Jes Staley wants Barclays to be big and diversified. But it's a bet that requires time and money. Even if the bank's new CEO is right in the long run, investors are unlikely to keep the faith.
Considering the amount of optimism riding on Staley's first big results presentation -- sell-side analysts expect him to deliver a bigger stock price gain over the next 12 months than any other European bank chief -- it was always going to be tough for the JPMorgan veteran to deliver.
And the disappointing announcements came in spades: a cut to the dividend for the next two years, a big dollop of one-time losses and litigation charges -- and a commitment to investment banking as a key plank of the business.
There was a sop to the bulls betting on a radical Staley-led restructuring of Barclays: the bank will cut its majority stake in its Africa unit and is stuffing several business lines including Barclaycard's Southern European unit into its non-core division.
Even this will take more time and more money. It may take "two to three years" to sell the Africa stake, Staley said on Tuesday, while the swelling of the bad bank will lead to 1 billion pounds ($1.4 billion) in total extra costs.
Selling the African business -- which generated a better return on equity than the investment bank last year -- makes little sense now. As my Gadfly colleague Duncan Mavin has argued, it will be hard for Barclays to find a buyer willing to pay a premium when commodities markets are in turmoil and the rand has plunged. Selling looks desperate rather than strategic.
What will investors get in return for their pains? Not much.
The bank will be more profitable and smaller -- but by how much? And when? Barclays is targeting a softer cost-to-income ratio of below 60 percent "within a reasonable timeframe", as well as a return on equity it describes as "attractive." Given Barclays has an (adjusted) cost-to-income ratio of 83 percent in the fourth quarter and a return on tangible shareholders' equity of negative 1.9 percent, investors are unlikely to get meaningful improvements in the short term.
And the big picture goal is more troubling still. Staley says he wants Barclays to be a "transatlantic consumer, corporate and investment bank", which is a far cry from what Bernstein analysts had hoped would become a "pure-play U.K. retail and commercial franchise."
Shareholders are being asked to double down on Barclays's ambition to remain an investment bank with little prospect of reward.
That explains a lot about why Barclays shares slumped more than 11 percent on Tuesday. Barclays is one of the cheapest banks in Europe, trading at 0.4 times book value (only Deutsche Bank is cheaper at 0.3). Lloyds, which focuses on the British consumer, trades at a premium, or 1.2 times book value.
Bank investors want more profit, more dividends and more capital -- and as little earnings volatility (read: investment banking) as possible.
There's a reason why investment banking is a turn-off for shareholders. U.S. rival JPMorganChase has already warned trading has got off to a dismal start this year; Barclays itself also expects more losses from oil and gas lending even if the price of crude holds at $30 per barrel.
Staley took pains to assure analysts on Tuesday that the investment bank is safer. In his defence, there is a chance his bet will come good. It's possible financial markets and economic growth will rebound in the next two years. It's possible pure-play consumer banks will be nursing losses and wondering how to take market share in an increasingly oligopolistic investment-banking industry.
But in the meantime, Staley is asking shareholders to back a moonshot -- with little prospect of immediate reward.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Even that figure is adjusted. According to Barclays it excludes the following: goodwill impairment; provisions for U.K. customer redress; gain on U.S. Lehman acquisition assets; provisions for ongoing investigations and litigation including foreign exchange; losses on sale relating to the Spanish and Portuguese businesses; Education, Social Housing, and Local Authority (ESHLA) valuation revision; and gain on valuation of a component of the defined retirement benefit liability.
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