Barclays Plc, under pressure to boost returns, will eliminate 7,000 jobs at its investment bank, about a quarter of the total, and signaled its effort to build a global bank is over.
Chief Executive Officer Antony Jenkins’s plan will bring the number of jobs to be cut across the firm by 2016 to 19,000, including the 12,000 the lender said in February it would eliminate this year. Barclays will create a bad bank to dispose of 115 billion pounds ($195 billion) of assets, including its European consumer arm. The investment bank will primarily target the U.K. and U.S., and serve fewer clients, while its Asian unit will be “more focused,” Jenkins told reporters today.
“The investment bank is too exposed to volatility in fixed-income, currencies and commodities, and the group is too exposed to volatility in the investment bank,” Jenkins, 52, told analysts on a conference call.
A consumer banker by training, Jenkins has been under investor pressure to cut costs at the investment bank created by his predecessor, Robert Diamond. The unit this week posted a 49 percent drop in first-quarter profit, as revenue from FICC, traditionally its biggest source of income, dwindled.
Jenkins said today that market faces a structural rather than a cyclical decline and that investment banking revenue will be “weak for some time.” That revenue weakness has prompted other European firms such as Switzerland’s UBS AG to scale bank sooner, and be rewarded with gains in their stock prices.
Barclays -- before today, down 10.5 percent this year and the worst performing bank stock in Britain -- rose as much as 6.6 percent and was up 14.55 pence at 257.85 pence as of 1:48 p.m. in London trading. By contrast, UBS, which is exiting most debt-trading activities, has gained almost 8 percent this year in Zurich trading.
“The revised strategy is sensible and should be well received,” Andrew Coombs, an analyst at Citigroup Inc. in London, wrote in a note to clients. “The shift in business mix from investment banking toward retail and commercial could potentially lead to a re-rating in Barclays’ shares.”
The plan will cut the investment bank’s share of the firm’s assets to 30 percent by 2016 from about 50 percent, Barclays said. The overhaul will cost an additional 800 million pounds, adding to the 2.7 billion pounds the bank announced in February.
Barclays’s bad bank, to be run by Eric Bommensath, will hold 90 billion pounds of risk-weighted assets from the investment bank, including complex derivatives from its FICC operation and some emerging-market specific products. It will also include 16 billion pounds of assets from the European retail and business bank as well as 9 billion pounds of assets from the corporate bank, Barclaycard and wealth-management units.
Jenkins will seek to cut the bad bank’s assets to 50 billion pounds by the end of 2016. That will help to reduce the unit’s drag on return on equity, a measure of profitability, to 3 percent by 2016 from 6 percent today. The rest of bank will target a 12 percent return on equity in 2016, Barclays said.
Barclays said it will make preserving net asset value “a priority” as it scales back the bad bank. Even so, the unit is likely to generate more losses than expected, according to Christopher Wheeler, a banking analyst at Mediobanca SpA in London.
“While its commendable that management has gone the distance, unfortunately without any macro tailwinds, it will be painful for the next 12 to 18 months,” said Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. who rates Barclays market-perform. “You can’t have 7,000 people walk out the door without any implications on income.”
Pretax profit at the investment bank fell to 668 million pounds in the first quarter from 1.32 billion pounds in the year-earlier period, hurt by a decline in revenue from trading bonds, currencies and commodities.
The overhaul is Jenkins’s second since he took over as CEO in August 2012 after the bank’s record fine for manipulating the London interbank offered rate. Diamond had rebuilt the investment bank after Barclays sold its money-losing European equities unit, focusing on bonds, loans and foreign exchange.
In 2008, Barclays acquired Lehman Brothers Holdings Inc.’s North American operations out of bankruptcy and then embarked on a hiring spree to add stock underwriting and merger advisory businesses and bankers in Europe and Asia to match its standing in the U.S.
Barclays has struggled since the financial crisis to reduce its dependence on the unit, which once accounted for more than half of profit and assets. Then-CEO John Varley said in Feb. 2009 he expected the investment bank to account for 30 percent of assets by 2016. The figure is still more than 50 percent today.
The operation has suffered departures of key dealmakers as compensation at the division came under criticism from investors and politicians. In the past week, Jenkins has lost Hugh “Skip” McGee, the firm’s most senior banker in the U.S., Robert Morrice, chairman of the Asia-Pacific region, as well as investment-banking chairman Ros Stephenson.
Jenkins said in an interview today the departures were unconnected to the job cuts and marked a “generational shift.”
“We will be competitive as we are today,” Jenkins said in the interview with Bloomberg Television’s Francine Lacqua. “We are focusing on where we can compete, and compete successfully.”