Barclays’ Diamond Sees Europe Surviving Slowdown, Weak Euro
“The underpinnings of the single currency, the underpinnings of the integrated economy across Europe are very, very strong,” Diamond said in a Bloomberg Television interview in Hong Kong today. “We’re going to continue to see some event risk as we, in our opinion, march toward, over the next couple of years, closer to fiscal and political integration.”
Spain on June 9 became the fourth of the euro area’s states to ask for a rescue, while Greece’s future in the currency bloc may hinge on elections this weekend. The region’s debt crisis won’t force London-based Barclays to scrap its profitability target, Diamond said.
“Our commitment is very, very serious around creating returns across all of Barclays that are comfortably ahead of the cost of equity,” Diamond, 60, said. He reiterated the goal of boosting return on equity, a measure of profitability, to 13 percent. Britain’s second-biggest bank by assets hasn’t set a deadline for achieving the target as the environment, including global interest rates, would have an impact, he said.
Still, the bank is seeing “some positive signs” with all three of its biggest units posting improvements in the first quarter, he said. Diamond was in Hong Kong to attend an executive committee meeting this week.
Shares of Barclays have gained 9 percent this year in London trading, outperforming the FTSE 100 Index’s 1.5 percent decline. Bigger U.K. rival HSBC Holdings Plc has climbed 10.4 percent.
“We don’t think the European crisis is like a Lehman Brothers 2008-type meltdown,” Sandy Mehta, CEO for Hong Kong- based Value Investment Principals Ltd., said by telephone. “The European Union will be able to muddle through,” he said, adding that some continental banks will need more capital, while U.K. lenders have already bolstered equity.
Diamond, who became CEO in January 2011, is selling assets and focusing on the most profitable operations to help meet his return-on-equity target. The lender last month raised about $5.5 billion by selling its stake in BlackRock Inc. (BLK) before the latest round of Basel rules stops it from counting the holding as capital. He also sold consumer and commercial bank operations in Russia in October and a private-equity unit in November.
Divesting more assets may be difficult given the global turmoil, Diamond said. “I would say that it’s a difficult environment to sell,” he said.
Profit Beat Estimates
The bank in April posted first-quarter profit that beat analysts’ estimates as revenue at its investment banking unit rebounded from the fourth quarter.
Pretax profit excluding losses on the valuation of the lender’s debt rose 22 percent from a year earlier to 2.45 billion pounds ($3.8 billion). Revenue at the investment banking unit, which generates about half of Barclays’s pretax profit, jumped 91 percent from the fourth quarter as income from trading fixed-income, currencies and commodities surged.
Barclays was hit by an investor protest over pay in April as 27 percent of shareholders voted against Diamond’s 12 million-pound compensation package. He and Finance Director Chris Lucas agreed to cut their deferred bonuses for 2011 until the bank improves profitability. Diamond declined to talk about executive compensation in the interview.
JPMorgan Trading Loss
Diamond said the bank reviewed its own operations after JPMorgan Chase & Co. last month reported $2 billion of losses related to derivatives trading in a unit managing the bank’s risks.
“In every incident like this, you can imagine, that the board audit committee is going to want a report and of course we have done those reviews,” Diamond said. “We feel very comfortable in terms of those activities in Barclays.”
Barclays expanded its investment bank by acquiring the North American unit of Lehman Brothers Holdings Inc. during the 2008 financial crisis, and added 2,000 bankers in Europe and Asia to build out the lender’s equities business.
The euro-area economy stalled in the first quarter as companies cut spending to weather the debt crisis, offsetting a gain in exports, official statistics showed last week. The European Commission said on May 11 that the region may shrink 0.3 percent this year before returning to growth in 2013. The euro has declined 13 percent against the dollar over the past year, the worst performer among 10 major currencies tracked by Bloomberg.
“In terms of our business, of course the environment has been very, very tough,” said Diamond, who joined the bank in 1996.
Greek banks are under strain ahead of this weekend’s elections on concern that country may move closer to abandoning the euro, which would cut off lenders’ access to European Central Bank funding. The June 17 ballot will determine whether the nation abides by spending reductions imposed as part of its two international bailouts and stays in the euro.
“It is in the best interest of Greece and in the best interest of Europe that Greece stays in the euro and that is what we would expect to happen,” Diamond said.
Spain’s benchmark borrowing costs climbed to a record yesterday, raising the specter of sovereign bailouts for the nation and then Italy that would stretch EU finances to their limit. The region’s policy makers face a series of hurdles in the coming days as bond investors spurn the 100 billion-euro ($125 billion) rescue package for Spanish banks that the ECB said yesterday would bolster financial stability.
Barclays is “well placed” to take advantage of consolidation in European markets including Spain, retail and business banking CEO Antony Jenkins said last week.
“You will have seen the speculation around our interests in Spain,” Jenkins said on June 7, days before the country’s bank rescue. “We are well placed to take advantage of the consolidation we see happening in the European markets but will only consider these opportunities if they meet our strict financial hurdles.”