• `Deteriorating' industry outlook means change is needed
  • JPMorgan forecasts 4 billion pounds of litigation by end 2018

Barclays Plc Chief Executive Officer Jes Staley should deepen cuts at the investment bank as the industry outlook deteriorates, and focus on its more profitable consumer and credit card businesses, according to JPMorgan Chase & Co.

The securities unit will generate a return on equity of less than 7 percent in the next three years, even if it eliminates 600 million pounds ($865 million) of costs, analyst Raul Sinha wrote in a report Thursday. The measure of profitability lags an average 14 percent return at its other businesses, he said. JPMorgan also estimates Barclays will have another 4 billion pounds of litigation and redress costs until the end of 2018.

A “deteriorating investment banking revenue environment could provide the catalyst for change,” Sinha said. “Weakness will continue to dilute the group’s core returns, partly eclipsing strong franchises in U.K. retail and corporate, Barclaycard and Barclays Africa.”

Share Slide

Staley, 59, and Chairman John McFarlane, 68, are facing increasing calls from analysts and investors to address the underperformance of the investment bank, seen as the main culprit for a two-year slide in shares that has left the bank trading 40 percent below its book value. Since joining on Dec. 1 the CEO has cut 1,200 jobs at the investment bank and is exiting nine countries, according to a person with knowledge of the matter. The board is also reviewing whether to keep its Africa business amid capital constraints.

Last week Sanford C. Bernstein Ltd. analyst Chirantan Barua urged Staley to take the “big decisions” to spin off its investment bank with an initial public offering of a reconstituted Lehman Brothers, and sell its Africa unit. Joseph Dickerson, an analyst at Jefferies International Ltd., said it’s “unlikely” the bank will be able to sustain dividend payments in 2016 and 2017.

Barclays’s common equity Tier 1 capital ratio, a measure of financial strength, was 11.1 percent as of Sept. 30, the lowest of the five largest U.K. banks. Cutting the capital allocated to the investment bank by 30 percent and reducing the unit’s share of the lender’s risk-weighted assets to 24 percent from the current 31 percent would boost Barclays’s capital buffer and lower the bank’s cost of funding, according to Sinha.

Rising Dividend?

“This would allow the new CEO to fund a rising dividend and would lead to the market attaching a lower cost of equity, which we estimate is implied at 16.3 percent at the current price,” wrote Sinha, who has an overweight rating on the stock.

McFarlane in July pledged to double the stock price in as little as three years. It’s since fallen 44 percent and in October, the bank cut the target for its “core” return on equity to 11 percent from 12 percent for 2016. The investment bank reported a return on equity, a measure of profitability, of 5.2 percent in the third quarter and the lender has warned fourth-quarter income at the unit will fall 11 percent.

The stock fell 6 percent to 148.85 pence at 2:10 p.m. in London, the most of any large U.K. lender. Bank shares were pulled lower as Societe Generale SA, France’s second-biggest bank, signaled it may miss its profitability target.

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