Jes Staley does not act like a man under siege. He comes across as confident and relaxed, but his breezy demeanour belies the fact that Barclays, the bank he has run as chief executive since December 2015, is the target of the most audacious assault by an activist investor on a UK company in recent history.
At stake is the future of Britain’s last remaining global investment bank, which Mr Staley has pledged to protect in the face of an onslaught by Edward Bramson, arguably one of the most successful forces in British activist investing. Mr Bramson is campaigning for the investment bank to be scaled back, claiming Barclays would do better to focus on its UK retail operation and its credit card business.
The bank first revealed that Sherborne, Mr Bramson’s investment vehicle, had built a stake in March 2018, during what was already shaping up to be a tumultuous year for Mr Staley. He was censured by regulators in the UK and US for trying to unmask a whistleblower who accused him of covering up the personal problems of a former colleague he subsequently hired at Barclays.
After narrowly surviving that scandal — which cost the bank $15m in fines — Mr Staley is confident he will prevail in the fight with Mr Bramson. “Having a major player in the global capital markets that is British is an advantage, I think, for Barclays, for our investors, and for the UK overall,” he said in a recent interview on the top floor of Barclays’ Canary Wharf tower.
Following several months of polite stalemate, Mr Bramson in December stepped up his campaign to use his 5.5 per cent stake in Barclays to force his way on to the board and engineer a shift in strategy. An initial attempt to secure a board seat was rebuffed by the bank’s directors in November, and Mr Bramson, the company’s fourth largest investor, now plans to take his fight directly to other Barclays shareholders already frustrated over the slide in the share price under Mr Staley. It sets the stage for a bitter, months-long proxy war that could be decided by a vote at the company’s annual meeting in May.
“This could go either way,” says Philip Augar, author of The Bank that Lived a Little, a book about Barclays. “It will only be settled by Barclays demonstrably succeeding at investment banking, or it failing so badly that shareholders demand it gets out.”
The battle has implications not just for Barclays and the City of London, but also for Europe’s financial services industry, given that it comes at a time of retrenchment among most of the continent’s global investment banks.
RBS, once a major force in capital markets, has vacated the space, while Deutsche Bank, Credit Suisse and UBS are dramatically pulling back. Meanwhile, US players like JPMorgan and Goldman Sachs are becoming ever more dominant in European trading and deal making. “Will Europe have any global banks left?” asks Ronit Ghose, banks analyst at Citi.
Some investors are wary of American hegemony at a time of tensions over global trade and rising nationalism. “Corporates will want to use a European investment bank,” says Richard Buxton, a veteran fund manager and long-term Barclays shareholder now at Merian Global Investors. “There is an argument for having [one] that is not subject to the whims of the US president”.
The internal fight over Barclays’ global investment strategy has raged for three decades with one shareholder likening it to dancing the hokey cokey — “they have been in-out, in-out”, he says.
With “Big Bang” deregulation imminent, the group merged its merchant bank with stockbroker Zoete & Bevan and market maker Wedd Durlacher in 1985 to create BZW. Little more than a decade later, it broke up the poorly-performing division and sold off large chunks to Credit Suisse, leaving Barclays without a presence in equities trading or a mergers and acquisitions practice.
During the depths of the 2008 financial crisis, Barclays revived its interest in global investment banking by purchasing the US operations of Lehman Brothers out of bankruptcy, while also building a large European operation.
More recently, Mr Staley’s predecessor, Antony Jenkins, tried to shrink the investment bank, having concluded it could not make decent returns in the post-crisis regulatory environment, where trading is treated as inherently hazardous. Mr Jenkins wanted to reduce the division’s risk-weighted assets — a measure of a bank’s assets adjusted for how risky they are deemed by regulators — from £122bn at the end of 2014 to £80bn, and then halve them again to just £40bn, according to a person briefed on the plan.
But Barclays’ directors got cold feet. Mr Jenkins lost out in a boardroom showdown and was fired in July 2015, opening the way for Mr Staley to take over. Today, the corporate and investment banking division — an amalgamation of the investment bank and the unit that lends to large businesses — accounts for £176bn in risk-weighted assets versus £75bn at the retail bank.
During the Jenkins era investment bankers at Barclays became dispirited, according to several people who worked there at the time. One former employee says the only contact they had with the former chief executive was a “regular memo” demanding that they shrink the size of their trading book.
But under Mr Staley, a Boston-born trader who spent three decades at JPMorgan, the division has regained its verve. Some at the bank date that change to the arrival in 2017 of Tim Throsby, a former head of equities at JPMorgan, to run the division.
Barclays subsequently stepped up its recruitment, bringing in 55 managing directors from rivals such as Goldman Sachs and Credit Suisse. It is also investing £500m in new technology, in part to improve its electronic trading platform.
In more than a dozen interviews, executives and managers at the investment bank say morale improved dramatically once Mr Staley killed the debate over the future of the unit.
Stephen Dainton, the bank’s global head of equities, says Mr Staley has replaced “inconsistency” with “equilibrium”. He says his unit now has the right level of resources but that the bank needs to stop flip-flopping on its strategy. “If you look at what separates [Premier League football champions] Manchester City from Manchester United, it is more consistent execution.”
The challenger v the banker
Activist investor, Sherborne
Holds a 5.5 per cent stake in Barclays and is using it to try and force his way on to the board and engineer a shift in strategy away from investment banking to concentrate on its retail and credit card business
Chief executive, Barclays
Has built up Barclays’ investment banking arm since taking over in 2015 and insists that it is crucial to the bank’s future health. Has told colleagues he would resign rather than take an axe to the division
In the third quarter, revenues at the bank’s equities and fixed income trading units grew by 35 per cent and 10 per cent year on year, respectively, outpacing most rivals. However, given the poor performance of some of its Wall Street rivals in the fourth quarter, Barclays may struggle to sustain that kind of improvement. And the corporate and investment bank is still struggling to generate good returns. Its return on equity — a key measure of profitability — stood at 6.6 per cent in the third quarter versus 20.1 per cent at the UK consumer bank division.
Mr Staley’s evangelism for investment banking has made him popular within Barclays, and some shareholders think this explains the nascent turnround. “He commands the troops,” says one top 10 shareholder.
But that it is not a universally held view among shareholders, and there are few fans of investment banking among the big institutions that one might expect to own a stake in Barclays.
The bank’s share register is instead dominated by names like Tiger Global, the New York-based hedge fund, and US value funds. “Investment banking is rarely a good business, unless it is a large universal bank like JPMorgan,” says one shareholder. “And sometimes it can be a very bad business indeed.”
It is hard to gauge how much support there is for Mr Bramson. The Financial Times recently reported that he was struggling to gain traction with some large investors, although there are pockets of support.
One top-five investor says they would support the activist if he were to nominate a number of directors at the AGM, but that they are less likely to back his attempt to secure a board seat for himself. Others think there is likely to be a transatlantic split, with London-based fund managers backing Mr Staley in any proxy war and some large US-based investors siding with Mr Bramson.
Mr Bramson has been shaking up companies since 1987, when he took over a US video technology group. But his approach is very different to that of corporate raiders like Carl Icahn or Bill Ackman, who have waged their battles against target companies through high-profile public campaigns.
He prefers to quietly build a stake in a company before meeting with other shareholders to convince them to back his strategy and vote him on to the board. This approach has earned him a fan club in the UK among large institutional investors like Fidelity and Aviva.
Barclays shares have fallen by 30 per cent since Mr Staley took over in late 2015, in line with the European banks index. Much of this decline can be attributed to the spectre of a disorderly Brexit, which has led to sharp declines in the share prices of all UK banks, as well as a general malaise for European lenders struggling to restore profitability to pre-crisis levels.
But some believe that the low-returning investment bank acts as a further drag on the group’s valuation. One person who has advised Barclays points to its price-to-book valuation, which is lower than UK rivals. “If it were a pure-play retail bank, I think it would be at a higher rating than it is today.”
Mr Staley says the reticence among some investors stems from the damage inflicted on the UK economy by RBS and Barclays during the financial crisis. “The role investment banks played in the economic crisis . . . was much greater here than what you saw in the US,” he says. “The discomfort is understandable.”
But that does not mean his strategy is wrong, he argues. Indeed, Mr Staley has short shrift for those who do not subscribe to his theory that the investment bank will become a major asset when the next economic downturn hits UK consumers and with it Barclays’ UK retail and credit card business.
He says that pulling back from investment banking and doubling down on the consumer only makes sense “for those that believe we have solved the riddle of economic cycles, that we will never again have unemployment in the UK greater than 4 per cent, and that financial markets need not be volatile because the economy is so consistent and stable”.
Nor does he think Barclays can back away from riskier parts of investment banking while trying to protect more profitable lines of business. “To operate on the scale that Barclays does with our institutional clients you need to be a full-service investment bank,” he says. “You need to offer the full suite in order to generate the full returns.”
Some large investors hope the fight with Mr Bramson will finally settle the question over strategy. “The Barclays investment banking story has been a slow-motion car crash for decades,” says the top-five shareholder. “Now we’re waiting for the final impact.”
Mr Bramson has yet to spell out his plan in detail. He declined to be interviewed for this article, but has told his investors he wants Barclays to make “judicious” cuts to the investment bank, which he described in a recent letter as a “black box with too much leverage” that “threaten[s] the overall stability of the group”. A reduction in the unit’s assets would provide headroom for Barclays to grow its retail businesses and boost its capital position, he believes.
Without a seat on the board, however, Mr Bramson does not have enough influence to force through a change of direction. He also lacks the kind of proprietary financial information he needs to flesh out his plan to shrink the investment bank, prompting him to approach former Barclays executives to see if they can help him fill in the blanks.
One of the biggest unknowns is the stance that Nigel Higgins, the incoming chairman, will take when he joins the company in May. One person who has spoken to Mr Higgins, a veteran of Rothschild, the investment bank, says he does not favour making knee-jerk cuts to Barclays’ trading operations but equally he will not stand idly by if the share price continues to underperform.
It is hard to see how Mr Staley and Mr Bramson can both survive this battle. If the chief executive wards off the attack, Mr Bramson would have to exit his investment, potentially with a loss worth hundreds of millions of pounds. But Mr Staley has told colleagues he would leave if he were forced to take a hatchet to the investment bank.
If Mr Bramson is successful, that would mean the bank having to find yet another chief executive, its fourth in as many years.
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