Barclays' excellent third quarter raises questions about bonuses

Based on their stupendous effort in the third quarter, people in Barclays' corporate and investment bank (CIB) deserve to get paid. While most other banks shrunk or turned in a very negligible increase in profits, Barclays' profits rose 77% as the bank took market share. 

The charts at the bottom of this page illustrate the achievement. In Q3, Barclays' fixed income sales and trading performance was second only to Morgan Stanley's. Its equities performance was second only to Bank of America's. Its advisory and capital markets performance was less comparable as Barclays doesn't break these out, but CFO Tushar Morzaria said the bank had its best ever third quarter for banking fees and that it performed particularly well in the U.S.. While RBS's rates business had a near-death experience in Q3, Barclays' rates business was credited with a "strong performance" that drove its fixed income trading growth.

All of this is impressive, and if you work for Barclays it will help focus your mind on one thing: bonuses. Following an excellent third quarter, people will expect to be paid.

Those expectations could present some difficulties. In the first half of 2019 Barclays cut bonus accruals across the bank by 23% compared with its accruals in the first half of 2018. By June, Barclays had only accrued £456m for 2019 bonuses. By comparison, the full-year bonus pool for the entire group was £1.5bn in 2018, of which £550m went to 868 top people in the corporate and investment bank alone. If accruals are not stepped up dramatically, people in the CIB will clearly suffer. 

So far, there's not much sign of this happening. The big increase in profits in Q3 was precisely because revenues rose while costs in the CIB were held static. Nor does there seem much room for manoeuvre in the fourth quarter - Barclays has a targeted return on average tangible shareholder's equity of more than 9% for the group in 2019. In the first nine months of the year it was 5.1% (or 9.7% after litigation and conduct charges), which would seem to preclude a big last minute bonus-dump. 

Banking analysts at rival firms were alert to the bonus risks in today's investor call and asked repeatedly what Barclays plans to do about paying people in its CIB this year. The response from Morzaria and CEO Jes Staley was mixed.  “We are a pay for performance business,” said Morzaria. “Whereas targets are important for us, they are more waymarkers….We will do the right thing by managing the company for the medium term rather than for the short term for the sake of it.”

Staley, however, seemed less inclined to placate any of his bankers and traders who are wondering whether they'll get paid. "We are not going to be slavishly held to the target, but at the same time we recognize that we need to deliver a good return to our shareholders and that compensation is a variable that can be used to deliver that return," he told analysts on today's call. Euphemistic though it is, this sounds like bonus cuts are not being ruled out.

Staley says Barclays committed to equities 

Lastly, Staley moved to nix any concerns that Barclays' equities business might go the same way as Deutsche Bank's, or Nomura's or HSBC's ex-Asia. 

Despite the strong third quarter, Barclays' equities revenues were down 11% in the first half along with much of the rest of the market. Staley said there are no plans to pull back from the equities business and that: "To be a bulge bracket investment bank in the two deepest capital markets in Europe and the U.S. you have to be across all asset classes, which includes equities."

"We like the [equities] franchise that we have," added Staley. "We believe we have a very good research product and we think we can compete with the U.S. players."