To judge by some of its financials, Barclays looks in as good shape as a pandemic can allow in late 2020. Before credit provisions, pre-tax profits were up 65% in the first nine months of the year.
Parts of the investment bank, like its markets businesses, are flying. Its core equity tier-1 ratio is at a high of 14.6%.
But group revenues only rose 3%, and the same period in 2019 saw litigation and conduct charges of £1.5 billion that were not repeated in 2020. Strip those out and pre-provision profits fell by 29% year on year, despite an extra £2 billion of trading revenues that came with no added costs.
And while trading was the standout for the year, investment banking fees rose just 1%, in spite of a year of soaring issuance volumes in debt capital markets, Barclays’ biggest segment.
Diversification vindication
It is a mixed picture, but for Barclays management such results are a vindication of the diversification that comes from having an investment bank within the group.
“I think this was a very important year for Barclays and an exceptional year for this franchise,” says Jean-François Astier, global head of capital markets and M&A. “What we did very well as a firm during the pandemic was to engage with our clients in very deep strategic discussions – the response was much deeper than just credit but really figuring out what the best option was for them to access capital markets.”
The bank has certainly done a lot of that. It reckons it has helped clients raise a total of $1 trillion in 2020, its biggest year ever.
It helped that one of the most active sectors was sovereigns, supranationals and agencies (SSA), where the bank is typically a top-three player. It held its 6% market share in EMEA and the Americas for SSA debt capital markets issuance, against a 60% increase in overall volume.
But heading into 2020, Barclays has two priorities for its investment bank: continue the development of the markets businesses and address shortcomings in equity capital markets and advisory.
It is more a question of focus than capabilities
Jean-François Astier
Barclays’ work rebuilding its markets business in recent years could not have come at a better time, enabling the firm to take advantage of the conditions presented by the coronavirus pandemic to clock up a 52% increase in revenues in the first nine months.
The investment banking piece is a harder one to crack. The Barclays debt franchise has long been well-regarded, but ECM and advisory have lagged. Why is that?
“We have not leveraged our debt market franchise enough to deliver the equity product,” says Astier. “On the origination side, we had not made the investment in time and energy to develop that side of the relationship. But it is more a question of focus than capabilities.”
If the bank had the same market share with ECM clients as it does in DCM and leveraged finance, it would be a top-four franchise. At the moment it is still some way from that target, despite all the work it has done. But there are certainly positive signs.
It might not be leaping up the league tables, but Barclays posted a 35% increase in ECM revenues in the first nine months of 2020.
Advisory, where revenues fell 43% as the pandemic made financing the strategic concern for clients rather than M&A, will be a tougher task.
If the pandemic year has shown Barclays the value of its investment banking and markets franchise, it has also revealed just how dependent it is on it for returns when things turn sour elsewhere. The fact that some 85% of group profits came from the investment bank in the third quarter of 2020 was arguably a concern as much as it was a relief.
As chief executive Jes Staley told analysts when reporting earnings: “The profitability of Barclays UK will most likely be the principal challenge facing the profitability of Barclays as a group in the near term.”
After a loss in the second quarter, Barclays UK returned to what Staley described as a “modest” £196 million profit in the third, but revenues fell 16% year on year in the period.
Signs of improvement
There are a few signs of improvement. Consumer, cards and payments returned to profit in the third quarter, and impairments are falling. Interest-earning card balances are well down year on year as households spend less. But mortgage balances are up and Staley says he is encouraged by the progress the group is making in its digital bank.
But in the short term, Barclays is likely to depend even more on its investment bank for returns.
Astier reckons it is in a better position than ever to do that, particularly following a re-jig in October that saw Barclays Bank PLC president Paul Compton and former chief risk officer CS Venkatakrishnan take explicit responsibility for the division.
Staley must hope that too, but he also acknowledges the challenge there. He knows that the scope for driving returns through cutting costs is limited – as he noted on his most recent earnings call. At 52% for the first nine months of 2020, Barclays’ investment bank already records a lower cost-to-income ratio than most.
That means finding sustainable growth in corporate and investment bank revenues will be all the more important, particularly without the outsized gains seen during the volatile pandemic-driven periods of 2020 in fixed income and equity sales and trading.
Astier and his investment bank colleagues will need to hope their confidence in the bank’s positioning for the year ahead is well founded. Much will depend on it.
