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3 March 2015 By Dominic Elliott

Barclays has got one thing right. Last year the UK bank found itself in the eye of a PR firestorm for hiking staff bonuses when profit fell. On the face of it, Chief Executive Antony Jenkins has managed to get things the right way round in his 2014 results, announced on March 3. Barclays’ investors shouldn’t celebrate just yet, though.

It’s not surprising Barclays’ staff costs have fallen – Jenkins is now running his investment bank with three-quarters of the staff and a third of the risk-weighted assets it had last year, at 122 billion pounds ($187 billion). But having cut 2,100 investment bankers, the average amount paid to those who remain has stayed at 199,000 pounds. The percentage of investment bank revenue devoted to paying staff has actually gone up slightly.

Poor investment bank performance explains why. Return on equity (ROE) has fallen from 8.2 percent in 2013 to 2.7 percent. That’s miles below the banking sector’s cost of capital, which McKinsey puts at 11.5 percent. Fixed income revenue fell 18 percent in the fourth quarter versus the previous year’s period, worse than European banks on average; revenue from equities dealing was roughly flat but still below peers.

There was also a big difference between full-year headline and underlying profit. The investment bank had to swallow an extra 1.25 billion pound provision for foreign exchange-related litigation. Factor this in and a one-off hike in fixed salaries as a result of the European bonus cap, and the investment bank’s pretax profit would have actually fallen 12 percent, the same as the drop in the bonus pool adjusted for that extra expense.

At least Barclays’ other divisions are holding up. Barclaycard produced an ROE of 16 percent in 2014, while retail banking delivered a 12 percent return. Jenkins’ turnaround programme is sufficiently on track, with 2016 targets on leverage and capital looking achievable, to allow him to receive 57 percent of his potential bonus for 2014.

But an 11 percent core Tier 1 equity target is low compared to UK peer Lloyds, which doesn’t have an investment bank. Lower costs can only offset declining trading revenue so far, and United States and UK ring-fencing costs won’t make it any easier to generate investment banking returns. Jenkins may have to cut his misfiring investment bank further.

 

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