The appointment of Antony Jenkins to replace Bob Diamond as CEO of Barclays has inevitably triggered chatter of a material shift away from the investment banking business as well as a shift in corporate culture, more generally. The market narrative is damning: Diamond oversaw a growth-at-all-costs expansion of investment banking with a gung-ho, pro-cyclical, capital-consuming zeal. The departure of Jerry del Missier, the other architect of the franchise, will trigger some much-needed hubris with Jenkins now seeking to profoundly boost the relative importance of retail and business banking. This shift will help to reduce the cyclical volatility of earnings as well as its quality. Barclays might even consider a divestment or separate listing of its investment banking unit. Or so the argument goes.
However, this narrative is plain wrong. Here's a note of caution from Deutsche Bank:
| "Basel III and industry revenue conditions make a shift of capital allocation away from ibanking inevitable for all players, but see this as incremental rather than revolutionary in Barclays’ case. We expect the bank to stick to its strategy of seeking to operate world-leading retail and investment banking operations. However, [Jenkins’] appointment reduces the chances of a balance-sheet kitchen-sinking exercise." |
In other words, Barclays, like all multi-product international banks, is faced with regulatory changes that will exact a heavy toll on the economics of investment banking. Barclays will focus on its profitable niches and market-leading operations and will moderate any excess lending and risk-weighted assets in low-returning products and services.
But Barclays won’t embark on strategic move to significantly downsize the investment banking unit, which makes up around a half of group profit before tax, compared with a third for the retail and business unit - because it makes no business sense. In Jenkins’ note upon his appointment, he affirmed Barclays’ status as a universal bank. For good reason. 1. Not only is BarCap’s cost-to-income ratio roughly the same as its retail and business banking unit, the investment-banking franchise is capital-efficient, relative to its peers. From a JPMorgan report in March:
| "BarCap consumes 56% of the Group’s capital in 2013E and contributes 47% to the Group PBT ex bank levy on our estimates. When compared to average European IBs where 56% of Group’s capital is consumed to generate 39% of the PBT, Barclays is positioned relatively well in our view." |
2. Profitability and return on-equity are rising even as capital-market activity remains depressed:
3. By the first half of 2012, Barclays ranked fifth in total investment banking revenue-generation, thanks to its strong FICC presence:
4. Its structural revenue-generating opportunities are strong. Here’s a positively amorous love-letter to BarCap from JPMorgan:
| "- Barclays remains a Tier 1 player in FICC globally and amongst the top 2 in Europe with strong market positioning in Flow rates, Commodities, flow credit, FX and munis. We estimate Barclays FICC revenues to be £6.7bn in 2013E, below the 2009-10 level but amongst the top 5 globally on our estimates. -Within Equities the group ranks outside top 5 players on 2013E revenues on our estimates with a significant portion of revenues generated by Equity derivatives and Prime Brokerage in our view. We estimate £1.9bn Equity revenues in 2013E - below the management target of £2.6bn-£2.9bn. -Within Investment banking, the Group fares amongst the top tier Investment Banks with most of the revenues driven by loans (debt financing) and debt underwriting businesses. We estimate £2.3bn IB revenues and £0.3bn Principal Investment revenues in 2013E." |
These factors only scratch the surface mind.