Antony Jenkins’ report card one year on from the big restructuring announcement last May when he cut the investment banking division that had previously accounted for over 50% of Barclays allocated equity, balance sheet and risk weighted assets to just 30% of the group is mixed.
The good news is that return on equity at the investment bank picked up from a poor 2.7% in 2014, following a disappointing 5.8% in 2013, to a much improved 9.1% reported for the first quarter of 2015. Benign conditions – with just the right amount of volatility in macro rates and FX – helped the markets businesses to earn a better return on ever higher amounts of capital. Barclays is doing a decent job so far pivoting its investment banking business model from the days when its old FICC division threatened to become a global leader. Barclays has slashed that division, trying to build instead on origination in debt and equity capital markets and M&A, helped by a boom in all three.
In the global investment banking fee league tables for the first quarter of this year, Barclays ranked sixth. All five firms above it are American. Barclays is the leading European investment bank, thanks in large part to having a much bigger slice of the largest single fee pool in the US through the old Lehman business. Deutsche, its biggest European rival, is now struggling in Barclays’ wake, having only just announced large cuts to investment banking RWAs last month and re-allocation of capital to global transaction banking.
But there are less flattering comparisons for Barclays. Lloyds came out of the financial crisis in much worse shape than Barclays, having required a tax-payer bailout and come close to collapse as it struggled to roll over short-dated wholesale market liabilities funding long-dated illiquid assets. Yet today, thanks to disposals that have left it focused solely on UK retail and commercial banking and to much improved management, Lloyds has left Barclays far behind.
In the first quarter it reported a 16% return on equity on a much higher common equity tier 1 ratio of 13.4% and a much more conservative leverage ratio of 5%. Lloyds, the market leader in UK retail with a 48% cost/income ratio, has the resources to attack Barclays where it is strong, for example in Barclaycard, unconcerned by continuing regulatory hostility towards investment banking and ever rising capital demands. No wonder Lloyds trades at 1.5 times book value per share, while Barclays still trades at a discount.
Barclays continues to trade at discount largely because of the investment bank, which produces returns below its cost of equity, has been a big contributor to the non-core book of assets now in run off which is a further drag on returns and because of continuing litigation costs, most recently in settlements and a felony guilty plea over forex market rigging.
Jenkins must wish that he could simply have exited the business, sold it off or floated it at some point in the past three years. But that is not a realistic option now, if it ever was. He must manage it down, while shareholders and a new executive chairman in John McFarlane – whose letter to shareholders in May was really a memo to Jenkins – drum their fingers impatiently. McFarlane has told investors that he will put in place plans to improve businesses earning below target returns or “curtail” them.
Jenkins, a brilliant retail banker, who turned around Barclaycard in three years from a laggard to a driver of group earnings, may not be given three years to do the same at the investment bank.
The smart money around the City of London is that he has nine months to a year to make it happen.