Barclays CEO’s Ethics Talk Drowns Out Silence on ProfitHoward Mustoe
Barclays Plc Chief Executive Officer Antony Jenkins’s pledges to shred the legacy of his predecessor and fix the lender’s culture are distracting from the difficulty he has in reviving profit at Britain’s biggest investment bank.
Jenkins, who took over after Robert Diamond departed in the wake of the bank’s fine for rigging Libor, is set to reveal the conclusions of his six-month review of the lender’s operations at London’s Royal Horticultural Halls on Feb. 12. While he may cut about 2,000 jobs, pledge to reform culture and reduce pay to boost returns, he’s unlikely to follow UBS AG and eliminate entire business lines, according to investors and analysts.
That’s because the securities unit that Diamond built out of the remains of Barclays De Zoete Wedd over the 15 years from 1996 still contributes about half of the lender’s profit. Still, return on equity at the unit, a measure of profitability, has shrunk by 23 percent in the past two years as regulators force lenders to hoard more capital. U.K. regulators are also planning to force the country’s lenders to erect firebreaks separating their consumer and investment banks, a plan that may increase the securities unit’s cost of funding, according to analysts.
“It’s going to be a promise deferred,” said Julian Chillingworth, who manages 17 billion pounds ($27 billion) at Rathbone Brothers Plc in London. “There’s a lot of moving parts, and he doesn’t have much control over a lot of them.”
Jenkins, 51, has asked 1,000 employees to become “values leaders,” responsible for carrying a code of conduct to the lender’s 139,000 employees. Those who don’t want to adhere to it should leave, he has told workers. He also pledged to eliminate units that don’t make enough money or pose a reputational risk and told lawmakers he will resign in the event of a “grave regulatory event” while he is in charge.
“We must never again be in a position of rewarding people for making the bank money in a way which is unethical or inconsistent with our values,” Jenkins said in a memo to employees last month. A Barclays spokesman declined to comment.
Barclays will defer all 2012 awards for the bank’s 1,200 managing directors at the investment bank and pay bonuses up to 65,000 pounds in cash for more junior staff, according to a person with knowledge of the plans. Managing directors’ bonuses for 2012 will all be deferred and paid in one-third installments from 2014 to 2016, half in cash and half in shares, said the person, who asked not to be identified as the plans aren’t yet public.
For more junior staff, awards greater than 65,000 pounds and less than 250,000 pounds will see 35 percent of the total deferred and paid half in cash and half in stock. Any bonus over 250,000 pounds will be deferred, with half being paid in cash and the rest in stock, the person said.
The shares rose as much as 1.7 percent to 297.50 pence in London and traded at 295.45 pence at 10:32 a.m. local time. They have gained about 13 percent this year, making them the best-performing of Britain’s five biggest lenders. Lloyds Banking Group Plc and HSBC Holdings Plc are up 8.9 percent and 10 percent, respectively, in that period.
Changing the ethics may be easier than reviving profit. The bank, which is also reporting full-year earnings, will post a net loss of 155 million pounds for 2012, compared with a profit of about 3 billion pounds a year earlier, according to the median estimate of five analysts surveyed by Bloomberg. Barclays this week increased provisions for improperly sold loan insurance and interest rate swaps by 1 billion pounds.
“They’ll have to just muddle through and make some noises about culture,” said Colin McLean, CEO of Edinburgh-based SVM Asset Management, who helps manage 700 million pounds and sold his stake in the lender after it was fined for manipulating Libor in June. “I’m not sure they will do anything other than limited cutbacks in the investment bank.”
Shareholders shouldn’t expect Barclays to repeat the example of Switzerland’s biggest bank, UBS, which in October retreated from capital-intensive trading businesses at the investment bank and announced plans to cut about 10,000 jobs, said Chirantan Barua, an analyst at Sanford C. Bernstein & Co.
“UBS has about 35 percent of its capital in investment banking compared to 65 percent at Barclays,” London-based Barua said. “Running down something like fixed income would be very expensive” for Barclays. Instead, Jenkins may seek to cut pay expenses, he said.
Barua estimates that the average bonus for employees of the investment bank may drop to 50,000 pounds by 2014 from 100,000 pounds in 2011, while about 3,000 jobs may go.
“Given there’s an oversupply of bankers globally I think they can afford to reduce compensation quite a lot and retain talent,” said Cormac Leech, an analyst at Liberum Capital Ltd. in London.
Barclays started eliminating some European investment banking jobs in December and may make cuts in Asia, people with knowledge of the matter said last month. About 2,000 jobs may go, they said. Barclays employs about 24,000 at its investment-banking unit globally.
In the third quarter, the investment bank contributed 937 million pounds, or 49 percent, of pretax profit, according to data compiled by Bloomberg. Fixed income, currency and commodities revenue over the same period was 1.58 billion pounds out of 6.87 billion pounds for the lender, or about 23 percent.
Jenkins’s plan to overhaul what he describes as an “aggressive” culture comes after the bank was fined 290 million pounds for manipulating the Libor benchmark interest rate in June. That led to the departure of the bank’s CEO, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier. Separately, on Feb. 3 the bank’s finance director and general counsel agreed to step down.
Rich Ricci, the head of the investment bank, and one of the last remaining executives of the old management, in November said the bank may curb businesses that harm the bank’s reputation, such as tax advisory and agricultural commodities trading.
Some “outlying” activities at the bank that aren’t “socially useful” will be pulled back, Chairman David Walker told the Parliamentary Commission on Banking Standards in London this week. A sale of the investment bank hasn’t been discussed by the board, Jenkins said at the time.
Jenkins in October told analysts he’s seeking returns above the cost of equity, as the Basel III rules increase capital requirements. The bank will trim areas of low profitability, removing 15 percent or 40 billion pounds of risk-weighted assets at the investment bank and reduce required capital by 4 billion pounds, wrote Mark Phin, an analyst at Keefe, Bruyette & Woods, in a note to investors on Jan. 30.
The bank is unlikely to make changes to its U.K. consumer and business banking unit or its wealth or cards units, which are in-line with or above earlier targets, wrote Phin. There is scope for cost cutting at the continental European unit, which includes Spanish and Italian consumer banks, and the corporate bank outside the U.K., he wrote.