Barclays Investment Bank Should Brace for Cuts, Investec Saysby
New CEO Staley starts Tuesday with shares down 8% this year
Unit to see 600 million pounds of cuts from 2014-17: Investec
As Jes Staley prepares to take over as Barclays Plc’s new chief executive officer on Tuesday, the investment bank should brace for deeper cuts as revenue stagnates and the lender struggles to reverse its falling share price, according to Investec Plc.
The bank may cut 600 million pounds ($900 million) of costs from the investment bank between 2014 and 2017, about 11 percent of the total at Barclays’s least profitable division, Investec said in a note on Monday.
“We see delivery on costs as critical” and the “investment bank must do the heavy lifting,” Investec analyst Ian Gordon, who has a buy rating on the stock, said in a note. “We continue to reject Chairman John McFarlane’s vision of a revenue-led recovery.”
After a initial boost when McFarlane, 68, fired former CEO Antony Jenkins and vowed to double the stock price in as little as three years, the shares have slid about 8 percent in 2015. While Investec’s Gordon said investors are too pessimistic, and expects the shares to rebound as Barclays works to achieve long-term expense-reduction targets first set by Jenkins, he forecast “a long slog ahead.”
The investor pessimism has already personally cost Staley, a 58-year-old veteran of JPMorgan Chase & Co., who was hired to speed up cost cuts, boost profitability and restore Barclays’s reputation. Staley bought 6.5 million pounds of the bank’s stock at 233 pence on Nov. 5, fulfilling a requirement that he holds four times his basic salary in stock to ensure his interests are aligned with investors.
Barclays shares were little changed in London on Monday, trading at 223.55 pence as of 2:45 p.m.
“The ‘McFarlane bounce’ has now fully unwound, Barclays trades near its 12-month low, and CEO-designate Staley is 400,000 pounds down on his 6.5 million-pound investment,” Gordon said.
Staley will also inherit the legacy of past misconduct scandals: just last week, Barclays it was was fined 72.1 million pounds for failing to fully probe a group of “politically exposed” ultra-high-net-worth clients tied to a 1.9 billion-pound transaction.
Overall, underlying costs will fall to 14.8 billion pounds in 2016 from 15.9 billion pounds this year, the Investec analysts estimate. Deeper cost cuts are needed because Investec forecasts a 3 percent decline in revenue this year, followed by “muted growth” of 2 percent and 3 percent in 2016 and 2017 respectively. In October, the lender cut its return on equity target to 11 percent from 12 percent for 2016.
The investment bank is Barclays’s most expensive to run, followed by the retail bank, Africa and Barclaycard respectively.
“We do not suggest that the Barclays buy case is particularly exciting,” but believe the bank “remains capable of cutting its way to a return on equity greater than 10 percent in 2018,” Gordon said.