Barclays' second quarter results are out. If you work there, or aspire to work there, there are a few things that you need to know - as illustrated in the charts below. However, falling pay, falling headcount, and further cost cutting aside, the real question for Barclays' investment bank is becoming clear, and it's one that's likely to become more pressing over time....
Headcount in Barclays' investment bank is down 10% since December 2015. Across the bank, cash bonuses are down 9% year-on-year; deferred bonuses from previous years are down 20%.
If the pattern across the bank is repeated in the investment bank (highly likely), it therefore looks like staff at Barclays' investment bank are in for lower bonuses overall this year, but that the cash element per head should stay the same.
Barclays' fixed income trading business did a lot better than arch rival Deutsche Bank's in the second quarter. Year-on-year, credit revenues in Barclays' credit trading business rose by 23%. At Deutsche, credit trading revenues fell by 25%.
Both Barclays and Deutsche had a horrible quarter for equities though, with revenues falling around 30% year-on-year. This is looking like a pattern at European banks: equities revenues also fell by 22% at UBS and by 10% at Credit Suisse.
Barclays' gave two reasons for its big declining in equities: 1) It's closed its Asian equities business, 2) It's been restructuring in Europe.
In the Americas, Barclays said its equities revenues actually increased year-on-year in the second quarter.
This leads us to Barclays' existential question of the moment: what's the plan for its U.S. investment bank? With around 50% of the investment bank's revenues generated in the U.S., it's a question that can't be ignored.
Barclays' U.S. problem is one of capitalization and exchange rates. Like every other European investment bank operating in the U.S., Barclays is under-capitalized. "If any European investment bank were to list in the U.S. tomorrow, it would need to raise its U.S. capital by 20% to 30%," says Chirantan Barua, a banking analyst at Sanford Bernstein in London. This is because U.S. regulators calculate capital requirements on a stricter leveraged basis, whilst European regulators calculate capital requirements more leniently as a proportion of risk weighted assets.
Unless rules converge, it's been calculated that all European banks in combination will need to inject billions of additional capital into their U.S. subsidiaries. This has the potential to be a far bigger problem for Barclays, which reports in sterling, than for its European rivals, which don't. So far this year, the pound has fallen by around 12% against the dollar; the euro is up by around 3%.
Barua says the nub of the issue is how and when Barclays will be required to recapitalize its U.S. bank. In the past, European regulators allowed European banks to issue debt and to ship that debt to the U.S. as capital, but this may not be permitted in future. There are also questions of timing. - Will U.S. regulators allow Barclays to build its U.S. capital buffer slowly over time using dollar-denominated U.S. earnings? Or will they require an immediate build-up of U.S. capital through the issuance of sterling denominated stock?
"If the Fed allows Barclays to build up U.S. capital using its U.S. earnings, there's no problem," says Barua. "But if you're a sterling denominated stock and you have to raise U.S. capital in a weakened sterling, that's a negative. There are a lot of moving parts."
For the moment, Barclays is skirting the issue of recapitalizing its golden goose on Wall Street. CFO Tushar Morzaria didn't directly respond to a question on the subject during today's call. Morzaria did, however, point out that there's an upside to having a big dollar denominated business as sterling declines: "We benefit overall from a strong dollar as we have significant U.S. dollar profits."
Unfortunately, it's not just sterling denominated profits that are rising at Barclays' U.S. investment bank: it's also costs and risk weighted assets. Morzaria said exchange rate effects were principally to blame for the extra £60m in operating expenses in the the investment bank in the second quarter of 2016. The exchange rate was also to blame for an extra £7m of risk weighted assets. For a bank that's supposed to be cutting costs and RWAs, this is the wrong direction of travel. It could get worse; Barclays' based its Q2 results on an exchange rate of $1:£1.42; the rate is currently closer to $1:£1.31.
The danger now is that Barclays' U.S. investment bank will find itself squeezed as its UK-parent seeks to recapitalize the U.S. business and to bring sterling denominated costs and risk weighted assets under control. This is unlikely to prove popular with Barclays' over-performing U.S. bankers who are already facing huge losses on their deferred bonuses held in sterling denominated Barclays' stock.
If Barclays' wants to keep these all-important U.S. bankers onside, it will therefore need to pay them well (in dollars). In order to do so, and to keep costs below its £12.8bn (sterling-denominated) target for the end of 2016, it will need to cut costs harder elsewhere. Barclays needs to seriously hope the pound doesn't fall any further. Either way, are its London-based traders prepared to take the rap?