Thousands of jobs now temporarily secure at Barclays' underperforming investment bank

Thank goodness for that. With Jes Staley let go with a mere monetary penalty, employees at Barclays' investment bank can live to die another another day. Staley the saviour is secure for the foreseeable future; deep exhalations and champagne all round.

Barclays' bankers certainly seem predictably pleased with Staley's survival. "There’s a palpable sense of relief," one MD told Financial News, adding that Staley has been, "championing the investment bank," and was effectively a breath of fresh air after the horror of Antony-the-retail-bank Jenkins.

With the FCA out of the way, Staley's position is made all the more impregnable by the fact that he also managed to negotiate a mere $2bn fine with the Department of Justice in February.  All that remains now is to implement "the strategy."

Herein, however, lies the problem. As the various charts at the bottom of this page from Morgan Stanley's banking analysts make clear, Barclays' investment bank lost market share in ever single area in 2017: the investment banking division was down, equities was down, and fixed income currencies and commodities (FICC) were down. The only other bank to share this dubious honour was Deutsche Bank, and bad things have been taking place there of late.

Even more damning, though, than Barclays' declining market share was last year's return on equity. At just 1.1% in the corporate investment bank, this was down from 6.1% in 2016. Capital costs are not being covered by a long margin.

This matters because Staley has made it his mission to increase RoE in the CIB. When he arrived in early 2016, Jes outlined a strategy for growing the division based upon the presumption that returns were at a cyclical low. "You cannot have global capital markets with the intermediate industry generating returns below the cost of capital – it’s not sustainable,” Staley said in his first strategy presentation two years ago. Henceforth, he said Barclays would be, "all about returns." Right.

Despite limited success, Staley's confidence in this strategy has not faltered. Barclays' aspirations for the corporate and investment bank in 2018 are all about improving technology systems, allocating assets to high returning businesses like derivatives trading, and pursuing market share in areas like electronic execution, macro, prime, equities and credit. Last year, Barclays hired over 40 new managing directors to the CIB. After disposing of 100 under-performing incumbents, 2018 is all about delivery.

Will Barclays investment bank employees come through? Morgan Stanley's analysts predict they will underperform rivals in equities sales and trading in the first quarter (year-on-year growth of 2% versus a market average of 19%), but outperform in IBD (12% versus -4%) and FICC (7% versus -3%). In its favour, Barclays' corporate and investment bank looks well balanced (see the chart at the bottom of the page) - like a transatlantic J.P. Morgan or Goldman Sachs, compared to less diversified European banks like Credit Suisse and UBS.

This does not mean, though, that jobs at Barclays' CIB are a sure-thing. Activist investor Edward Bramson continues to lurk in the wings, pushing for "change" and a "turnaround" in the apparent belief that he can double Barclays' stock price.  Yesterday, the Evening Standard reported that Bramson wants to spin out or close down the markets division in the next two to three years. Despite Staley's bluster, Barclays hasn't totally taken this option off the table: last summer, the board met at a "Palladian Mansion" in the British countryside to discuss just this eventuality. 

For the moment, Staley has an opportunity to test his strategy further. Achieving results will not be easy: in this year's Blue Paper, Oliver Wyman and Morgan Stanley identified Barclays as one of the banks over-exposed to shrinking revenues from institutional clients in its sales and trading business. Today, Morgan Stanley's analysts note that performance at Barclays investment bank is key to improving the stock price, but that the investment bank itself is at risk of missing its cost targets.

Staley is still in his seat, but the pressure on both he  and Barclays' traders is growing. Barclays' AGM is scheduled for May 1st. Bramson has until April 24th to assemble his case for culling the trading business. And if not? There's always next year.

 

Changing market share by bank and business 2016 vs. 2017 

Investment bank revenue mix, 2018

 

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