Barclays Needs Dramatic Investment Bank Cuts, Berenberg Says

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Barclays Plc will struggle to meet its profitability target unless it makes deeper cuts to its investment bank, analysts at Berenberg Bank said.

Chief Executive Officer Antony Jenkins, 53, has targeted a 12 percent return on equity by 2016. While the investment bank, headed by Tom King, increased profitability in the first quarter, cost cuts were responsible for the bulk of the improvement as trading income stalled.

“The malaise from the lackluster investment bank strategy has worsened,” said James Chappell, an analyst at Berenberg in London, who downgraded the stock to sell on Friday. “Barclays must either lay out a commitment to a full service, independent investment bank or choose to downsize it more dramatically.”

Since taking his job in 2012, Jenkins has cut costs and sold assets at the securities unit championed by his predecessor, Robert Diamond, after tougher capital regulations and rising fines undermined earnings. The division accounts for about a quarter of Barclays’s profits, compared with about three-quarters at its peak in 2010, and has lost market share to rivals in fixed-income, currencies and commodities trading.

Barclays fell 0.9 percent to 252.9 pence at 11:22 a.m. in London, paring its gain this year to about 4 percent. The bank fell 10 percent last year.

The investment bank reported a 9.1 percent return on equity in the first quarter, up from 2.7 percent in 2014. It’s still the least profitable of Barclays’s four divisions. The unit set aside an additional 800 million pounds ($1.2 billion) to cover potential fines for rigging currency markets, taking total provisions for the scandal to about 2.1 billion pounds.

Berenberg is also concerned about Barclays’s U.S. operations driven by its Barclaycard credit card unit, leaving it vulnerable to a slowing economic growth across the Atlantic.

“Barclays is one of our wild cards for 2015 as it has the potential to emerge as a long-term winner in the sector,” Chappell said. “Unfortunately, that change seems further away than we had hoped.”