Jenkins slashes Barclays’ problem division
Revenue and cost targets do not convince analysts, but regulators appear to bless capital planning.
Antony Jenkins acted boldly and ruthlessly in February, having spent his first five months as Barclays’ chief executive painstakingly reviewing each of its businesses, separating them into those to be maintained, restructured or closed down. Shareholders initially welcomed the outcome of his strategic review and bid up the bank’s shares. However, the question still lingers: has he gone far enough?
Having identified the bank’s biggest problem division, Jenkins took the knife to it, announcing plans to cut 25% of the headcount and close 30% of the branches. “We will reposition European retail and business banking to focus on the smaller but more profitable mass affluent market,” says Jenkins, while also announcing the intention to “significantly rationalize the retail network in all four countries and accelerate the run-off of our legacy assets.”
However, he adds a qualifier: “There are no magic solutions here.”
Spotting that even if Barclays is able to execute its plan substantially to reduce the troubled division’s cost-income ratio – it will still only be generating a return on equity in the low single digits by 2015 – analysts want to know: why not just shut it down completely?
That return is well below the group’s cost of equity of 11.5%. Jenkins emphasizes that the plan marks a “major retreat from retail and corporate banking” in Europe and that the portfolio will eventually account for just £17 billion of risk-weighted assets (RWAs).
The unspoken assumption must be that Barclays is dressing up these businesses for eventual sale in the hope a potential acquirer will eventually emerge among European banks, themselves still in the midst of restructuring, that will see a scale advantage in picking them up.
Jenkins has staked his reputation and, apparently, his and his senior management team’s future pay awards on achieving by 2015 a goal that should be the most basic target of any business: delivering a return on equity above its cost of equity.
|Antony Jenkins, Barclays’ chief executive|
The path to this involves cutting annual costs from £18.5 billion in 2012 and 2013 to £16.8 billion in 2015 – excluding restructuring costs – with a cost-income ratio in the mid 50s. The bank aims to cut legacy and other RWAs of £75 billion for a 2015 balance of £440 billion of RWAs after CRD IV implementation, with a common equity tier 1 ratio above 10.5% by 2015. It hopes this will allow a progressive dividend policy from 2014, eventually targeting, over an unspecified period of time, a 30% payout ratio. John-Paul Crutchley, banks analyst at UBS, says: “A substantial element of the positive market reaction to Barclays’ strategic update reflected the implicit confirmation that the FSA was onside as to the group’s proposed capital plans.”
In November, the Financial Policy Committee of the Bank of England had suggested UK banks were undercapitalized because forbearance policies understated likely future loan losses and their RWA calculations were suspect. It asked the FSA to investigate.
Barclays, as the biggest non-state owned UK bank and one deriving most of its earnings from investment banking, appeared to be straight in the cross hairs. But Jenkins confirmed it had shared its capital plans with the FSA.
However, analysts do not seem to be convinced, with doubts focusing around Jenkins’ repeated claim that the bank’s planning had been based on “deliberately conservative revenue growth assumptions”.
Analysts at Credit Suisse describe as one of the biggest surprises from the strategy review “higher revenue growth targets across the board”, and for their part forecast no revenue growth to 2015 and a cost-income ratio of 60%. They suggest the bank’s shares will continue to value Barclays a discount to tangible net asset value.
Citi analysts calculate Barclays new 2015 financial targets imply revenue growth of 9% (to £31.8 billion), combined with cost reduction of -9% (to c£16.8 billion), or positive “jaws” of +18%. That’s ambitious, considering the bank will lose £500 million of revenue from businesses it is exiting, while those it intends to overhaul account for well over £1 billion of revenue, some of which will presumably be lost.
“The group revenue growth assumptions therefore look somewhat challenging in our view,” notes Citi.
Meanwhile, cost reductions won’t improve margins this year and the Citi analysts say: “We expect the market will demand greater evidence of cost take-out in the P&L before giving full credibility to the 2015 cost target.”
At least Jenkins got one thing right on his big day. He resisted the siren voices urging him to cut back the investment bank which dominates the group. Instead, the former retail banker reaffirmed: “We intend to maintain its position as one of a small group of full service, global investment banks.”
Had he slashed this business, as many had urged, he might have satisfied a few politicians and pleased his competitors but he would have done no favours to shareholders. The investment bank provides 60% of pre-tax profit and, of that, the largest component comes from the FICC division.
Barclays is a leader: a position Jenkins’ now maligned predecessor had fought hard for, not one to be tossed away just because Bob Diamond built it. Jenkins says: “Competitors are retrenching here, and I am confident that we will be one of the true scale players. Continued electronification will require further technology investment that will advantage scale players like us.”
He did at least manage to come up with 1,800 job cuts in investment banking, almost as many as in European retail banking, shutting the odious structured capital markets business as his predecessor should have done, or rather shifting it away from structuring transactions purely to derive tax benefits.
Continuing with this would only have increased the bitter political and regulatory hostility towards Barclays. It was an easy call. He has also reduced trading in soft commodities and cut front-office headcount by 15% in equities and advisory in Europe and Asia, where potential fee pools look smaller than they once did.
This is sensible pruning of the business Diamond built rather than slash and burn. It’s just what is required.