Since Bob Diamond went, people have been speculating that Barclays' strategy for its investment bank would need to change. We have been speculating that Barclays' strategy for its investment bank would need to change. Analysts have pointed out that Barclays' investment bank hasn't met its targets, that its costs are too high, that its revenues are too low, that it hasn't adjusted to the new reality and is still paying comparatively highly and stubbornly refusing to make redundancies. Change seems necessary.
Barclays, however, would like to let it be known that it has no intention of making any alterations. The Telegraph reports that Barclays' investment bankers received a memo from the bank's board last week stating that they wanted to make "an unequivocal statement." Namely: "our strategy and business model were right for Barclays before recent events, and they remain right for Barclays now."
'Bob's baby' as BarCap is apparently known, is safe.
What was Barclays' strategy for the investment bank before Bob broke off? In brief, it was hiring, hiring, hiring under the Alpha Plan between 2003 and 2007, followed by diversification into M&A advisory, ECM and cash equities from 2008 to 2010, followed by building out in Asia in late 2010 and 2011.
This strategy hasn't been entirely successful.The rationale of adding 2,000 people in 2010 was that BarCap would increase revenues by £2bn over the following three years. In the middle of last year, this intention was reiterated: Barclays wanted to generate additional revenues of £2.4bn by 2013, mostly from its equities and advisory businesses.
Unfortunately, haven't been going to plan. Equities and advisory revenues are slowing - and not just at Barclays. Investment banking revenues fell 35% year on year at JPMorgan in the second quarter; equities revenues (ex-DVA) fell 9% over the same period.
As the chart below, taken from Barclays' Q1 results presentation shows, revenues haven't been increasing in equities and investment banking at Barclays; they've been flat or falling. Meanwhile, Investec analsyt Ian Gordon is predicting revenues at what was formerly known as BarCap will be down 17% this year versus 2010, and 38% below 2009. Nor does he see much improvement by 2014.
The second pillar of Barclays' strategy, reiterated frequently by Bob Diamond and endowed with greater importance in the past six months, has been maintaining a cost to net income ratio of 60-65%. "We are absolutely committed to 60-65%," said Bob earlier this year.
In the first quarter, Barclays Capital's cost to net income ratio as 63%. Bob suggested this was probably an outlier and would come down. Gordon says this is wishful thinking and is predicting a ratio closer to 72% for 2012.
Finally, Barclays has been targeting an overall ROE of 13% by 2013. ROE at the investment bank was 17% in the first quarter (albeit down from 18% the previous year). ROE across the bank was 12.2%, up from 10.2% the previous year.
Given Barclays' investment bank looks likely to fail two of the three strategic targets set for it in recent years, what's the rationale behind maintaining business as usual?
Gordon gives a good indication in his note this morning.
BarCap is the key driver of profits at Barclays, points out Gordon. It accounts for, "44-78% of underlying Group profits in every year 2009-2014e," he says, pointing to the chart below.
Gordon also points out that BarCap has proven surprisingly able to flex on costs. When revenues fell at RBS global banking and markets in Q4 2011, costs spiralled out of control. At Barclays Capital, they didn't - even though BarCap barely cut headcount at all (see chart below).
The implication: despite missing its targets, maybe Barcap doesn't need to make big redundancies and rethink its business model after all. It may, however, need to pay people a lot less.