Barclays Plc (BARC)’s decision to shrink its investment bank shows how tighter rules and dwindling revenue are forcing Europe’s lenders to scale back operations and efforts to compete globally.
In a break from his predecessor’s strategy to create a global securities operation, Barclays Chief Executive Officer Antony Jenkins said yesterday the lender will eliminate 7,000 jobs, a quarter of employees at the investment bank, shrink its fixed-income business and focus on fewer clients in the U.K. and U.S. The fixed-income market faces a structural rather than a cyclical decline and investment-banking revenue will be “weak for some time,” Jenkins told reporters.
“European banks haven’t had sufficient time to build capital, and investors and managers have become impatient,” said Paul Vrouwes, who helps oversee about 6 billion euros ($8.3 billion) at ING Investment Management in The Hague, including Barclays shares. “Banks are having to think about returns at the group level, and they are seeing a more promising environment in other areas.”
Demand from regulators for larger capital buffers and dwindling volatility are curbing revenue from fixed-income trading in Europe. That’s forcing firms like Barclays and UBS AG (UBSN) to curtail their trading activities and boost their focus on other businesses, among them consumer banking and wealth management. Jenkins’s decision will leave Deutsche Bank AG (DBK) as the biggest European investment bank by revenue.
Investors have rewarded lenders that have pledged to cut back: Barclays shares jumped 7.9 percent in London yesterday, their biggest gain in more than a year. They slipped 0.9 percent to 260.15 pence in London today. Before the announcement, Barclays was the worst-performing U.K. bank stock. Zurich-based UBS is up about 7.9 percent this year. Frankfurt-based Deutsche Bank is down 11 percent.
“Barclays’s radical strategic reposition will put pressure on Deutsche Bank to re-examine its fixed-income trading business,” said Mark Williams, author of “Uncontrolled Risk,” a book on the rise and collapse of Lehman Brothers Holdings Inc., and executive-in-residence at Boston University. “Fixed-income trading historically has been its golden goose.”
Officials at Deutsche Bank in London declined to comment.
Revenue from fixed-income trading fell by an average 16 percent in the first quarter, according to data compiled by Bloomberg Industries from nine firms worldwide. Income at Barclays tumbled 41 percent in the quarter, while at Deutsche Bank it slipped by only 10 percent, the data show.
JPMorgan Chase & Co. (JPM:US), the world’s biggest investment bank by income, forecast on May 2 that fixed-income and equities trading revenue in the second quarter may drop by about 20 percent from the year-earlier period.
“We have to acknowledge that global investment banking is in a state of massive transition because of changes to capital requirements and because of the nature of the global economy,” Jenkins told reporters yesterday. “Our strategy is to be a focused international investment bank.”
Jenkins’s cuts will bring the number of jobs to go across the firm by 2016 to 19,000. About 2,000 positions will be eliminated at the investment bank this year, adding to the 12,000 reductions across Barclays announced in February. The company will create a bad bank to dispose of 115 billion pounds ($195 billion) of assets, including its European consumer arm.
Jenkins, 52, has been under investor pressure to recast the investment bank and exit unprofitable businesses. His efforts to revive profit by cutting costs have been hampered by a decline in revenue from fixed-income, currencies and commodities, traditionally the single largest revenue generator for the bank.
About a quarter of Barclays’s decline in FICC revenue should be attributed to the lender’s own decision to scale back parts of the operation in longer-dated derivatives and parts of the rates unit, Finance Director Tushar Morzaria said yesterday.
The decline at the investment bank pushed first-quarter pretax profit, excluding swings in the valuation of the lender’s debt, down 5 percent to 1.69 billion pounds, missing analysts’ estimates.
Barclays’s overhaul will cut the investment bank’s share of the firm’s risk-weighted assets to 30 percent by 2016 from about 50 percent, Barclays said. In reducing the company’s reliance on the investment bank, Jenkins follows UBS CEO Sergio Ermotti, who in 2012 decided to exit most debt-trading activities while increasing the focus on wealth management.
The British bank said instead it will focus on businesses outside of investment banking that are less capital intensive. Those include its African unit as well as its Barclaycard consumer credit-card division, where profit climbed 17 percent in the first quarter.
The overhaul is Jenkins’s second since he took over as CEO in August 2012 after the bank’s record fine for manipulating the London interbank offered rate.Robert Diamond, his predecessor, had rebuilt the investment bank after Barclays sold its money-losing European equities unit, focusing on bonds, loans and foreign exchange.
In 2008, Barclays acquired Lehman Brothers’s North American operations out of bankruptcy and then embarked on a hiring spree to add stock underwriting and merger advisory businesses and bankers in Europe and Asia to match its standing in the U.S.
“The after-tremors of the financial crisis are a little stronger for European investment banks,” said Christian Zogg, who manages about 500 million Swiss francs of equities at LLB Asset Management AG.
“People will be trying to get a hold of Barclays’s talent and the business will come with them,” he said. “Barclays was quite the powerhouse.”
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