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Does BarCap need to make a lot of redundancies too?

Black and blue.

Black and blue.

BarCap and RBS have a few things in common. They are both British banks. encumbered by the UK’s banking levy and Vickers legislation. They both have investment banking arms. And they have both engaged in building up those investment banking arms very considerably in recent years.

Global banking and markets (GBM) headcount at RBS went from 7,900 in 2006 to a peak of 26,900 in 2009 after the acquisition of ABN AMRO. That’s now being cut back to 13,400 – a peak to trough reduction of 50%.

Meanwhile, over at BarCap, headcount increased from 16,200 in 2007 to 25,500 in the first quarter of 2011, an increase of 70%. It has since been cut back, but only modestly. In the second quarter of 2011, headcount was down by 1,400 people. In August, BarCap indicated it might make another 2% of its investment bankers redundant.

BarCap is currently on track to cut headcount by around 7.5% from its peak – or maybe 10% at most. This looks like wishful thinking.

The optimists

“The people at RBS were the substandard ones who couldn’t find other jobs,” says one senior BarCap equities professional. “It was never a good place to have on your CV.The optimists at BarCap say big headcount reductions are not necessary and that comparisons with RBS are irrelevant.

“BarCap should benefit from its closure,” he adds. “We’ll get some of their flow and a lot of their clients and primary business. There are no big redundancies planned here, just some upgrading.”

Banking analysts (loosely) agree. “BarCap are big enough to be top tier,” says Mark Phin at Keefe Bruyette & Woods. “If you are subscale like RBS, you are not going to be able to get the flow and volumes to earn the returns. In theory, the smaller players falling out of the market should be good news for the bigger ones.”

“The market perception of BarCap is that it’s got more of a chance than RBS,” agrees Bruce Packard at Seymour Pierce.  “BarCap’s equities business is probably not profitable yet, but they are building a global platform and have a credible strategy,” adds Ian Gordon at Evolution Securities. “RBS’s equities business was always subscale. That was ok in a 2009 environment, but not in 2011.”

Equities aside, many of BarCap’s businesses look good. It outperformed the market in securitization, M&A and ECM last year and its fixed income business did notably better than others.

The pessimists

Nevertheless, there are reasons for caution.

Key among them is Bob Diamond’s public insistence that costs at BarCap should not exceed 65% of revenues. In recent quarters, they overshot substantially, prompting Tom Rayner, an analyst at Exane BNP Paribas to point out in October that costs would need to be reduced by 30% in order to meet the target for the full year.

Back then, Diamond said he was happy for costs to overshoot, “from time to time,” that there would be no “big announcements” on exiting businesses, and that BarCap would continue operating in the “top tier of investment banks.”

However, with equities income falling 40% quarter-on-quarter at BarCap in the three months to October, with the 65% cost ceiling, and with Bob Diamond wedded to maintaining a 15-16% return on equity at Barclays Capital to 2013, BarCap’s staff could find themselves vulnerable.

“I would expect them to miss the 65% cost target in the fourth quarter and in 2012,” says Gordon. “I don’t expect them to exit any businesses, but my belief is that BarCap’s fixed cost base is still too high.”

Matters could be made worse by the cost of implementing the Vickers reforms, put at £3bn a year annually by Bruce Packard. In the first nine months of 2011, profits at BarCap were £5.7bn.

As with other banks, BarCap’s room for manoeuvre on staff costs has been compromised by higher salaries and prior years’ deferrals. In October, Bob Diamond implied that bonus costs in 2012 and 2013 will consist equally of accruals from the past and provisions from the future – suggesting only 50% of the bonus pool is flexible.

More promisingly, BarCap may be able to reduce salaries in order to mitigate the need for headcount reductions: like Goldman it allegedly increased salaries as a non-pensionable fixed payment which can be removed.

Either way, additional redundancies look likely, although BarCap may still reach 2013 substantially larger than it was a few years ago.

One equities headhunter says BarCap is still building its business: “They’re 85% of the way there in equities and still have areas where they could do with additional headcount, mostly in emerging markets and niche sectors.”

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