The market is looking closely at Barclays, as it has ever since a retail banker, Antony Jenkins, took over as chief executive from the investment banker who built Barclays into a bank dominated by that business. It might be as well for Barclays shareholders that the fallout of the Libor scandal means that the man now charged with deciding how the bank should adapt its business portfolio to a new world of closer regulatory scrutiny and much higher capital requirements is not an investment banker.
Barclays, as it is now constituted, still has some staunch supporters. Ian Gordon, analyst at Investec dismisses “scaremongering over a perceived capital shortfall” that led Barclays to issue a $3 billion, 10-year contingent convertible paying 7.625% when its capital position was already “rock solid”.
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| Barclays CEO Jenkins |
Gordon also likes the business mix. He notes: “Barclays already held ample core capital to support its defensively positioned and solidly profitable portfolio of businesses. However, the Independent Commission on Banking proposed a less sophisticated approach to assessing capital requirements, hence the journey to satisfy Vickers’ 17% to 20% loss-absorbing capital threshold by 2019, in which CoCos will clearly now play a key part.” However, a growing whispering campaign continues to encourage the most successful British-based investment bank to slash and burn the business, by quitting equities and/or heavily reducing capital supporting its top-three FICC franchise. The Financial Times cites an unnamed Barclays insider saying three of the bank’s top 30 shareholders have urged this course in recent meetings with management.
Now JPMorgan has weighed in, suggesting that under Basel III risk weights, the return on equity from Barclays investment bank will plummet far below its cost of capital.
Jon Macaskill points out in his upcoming December column for Euromoney the prominent role of JPMorgan analyst Kian Abouhossein in agitating for the radical reduction in capital allocated to FICC that UBS finally unveiled at the end of October.
Now cranking up the pressure before the next Barclays investor day, scheduled for February 2013, JPMorgan analysts Raul Sinha and Vivek Gautam suggest in a note published on November 26 that: “In our view, the IB, which consumes 51% of the group capital and generates 49% of group profits, is likely to see its ROE halved from 14% (2013E B2.5) to 7.0% pro-forma (ex-market RWA convergence) due to the impact of regulation.”
The two point out that the UBS announcement marks a material change in the environment in which investment bank restructuring will now proceed and that therefore: “Any plan which does not tackle the scale of capital consumption within the IB post-regulation as well as the higher funding costs post ring-fencing could disappoint the market.”
The JPMorgan analysts appear to advocate a 30% reduction in investment banking assets, which they say would lead to a 25% fall in revenues but also permit cost savings of £1.9 billion, and allow Barclays to hike that investment banking return on equity back up to a group average of 11.2%. They suggest this could lead to a 30% increase in the bank’s market cap, even though that return on equity would be no higher than group cost and perhaps below the investment bank’s standalone divisional cost of 12%.
The JPMorgan analysts point out Barclays is more exposed than its closest peers – JPMorgan itself and Deutsche Bank – to a domestic regulatory stance hostile to investment banking that could lead to ring fencing, which would expose the investment bank to higher funding costs. That would further eat into its returns, perhaps taking them down to 6.1%.
Barclays’ management must be tired of pointing out the investment bank is already wholesale funded and does not rely on retail deposits. However, the group’s 50:50 split between investment banking and retail banking, which has prevailed since Bob Diamond sold the BGI asset management business – and used to comprise one-third of the group before 2009 – looks more ill-suited to the times.
The bank trades at 0.61 times 2013 estimated net asset value, while UBS now trades at 1.3 times, Credit Suisse at close to 1.0 times and BNP Paribas at 0.8 times.
The bank has to do something.
