Jes Staley's rose-tinted vision for Barclays' investment bank
As anyone who's worked at Barclays Investment Bank any longer than 12 months will know, things have a habit of changing there. In the last eight years, the investment bank has been led by Bob Diamond, Rich Ricci and Jerry Del Missier, Ricci on his own, Eric Bommensath, and Tom King, each with their own particular strategies. Now it's firmly under the control of group CEO and ex-J.P. Morgan banker Jes Staley.
Today was Staley's first opportunity to set out his plans for the future. Needless to say, they're not the same as his predecessors'. However, if you work in Barclays' investment bank they're good news - as long as you believe Staley's optimistic version of the future.
1. Barclays will have a "bulge bracket" transatlantic investment bank which will take share from weaker rivals
Staley has worked in investment banking since 1979. He's been the CEO of J.P. Morgan's investment bank and he's been the managing partner of hedge fund BlueMountain Capital Management. He is big on investment banking, very big indeed.
Barclays has a "bulge bracket investment bank," said Staley during today's call. It is a "top tier" player, he added.
Under Antony Jenkins, the ex-CEO of Barclays Group, Barclays' investment bank was perceived as shrinking. Under Staley, this is not so. Under Staley, Barclays is instead being pitched along with Goldman Sachs and J.P. Morgan as standing firm while all around crumble. "As one of the few remaining investment banks, Barclays is well positioned to benefit [from an improving market],” said Staley.
Basically, Staley sees Barclays as a transatlantic version of J.P. Morgan.
2. This is just a temporary problem - the outlook is VERY rosy
If Staley's right, this is just a temporary blip - not only for Barclays' investment bank but for all investment banks everywhere.
Pressed by analysts on the fact that he seems to be presuming an increase in the 6% return on equity at Barcalys' investment bank, Staley said the industry as a whole is in a slump from which it must emerge: "You cannot have global capital markets with the intermediate industry generating returns below the cost of capital - it's not sustainable." Unfortunately, he didn't elaborate on how this unsustainability will end.
3. Barclays investment bank will therefore NOT be cutting risk weighted assets or costs significantly
What about cutting costs and trimming risk weighted assets (RWAs) to improve the return on equity in Barclays' investment bank? There will be none of that. Even though returns in Barclays investment bank are below the cost of capital and lower than in any other of its business units (see the chart below), Barclays investment bank will not suffer further cuts in RWAs or significant further cuts in costs.
"To significantly reduce RWA further would reduce the investment bank's core functionality and ability to compete in the top tier," said Staley today.
Instead, Barclays is selling off its Africa Banking unit. Several analysts suggested that this seems strange given that the unit generates higher returns than the investment bank and Barclays is - in Staley's words, "all about returns," but this is the way it will be.
During this morning's call, Staley and Barclays' CFO Tushar Morzaria made a big deal of the fact that risk weighted assets in Barclays' investment bank now account for just 25% of the group total, whereas two years ago they accounted for 50%. However, as one analyst pointed out, the investment bank's RWAs will rise to account for 40% of the total again once Barclays winds down its non-core business (something now being "accelerated") and sells off Africa.
4. There won't be huge cuts to headcount
Nor should Barclays' investment banking staff be too fearful of losing their jobs. Yes, Staley is cutting another 1,000 jobs from Barclays investment bank, but headcount in the business has borne up well. At the start of 2014, it was 21,000 people. At the end of 2015, it was 20,500 people. That's a reduction of the merest 2.4%.
5. But the use of temporary and outsourced staff has gone through the roof
Staley only took over from Antony Jenkins as Barclays' CEO last November, so this may not entirely be his doing, but Barclays has been staffing-up with an army of contractors and outsourced employees. Spending on outsourcing in the investment bank increased 67% last year. Spending on temporary staff increased 41%.
6. Barclays investment bank bonuses are down 8% but overall pay has barely fallen at all
The bonus pool in Barclays' investment bank continues to fall. It was down 8% last year, as per the chart below.
As ever, the bonus pool is only part of the story. Thanks to role-related pay and salaries, pay per head in the investment bank has only fallen 3% - to £167k in 2015 ($234k), versus £172k a year earlier.
7. There's no more talk about the importance of IBD over sales and trading
Under Tom King, the former head of Barclays' investment bank, with whom Jes Staley has parted company, Barclays was all about IBD. When Tom King set out his strategy for the investment bank in September 2014, he spoke gushingly about the importance of M&A and ECM and of the synergies that lay between them.
While King was an M&A banker by profession, Staley has had more exposure to the trading floor. There was none of this IBD-talk this morning. Nor was there much talk about the importance of Barclays' equities sales and trading business. Instead, it looks like fixed income traders might be back in the ascendant.
As the chart below shows, Barclays' fixed income traders didn't do that badly last year (its credit traders actually had an exceptional Q4, with revenues rising 28%). It's equities traders, however, were some of the worst performing of the lot. And as for Barclays' big M&A bankers and capital markets professionals? No one really knows who they performed comparative to the rest - Barclays has stopped breaking out revenues for M&A, ECM and DCM separately.
8. Barclays investment bankers will have to work a lot more closely with the corporate bankers, and to act as a counterweight to the consumer bank
Under Staley's vision, Barclays' investment bank is a crucial cyclical counterweight to Barclay's big consumer business. When investment banks are strong, consumer banks are weak - and vice versa, insisted Staley. Both units are necessary as part of a diversified portfolio.
Barclays investment bankers will also be expected to work a lot more closely with its corporate bankers, a la J.P. Morgan and Citi.
9. Barclays investment bank will be all about London and Wall Street
There wasn't much mention this morning of the shrunken Asian business which was supposed to be the next big thing at Barclays' investment bank in 2009. Instead, Staley simply said that: "The group will be anchored in two financial centres: London and New York.” And that there will be a "focused presence" elsewhere in EMEA and in Asia Pacific.
In the notes accompanying its remuneration statements, Barclays revealed that 55% of its staff who earn more than £1m in total remuneration are based in the US, 34% in the UK, and 11% in the rest of the world.
10. But within the context of the overall strategy, the future may not be easy
For all Staley's optimism, the future for Barclays' investment bank is not exactly assured. Various analysts during today's call suggested Staley should be cutting the investment bank instead of the African business. And Staley's strategy of accelerating the closure of the non-core business is likely to lead to big losses in 2016. Barclays' shares were briefly suspended this morning as they plunged in price: Staley and Barclays' investment bankers may buy the new story, but it will only work if markets do too.
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