy day on May 8 provides a chance for a reset. Even if Barclays can’t exactly copy UBS, it should be as radical in fixing or exiting low-return businesses. 



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