In July 2015, it seemed like Barclays had reached a nadir.
New chair John McFarlane had just brutally fired the bank’s chief executive Antony Jenkins, after a bruising boardroom showdown over his proposed reforms at the genteel Lucknam Park country house hotel in Wiltshire.
Anxious staff gathered in Barclays Canary Wharf headquarters for an impromptu town hall. “Mac the knife”, as the uncompromising Scot is known, reassured them he would end years of strategic drift and stock market woes, promising to double the share price in the next three to four years.
If this did not happen, the bank’s top team “would not be doing our jobs properly”, he said.
But eight years on, Barclays is still plumbing new depths. The shares have lost half their worth since then, steadily declining from 285p at the end of July 2015 to 136p today.
Over that period, the bank has careened from scandal to screw-up: a former chief executive found to have misled regulators over his relationship with a convicted sex offender; an activist investor on a damaging yet ultimately unsuccessful campaign to shrink the investment banking division; a paperwork blunder that led to hundreds of millions of pounds in fines and compensation.
The bank currently languishes near the bottom of the global rankings for bank valuations, trading at a 60 per cent discount to the book value of its assets with a market capitalisation of around £20bn. JPMorgan Chase, the US rival it most wants to emulate, is worth $425bn.
Now, the outlook is darker than ever. The stock sank further last month after chief executive CS Venkatakrishnan revealed that third-quarter profit fell 16 per cent, as both sides of its transatlantic business underperformed peers.
The bank announced a strategic review for February and another round of cost cuts, while promising more granular disclosure on performance and more ambitious financial targets.
But fixing what ails Barclays will mean resolving a four-decade debate over its dogged strategy to remain the UK’s last global investment bank in an industry dominated by Wall Street.
In an interview, Venkatakrishnan tells the Financial Times he will continue to reject calls to shrink the investment bank, which dominates the rest of the business.
“Rebuilding [it] took time, treasure and persistence,” says the chief executive, who is known as ‘Venkat’. “We are now at scale and it has helped diversify our returns, but it has grown to two-thirds of the bank, so we need to rebalance and grow the rest of the businesses outside it.”
That means mapping a path to greater revenues from other sources such as credit cards and wealth management, he says, as well as tackling high costs at the UK retail bank. “Running the place well, not slipping on any more banana skins, those are just the table stakes,” adds Venkat, who is now in remission after battling non-Hodgkin lymphoma for much of the past year. “We have to convince people that we are a well-run business with an important role to play in the financial system.”
The bank still has its fans — who point to improving profitability and record capital buffers with plenty of capacity to return cash — but after a bruising few years their patience is beginning to wear thin.
“Barclays is currently one of the lowest-rated banks in the developed world, reflecting a lack of confidence in their strategic direction and inconsistent delivery over the past few years,” says Ambrose Faulks, a top-20 shareholder at Artemis Investment Management.
“They have an attractive set of assets which provide both diversification benefits and strategic optionality,” he adds. “If the board can finally address these issues, then the opportunity for value creation is substantial.”
Some are concerned that the review, aided by Boston Consulting Group, will do little more than fiddle at the margins. “I worry that the investor update will not address the dominance of the investment bank,” says Bank of America analyst Alastair Ryan. “It is a confusing message [that] at present this looks like a list of investor concerns, rather than a focused strategy.”
Other long-suffering shareholders have lost faith. A top-10 investor, who asked to remain anonymous, says there is little Barclays can do now to change the way it is perceived against a tough macroeconomic backdrop.
“With their discount they are at the extreme end of the sector,” he says. “The market does not like the UK post-Brexit, [or] non-Wall Street investment banks [or] credit cards heading into a recession. So long as that is true it will be very hard for them to re-rate.”
The stakes are high. If Venkat’s new model fails to convince, the old argument that Barclays as a whole is worth less than the sum of its parts could re-emerge.
“Operationally the bank is performing reasonably well, but investors still see it as accident prone,” says Philip Augar, the author of The Bank that Lived a Little, a book about Barclays. “The share price and the rating are now so low that the bank is in break-up territory.”
Saints and sinners
Barclays was founded by Quakers as a goldsmith bank on Lombard Street in 1690. For almost 300 years it remained a domestic lender, until the “Big Bang” deregulation of the City of London in the 1980s recalibrated its ambition.
Barclays de Zoete Wedd was its first attempt to build a full-service securities operation, formed in 1985 by merging its merchant bank with a stockbroker and market maker. BZW produced tepid results until it was dismantled and sold to Credit Suisse First Boston in 1998.
The next attempt was led by Bob Diamond, a brash American trader whose big break was buying the US assets of Lehman Brothers out of bankruptcy in the financial crisis, leading to his appointment as group CEO in 2010. He lasted less than two years before resigning in the wake of the Libor rate-rigging scandal.
The chastened board reversed course, naming a retail banking expert nicknamed “Saint” Antony Jenkins to clean up the culture. He set in motion plans to cut Diamond’s investment bank to the bone before his defenestration at the hands of MacFarlane.
Then came Jes Staley. Once a top deputy of Jamie Dimon at JPMorgan, he was recruited in 2015 with the mandate and budget to rebuild Barclays into the pre-eminent trading and advisory firm in Europe.
Staley’s belief was that investment banking was an essential counterweight to the retail and credit-card operations, particularly during economic crises when market volatility turbocharges trading and M&A activity. He also thought that London needed a homegrown trading and capital markets house so UK companies would not be reliant on Wall Street.
This thesis played out perfectly during the pandemic. As the consumer units suffered amid lockdowns, 2020 and 2021 were record years for the division. Barclays grabbed market share to jump to number six in the global league tables, taking advantage of the decline of Credit Suisse and retrenchment at Deutsche Bank.
Yet to executives’ dismay the stock remained depressed — not helped by the resignation of Staley in November 2021 as financial regulators examined his account of his relationship with deceased sex offender Jeffrey Epstein.
Worse still, the revenue windfall from investment banking and rising interest rates has faded rapidly since, exposing the high underlying costs of the business.
“There’s a sector-wide malaise, but Barclays suffers from being in a peer group of one in the UK market,” says Richard Marwood, head of UK equities at Royal London Asset Management. “It’s got aspects like NatWest and Lloyds, but it’s more complicated than them; it’s got an investment bank, but it’s not JPMorgan; and it has a US cards business but it’s not Amex or Visa.”
One board member acknowledges that “Barclays has some convincing to do” and that “in an ideal world [the review] could have been sooner”.
“Investors want to know what sustainable return the business can deliver and how,” the person says. “We need a clearer strategy on investment banking and Barclays UK needs to be more efficient — this is about execution not [a change in] strategy.”
Seeking equilibrium
Rebalancing Barclays will be a tough task.
The corporate and investment banking division has grown to dwarf the consumer side. It accounts for £219bn in risk-weighted assets (RWA), up from £122bn at the end of 2014, and compared with £73bn at the UK retail bank and £40bn at the cards and payments unit.
That equates to 64 per cent of RWAs allocated to the division, compared with about 40 per cent at Deutsche Bank and 30 per cent at HSBC and BNP Paribas.
Despite consuming the lion’s share of the resources, the investment bank currently generates a lower return on equity — a key measure of profitability — of 11.5 per cent versus 21 per cent on the consumer side.
This imbalance was the subject of a vitriolic three-year campaign by activist Edward Bramson, who tried to force his way on to the board and dramatically shrink its trading unit. He argued it was too small, too risky and sucked resources from the more profitable consumer operations. He ultimately failed and sold out with a £100mn loss in 2021.
At the heart of shareholders’ distaste for investment banking is its unpredictability. This is particularly pronounced because the division generates the vast majority — about 80 per cent — of its revenue from trading fixed-income assets, currencies and equities, which are at the mercy of market conditions and client activity.
“The quarterly fixed-income and equities revenue volatility of Barclays is now greater than any US or European peer,” says Citigroup analyst Andrew Coombs. “While Barclays has made market share gains . . . it is hard to reward this.”
Demonstrating this, after a buoyant 2022, in the first nine months of this year trading revenues fell 18 per cent to £6.1bn, compared to an average 2 per cent decline seen at US peers.
The advisory and capital markets unit — reeling from a series of high-profile defections earlier this year after replacing its leadership — also saw income decline 16 per cent to £1.5bn over the same period.
The third quarter was especially disappointing. Revenue fell 30 per cent to £375mn, hitting the lowest level since at least 2015, including just £80mn from M&A advice.
While the division overwhelms the rest of Barclays, it is undersized versus US peers, in an industry that is increasingly a scale game. This makes it harder to match their technology investments and attract and retain the top talent.
The regulatory environment in the UK does not help, either. The so-called ringfencing law, which requires lenders to split their consumer and investment banking operations into separate legal entities to protect depositors from trading losses, increases costs on both sides.
The UK government also imposes a tax surcharge on bank profits and investor sentiment has still not recovered from the shock of a Bank of England ban on dividends during the pandemic.
“We are trying to compete with the Americans with a 400-pound gorilla on our back,” says one senior figure at the bank. “Investors just don’t know what regulators are going to impose on us next, so they are putting their money elsewhere.”
One former investor who sold out of the stock describes Barclays as being stuck in a “killing ground” between the giants of JPMorgan and Goldman Sachs, and the more targeted, lower cost advisory boutiques such as Jefferies and Moelis.
When asked to explain why Barclays persists with a strategy unpopular with the market, another top-20 shareholder says: “Like in religion, there is always hope. And people that pay themselves millions will always find an excuse to continue — turkeys never vote for Christmas.”
There are some, however, who think Barclays’ achievements in recent years are unfairly maligned.
Despite what he calls its “image problem”, Berenberg analyst Peter Richardson says that Barclays’ investment bank is “stronger than perceived” and has generated a return on equity of at least 10 per cent for eight of the past 10 quarters, considered to be the minimum acceptable level by investors.
He also estimates that Barclays’ share of global investment banking revenues has increased by 13 per cent since 2017, outpacing a 9 per cent increase for Wall Street and a 16 per cent decline among non-US peers.
“Far from being ‘just another European investment bank’, Barclays has the strongest franchise of any foreign bank in the US market, where we estimate returns are twice as high as in Europe,” Richardson says.
What Venkat does next
While the investment bank has long been a lightning rod for criticism, analysts and shareholders want issues with the consumer side to be addressed too — especially rising defaults in unsecured lending and its persistently high costs.
Barclaycard, the vast credit card operation, had been highly profitable in the benign economic environment. But the cycle is turning: not only are margins now levelling off or declining, but higher interest repayments are leading to more customers defaulting on their small-business loans, mortgages and credit card debt.
In the third quarter the bank’s closely watched net interest margin — the difference between the interest received on loans and the rate paid for deposits — narrowed more than at rivals such as Lloyds.
Expenses are also an issue. Christopher Cant, an analyst at Autonomous, says that Barclays’ UK personal banking unit has a cost-income ratio of 59 per cent, far in excess of the 44 per cent reported by the comparable division at NatWest and 46 per cent at Lloyds.
“It feels like Barclays will try to grasp the nettle on costs in the UK, which is somewhat overdue,” Cant said. “They have been more inefficient than peers for a considerable amount of time and we don’t really know why.”
Strategic moves such as tackling costs might help Venkat move the share price in the long term. But the chief executive could secure a more rapid fillip for the stock with a firm commitment to boost shareholder returns.
Conor Muldoon, a portfolio manager at Barclays’ sixth-largest owner Causeway Capital, says that while the share price is “obviously not good”, it is driven by “myopic” short-term concerns over recession and he has been adding to his position.
“Unless Armageddon hits it should be able to generate £3bn to £4bn per annum of capital,” he says. “We’d like to see the majority of that go to share buybacks — their power when you’re trading this cheaply is enormous.”
“There are valid indications of frustration and I sympathise with them, but we want to do this carefully, methodically and thoughtfully,” Venkat says of restive owners. “What people are worried about is that is [profitability] high enough, consistent enough, is it coming from the right places and what am I as an investor going to get as a result?
“We have not been clear about how much of our returns we will share with shareholders,” he adds. “Doing that now is really, really important.”
But if Venkat does not succeed in winning over investors in February, there is a danger that the depressed valuation will leave the bank vulnerable to another activist like Bramson, or a deep-pocketed competitor.
Though most think it unlikely, there might be renewed calls for executives to explore a dual listing or break-up of the group with a potential IPO of the investment bank in New York. McFarlane once argued for such a plan, according to people familiar with his thinking, but Staley and his team chose to stay the course.
Venkat now proposes to do that too. But insiders say bold decisions might be required. “There are a lot of really good pieces at Barclays, but it looks hard to win as currently constructed. The wheels won’t fall off the bus, but there is a risk we lose pace with the pack and the share price falls even further,” says one person involved in the strategic review. “There needs to be more radical action.”
Additional reporting by Michael O’Dwyer
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