What was really said about the future of Barclays' investment bank

Barclays' full year 2013 results announcement was a damp squib. Expected to involve a major strategic reworking of the investment bank, it did nothing of the sort. Yes, 220 managing directors and 600 directors are being made redundant. Yes, there's the 'exit quadrant' of businesses that Barclays wants to get out of. But all of this was pretty much known already. The world is still none the wiser how Barclays plans to turn its investment bank around.

The failings of Barclays investment bank

And yet, turn its investment bank around Barclays must.

Profit in the investment bank fell 37% last year compared to 2012. In the fourth quarter it made a loss of £329m. This loss was partly due to the UK Bank Levy and the costs of executing the 'Transform' cost cutting plan, without which Barclays would have made a profit of £91m, but the UK bank levy is an annual recurrence and £91m is a pitiful margin on net operating income of £2.2bn.

Worse, as analysts repetitively pointed out during today's investor call, Barclays' cost of equity in the investment bank is still higher than its meagre 8.2% return on average equity. Barclays investment bank doesn't make economic sense. And far from cutting headcount in the investment bank, Barclays added 600 people last year.

So, what - exactly is going on?

In today's call, CEO Antony Jenkins and CFO Tushar Morzaria insisted that Barclays does have a plan to raise returns, but admitted it may not be entirely clear. Morzaria said the plan revolves around Barclays' so-called 'exit quadrant businesses', but confessed it's opaque.  "It's difficult for you guys to see into our investment bank, because we haven't provided the detail, somewhat deliberately," Morzaria said.

For his part, Jenkins reiterated over and over again that Barclays plans to reduce the cost ratio and the compensation ratio in its investment bank. Analysts asked how these stubbornly high ratios will be reduced. - By cutting costs or by raising revenues? Both, said Jenkins.

Barclays plans to make £350m of annual cost savings by automating processes in its investment bank by 2015. It also plans to stop hiring any new managing directors or directors this year. And it's hopeful that the struggling fixed income trading business will be resurgent and boost revenues. 2014 has started well. 'What if FICC revenues don't recover in 2014?' asked analysts on the call. In that case, Barclays will have to rethink, Jenkins said.

Following the increase in pay for Barclays' investment bankers, analysts also questioned whether the bank can really afford to pay what it refers to as 'competitive' compensation. "How can you afford to pay competitively when U.S. investment banks only have a 10% capital ratio?," one asked. As we noted earlier, Barclays pays less than UBS, Credit Suisse and Goldman Sachs.  Jenkins and Morzaria didn't have much of an answer.

And what about the increase in headcount? Take no notice, said Morzaria - costs are what's important. He added that headcount can often increase as a result of near-shoring and bringing IT development work in-house - measures which will reduce compensation costs in the long term. For the moment, however, Barclays' compensation costs and its headcount are increasing in the investment bank. At the same time, regulatory requirements have kept non-compensation costs stubbornly high.

'Trust us'

Fundamentally, Jenkins and Morzaria asked investors to trust them to do the right thing with the investment bank. There will be no big fireworks, but there will be a steady running down of the so-called 'exit quadrants' (US mortgages, residential mortgages, leveraged loans and CLOs, structured credit, monoline derivatives, and corporate derivatives), and in itself this will cut costs.

In the meantime, Barclays will keep paying its people competitively, it will clear out 620 senior staff (and not hire in any replacements), it will automate as much as possible, and it will remain committed to its fixed income business.

This message doesn't seem to have gone down too well. Since announcing its results, Barclays' share price has fallen 5%. At some point, investors' patience will run out.