Barclays Pressed by Investors to Start Delivering on RevampHoward Mustoe and Gavin Finch
Barclays Plc Chief Executive Officer Antony Jenkins’s plan to cut jobs and costs to return the lender to profit sent the stock to a two-year-high. Investors say he now has half that time to start delivering on his turnaround.
Shunning the firm’s offices in London’s Canary Wharf his predecessor Robert Diamond and his team used for presentations, Jenkins stood alone at the Royal Horticultural Halls in London’s Westminster district yesterday and pledged to save 1.7 billion pounds ($2.7 billion) in annual expenses in 2015, cut 3,700 jobs and reduce costs to about 55 percent of income from 64 percent. He also aims to achieve a return on equity that exceeds the lender’s 11.5 percent cost of equity.
To meet that target, Jenkins will dismantle part of the investment bank Diamond created, cut back the lender’s money-losing European consumer unit as well as eliminate divisions such as its tax-structuring operation that have been criticized by politicians. He needs to convince regulators that the bank has adequate capital, politicians that he will avoid missteps such as interest-rate rigging and shareholders he can return the lender to profit after a 1.04 billion-pound loss for 2012.
“He’s going to be given the benefit of the doubt to start with, but he can’t afford too many slip-ups,” said Julian Chillingworth, who manages 17 billion pounds at Rathbone Brothers Plc in London. “By this time next year he’s got to show some progress.”
Barclays rose 0.5 percent to 328.95 pence as of 8:32 a.m. in London today, extending yesterday’s 8.6 percent gain. The stock has risen 25 percent this year, the best performer out of Britain’s five biggest lenders. Lloyds Banking Group Plc has advanced 16 percent and HSBC Holdings Plc almost 13 percent.
“The landscape for banking has fundamentally altered,” Jenkins, 51, said as he committed the bank to the five values of respect, integrity, service, excellence and stewardship. “There will be no going back to the old ways of doing things. We get it. We are changing the way we do business, we are changing the type of business we do and we are setting out a new course.”
Barclays has reviewed 75 of its units to weed out those that pose a reputational risk or don’t make profits. The firm will wind down four “legacy” operations that account for about 90 billion pounds of risk-weighted assets to help reduce total RWAs under Basel III to 440 billion pounds by 2015.
They include portfolios of loans at its European consumer unit and parts of its corporate book in Spain and Portugal, the lender said. The company may wind down a further 17 operations that generate about 2 billion pounds of income, Jenkins said. The bank will lose 500 million pounds of revenue from the divisions being shut.
The decline in revenue from closing businesses and shrinking assets is “not material,” Shailesh Raikundlia, a London-based analyst at Espirito Santo Investment Bank who rates Barclays a buy, said in a report to clients today. “The route for returns to exceed cost of equity is achievable.”
The lender will separately shutter part of soft commodities unit that deals with “speculative” trading of agricultural products and the part of the structured capital markets division, which advises customers on tax planning and has been criticized by politicians as encouraging tax avoidance.
About 1,800 positions will be cut this year at the firm’s corporate and investment bank, which generated 78 percent of Barclays’s profit in the fourth quarter, and 1,900 in its money-losing European consumer and business banking unit.
Barclays will scale back the investment bank’s Asian and European equities business, reversing an expansion that followed its 2008 purchase of Lehman Brothers Holdings Inc.’s U.S. unit.
It will also shut about 30 percent of branches in its European consumer bank, which posted a pretax loss of 239 million pounds in 2012. Jenkins said Barclays plans to refocus the operation on the “mass-affluent market.” He wouldn’t identify which countries will bear the brunt of the closures.
“There’s not much meat on the bones on where the cost-cutting will happen,” said Paul Mumford, who helps manage about 350 million pounds, including Barclays shares, at Cavendish Asset Management Ltd. in London. “They have got the overall plan in place, but we don’t know what areas are likely to be hit. Equally, I think the whole operation is clouded with some sort of secrecy, so you can’t really get a feel for the high and low-risk areas.”
Jenkins may be reluctant to disclose which assets he plans to sell at this stage so he can get a better price for them, and uncertainties over the future shape of bank regulation in Britain mean he can’t plan for everything, Mumford said.
Britain plans to force lenders to erect firewalls between their consumer and investment-banking divisions to prevent a repeat of the financial crisis of 2008. The so-called ring-fencing rules may cost Barclays less than 1 billion pounds, Jenkins said, adding that the figure is yet to be finalized.
Chancellor of the Exchequer George Osborne last week toughened his stance on bank regulation, saying the government plans to “electrify” the ring fence, giving regulators powers to break up universal banks that try to flout the rules.
Jenkins still has to persuade politicians he has changed the bank. Yesterday’s plans lacked a defining moment where the old administration became the new, Pat McFadden, a Labour Party lawmaker and member of the Treasury Select Committee, said in an interview with Bloomberg Television’s Guy Johnson yesterday.
“What they’re trying to do is look for a ‘Clause Four’ moment, a moment when they go out the public and say we get it,” he said, referring to then Labour leader Tony Blair’s 1995 move to abandon the party’s commitment to the nationalization of industries, a move that helped him achieve his party’s first election victory since 1974. “I don’t think today does the job, but that’s the process they’re beginning to embark on.”