Bank’s CEO must persuade investors that his vision of a 'socially useful bank’ can also deliver sustainable returns, reports James Quinn
It was Antony Jenkins’ big moment. Over two days of an away trip at a secret location in north London in November (Xetra: A0Z24E - news) , he shared with the bank’s top 125 managers his vision for the Barclays (LSE: BARC.L - news) of the future.
He set out a vision of Barclays as a “socially useful bank”, defined by an “external lens”. Not, as he said on the day, a move away from capitalism, but a recognition that shareholder value is not the only metric by which the bank should be judged.
Speaking to some of those present, they describe the bank’s chief executive as measured, enthusiastic and determined. The chatter in the break-away rooms and lunch breaks was of a marked difference to what had gone before. It was not to everyone’s liking, sources indicate, and Jenkins has since indicated to confidants he expects some will “select out”.
“You’re either with me or you walk”, was the mantra that stuck in many minds. Here was Jenkins attempting to outline a future for the bank beyond Bob Diamond, the previous CEO, and last summer’s £290m Libor fine which plunged the bank into crisis and saw Jenkins anointed chief executive in late August.
On Tuesday, Jenkins will again stand up, this time in the Lindley Hall at The Royal Horticultural Halls in Westminster, to set out his vision in much more detail. This time the room of invited guests will not be his most senior staff but a mix of analysts, investors, and journalists, gathered to hear the outcome of his six-month long strategy review, being published on the same day as the bank’s results for the year to December 2012.
His opening remarks will focus on the fact that Barclays is good for the British economy, and while admitting what the bank did in relation to Libor, swaps mis-selling and PPI mis-selling was wrong, he is not going to spend 30 minutes apologising, sources indicate.
The focus will be the 75 different business units Jenkins and his team of internal and external consultants initially identified last autumn, and how many of them will remain intact. The future shape of the investment bank formerly known as Barclays Capital will also be made clear.
The outcome of the strategy review is based on what sources indicate is 1,800 pages of financial data that backs up the analysis.
The data have been used to run a slide rule over each individual business unit in turn, using a screening process divided into four quadrants, the top left and best being good returns and good reputationally.
Foreign exchange, fixed income, equity capital markets and debt capital markets will all survive and remain largely intact, given good returns and good reputation.
However those units which provide good returns but are bad reputationally will see change. Barclay’s once high-profile tax-structuring division, Structured Capital Markets, will be closed, as The Sunday Telegraph reveals today.
Also at risk is anything that looks like proprietary trading, senior sources said. The bank’s relationship with C12 Capital Management the firm of ex-Barclays managers at the centre of its controversial Protium transaction is also in jeopardy, it is understood.
Gary Greenwood, analyst at Shore Capital, argues that there will be a number of “sacrificial lambs” including Asian equities and mergers and advice. It is expected that only a very small number of units will be cut altogether, but others will be amalgamated or restructured. “Expect key-hole surgery, rather than amputation,” said a senior source.
In total, by the end of the process, between 2,000-3,000 positions will be removed from the investment bank, which had 23,300 staff at the end of June 2012.
The process of redundancies has already begun in some instances, with 275 traders let go from Barclays’ New York offices last week. Part of the job cuts will come through a reduction in middle management, shortening report lines similar to a process undertaken by Stuart Gulliver at HSBC (LSE: HSBA.L - news) .
The end result, Jenkins hopes, will be a more streamlined investment bank more appropriately geared to the current social and economic environment, while at the same time delivering substantial returns.
In conversation with investors he has personally spoken to the entire top 30 of Barclays’s share register over the past two months he is understood to have found a tolerance for his socially useful quest, so long as it delivers sustainable returns.
“The entire market is hoping for clarity as to what Barclays’ investment bank stands for over the next 5-10 years,” one top-15 shareholder told The Sunday Telegraph.
The investor said he will be looking at the costs involved in the reshaping of the investment bank, as well as the future margins Jenkins hopes to deliver. “My sense is it will be a smaller, more easily understood investment bank, with less capital employed and more diligent on costs, particularly employee costs.”
“Sustainability is more important to me than whether it’s actions are socially useful,” said a second blue-chip investor. “But if that helps focus the strategy, then so be it.”
Chirantan Barua, banking analyst at Bernstein, points out that Barclays’ over-reliance on fixed income, currency and commodities which account for 60pc to 70pc of investment banking revenues leaves it underweight in equities and mergers and acquisitions.
However he does not think Jenkins has the appetite to build up a strong presence in either of these areas, and argues that the strategy day is “unlikely to satisfy”.
“We expect management to take out marginal 'non ethical’ desks but it is unlikely that we will see risk-weighted assets coming down with it,” he said.
One major issue regarding the investment bank which is highly unlikely to be addressed on Tuesday is the future of Rich Ricci, its head.
Although Ricci has bought in to Jenkins’ new mantra, it is not thought to sit overly comfortably with him. He is thought to have been frustrated that Jenkins rolled his own “Project Mango” strategy review into the bank-wide one.
“Rich knows which way the wind is blowing,” said a Barclays insider. “Antony is not seeking a big confrontation, but there’s acknowledgement on both sides that there’s a time when he [Ricci] will go once a new investment banking chief has been selected.”
Jenkins’ approach in this area seen in the resignation of chief financial officer, Chris Lucas, last week after much below-the-radar discontent from investors is similar to how he has run the strategy review. Not one to barge into a meeting with pre-conceived ideas, he prefers to assess the situation over a period of time.
The same is true with his plan for the bank. He does not envisage quick “wins”, and would rather those involved in the bank looked to longer-term horizons than perhaps has been the case in the past.
Jenkins’ vision for the bank as a whole will also play out on Tuesday, as he outlines a desire for a gradual rebalancing of the bank over the next five years. Ideally the investment bank will reduce in size while still delivering substantial returns.
“It’s an interesting equation,” says one top-10 investor. “Because the smaller the investment bank gets, the more highly rated the bank’s shares will be. It’s finely balanced.”
Jenkins will not shy away from the retail and business bank, however, the division of Barclays he ran until last summer. In a recent interview with CNBC, Jenkins said Barclays is strong in the UK, US and Africa, signalling the potential end of the road for its retail operations in continental Europe.
“A lot has been done to turn around Spain and Italy on the corporate side, but they’re both still loss-making and it’s hard to see how they’ll return to growth,” said one inside source.
Diamond had in the past talked about building up its Spanish retail operations, but Jenkins is likely to signal a possible volte face.
Closer to home, he will applaud the strength of the UK retail bank, which is gaining market share in mortgages, and focus on the potential in winning more small and medium-sized business customers. Barclaycard, which he also used to run, will be picked out for praise, it is believed.
It is known Jenkins has his own thoughts on the future of free banking, believing that transparent pricing would allow customers to see what exactly they are already paying for. It is not known if he will use this week to put any more detail in the public domain.
The CEO’s review will be made against the backdrop of Barclays’ full-year results for 2012, published three-and-a-half hours before he stands up in the Lindley Hall.
The bank’s own consensus suggests adjusted profit before tax of £7.18bn on sales of £29bn, taking into account £3.5bn of impairment charges, including the recently raised provisions for PPI and swaps mis-selling. This compared to adjusted profit before tax of £5.88bn in 2011.
The investment bank is expected to contribute £4bn of that £7.18bn figure, reflecting its continued importance to the bank’s bottom line.
As well as the headline figures, investors are keen to know about compensation. While Jenkins has said he will not take a bonus for 2012, the bank’s investment bankers learned of their bonus fate on Friday.
It is understood Jenkins wants to remain competitive on pay but not pay for failure, balancing returns with shareholders.
The compensation:net income ratio for the bank stood at 39pc at the end of the third quarter of 2012, against 46pc at the end of 2011. Jenkins is believed to want to reduce this to the mid-30s mark, within two years.
His target is believed to be to remain in the bottom quartile for the investment bank for compensation, signalling costs will be driven down.
“Are they funding fines from the bonus pool,” asks one top-15 investor.
“Before the Parliamentary Commission [last week], he didn’t quite say all fines would come from the pool.
“The question is are they really committed between balancing returns on capital and returns to employees?”
But even more important will be the message he sends.
A source close to him says: “He needs to deliver acceptable returns in the eyes of the market but also needs to demonstrate to the outside world that he’s genuine about cultural change.”
If he can do both, his short tenure of the 323-year-old bank could already be judged a success.