Facing Angry Investors, Barclays’s Investment Bank Is Under Review

Source: http://www.flickr.com/photos/ell-r-brown/

Source: http://www.flickr.com/photos/ell-r-brown/

Barclays (NYSE:BCS) — like many other large banks — still bears the scars of the financial crisis, with hefty regulatory charges and long-lasting litigation still impacting its operations Chief Executive Officer Antony Jenkins, who has pushed to implement a “fundamentally different culture” than that created by his predecessor Bob Diamond. It has also downsized the size, structure, and workforce of the second largest bank by assets in the United Kingdom in an effort to rid its balance sheet of capital-hungry loan portfolios and limit derivatives and securities lending so as to be compliant with the global banking rules known as Basel III. The results of the British bank’s fourth-quarter earnings showed the size of the task facing Jenkins. But the goal is still to downsize, and through sources familiar with the matter, Reuters learned that Barclays is reviewing the size and shape of its investment bank so that the bank can better focus on its most profitable areas.

A Barclays spokesperson told the publication that management has no plans to change leadership at the investment bank. But the fact remains that shareholders — who have bid shares of the British bank down 13.57 percent down this year through Thursday — were outraged after Barclays announced last month that it had increased bonus payments by 10 percent to 2.4 billion pounds last year, despite the large decrease in its pre-tax profits.

Net income did rise to 540 million pounds, or $886.73 million in 2013 — a massive recovery from the loss of 624 million pounds, or $1.02 billion, reported in the year-ago quarter. But underlying pre-tax profit dropped 26 percent last year, while adjusted return on average shareholders’ equity, a measure of profitability, fell to 4.5 percent from 9 percent a year ago. The problem is costs have soared as Barclays has worked to reshape itself into a smaller, more competent bank.

The disappointing results at the headline level reflected the changes taking place within Barclays. Fixed-income, currencies, and commodities revenue (FICC) — the largest single source of income for its investment bank — decreased by 16 percent in the fourth-quarter, and investment banking income, which includes proceeds from underwriting and mergers advisory, dropped 5 percent from the year-ago quarter. Of course, declining FICC revenue is not a phenomenon unique to Barclays; FICC revenue at the five largest U.S. investment banks decreased 4.2 percent to $10.2 billion in the fourth-quarter, according to Bloomberg data.

The aim of the review of the investment bank is to improve profitability, sources informed Reuters. Profitability has been hurt by tougher regulations and weak trading in fixed income, which generates the majority of profits for the investment bank. Since the slump in fixed-income revenues, numerous banks have shrunk their fixed income operations and begun to allocate capital to equities, advisory units, and other aspects of commercial banking.

“Profits have been impacted by the restructuring and de-risking activity we completed during the year,” explained Jenkins in the earnings press release. “This included withdrawing from certain lines of business, investing to transform our operations and resolving legacy conduct and litigation issues. The cost of these actions suppressed statutory profits to [$4.76 billion] in the year but was in the long term interest of our shareholders.” Costs as a proportion of revenue “rose in 2013 mainly as a consequence of reduced income, but we remain committed to achieving a ratio in the mid-50s by 2015,” he added.

Critics have argued that Jenkins must get costs under control at the investment bank, especially after he said in an interview with the Telegraph that the bank had been forced to increase compensation for investment bankers in the United States to prevent a “death spiral,” in which lower pay would result in clients and employees being less likely to use Barclays.

Upon taking office in August 2012, amid the fallout that followed the bank’s Libor-rigging scandal, Jenkins committed to rebuilding investor and customer trust in the institution — a task he believes could take as many as ten years. Libor rigging costs Barclay’s former chief executive and chair their jobs and gave both investors and customers a reason to be concerned about its business culture. “It is about what you do, not what you say,” Jenkins told BBC’s Today radio program in December. “Until people start to perceive the change, Barclays will not begin rebuilding that trust.” He acknowledged that, “It’s desperately disappointing to still have these issues being uncovered,” but with  news that massive amounts of customer data was stolen to be sold on to brokers, it has been hard for Jenkins to sell the idea that a fundamental change in corporate accountability has begun.

Alongside earnings, the bank announced plans to cut as many as 12,000 jobs, or about 8 percent of its staff, as part of the restructuring that began a year ago.

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