Barclays' identity crisis

By:
Peter Lee
Published on:

One year on from its big restructuring announcement, Barclays is still struggling to convince that it has found the right model. Investment banking remains the sticking point. Senior executives in the division say they’ve pulled off a £100 billion restructuring and improved the client franchise. They want to invest for growth. But sceptics say that bull market conditions and accounting sleight of hand have flattered results and the investment bank needs to become even smaller and more focused. The instinct of chief executive Antony Jenkins may be to give the investment bank more time. Shareholders and the new chairman may not be so patient.

barclays identity crisis
What better way for a bank chief executive to see the markets celebrate the first anniversary of his signature restructuring announcement than with a one day rise of close to 4% in the share price? When Barclays shares shot up on May 20 this year, from £2.60 to £2.71, the discount to book value narrowed to 0.93 from 0.90, inching chief executive Antony Jenkins closer to erasing a glaring and embarrassing signal of investor distrust over the bank and one that he had set out to tackle on May 8, 2014. 

Many of the European banks that traded at far below book value in the worst days of the eurozone crisis have long since recovered to trade at, or above, book. Barclays has been a laggard, largely because of fears of large litigation costs and weak earnings at its investment banking division.

It’s worth remembering that when Jenkins became chief executive of Barclays three years ago, following the ouster of Bob Diamond over the Libor scandal in summer 2012, many analysts and investors had feared that this retail banker would dismantle the UK’s only competitor as a global investment bank and, cowed by the political furore over Libor, destroy or divest its biggest earner.

Jenkins is the classic battlefield promotion. As the top echelons of Barclays’ senior management gathered in Canary Wharf on that fateful day in 2012, struggling to come to terms with the departure of their leader Bob Diamond – which had become inevitable following the intervention of then Bank of England governor Mervyn King – there was an almost comic moment. “Has anyone told Antony?” asked one voice. “Somebody should call him and let him know.”

One of the corporate staff had to track down Jenkins, head of Barclaycard and of retail and business banking at the 325-year old British bank, the only remaining member of Barclays’ senior management not a fully paid-up member of Diamond’s cabal since they had seen off Frits Seegers as head of retail banking in 2009, and tell him that he was now the last man standing.

Antony Jenkins, chief executive, barclays
When I look at the investment bank’s place in the Barclays group as a whole, I feel positive that we have scale, capability and competitive advantage in investment banking and that important clients need those services

Antony Jenkins

In the months that followed, now chief executive of the whole bank, Jenkins refused to take revenge on the survivors of a club that had excluded him. Those who work with him variously describe Jenkins as intelligent, considered, private, cold, decent, honourable. What has he learned about investment banking since becoming chief executive of Barclays?

“One point that has been consistently reinforced is that while a few parts of investment banking activity can sometimes be derided as being of limited benefit to society, that is certainly not what I believe and it’s not the case across the business lines I witness when I visit clients: insurance companies that need to invest and earn returns; corporations that need to raise capital, hedge their risks, transact in foreign exchange markets to conduct international trade. What we have sought to do with the investment bank is remove those parts that don’t benefit society – so the tax structuring business, prop trading, structured derivatives – and concentrate only on those that benefit clients.

“And when I look at the investment bank’s place in the Barclays group as a whole, I feel positive that we have scale, capability and competitive advantage in investment banking and that important clients need those services.”

But by 2014, certain realities were becoming clear. New capital rules had destroyed the profitability of large parts of Barclays’ signature FICC businesses – structured and long-dated rates and credit derivatives, in particular – that had become heavy consumers of capital against risk weighted assets. Pressured over the leverage ratio, Jenkins had had to undertake a £5.8 billion rights issue in 2013, equivalent to 15% of Barclays’ market value, and one that 5% of shareholders decided not to support. 

Jenkins saw that, as a group, Barclays was too exposed to the vagaries of an investment bank which was itself in turn too exposed to the volatility of FICC. He now had decisively to shrink an investment bank that was delivering weak returns – a 5.8% return on equity in 2013 – and overshadowed the whole group, distracting attention from the better-performing retail banking and Barclaycard units, while accounting for more than half of the groups risk-weighted assets.

When he announced a new strategy on May 8, 2014, Jenkins didn’t mince his words. “The broad issues around the investment bank in the current environment are clear: it consumes too much capital; it does not generate sufficient returns for shareholders; and it is too large as a proportion of the group. As currently constituted, it is an unacceptable drag on group returns.” 

Jenkins slashed capital allocation to those FICC businesses, decreeing that the investment bank must account for no more than 30% of group risk weighted assets, and would start anew with £130 billion of RWAs, down from £222 billion in 2013. Last year’s restructuring hived off £90 billion of legacy RWAs into the group’s new non-core unit for run down. Barclays’ investment bank would be led by its origination businesses around debt capital markets, equity capital markets and advisory – even though it is not renowned as a top-tier ECM or M&A house – with secondary equity and credit markets businesses shrunk only to support those origination efforts. 

The FICC division would shrink and continue as the renamed Macro division, trading mainly plain-vanilla flow rates and foreign exchange products for customer business.

The first anniversary is an opportune moment to check how this is all working out. The reported numbers tell part of the story. For the whole of 2014, the investment bank produced a meagre return on equity of just 2.7% through the first months of the transition. For the first quarter of 2015 the investment bank reported a much-improved return on average equity of 9.1%, raising hopes that the new strategy laid out one year ago is starting to pay off.

Barclays sources even suggest that reported return understates the true progress of the investment banking division because it includes deferred bonuses now coming due that were agreed under old pay arrangements that have been replaced by less generous ones. The reported return is also dampened by costs to achieve the restructuring that should prove nonrecurring and without which that first quarter return would have been 9.6%. 

Chief financial officer Tushar Morzaria has told analysts that the division’s true return on economic capital is into double digits already and this will soon flow through to reported earnings as new pay arrangements come to dominate the P&L account in the years ahead and old deals roll off.

Tom King, chief executive of the investment bank, barclays
This is now a better balanced, less volatile investment banking business. My proudest achievement is that we executed a £100 billion restructuring while always putting our client relationships first

Tom King

Tom King, chief executive of the investment bank, tells Euromoney: “With the benefit of hindsight you could always think one or two things we might have done differently in regards to the restructuring. For instance, we came into it with a very noisy P&L and maybe we could have been more clear about restructuring costs and timing.”

It’s revealing that Barclays insiders should argue the toss on this so keenly. Perhaps that’s because analysts calculate the bank’s cost of equity at around 9.5%, which given the low level of risk-free rates is still alarmingly high. It would be nice to say that the division is earning a return on equity above the cost of that equity, even if only marginally. 

Time will tell on the new pay deals, though the Barclays investment banking division must also pay its share of the bank levy and higher fixed so-called roll-based pay. The recent court battle between the Lehman Brothers bankruptcy trustee and government bond trader Jonathan Hoffman offers an insight into some of the extraordinary pay deals that continued long after Barclays took Lehman over, with Hoffmann – not a big name outside Treasury bond circles – paid a reported $170 million between 2009 and 2013 on a straight share of earnings.

It’s a bit much, however, to ask for allowances on costs to achieve those goals, given that the restructuring was accompanied by an accounting sleight of hand that saw the investment bank contribute £90 billion of the total £115 billion RWAs in the new non-core division last May, and so from the start account for close to 80% of a division that produced a negative 4.2% drag for the whole of last year. 

There has been good progress in non-core since. By the end of the first quarter of 2015, non-core RWAs had come down to £65 billion, with a big cut at the start of the year from the sale of Barclays’ retail business in Spain. The non-core division produced a negative 3.3% drag on the group return on equity in the first quarter of 2015. But it’s a reminder that investors don’t get paid in adjusted underlying returns after supposedly exceptional costs are taken out and divisions are split into new accounting confections. They get paid out of reported returns. And universal banks’ investment banking divisions have been in a near permanent state of restructuring – with associated costs – ever since 2008. 

However, it is certainly sensible to check the underlying progress of the newly-restructured investment banking business and try to gauge its potential business and financial performance in different market conditions. That first quarter return does give a promising glimpse of what Barclays might achieve. But rather than unpicking the accounting behind it, investors might be better advised to judge it in the context of a strong market for investment banks. 

In the first quarter of 2015, bond and equity markets boomed as investors bought on the back of ECB quantitative easing. Volatility picked up in securities markets and foreign exchange, with different investors taking varying views on all manner of markets – the direction of Fed rates, nine elections in Europe, the direction of the oil price and of the euro. And it was the best kind of volatility for banks: sufficient to entice customers to shift positions and to help derivatives desks that are inherently long volatility, without becoming so extreme as to put customers into a funk where they do nothing. 

Barclays’ equity business, still a comparatively new one for the firm outside the US, and largely driven by the old Lehman business acquired in 2008, had a wretched 2014, being hit by US investigations into its dark pool. But equities picked up in the first quarter, helped – as all firms were – by rising volatility boosting returns in equity derivatives.

“Across the industry, the first quarter is typically good for the markets businesses in which Barclays was always renowned and it’s pleasing that those businesses have done well as we shift the balance of the investment bank towards origination which often does better in the second and the fourth quarters,” says King. “This is now a better balanced, less volatile investment banking business. My proudest achievement is that we executed a £100 billion restructuring while always putting our client relationships first. We have actually enhanced our franchise as evidenced by some of the transactions we recently advised on.”

Barclays’ signature origination business is debt capital markets. This division had a whirlwind first quarter, with ECM and M&A also doing well, as for every investment bank. The tough question remains however: did Barclays’ investment bank just fail to earn a return above its cost of equity in a top-of-the-bull-market quarter? 

“I would be very wary of writing any kind of plan for any investment banking business predicated on the benign environment we were in during the first few months of 2015 simply continuing,” says one source at Barclays.

Let’s not declare success too quickly.

Barclays chairman John McFarlane

One City source who knows new Barclays chairman John McFarlane well says he will run the bank for shareholders and that he is “a man with all the answers; at least in his own mind”

That one day share price pop is certainly nothing to celebrate either, even though Jenkins and new Barclays chairman John McFarlane have promised to close the discount to book value. It came in one of those bizarre relief rallies that confound those who don’t understand equity markets as discounting mechanisms, when fines for forex rigging imposed by the US’s Commodity Futures Trading Commission, the New York Department of Financial Services, the Justice Department, the Federal Reserve and the UK’s Financial Conduct Authority amounted to only £1.53 billion. That’s below the £2.05 billion Barclays had reserved in the first quarter.

It wasn’t quite as bad as the market had feared and came with just the one guilty plea to a felony charge from the US Department of Justice. Pleading guilty to Federal crimes doesn’t seem to count as a disaster anymore, even though Barclays’ plea clearly breached the terms of its non-prosecution agreement from 2012 over Libor fixing. The US authorities won’t ban it from operating in what it calls one of its two home markets, though. Shareholders must be pleased that they only had to cough up another $60 million out of loose change to take care of that one.

They might take note of two aspects from the FCA’s latest notice on Barclays, however. First it notes that misconduct in FX market rigging was still going on as recently as October 2013. That’s well over a year after Jenkins had become chief executive, after he had preached lengthy sermons about ethics and values and required his employees to sign on to all these: and a fat lot of good that appears to have done. It appears to be stretching credibility to blame a long list of litigation settlements on the few metaphoric bad apples.

Barclays wants to position these latest settlements as the beginning of the end for big fines over legacy misconduct issues. But can they accurately be called legacy issues, if they were still going on in late 2013, long after the Diamond cabal had been expunged? 

It appears strains of that poisonous culture still lurk. The bank continues to cooperate with investigations into FX, Libor, precious metals and other benchmark fixing. Fitch notes that for Barclays and the other four banks that entered guilty pleas with the DoJ, exposure to misconduct and litigation risk will persist for a considerable period of time and at least for a new three-year probation period.

Guilty pleas increase the risk of civil litigation cases, which can take many years to resolve and be costly. Banks such as Barclays that have already been involved in a higher number of settlements and resolution agreements with authorities are more at risk from severe penalties should further wrongdoings be uncovered. 

More flippantly, investors might look at the FCA’s worked example of Barclays FX traders trying to rig the market around a client stop-loss order and, even while colluding with other members of the FX market rigging cartel and working against client interests, still managing to lose money in the process. If these people weren’t sacked for being dishonest, they surely deserved to be for incompetence.

Investors must be forgiven for still asking whether Jenkins is the right man to get his arm around the investment bank and execute a restructuring of a very complex business he had no previous direct experience of, in fast-moving markets and when still-developing regulation might tilt the playing field in unexpected ways at any time. 

“I think he’s a better man than his predecessor to try it,” says one of the many recently-departed senior Barclays sources contacted by Euromoney. “But he’s a retail banker. If he was running a purely retail bank he would be a huge success. He’s very good on technology for example. He’s also quite approachable. But I fear others may mislead and take advantage of him. Tom King [head of the investment bank] is in the same boat, a corporate financier running an investment bank still largely dependent on its markets businesses and especially debt markets. They have made mistakes on people in senior management positions, on pay and on some of the tough choices that remain still to be taken. Barclays is now a sub-scale global investment bank. It’s probably easier to see where it will have to be in three years – smaller, more focused geographically, dealing with fewer clients – than how they will get it there, if it’s still the same people in charge.”

Barclays is now a sub-scale global investment bank. It’s probably easier to see where it will have to be in three years – smaller, more focused geographically, dealing with fewer clients – than how they will get it there, if it’s still the same people in charge

A former senior Barclays executive

Another Barclays veteran says: “Barclays needs to accrete capital because the regulatory charges on the markets business in the investment bank are still only going one way from here and that’s up. Barclays has to be much tougher now on capital allocation. Why is it still investing in Asia when its market share there is de minimis and that capital could be better deployed where it might actually earn a return and so help build a cushion to ride out the volatility in investment banking?”

Joe McGrath, co-head of banking, barclays
When we need to add resources from outside Barclays, I’ve been pleasantly surprised how attractive this platform still looks to senior bankers and how we’ve been able to attract people from a range of leading global banks

Joe McGrath

Joe McGrath, co-head of banking, tries to explain. “Our strategy is not to serve all Asian clients, especially where the majority of their business is local and in very specific products, but rather to target multinational clients investing in the region and Asian-based multinationals looking outside the region,” he says. “Like others, we did downsize our operations in Asia 18 months ago when the fees the industry had anticipated in the region did not materialize. We now have a strong new management team in place who are continuing to evolve our strategy focusing on clients that need global expertise.”

The problem is Barclays has tried this in Asia before, hiring a team of high-profile investment bankers such as Matthew Ginsburg and Ed King from Morgan Stanley, and Johan Leven from Goldman Sachs, on big-earning packages while Diamond was still in charge, and Barclays’ commitment to its investment banking future was not in doubt. Over the course of a number of years, that team – all of whom were successful in their previous shops – made little impact, and drifted away. What’s different this time?

There are other geographic markets Barclays wants to invest in as it builds its ECM and M&A expertise outside the US, even in Europe. In Italy for example, it hired in Pier Luigi Colizzi as head of investment banking, and may seek to support him with a couple more people. It’s difficult to enthuse investors, however, with talk of investment in investment banking. 

A third senior departure says: “You still get the feeling the investment bank is being run for employees more than for shareholders. Why, for example, did Barclays apparently pay Eric Felder [ex Lehman veteran who rose to run all the markets businesses in April 2014, before leaving the firm in April this year for a hedge fund] a small fortune just weeks before he was out?

“Investment bankers will always try it on. When they tell you how much they need to pay their people so as to avoid a death spiral of departures, that’s just a negotiating position. The first response of senior management always has to be: ‘No way. Go to hell.’ Remember that many of the senior people at the investment bank have already earned far bigger fortunes out of Barclays than Antony Jenkins ever will. If you cave in to these people, they’ll only assume they can do what they like.”

Investment bankers will always try it on. When they tell you how much they need to pay their people so as to avoid a death spiral of departures that's just a negotiating position. The first response of senior management always has to be: "No way. Go to hell"
A recently departed Barclays banker

The “death spiral” reference is to Jenkins’ widely derided explanation in March 2014, that Barclays had been compelled to pay big bonuses to investment bankers in 2013, even after the division had reported lousy returns, because having reduced payouts in 2012, it faced the risk that hundreds of staff might leave. Just weeks later, he announced a re-organization of the same division that paid 2,500 or more of those bankers to leave last year and will see a similar number leave this year.

Morale among the survivors is clearly still good, or so it seems from official on-the-record meetings. In June last year, Euromoney asked a familiar source at Barclays how staff were finding the restructuring. “After all the talk in the run-up to May 8 2014 that Barclays would be ‘doing a UBS’, now that people here can see we are not doing a UBS, they’re getting on with it pretty well,” came the reply.

It was a revealing choice of words. Investment bankers tended to use the phrase “doing a UBS” in a pejorative sense, indicating retreat, withdrawal, failure and mass redundancies. For investors, of course, “doing a UBS” has different connotations, as the Swiss bank’s speedy stock value re-rating after it radically cut back its investment bank and strong shareholder returns since attest. Of course, comparisons are somewhat odious. The investment bank at UBS had become a distraction from a world-leading wealth manager and the group was also able to cut it back to an equities-led investment banking business just as stock markets boomed.

barclays-identity-crisis

The swollen investment bank at Barclays had grown to overshadow… what exactly? Barclays has a large, established, and certainly half-decent UK-focused retail and corporate bank earning a 12% return on equity; a smaller faster growing jewel of a business in Barclaycard returning over 16% but now looking for a new top executive and a promise of longer-term growth in the suddenly trendy emerging markets of Africa. 

The investment bank had previously been the one Barclays business that threatened to be a global leader, although goodness knows what actually lurked behind the accounting in the division that Diamond and his lieutenants had built. 

Analysts at Citigroup have produced a dense report analyzing auditors’ notes and comments in 35 large banks’ 2014 annual reports on the assumptions and estimates used in valuing level 2 and level 3 balance sheet assets. This suggests that, if Barclays’ balance sheet were marked on a full fair value basis, its net asset value could be 24% below where it is now reported at £2.88 a share. But let’s leave that story for another time.

Jenkins certainly deserves some sympathy. One of the few things more difficult than building an investment bank up is managing one down, because the profits disappear quickly while risks remain on the balance sheet. Even the best, most experienced managers who have spent their whole professional lives in investment banking are struggling to do this while also adapting to the remorseless hostility of regulators. The fundamental review of the trading book, rising operational risk RWAs to reflect never-ending misconduct and market rigging legal bills and a possible tightening of the leverage ratio, might yet make redundant the restructurings that Barclays – and many other banks –have so far imposed on their investment banking arms.

But let’s not forget Barclays holds some strong cards. Calling itself a focused international bank is nowhere near as snappy as calling itself a global bank, but having strong positions in the US and the UK is a boon for any investment bank, given the size of those two fee pools. Its strong position in the US, by far the biggest fee pool, puts it ahead of every other European bank. Many have wasted billions of dollars over many years trying to break into the US bulge bracket cartel. Diamond marched in and picked up Lehman for next to nothing while every other banker hid in his foxhole during the financial system meltdown in 2008.

Its debt capital markets business is thriving in boom times. In the global debt capital markets bookrunner rankings in the first quarter of this year, Barclays ranked second behind only JPMorgan. It is the top-ranked bank globally for sovereign, supranational and agency issuers, a segment from which several rivals have fled but where some are now attempting to re-enter as margins and profits improve. The bank has risen to fourth in global high-yield bonds, where it has recently been making a push as also in leveraged loans. It is the top European DCM house in the league table rankings, ahead of Deutsche Bank.

John Langley, head of global finance and risk solutions at Barclays
Some clients wanted to know we remained fully committed to these financing businesses that are so important to them. Our DCM performance over the last year has confirmed that we are

John Langley

“I think our client focused origination-led strategy is clearly working. We have tremendous momentum, particularly in the US and the UK, our dual home markets,” says John Langley, head of global finance and risk solutions at Barclays. “Understandably some clients wanted to know we remained fully committed to these financing businesses that are so important to them. Our DCM performance over the last year has confirmed that we are, if anything in an even stronger position in DCM globally now than we were one year ago.”

That enhancement comes from the classic route all investment banks are now following of devoting more of their scarce capital to the benefit of fewer, select clients. It helps that Barclays has many of those in the US, the UK and Europe.

It all sounds good. In the first quarter of this year, Barclays ranked sixth in the global investment banking revenue league table with a 4.6% market share of all fees derived from DCM, ECM, loan arranging and M&A. The five banks above it are all American. It is narrowly ahead of Deutsche Bank, comfortably ahead of Credit Suisse, far ahead of UBS, boasts twice the market share of HSBC and three times that of BNP Paribas.

Yet any Barclays board director wanting straight answers on which financing and markets business to allocate more capital to in pursuit of better returns and which to take capital away from, will struggle. The question today in investment banking is the same question that has always been asked: what is the least amount of the low-returning business the banks have to undertake to earn the chance to pitch for the high-margin client business that makes it worth staying in the fight?

“The derivatives markets are now the most challenged by higher capital requirements. But you may not be able to win the financing business if you can’t provide hedging capabilities,” Langley says. “This is most prevalent today with sub-investment grade issuers where new issue mandates are often linked to the provision of swap lines. It’s important to look at the hedge in conjunction with the financing from an overall returns perspective.”

Capital discipline is supposed to be about allocating capital in an optimal way between different businesses with different returns. But investment banking is awash with complex cross-subsidization that clouds the picture. It was ever thus.

Joe Corcoran, Barclays
Having a central department for capital allocation to clients has helped us build even closer relationships with clients where we were already strong

Joseph Corcoran

Joseph Corcoran took the top job in the markets businesses in April after Eric Felder left Barclays. [Felder had taken over markets in April 2014 from Eric Bommensath, a Barclays veteran close to Jerry del Missier who had run markets since 2012 and co-headed the investment bank with Tom King before being put in charge of Barclays new non-core division (in the reorganization of May 8, housing a lot of assets his old markets businesses had generated. Long one of Barclays’ best-paid if lowest-profile senior traders, Bommensath lasted eight months in that role and quit the bank in January 2015]. The doorway into the office for head of markets at Barclays needs a slow switch to stop it revolving so fast.

Corcoran, who came up in the credit and equity sides now neatly aligned under origination, like his peers at Barclays wants to declare a job well done. But he certainly doesn’t want anyone thinking it has been easy. “We are happy with the initial progress made and the results shown. We have made dramatic changes to our capital and resources with big reductions of headcount in certain markets. Importantly, I think we are ahead in terms of addressing these fundamental issues. I’ve seen people here become educated very quickly around the RWA and leverage ratio characteristics of their own businesses, to the point of recommending that more capital should go to other businesses instead. I believe that having a central department for capital allocation to clients has helped us build even closer relationships with clients where we were already strong. And also in the macro businesses, I think our discussions with clients are now going far beyond research content, market read, price and execution into helping those clients deal with their own internal resource and efficiency issues as we have first-hand experience in a lot of the same situations.”

Corcoran says of the continuing restructuring of markets business inside Barclays investment bank: “We are not at the end yet, but we are far past the beginning. We regularly review whether business are hitting their return hurdles and meeting client needs. We still have businesses where it is not fully clear yet if they will fit our strategy for the long term. Partly that may depend on the outcome of the fundamental review of the trading book. Things may become clearer in the next six months. But you also have to retain some flexibility. Right now, with new issue markets booming, it makes sense to devote a lot of capital to financing. If we return to conditions as in the second half of 2011, when secondary markets were in tumult, new issues had ground to halt and customers needed capital to support secondary market liquidity, we may be better off deploying it in markets.”

King takes up the theme. “That’s one of the reasons why having a diverse platform, which includes Macro, is important. It thrives when markets are volatile and origination slows. In a low volatility world, origination thrives.”

To an experienced investment banker, this just sounds like common sense. To shareholders, board directors, maybe even to a new chairman looking to boost shareholders returns, it must sound suspiciously like special pleading to keep businesses going even if they won’t earn an acceptable return on a consistent basis.

King suggests that for the investment bank at Barclays exiting large lines of business is now in the past. “We’ve made a lot of big decisions on which businesses to be in. Now we have to continue to perform and make sure we optimize our use of balance sheet.” 

The piece of the puzzle that no firm has quite cracked yet is the right intensity and velocity for balance sheet turnover. Everything that regulation has done is pushing towards higher velocity of capital allocation and reallocation to more liquid exposures as investment banking shifts back from a largely principal to a largely agency business. Their balance sheets are finite and will be more taken up by operational RWAs and as investment banking businesses look to enhance returns they’d like to operate with less capital not more.

That probably sounds about right to Jenkins. He knows that the stock has traded for so long at a discount to book value mainly for reasons connected to the investment bank: the litigation issues and investigations that came to a head again in May over foreign exchange, the drag from a still large non-core run-off book, and low returns at the core investment bank. As Barclays runs down its non-core assets, that will free up capital. Where will it go? 

“We run a free market for capital inside Barclays,” Jenkins tells Euromoney. “Give me a better return on it and you’ll get more of it. So while I’m happy to invest for example bringing in more M&A bankers in industry verticals where we have clear opportunities inside the investment bank, as capital becomes available there’s also the possibility for this to go to PCB, Barclaycard or Barclays Africa.”

We run a free market for capital across Barclays. Give me a better return on it and you'll get more of it
Antony Jenkins

And what is the outlook for returns across the investment bank that might win it more capital in that internal free market? Across the markets, capital has become scarce and the laws of supply and demand suggest that when something clients need becomes scarce, it should re-price. Corcoran says: “Very few clients, if any, have been surprised when we talk to them about needing to earn a return and so there have been some very positive discussions about enhancing efficiency with clients telling us ‘we actually need less from you of this, but we would like more of that’.”

Like all investment banks, Barclays hopes that by focusing its scarce capital on fewer clients it can do more with them.

There are few people more cynical about the investment banking business than those who work within it, and it’s interesting that Barclays has not struggled to recruit after the restructuring announcement. 

After the departures of some big name M&A bankers just before and just after the restructuring of the investment bank last May – most notably the veteran Skip McGee, but also tech banker Stuart Francis, Brad Whitman covering financial institutions, Dana Weinstein covering business services and head of M&A Paul Parker – Barclays has been recruiting selectively, pulling out the big boy cheque book McGee used to talk so fondly about to bring in 39 bankers at managing director level. 

“The historic Lehman business in North America had some excellent franchises in industries and products, such as in natural resources, power, industrials and M&A.  Remember that with the Barclays/Lehman combination only seven years old, this is still a young investment bank with numerous growth opportunities, especially in international ECM and M&A,” says McGrath.

“We have an excellent partnership with our colleagues in the markets area and have collectively targeted areas such as real estate, consumer/retail, managed healthcare, technology and others for growth. When we need to add resources from outside Barclays, I’ve been pleasantly surprised how attractive this platform still looks to senior bankers and how we’ve been able to attract people from a range of leading global banks.” 

Further reading
Barclays
-FICC is reborn as Macro
-Barclays' downward spiral
-Jenkins’ critical year at Barclays
-Revealed: The truth about Barclays and the Abu Dhabi investment
-Barclays retreat turns disorderly

Of course, M&A bankers are not big consumers of capital or carriers of risk-weighted assets – at least not until they start pitching leveraged loan-underwriting commitments that clients also need big derivatives positions to hedge. So, with M&A recovering as it has been for the past year, and with big fees to be won, it’s easy to see why Barclays might hire them in. 

Barclays now operates on the basis that there are certain markets activities such as derivatives that, looked at on their own, appear uneconomic, but that support higher margin businesses. Normally, to get an M&A mandate, the bank will have to extend a loan to a client and often hedge that as well. It used to be that hedges were the profitable money-spinning parts of the investment banking business and advisory and capital markets the expensive marketing for these lucrative trades. Higher capital charges have sucked the profits out of markets and Barclays now hopes the subsidy can somehow be persuaded to work the other way.

The problem with M&A bankers is not so much the consumption of capital when M&A is hot, as the high fixed cost, the poor cost-income ratio and the drag on profit, if M&A activity freezes up again as it did for so many years after the financial crisis. 

In the first quarter of 2015, the investment bank at Barclays ran on a cost/income ratio of 69%, an improvement on 78% for the whole of 2014, but still above the average rate across all four Barclays core businesses of 61% in the first quarter and far away from 48% at the wholly UK retail and commercial banking-focused Lloyds.

Jenkins focuses a lot on costs, but in his own way. “People have asked me about the differences between running a retail bank and an investment bank, in certain aspects I think there are some definite similarities. Technology is evolving very quickly now in ways that will transform financial services in the decades ahead. As in retail banking so in investment banking, new robotic software that simply wasn’t available 24 months ago will soon allow us to automate a lot of the back and middle office, bringing cost efficiency, improving controls, reducing headcount and saving money in other ways too, by also cutting error rates and improving risk monitoring. And it will even impact some front office functions.” 

He admits: “We still have work to do to bring the investment bank to the point where it can earn a 10%-12% return on equity across the cycle. But that’s the challenge facing investment banks generally where returns are not where they once were. There’s a tremendous opportunity for us to do this on a regular and sustainable basis going forward. One thing that distinguishes our strategy is not just its scale but that we have made firm and precise commitments on absolute cost reduction and we have consistently delivered on those commitments.”

The stock market seems half convinced. Morale inside the investment bank appears good but the suspicion remains that more radical steps may be needed to cut capital in certain areas – for all the insiders pleas about interdependencies and the need to balance the portfolio of businesses in the investment bank to support ones that don’t appear to be earning an adequate return.

City executive suites are full of speculation over how Jenkins will work with new chairman John McFarlane who comes to Barclays after ruthlessly overseeing a turnaround at Aviva, having previously been chief executive of ANZ and having worked in investment banking in Citigroup and Standard Chartered. “McFarlane is a man with all the answers,” one senior City source who knows him tells Euromoney. “At least in his own mind.”

Jenkins talks about running Barclays for shareholders, for clients, for society at large and for employees. “McFarlane likes to keep things simple. He’ll want to run it for shareholders,” this source says.

The question now becomes what breathing time remains for Barclays’ investment bank to drive its returns ahead of its cost of equity. 

“I think the team have executed the plan we put to the board one year ago as well as I could possibly have hoped,” King tells Euromoney. “People ask me: ‘could you have done more and faster’? I honestly don’t know the answer to that. We have had tailwinds recently with the market helping us with revenues but big headwinds related to capital. To have executed this restructuring and kept our banking franchises intact is a big accomplishment. But we are not declaring victory. This is a long march. We have made it over the first peak. There may be more and higher peaks still to come.”

We are not declaring victory. This is a long march. We have made it over the first peak. There may be more and higher peaks still to come
Tom King

In May, McFarlane published a letter to Barclays shareholders. He told them: “We need to reposition and improve those segments across the Barclays Group which operate below our required return. We need to take a considered view as to their prospects as well as the probability of their future success, and put in place plans and action to improve them or curtail those that are unable to be resuscitated.”

Was this a letter to shareholders, or a memo to the chief executive? 

Jenkins, of course, will say that his and his chairman’s priorities are one and the same. And while he may be reserved by nature, Jenkins does not lack self-belief. There is a sense of gathering impatience around Barclays’ investment bank, stemming no doubt from the lingering litigation issues at the first bank into the defendant’s box over Libor and the most recent to disgorge large settlements over FX last month. 

Whispers say that his time at the top may be drawing to a close. In his own mind, it’s certainly not though. Jenkins leaves Euromoney with a hint that while he himself is thumping the table and demanding more and faster from the investment bank’s executives, his patience is far from exhausted.

“I came back to Barclays in 2006 to run Barclaycard,” he reminds Euromoney, “a business that had declined from making £850 million of profit in 2004 to just £380 million that year. It took two years to turn Barclaycard around and another year after that to really get it going again.” He doesn’t need to say that today Barclaycard, which brought in pre-tax profit of £1.34 billion last year and showed a 17% return on equity in the first quarter of 2015, is now the jewel in Barclays’ crown. 

Jenkins draws a lesson. “Big turnarounds take time.” The question is not just how long does he have to achieve it; more importantly, do he and his senior investment bankers share a vision of what a post-turnaround Barclays should be?