Barclays Seen Needing Deeper Cuts to Reach Profit Target

Barclays Plc, the only U.K. consumer bank not to have scrapped its profitability target amid Europe’s debt crisis, will struggle to reach the goal without cutting costs as revenue from investment banking falls, analysts said.

Unlike his U.K. competitors Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, Barclays Chief Executive Officer Robert Diamond has stuck to the 13 percent return on equity target he set for 2013 a year ago, even as the sovereign debt crisis and tougher rules on capital erode revenue.

He may have now to cut jobs and sell assets to reach the goal, or scrap it, after return on equity totaled 6.9 percent in the third quarter, analysts said. Barclays will be the first of Britain’s five-largest banks to report earnings this week.

Diamond “is going to have to wriggle out of somehow,” said Julian Chillingworth, who helps manage 15 billion pounds ($24 billion), including Barclays shares, at Rathbone Brothers Plc in London. “He requires capital markets to be reasonable to achieve this. It’s going to be pretty tough to get there.”

Barclays is scheduled to report full-year earnings on Feb. 10 at 7:00 a.m. local time. The London-based bank’s full-year net income will decline 12 percent to 3.14 billion pounds ($4.95 billion) from 3.56 billion pounds a year earlier, according to the median estimate of 11 analysts surveyed by Bloomberg.

Investment-banking revenue fell 15 percent to 2.25 billion pounds in the third quarter. It may decline to 2 billion pounds in the fourth quarter, down from 3.5 billion pounds in the year- earlier period as fixed income, currencies and commodities trading revenue slows, Chris Manners, an analyst at Morgan Stanley wrote in a Feb. 3 report to investors.

Consumer Unit

Barclays’s U.K. consumer and business division may post a profit of 1.7 billion pounds for 2011, while the European unit will probably post a loss of 200 million pounds, according to Mike Trippitt, an analyst at Oriel Securities Ltd. in London.

“The biggest challenge will be when asked about their future return on equity targets and whether or not it’s credible without restructuring Barclays Capital more aggressively,” said Tom Rayner, an analyst at Exane BNP Paribas in London. “Either revenue has to go back to pre-crisis levels with the same cost base or costs have got to be adjusted in line with a weaker revenue environment.”

Barclays gained 2.3 percent to 236.8 pence in London trading today. The stock has declined 24 percent in the past 12 months, valuing the bank at 28.9 billion pounds. The FTSE 350 Banks Index, which tracks the performance Britain’s five biggest lenders, has dropped 22 percent. Barclays spokesman Giles Croot declined to comment.

Photographer: Simon Dawson/Bloomberg

Robert Diamond, chief executive officer of Barclays Plc. Close

Robert Diamond, chief executive officer of Barclays Plc.

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Photographer: Simon Dawson/Bloomberg

Robert Diamond, chief executive officer of Barclays Plc.

HSBC Sales

HSBC Holdings Plc, Europe’s biggest bank, has announced sales of divisions and assets valued at $5.07 billion in the past year, according to data compiled by Bloomberg. The lender also said it would meet only the “softer end” of its 12 percent to 15 percent ROE target.

Lloyds said in November it may not meet some its medium- term financial targets until beyond 2014. The bank had said in June it planned to reach an ROE of 12.5 percent to 14.5 percent by 2014. Edinburgh-based RBS said in November it may no longer meet its ROE target of 15 percent.

“I’d like to see a little more progress on Diamond’s strategic restructuring, where he has a target of selling, restructuring or winding down businesses that don’t get by 2013 13 percent return on equity target,” said Matthew Czepliewicz, a London-based analyst at Collins Stewart Hawkpoint Plc. “Whereas at HSBC we’ve seen some pretty steady progress from Stuart Gulliver, at Barclays we haven’t seen a lot yet.”

Job Cuts

Barclays plans to sell at least $1.36 billion of financial assets, including a $628.5 million holding in real estate company Archstone, according to data compiled by Bloomberg. Barclays might consider selling its 19.9 percent stake in BlackRock Inc. said Oriel’s Trippitt.

The bank said in October that it had already eliminated 3,500 jobs in 2011. The bank was “on track” to exceed its 1 billion-pound cost-reduction package, Finance Director Chris Lucas said at the time.

Barclays Capital, which employs about 24,000 people may eliminate about 5 percent of its senior bankers, two people with knowledge of the talks said last week. The lender plans to reduce compensation for employees at the investment banking unit by as much as 30 percent, said the people who declined to be identified because the plans haven’t yet been made public.

Lloyds has already started to cut 15,000 jobs, while RBS announced about 4,800 job cuts last month in addition to the 2,000 it made in August.

Cost-Income Ratios

Barclays’s cost-income ratio, a measure of efficiency, stands at 61 percent, behind HSBC’s 55 percent and Lloyds’s 52 percent, according to company filings. It’s only exceeded by RBS’s 68 percent.

Cutting jobs or selling parts of Barclays Capital may mean dismantling the division Diamond built himself from the remainder of the Barclays de Zoete Wedd operation that wasn’t sold in 1997. Barclays bought the North American unit of Lehman Brothers Holdings Inc. amid the 2008 financial crisis and then added more than 2,000 bankers in Europe and Asia in equities and mergers and advisory to expand the bank.

Some analysts say it may be too soon for Diamond to give up on the bank’s profitability target. The size of Barclays’s investment banking unit may allow it more leeway in reducing risk in preparation for incoming Basel III rules, said Neil Smith, an analyst at WestLB AG in Dusseldorf, Germany.

“The investment banks are able to reduce their risk profile more quickly than a traditional bank with loans,” Smith said. “Often there you have to either sell the loans or run down your book.”

Positive Surprise?

Smith said markets are changing too quickly to determine whether Diamond’s target is attainable. He’s more focused on how Barclays will reduce its risk-weighted assets to meet the latest rules set by the Basel Committee on Banking Supervision.

“I suspect there might be a bit of cautious optimism for first-quarter investment banking revenues,” Smith said.

Deutsche Bank AG, Germany’s largest lender, said last week fourth-quarter profit fell 76 percent, more than analysts estimated, as Europe’s debt crisis curbed trading and the company wrote down holdings. The investment bank posted a 422 million-euro ($552 million) pretax loss. Anshu Jain, who takes over as co-CEO with Juergen Fitschen in May, told reporters at a Feb. 2 press conference in Frankfurt that January was “more gratifying” for the investment bank than the second half of 2011.

The following is a table of estimated full-year earnings and the year-earlier results. The last column shows the number of analysts in the consensus. All figures are in millions of pounds.


                  Full Year        Full Year 2011     No. of
                  2010 Actual      Estimated          Analysts


Net income         3,564           3,136              11

Pretax profit      6,065           5,800               8

Revenue           31,440          29,994              18

Return on            7.2             6.7              19
Equity

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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