Anatomy of a wind-down: life in Barclays Non-Core

Mark Baker
Published on:

For the past couple of years, staff in a unit of Barclays have been hearing the sound of bells. Unlike at the New York Stock Exchange, however, this does not indicate the end of the trading day. The Barclays bells tell the global team tasked with offloading the bank’s non-core businesses that one of their colleagues has closed a deal.

For John Mahon and Harry Harrison, co-heads of Barclays Non-Core, the bells are no mere gimmick. They are a crucial way to maintain the momentum of the mission to restore the group’s returns to where they should be.

Barclays CEO Jes Staley and chairman John McFarlane have staked pretty much everything on this, even asking shareholders to absorb the pain of a halved dividend for the next two years to help finance it.

Barclays’ corporate and investment bank was one of the industry’s better performers in the first quarter of 2016: revenues fell by only 4% year-on-year, while those at many peers fell by 15% to 30%. Nevertheless, the wind-down of non-core operations is firmly at the heart of Barclays’ strategy right now.

If the task can be pulled off, the prize looks like a big one. Barclays’ latest quarterly results showed the core businesses of Barclays Corporate & International and Barclays UK posting a return on tangible equity (ROTE) of 9.9%. The UK business racked up an enviable 20.5% on its own.

However, taken as a whole, including non-core, the Barclays group ROTE was a paltry 3.8%. No wonder Staley wants the core business "unshackled" from the drag of the rest, as he told analysts on April 27. Success or failure in this unshackling is likely to determine the length of his career at the bank.

John Mahon-160x186

John Mahon,

All of which means plenty of pressure on Mahon, Harrison and their team. The non-core division was set up in May 2014 under previous CEO Antony Jenkins, with about £115 billion of risk-weighted assets (RWAs). The bulk were from the investment bank (about £90 billion), and included non-standard FICC derivatives, non-core commodities and some emerging-markets products.

Another £16 billion was accounted for by the European retail banking business, while there were also some £9 billion of corporate, Barclaycard and wealth RWAs. By the end of 2015, outstanding RWAs in the unit had already been cut to £47 billion.

In 2016, new CEO Staley added another £8 billion of RWAs to the scope of non-core, comprising the investment banking operations in nine countries, the bank’s business in Egypt and Zimbabwe (both of which fall outside Barclays Africa), the Southern European credit cards business and the Asian Wealth business – but kept the wind-down target timeframe unchanged.

Since the bank’s announcement this year of its plan to sell down its 62% stake in Barclays Africa, that business has been treated as discontinued, but is not included in non-core.

This year has seen the completion of the sale of a majority of the bank’s Jersey-based offshore trust business as well as its insurance, retail, wealth and SME corporate banking businesses in Portugal.

Agreements have also been announced for the sales of wealth management in Singapore and Hong Kong, retail and wealth in France, and Barclaycard in Spain and Portugal. The sale of the Italian retail business was announced in December 2015 and is slated to complete this year.

Non-core RWAs stood at £51 billion at the end of the first quarter, taking into account the additional £8 billion.

Credibility test

The dividend cut certainly helps in giving Mahon and Harrison the capacity to take some hits along the way if needed. However, with the bank’s equity trading at less than 0.5 times book value, it’s obvious that not all in the market believe Barclays will be able to achieve what it says it will.

That is despite the fact the non-core unit is running well ahead of the targets set in May 2014, when the bank said it would reduce the original £115 billion of RWAs to £50 billion by the end of 2016. The sooner Mahon and Harrison can wrap up the complete wind-down, the sooner Staley will be on the path to proving the strategy right.

Fortunately, the non-core bells – they are in the bank’s London, New York and Singapore offices – have been ringing a lot recently. Whether the disposal is of a tiny loan position or an entire business, the bells ring all the same.

"Throughout our careers, most of us working in this industry have been trying to earn as much revenue as possible for our firms subject to not using too much capital, but here we are focused on reducing the use of capital at speed whilst achieving appropriate value," says Mahon. "We have to celebrate and keep that momentum each time we do this."

They are helped by what Mahon describes as a remarkable freedom and sense of purpose. Even non-core has a core, it turns out, and in Barclays’ case this comprises about 200 staff whose goal is purely to effect the wind-down of the unit – there are about 6,000 more in those businesses that sit within non-core.