Barclays investment bank will continue to drive down compensation and, although no further redundancies have been announced, further shrinkage is expected after it completes its strategic review in February next year
The bank has just reported its third quarter results and, amid revelations of further fines (this time for power trading during 2006-2008), the investment bank has had a relatively positive year. Revenue was up 17% from a year earlier, to £2.63bn, and underlying profit surged to £937m from £388m in 2011.
Despite this, the focus is still very much on cutting costs, even if no job cuts have been announced. Barclays investment bank’s cost-income ratio fell below its target of 65%, to 64%, while compensation now accounts for 39% of revenues, down from 46% for the first nine months of 2011.
Antony Jenkins, the bank’s new chief executive, said the aim was to continue to drive this ratio down while “always having one eye on being competitive”. Evidence of this is already starting to emerge, with the bank expected to cut senior bankers’ salaries by 30-40% by reversing pay increases implemented in 2009.
Barclays deferred 75% of its bonus pool last year, and this is starting to come back to bite – it booked £942m in charges related to deferred awards to September, versus £751m in 2011.
Is the FICC engine fading?
Q3 wasn’t great for Barclays fixed income, currencies and commodities business – its traditional strength in investment banking – with revenues falling by 20% on the previous quarter. So far this year, though, they have increased by 11% to £5.9bn. Barclays says that the quarterly decline is down to its “conservative” investment style means it overperforms in weak markets and underperforms relative to its peers when the situation picks up.
In light of UBS’s decision to move out of the fixed income space, the expectation is that banks with a historical strength in this area – like Deutsche Bank and Barclays – will grab even more market share.
Jenkins admitted that UBS’s exit was a positive for Barclays: “It is, of course, to our benefit that a player is leaving the FICC space. We’re a huge player in FICC flow businesses and this will be helpful to us over time”.
Meanwhile, a 26% quarter-on-quarter increase in revenues within Barclays’ equities business is no doubt particularly galling bankers affected by recent redundancies in the division. The bank cut 50 people in cash equities and equity derivatives, according to reports. The strong performance in Q3 was primarily down to prime services and equity derivatives the bank said.
Keeping schtum on redundancies and business exits
Barclays’ “strategic transformation programme” is due to be completed in February this is expected to result in job cuts and shrinkage within the investment bank. Jenkins, however, refused to comment on any “grey” areas of the investment banking business that the bank may exit or downsize, merely reaffirming his commitment to a “universal bank”.