Barclays – new CEO will bring restructuring opportunity

If the problem is the investment bank, hire an investment banker. Jes Staley, an American investment banker, looks like a good fit for Barclays, then. Subject to regulatory approval, he is likely to be the bank’s next boss.

But the arrival of Mr Staley raises a big question: is he going to put more money into the investment bank, or continue the process started under former chief Antony Jenkins, and take costs and capital out of it?

The right answer is the latter. In the first half, Barclays’ investment banking division had a cost-to-income ratio of 66 per cent; earned a return on equity above 10 per cent; and employed 31 per cent of the group’s risk-weighted assets to generate 35 per cent of its profits.

All of this sounds good. But remember that investment banking is volatile. Last year’s results were awful. ROE was 2.7 per cent. With the crisis seven years gone and the US and UK economies relatively resurgent, this should be the sweet spot in the investment banking cycle. A 10 per cent ROE is not sweet enough. Barclays has not nearly proven that its investment bank can earn back its cost of capital across the cycle.

The investment bank is not even the biggest challenge Mr Staley faces. Something must be done about Barclays’ structure. It is a misbegotten hybrid: a US/UK investment bank, a UK retail bank, a credit card issuer, and an African bank. No one has ever made a strong case that the benefits of having these units together outweigh the costs in complexity, regulation, and investor confusion. Barclays trades at 0.8 times book value. It is unlikely to close the gap in its current form.

The conventional view is that an investment bank cannot function without an implicit subsidy from retail banking’s lower cost of capital. But the ringfencing of UK retail banks weakens that argument.

Investment bankers usually earn a fat fee advising on a break-up. If Mr Staley does the right thing, his reward will be running a smaller company — and the gratitude of investors.

source: LEX, FT

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