Barclays’ unpopular bet on investment banking seems to be paying off in the UK as the bank closes in on the top spot in the UK’s annual investment banking league tables for the first time since 2012.
Jes Staley, the former JPMorgan banker who took over Barclays with a turnround mandate in 2015, has come in for persistent criticism from shareholders and analysts for his enduring commitment to the investment bank built up under Bob Diamond.
New data from industry monitor Dealogic, which was compiled for the Financial Times, suggest that the strategy is bearing fruit in the UK at least.
Barclays earned fees of $352m in the year to date from M&A and capital markets, giving it a 9.1 per cent market share, comfortably ahead of JPMorgan’s 7.8 per cent share and Goldman Sachs’ 6.6 per cent. In 2016, Barclays had a market share of 6.5 per cent, behind both JPMorgan and Goldman.
Despite being a UK bank, Barclays has only held the top place in the league tables twice in the last 10 years. It is the first time it has held the accolade since Mr Staley launched his strategy to refocus the investment bank around hubs in London and New York, in an attempt to lift persistently poor returns.
The UK is by far the smaller of the two key markets, accounting for about 5 per cent of the global investment banking wallet versus the 50 per cent of the global fee pool that is spent in the US, according to Citi analyst Andrew Coombs.
“Being good in the UK helps but in the grand scheme of things it’s not going to be that significant relative to how you perform in the US,” he adds.
Barclays is ranked sixth for US investment banking fees in the year to date, with a share of 5.5 per cent, down 0.2 per cent year on year.
But the lender argues there is outsize importance to success on home soil. “We’re a UK bank and it’s hugely important that we have a strong UK franchise,” says Alisdair Gayne, Barclays’ head of UK investment banking. “If we can’t do it in the UK, it’s going to lead to questions about our abilities elsewhere.”
Mr Gayne attributes the recent success to hiring in key areas such as equities and mid-cap coverage, as well as greater co-operation between investment bankers and Barclays’ sizeable corporate bank. Barclays has also invested heavily in its equities sales, trading and research business, adding 50 people in the last year alone, which has boosted its equity capital markets business and corporate broking franchise.
The group has notched up the highest number of FTSE 350 client wins on a net basis to its broking business in each year since it began expanding into the space in 2010.
“Our M&A business much like our equity capital markets business is maturing over time . . . it’s only eight years old,” says Mr Gayne. “They’re obviously the areas where we want to grow share and build out the business.”
The bank is in third place for equity capital markets in the year to date, far better than the ninth place it ended 2016 on. In M&A, Barclays is in ninth position in 2017, worse than 2016’s seventh place. In debt capital markets — Barclays biggest investment banking division by some margin — the UK lender is in first place, up from second last year.
Jason Napier, banks analyst at UBS, says the UK progress was encouraging. “Investors are almost entirely focused on the outlook for Barclays’ investment bank and its role in helping the firm achieve its 9 per cent return on tangible equity target for 2019,” he says.
It is hard for outsiders to judge the contribution of UK investment banking to Barclays’ bottom line. Mr Gayne says return on equity is the single most important performance indicator for his division, but he will not disclose what the current or aspirational levels are.
A senor investment banker at a large US bank says Barclays is “not doing badly” in the UK, but he attributes its success to the fact that they it is “the only UK bank left” after the withdrawal of Royal Bank of Scotland and that it has a high number of people covering the UK market.
Still, the US banker believes there is a case for allocating even more resources to the UK and pulling back the small numbers of bankers that Barclays still has in continental Europe and in Asia, two regions where he describes the bank as “very weak”.
Reid Marsh, Barclays’ head of global banking ex-Americas, disagrees and says that while Barclays will continue to make investments in the UK, those investments will “certainly not (be) at the expense of other regions”.
“Our global connectivity allows us to deliver cross-border opportunities for clients both in and out of the UK and to date our involvement in these kinds of flows has been strong,” he adds.
“We have a meaningful banking capability in Europe and although there is wider uncertainty around Brexit, we don’t see any shift in our focus as that negotiation process continues.”
Opportunities to be had from Mifid II
Barclays sees a “massive opportunity” from the Mifid II investor protection rules that will shake up the equities research market this year, Richard Evans, the bank’s head of Emea equities, tells the FT.
Banks have been fretting over the impact of the new rules that are designed to offer greater protection for investors and to promote greater transparency across investors’ dealings with banks, including forcing them to explicitly pay for research.
Most asset managers will reduce the number of investment banks and brokers that they use, and some firms are cutting back their research divisions in anticipation.
“Inevitably the (equities) wallet will decline under Mifid II but Mifid II for Barclays is a massive opportunity,” says Mr Evans. “What Mifid II is really going to do is it’s going to reduce mediocrity. You have to be the best in the areas where you choose to compete.”
Mr Evans believes that Barclays’ strong UK and US coverage will make it a must have for investors, even though the bank no longer does cash equities in Asia.
Mr Evans says investors may not choose to buy global packages of research because “you don’t want to buy everything that’s number five or number six, you want to buy in the areas that are the best”.
“I’d far rather be number one or number two in the UK and number six in Europe than be number five everywhere,” he adds.
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