If you happen to be working in Barclays’ equities business, the Financial Times has a worrying article for you today. Inspired by the 20% increase in UBS’s share price since it eviscerated the FICC business a few weeks ago, the FT claims Barclays’ shareholders are calling either or both for the investment bank to be spun out and the equities business to be closed.
Sounds bad? Barclays equities bankers are unperturbed. “This is complete rubbish,” one senior equities professional at Barclays told us. “We have no intention of pulling out of equities and this has been completely blown out of proportion. The FT has only spoken to three investors and has based its entire story on that.”
An equally sanguine Barclays equities banker told us he attended an investor meeting the other day at which investors expressed their support for both the equities business and for the investment bank, and were keen that both should stay integral to the group.
Nevertheless, one banking analyst who spoke to us off the record, said questions remain over the profitability of Barclays’ equities business: “They only break out the revenue number and don’t split out the profitability of equities. The suspicion will always be that Barclays’ equities operation is as unprofitable as RBS’s was.” RBS closed its equities business this time last year, with the loss of 3,500 jobs.
Bruce Packard, a UK banking analyst, points out that RBS pulled out of equities despite benefiting from the established ABN AMRO and Hoare Govett platforms. Barclays, by comparison, has attempted building a cash equities business entirely from scratch. So far it’s had limited success: according to last week’s report by analysts at Bernstein, Barclays’ market share in cash equities is just 5.5%.
In a report out today, analysts at JPMorgan Cazenove suggest that something dramatic will have to be done about Barclays’ investment bank. The bank is simply too big and too unprofitable to be viable under new capital rules, they suggest, pointing out that: “The IB consumes 51% of the group capital on a Basel 3 basis, and is likely to deliver returns 2% below its CoE of 12% in 2013.”
As an extreme solution, JPMorgan’s analysts suggest Barclays could designate the European business as non-core and run it off over time. Alternatively, they suggest that Barclays could take out of £1.1bn of costs from the investment bank to help achieve a 9.1% RoE. Any such moves are likely to happen in the next 3-5 years.
The Financial Times may only have spoken to 3 out 30 Barclays investors, but its conclusion that they would be happier if the investment bank were significantly trimmed may be sound. JPMorgan’s analysts point out that Barclays is trading at just 61% of its net asset value, compared to 89% for Goldman Sachs and 96% for Credit Suisse. They propose that this valuation discount is mostly due to the fact that, “Barclays is currently too dominated by the Investment bank (IB) whose returns are under threat from regulation.”
This being the case, confidence levels in Barclays’ investment bank may yet shrivel away after February’s all-important presentation of the group’s future strategy.