BarCap's big issue (and why it had to keep paying those new equities and M&A people)
2011 is going to be a big year for BarCap's fledgling M&A and equities businesses.
BarCap hired a huge heap of people in 2009 and 2010, many of them on guaranteed bonuses. This will be the first year in which the stabilisers are totally off. Guarantees will expire, growth is needed. Now.
2011 is the year in which revenues in the equities and advisory businesses need to increase substantially to avert disaster.
The big Barclays problem
Barclays' big and immediate issue is that its return on equity is below its cost of capital.
The former was 7.2% for 2010. The latter was 11.5%
Something needs to be done.
The bigger BarCap problem
Bob Diamond has several ideas for increasing its ROE. Most importantly, he intends to sell, close, or fix the 15 out of its 44 business lines currently delivering returns below 11.5%.
However, if Barclays is really to resolve the difficult ROE issue, Arturo de Frias Marques, head of banks research at Evolution Securities, contests that it needs a massive increase in revenues at BarCap.
This is based on the fact that BarCap currently generates a 17% RoTE with RWA of 190bn. According to Barclays' own calculations, RWA will increase by 100bn in the next two years. To simply keep its RoTE stable, de Frias therefore points out that BarCap will need to increase its bottom line by 50%.
To do this, he says it will need to increase revenues from equities and investment banking by 50% in just two years. It also plans to cut costs by 15%.
Feasibility fantasies
How possible is this?
BarCap's revenue growth in M&A and advisory ('Investment banking') and equities was strong in the fourth quarter, increasing 45% and 74% on Q3. However, for the full year, revenues in equities and prime services actually fell 6%, while investment banking revenues rose just 3%.
At the same time, pay per head at BarCap appears to be increasing fast. As we pointed out yesterday, there was an increase of 19% last year - more, even, than at UBS.
In 2011, BarCap's new equities and investment banking hires need to make a superhuman effort to prove their worth. In the current climate, they are likely to fail. If they do, costs will need to be cut - substantially.
