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Following Deutsche Bank’s dramatic retreat, there is now just one European investment bank that hopes to remain a global force: Barclays.
“The world doesn’t want to see just US investment banks,” said Jes Staley, the American chief executive of Barclays. “Being reliant only on the US financial industry is just not prudent.”
Mr Staley, who used to run JPMorgan’s investment bank, has staked his tenure at Barclays on protecting this part of the business against an attack from activist investor Ed Bramson.
But the future of Barclays’ investment bank, which has struggled with poor returns, is not yet guaranteed. It depends on whether it can win business relinquished by Deutsche, while also boosting profitability and taking market share from larger US rivals such as JPMorgan.
In an interview at the company’s London headquarters, Mr Staley told the Financial Times he remained confident Barclays’ investment bank would prevail, arguing that clients want to give a chunk of their business to a group that is based outside the US.
In the near term, Mr Staley said Barclays could benefit from Deutsche’s exit from equities trading in Europe, a business where few banks turn a profit. “We will get more volumes through the same cost base . . . we’re going to gain market share.”
Some competitors agree. “The demise of Deutsche was a good day for Jes Staley,” said an executive at a rival.
However, analysts at Citi recently noted that Deutsche’s share of global equities trading was just 4 per cent, and that it was “likely to be spread thinly between competitors”.
Mr Staley said Barclays’ equity capital markets (ECM) business — which handles initial public offerings and share sales for companies — is now “the only place where we are underperforming” in terms of market share.
According to data from Refinitiv, Barclays ranked eighth for global equity transactions in the year to August 2, behind the five big US investment banks and UBS and Credit Suisse. It was third for global debt transactions, number six in global IPOs and number seven in terms of estimated investment banking fees.
Although Mr Staley can point to successes in ECM, such as the bank’s role as a lead book runner on the recent flotation of Change Healthcare on Nasdaq, Mr Staley said Barclays needs to lead more IPOs.
To that end, the bank has recently hired Kristin DeClark from Deutsche, who Mr Staley described as “the best ECM banker in Silicon Valley” and Taylor Wright from Morgan Stanley.
Deutsche has insisted that it can revive its struggling ECM business even as it shuts its equities trading unit, prompting scepticism from rival banks who claim that operating a sales and trading division is critical to managing an IPO.
Mr Staley said it is “impossible” for a bank to lead an IPO without also having a secondary trading operation. “You have to control the first couple of days of trading, you have to use your own capital, and you have to have relationships on the street.”
Barclays has a significant presence in equities trading in Europe, and New York, thanks to its acquisition of Lehman Brothers’ capital markets business during the financial crisis. But the bank closed down its cash equities business in Asia in 2016, a decision that Mr Staley said was taken due to “cost pressures at the time”.
He said that the bank could one day re-enter Asian equities trading. “It may be the first part of our strategic restructuring that we reverse.” And he warned that pulling out of the US would be an irreversible error. “If you drop out of New York, you’ll never get back in.”
If Deutsche does manage to win more ECM mandates without also operating an equities trading unit, it could prompt calls for Barclays and others to follow suit.
Indeed, the German bank’s radical restructuring has broad implications for Barclays. If it succeeds, Mr Bramson might be able to revive his floundering activist campaign for Barclays to shrink its investment bank.
Mr Bramson, who controls 5.48 per cent of Barclays shares via his Sherborne Investors vehicle, suffered a heavy defeat in his attempt to force his way on to the bank’s board at its annual meeting in May. At the time, he agreed to a ceasefire, saying he wanted to give Nigel Higgins, the bank’s incoming chairman, some time to boost returns.
However, one person briefed on Mr Bramson’s plans said he is not preparing a full-scale retreat: “His resolve has not changed at all.”
Mr Staley noted that just 3.8 per cent of investors backed Mr Bramson’s effort to secure a board seat but conceded that there was still a “question” over whether the bank is “executing well enough”.
However, he said that further cuts to trading operations were not the answer and pointed out that Barclays had already shed £100bn of risk-weighted assets, sold more than 20 businesses and pulled out of several countries.
“We’re not there yet, in part because of the surgery of cutting off all those businesses,” he added. “You’d have to be missing your targets dramatically to embrace such an extraordinary strategic pivot.”
Even if Mr Bramson is ultimately unsuccessful, several other large shareholders harbour doubts about whether Barclays should operate a full-scale global investment bank.
“The vote at the annual meeting was less about support for Barclays and more about Bramson not articulating anything different,” said one top 30 shareholder. “We want to see some movement on . . . the strategy around the investment bank.”
Whether Mr Staley can settle the doubts hinges on whether he can improve poor returns at the bank’s corporate and investment bank, which he must if he is to hit Barclays’ overall profitability target: a return on tangible equity of more than 9 per cent this year and 10 per cent in 2020. The figure last year was 8.5 per cent.
Excluding a one-off gain from the sale of its stake in a trading business, corporate and investment banking generated a return of roughly 7.5 per cent in the second quarter, versus 9.5 per cent in the quarter before and 9.1 per cent a year ago. That was well below its international cards and payments business — 17.9 per cent — and its UK bank with a 12.7 per cent return.
Mr Staley pointed out that returns at the CIB division had improved substantially compared with two years ago, when they were between 3 and 4 per cent.
But Mr Higgins, the new chairman, will not accept current profitability levels for long, predicts one Barclays executive. “Jes has five or six quarters to improve returns. Nigel will not let Bramson do the job; if it looks like Bramson will win, he will wield the knife,” the executive said.
Mr Staley recently increased his control of the investment bank following the ousting of Tim Throsby, a freewheeling trader who sparred with other executives over whether the bank’s profitability targets were achievable.
Since then, Mr Staley has also exerted a tighter grip on costs, including a 23 per cent reduction in the amount the bank set aside for bonuses in the first half of this year. He insists he can be disciplined about pay without prompting an exodus of top traders, noting that attrition in its markets division is “significantly down” at a time of poor job prospects in the industry.
“It’s my belief that the talented people here recognise the importance of the profitability of the bank,” he said.
Additional reporting by Attracta Mooney in London
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