BAML says Barclays' US ex-Lehman business should go it alone
A note is doing the rounds from analysts at Bank of America Merrill Lynch. It suggests it might be time for Barclays' ex-Lehman bankers in the U.S. to unpick the deal done by Bob Diamond in 2008, to split off from Barclays and to become a separate entity.
The idea is intrinsically appealing. Barclays' investment bank is due to have yet another strategic review and yet another chief executive. The organization is being led by a UK-focused ex-retail banker who has committed to keep the compensation ratio at less than 35%, even though U.S. banks pay 50%. The higher bonuses paid to Barclays' investment bankers in the New York have already caused outrage in London.
The ex-Lehman business in the U.S. is the best bit of Barclays' investment bank
BAML's analysts argue that the ex-Lehman business is the jewel in Barclays' investment banking crown. Based upon Barclays' own disclosures, they estimate that the investment bank makes two thirds of its profits before tax in the U.S, which they claims generates a return on equity of 16%, compared to just 4% in Europe and 8% in Asia.
Unpicking the Lehman (now the U.S.) business would be "strategically significant," argue BAML analysts. It would enable Barclays to jettison its plans for global domination and allow the investment bank to align to its UK and corporate client base, in much the same way as is happening at RBS.
Not everyone thinks that a spin-out of the ex-Lehman business in the U.S. would be advisable, however. Chris Wheeler, a director at Mediobanca in London and ex-Lehman banker for a decade, tells us Barclays' US business alone would be, "too big to be to niche and too small to be a serious player.
"You need global coverage and global distribution," adds Wheeler. A U.S.-focused business wouldn't have that, and would need to build an international presence from scratch, he claims.
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