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Morning Coffee: Barclays looks at U.S. retail as alternative to investment banking growth, and Lloyd Blankfein’s farewell note

They say that there’s never a bell rung at the top of the market, but there are some things which seem to happen about once every business cycle.  A new record for the tallest building in the world, for example.  A high proportion of the Harvard Business School graduating class going into finance.  And a UK High Street bank having a serious look at expanding into the USA.  This time it’s Barclays, thinking about expanding its online lending operation in the USA to offer a checking account product and gather deposits.

It’s a perennial problem for UK banks – Britain is a small island.  If you can avoid massive conduct fines and run your business in relatively stable economic conditions, then you have a decent chance of generating a double digit return on equity there (as Barclays did in Q1 2018).  But if you’re a big incumbent player then you’re probably maxed out on market share, so you can’t reinvest those earnings in your core retail and Barclaycard franchise.  Historically, the answer has been to channel the profits into trying to compete globally in investment banking, and Jes Staley still seems to be committed to this. But when you’ve got activists like Sherborne in the shareholder base, there’s a limit to how aggressively you might want to push growth in markets and IBD.

So, the USA looks attractive.  Although it’s been a bit of a graveyard for UK banks in the past (HBOS’ acquisition of Drive Financial and HSBC’s of Household International are two names engraved on the wall of shame from the 2000s), there have been success stories too, like RBS’ ownership of Citizens’ Bank.  It’s a healthy economy with a broadly friendly regulatory environment, and one where there are a lot of local incumbents who have not faced particularly aggressive competition historically, and who haven’t kept on the cutting edge of technological progress.

But more to the point, Barclays has already got scale in America.  About a fifth of its capital is allocated there, generating 40% of group profits.  The online lending operations have been going since 2016, targeted at the “superprime” market.  At present, it takes term deposits to fund them, but that can be expensive compared to the cheap funding that you get by offering current account services.  And Barclays has enough expertise in payments to be a credible provider.  Since one possible business model of partnering with a fintech firm is looking less likely – New York State regulators are frowning on this sort of arrangement – it might make sense for Barclays to build up something there.

So for Barclays people, or investment bankers thinking of moving to Barclays, this probably ought to be taken seriously.  This industry is all about capital allocation, and if Jes Staley and his board (who have blown hot and cold on its global banking ambitions in the past) have an potential source of growth in international retail banking, then that could be a credible alternative use of capital to the IBD growth plan in the last strategic review.  There’s never a bad time to have a good quarter’s trading results, but a few big wins for the investment bank while the US retail expansion is still under discussion could be very useful indeed.

Goldman Sachs’ succession announcement all went according to expectations, announced in the context of a strong set of results (albeit that the share price went down).  Lloyd Blankfein’s farewell letter said that he was “not the easiest person to live with” but heaped praise on Goldman employees for their teamwork and the way they pull together in a crisis.  As he headed off towards a final payout potentially as high as $85m, Lloyd praised his successor David Solomons specifically for “strategic insight into all of our businesses, focusing on the key trends that will shape them and what our clients will most value from us in the years to come”.  This could be boilerplate language, or it could indicate that the Solomon's succession is indeed part of a strategic plan to pivot GS away from the trading-heavy operation of the Blankfein years and toward … what?  Back to banker-led relationships and advisory?  Asset management?  Consumer finance for millennials with the Marcus brand?

According to the WSJ, the Solomon era may mean more openness to the capital markets – even an investor day – and is likely to mean a significantly smaller partner class of 2018, with more revenue-earners and fewer compliance and management staff.  He is also, apparently, thinking of reducing the size of the Management Committee, also to reduce the proportion of pure managers on it.  That might suggest that the “key trends” of the farewell letter are that the pendulum is beginning to turn and the focus on compliance, systems and IT of the last decade may be coming to an end.  The early message seems to be that if you’re at Goldman, it’s time to make sure you’re attached to a revenue line.


A survey of finance professionals has found that Frankfurt is not necessarily in pole position to pick up Brexit related job gains.  Paris in particular seems to be attracting head offices of major banks. (Handelsblatt)

A survey of 67,000 people seems to find that theories of “person-environment fit” don’t seem to predict what kind of jobs people end up in.  Apart from careers like artists and carpenters, there doesn’t seem to be much correlation at all between personal interests and work life (BPS Research Digest)

Point72 was up around 7% for the first half of the year, in line with multistrategy funds of similar size.  The fund also raised around $4bn of new outside money, although not in the UK where it failed to get authorisation (Bloomberg)

SocGen have hired Claire Calmejane, formerly of Capgemini, from Lloyds to be their new Chief Innovation Officer (Finextra)

Jeff Bezos is now the richest person to have existed since records began (in 1982). The value of his stake in Amazon is now over $150bn, which in inflation-adjusted terms is now greater than the value of Bill Gates’ Microsoft holdings at the peak of the dot-com boom.  (Bloomberg)

Mike Lloyd is leaving the AA’s insurance business which he has run for the last four years.  He was most recently in the newspapers when Bob Mackenzie, the AA chairman, had to resign after punching him at a corporate event last year (The Times)

Nomura decisively won the World Cup forecasting competition for sell-side research houses.  They picked France to win; everyone else had either Brazil or Germany (Bloomberg)

Banks are being sued by British local governments over the “LOBO” loans with embedded interest rate swaps that they sold before the crisis.  The councils are claiming that LIBOR manipulation means the loans should be voided and the fees returned (Public Finance)

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AUTHORDaniel Davies Insider Comment

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