Gigantic further cost cuts to come at Barclays' investment bank. But pay is stable

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2015 could be a nasty year for people at Barclays investment bank. Following seven months of cost-cutting and the extraction of 2,100 jobs, things still aren't looking good at all.

Barclays is targeting a 12% return on equity (RoE) for all its businesses. However, in 2014, the return on equity in its investment bank was 2.7%, down from 8.2% the previous year. Over the same period, the cost income ratio in the investment bank rose from 77% to 82% and profits fell by 32%.

"The investment bank will have to deliver a 12% RoE through the cycle," said Barclays' chief executive Antony Jenkins during today's call. "That is our goal."

Barclays has two main methods of hiking its RoE: cutting costs and cutting capital. Both are likely to be used, but cost-cutting could be preeminent. Analysts estimate that Barclays needs to take another £1bn from costs to reach its target, a figure disputed by neither Jenkins nor finance director Tushar Morzaria. “A lot of costs are still to come out," said Morzaria today. "I can't go on enough about how excited I am about cost reduction," added Jenkins.

Some costs have been cut from Barclays' investment bank already. Operating costs fell by 8% last year, a reduction of 'just' £373m as per the chart below. The bank said these were mostly due to reductions in the front office, although middle and back office functions were also "optimized."

Cost cutting at Barclays investment bank:

Barclays operating expenses

Source: Barclays 


Compensation costs in the investment bank fell by 9% in 2014. However, pay per head at Barclays' investment bank seems to have been stable. Barclays' investment banking headcount figures are buried in the remuneration section of its annual report. Over the past 12 months, headcount at the bank went from 22,600 to 20,500, a reduction of 9%. In other words, headcount has been cut exactly in line with pay.

Pay cuts at Barclays investment bank:

Compensation costs Barclays investment bank

Source: Barclays 

Where Barclays will cut costs in 2015 

If Barclays is going to take out another £1bn in costs in 2015, where will those costs come from?

Headcount is a clear target. When it laid out the strategy for its investment bank in May 2014, Barclays said it planned to remove 7,000 jobs in total. With 2,600 taken out so far, it still has 4,400 to go. Although front office headcount cuts seem to dry up at the bank in February, London front office bankers have suffered nearly proportionately over the past year - between January 2014 and January 2015, Financial Conduct Authority (FCA) registered staff at Barclays in London fell by 135 people, or 7%. In volume terms, however, most of the cuts have clearly come elsewhere.

Banking analysts suggest that Barclays lops off its fixed income sales and trading business entirely. With its overwhelming focus on the easy-to-understand "origination driven business" which provides a service that "clients value," Barclays is determinedly rendering its previously formidable fixed income sales and trading business a shadow of its former self. Barclays' fixed income business failed to benefit from improving conditions in rates and FX in the fourth quarter, although a revenue reduction of just 10% year-on-year was an impressive performance compared to the 30% reduction at Goldman Sachs and the 23% reduction at J.P. Morgan over the same period.

On today's call Sandy Chen, a banking analyst for Cenkos Securities, suggested that Barclays might want to divest itself of entire business lines in fixed income. Equities and investment banking are running at a 60% cost ratio while macro products are more like 80%, suggested Chen. Why, therefore, doesn't Barclays make "entity level disposals" and dump the capital-hungry macro business entirely? This would make sense given Barclays' concurrent need to cut capital to hike its RoE.

Alternatively, an analyst at independent research firm Autonomous suggested Barclays might want to trim its U.S. investment banking business. Barclays will find it difficult to compete in the U.S. under new European pay rules and a U.S.-focused equities and IBD franchise doesn't seem to fit with its overall aspiration to be a UK focused bank.

Morzaria and Jenkins weren't drawn on either point. However, no one at Barclays' investment bank can be complacent over the coming 12 months. "“We won’t hesitate to take whatever action is necessary to get to those [12%] returns,” said Jenkins, ominously.

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