Barclays big strategy presentation is over. You can see the whole thing here. The worst news is already out: Barclays plans to cut 7,000 jobs, or 27.5% of the total headcount in its investment bank by the end of 2016. The bank said today that the cuts will come equally this year, next year and the year after that. Front office bankers will go first. Support staff will follow. It's bad. But it's not all bad.
Tom King, a career M&A banker is now in charge of Barclays' investment bank. Eric Bommensath, a career fixed income trader, has been shunted off to manage Barclays' bad bank. Unsurprisingly under King, relationship bankers in M&A and capital markets are now seriously ascendant. Henceforth, Barclays investment bank will be a client franchise.
"There are very few real client franchises out there," said King on this morning's call. "To be successful you need some balance sheet, differentiated products, good products with a track record and a relationship franchise. There are only a handful of those, and we've got one."
We suspect Barclays' rivals might disagree with the uniqueness of its relationship focus, but it's a message that the bank is behind. "We’re moving from a balance sheet business to one focused on the origination needs for our clients," said CEO Antony Jenkins. Barclays needs relationships with "key clients and decision-makers," added Jenkins. "Some of our peers claim to have these, but our leading position in the UK and US markets gives us a distinctive advantage to securing our global client base."
Barclays will be investing in these relationship people, said Jenkins. It helps that Barclays is now wholly focused on increasing its return on equity, and that origination-focused businesses don't use much capital. Investment bankers are back on top.
Barclays doesn't want just any old relationship bankers, however. Like other major banks, it's only interested in people who have relationships with its major clients. Barclays has 1,000 clients in total and they generate 80% of its revenues. These are the relationships it's going after. Relationship bankers who focus on smaller clients will probably need to shuffle off to a boutique.
Barclays' generosity towards its U.S. investment bankers in 2013 caused a fuss. In a year of diminishing profitability, Barclays said that it had to pay-up to avoid a "death spiral" in which its best U.S. staff quit for better paying rivals. When Barclays first evoked the death spiral, it was in the context of senior U.S. fixed income people threatening to quit, but Jenkins said today that the bank's generosity has also left it in a good position to retain all the relationship-focused ex-Lehman M&A bankers who might follow Skip McGee out the door.
"The bench [of people] we deliberately protected with our compensation payments last year is still there," said Jenkins. "The next generation of MDs who are dealing with clients day in and day out. We made exactly the right decision to protect that last year with the compensation decisions we took."
Like most other investment banks in the world (Citi, JPM, Deutsche), Barclays says it plans to invest money to strengthen its control functions. This sounds a lot like Barclays will be adding to the rush for compliance staff. Finance professionals may be squeezed, however. 40% of Barclays' job cuts across the whole bank are expected to come from operations and technology (with 60% coming from front office positions and distribution). The bank says that finance and HR functions are to be "consolidated."
From now on, Barclays is all about return on equity. It wants to achieve a solid 12% ROE in the new-look investment bank across the cycle (down from Bob Diamond's aspiration for 15%-20% back in 2010), up from the 10% it achieved in the core investment bank in 2013. But without any real prospect of top line revenue growth, Antony Jenkins says most of the ROE improvement will need to come from costs, which he says are the new "strategic battleground" in investment banking.
In addition to laying off nearly 30% of its investment banking staff, Barclays intends to heavily automate as much as it can. As far as possible, macro products trading systems are to be migrated onto Barclays' current FX trading system. Multiple trading systems are to be condensed down. The technology platform will be "simplified," said Tom King. "It will be all about technology," he reiterated. Contractors who've done similar work at JPMorgan and BAML could find themselves highly sought after.
These are the areas of trading upon which Barclays plans to focus in future, said Jenkins. They are all non-capital intensive. Less promisingly, they are all susceptible to increased automation in future. They are also the areas many other banks are focused on. There will be 'margin compression' admitted King.
A few years ago, Barclays was building in Asia. Not any more. Now, it's all about the U.S. and the U.K. Investment bank staff at continental European outposts seem to be surplus to requirement. So are locally focused staff at Barclays in Asia. The bank will have an Asian presence in future, but in Asia it will only focus on international clients. That bubble has well and truly burst.