Barclays Investor Showdown Looms as Jenkins Targets Recede

Mar 31, 2014 11:45 am ET

(Updates with closing share price in ninth paragraph.)

March 31 (Bloomberg) -- Antony Jenkins replaced Robert Diamond as Barclays Plc chief executive officer 19 months ago, pledging to control costs at the investment bank and boost returns. So far, both goals are eluding him.

Jenkins, 52, is trying to revive profitability at the securities unit, the biggest source of income for the London- based firm, while wrestling with demands for higher pay from its bankers. He has fallen behind on targets he set as CEO and faces calls to outline a clear plan as he prepares to meet shareholders at the annual meeting next month.

“We want them to tell us when they can deliver an acceptable return on capital,” said Robert Talbut, who as chief investment officer of Royal London Asset Management Ltd. oversees about 75 billion pounds ($123 billion) including Barclays shares. “My expectation is that Barclays will come back and say their size and shape of the investment bank is not appropriate for the business they require.”

Diamond quit after Barclays was fined 290 million pounds for manipulating the London interbank offered rate, or Libor. Jenkins, a former consumer banker, has focused on overhauling the company’s culture, pledging to become the “go to” bank while upholding the values of “respect” and “integrity.”

Return on average equity at the securities unit, a measure of profitability, fell to 8.2 percent last year from 13 percent in 2012, short of his target of at least 11 percent in 2015. Compensation as a proportion of investment-banking revenue rose to 43.2 percent in 2013 from about 40 percent the previous year. That’s short of the 35 percent target Jenkins set for 2015.

‘Lost Control’

His efforts to revive profit have been hampered as revenue from trading bonds, currencies and commodities dwindles across the industry and regulators press Britain’s second-largest bank to increase capital or shrink assets to meet limits on leverage. Barclays’s full-year adjusted profit excluding one-time items as well as gains or losses on the value of the lender’s debt fell 32 percent to 5.2 billion pounds. The firm raised about 5.8 billion pounds in a rights offering in October.

“There’s a feeling he has lost control of the business,” Christopher Wheeler, an analyst at Mediobanca SpA in London who last week cut Barclays to neutral from outperform, wrote in a March 24 note to clients. “The threat of an uncomfortable annual general meeting is becoming very real.”

‘Awful’ Performance

The bank is seeking shareholder backing to pay bonuses twice as much as basic pay, as it’s required to do under European Union rules that start this year. The U.K.’s Local Authority Pension Fund Forum, which advises funds with about 125 billion pounds of assets, is calling on shareholders to oppose Barclays’s pay plans because of the “awful” performance of the investment bank. A defeat would mean bonuses couldn’t exceed salaries. The pension-fund group is also pushing for the ouster of John Sunderland, who oversees the remuneration committee.

Barclays has slumped 14 percent in London trading this year, making it the worst performer of Britain’s five biggest banks. By comparison, UBS AG is up 8 percent and Credit Suisse Group AG gained 4.8 percent. Barclays rose 1 percent to 233.40 pence in London trading today.

Jenkins declined requests for an interview, as did the co- heads of the corporate and investment-bank unit, Tom King and Eric Bommensath. Diamond, who’s now running an investment fund targeting Africa, declined to comment.

While competitors such as UBS and Credit Suisse, both based in Zurich, have announced overhauls of their investment-banking arms, Barclays hasn’t set out its plan, Wheeler said. UBS, Switzerland’s largest bank, is exiting most of its fixed-income operations to boost returns, while Credit Suisse is shrinking its interest-rate trading business.

Model Change

“The industry is facing an enormous amount of regulatory change that requires business-model change,” said Eli Haroush, a fund manager at APG Asset Management in Amsterdam, which oversees 346 billion euros ($476 billion), including Barclays shares. “In many markets, unless you’re in the top three you don’t make any money. Firms need to adjust relatively quickly, otherwise others might seize your market share.”

Barclays this year has started another review of its investment bank and may cut more jobs and exit unprofitable businesses amid toughening industry regulation, a person with knowledge of the company’s thinking said this month. The firm probably won’t spin off the investment bank, even as some investors press the bank to consider the move, the person said.

Following Diamond

Jenkins, who studied politics, philosophy and economics at Oxford University, had been CEO of Barclaycard, the bank’s credit-card division since 2006, before he was named head of retail banking in November 2009. He joined Barclays in 1983 and moved to what is now Citigroup Inc. in 1989, where he worked in the firm’s credit-card division.

He took over in 2012 following the resignations of Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry Del Missier in the wake of the Libor scandal. Diamond had led a 15- year expansion of Barclays’s fixed-income operations, capped by the firm’s 2008 purchase of Lehman Brothers Holdings Inc.’s North American operations out of bankruptcy.

“The days of Bob Diamond and wheeling and dealing in the investment-banking world have gone,” said Julian Chillingworth, who oversees about 22 billion pounds, including Barclays shares, at Rathbone Brothers Plc in London. “I haven’t heard of a clear strategy -- other than being one of the leading investment banks in the world.”

Jenkins announced a review of the investment bank in February 2013 that led to closing parts of its commodities operations and structured capital markets division, which advised customers on tax planning and had been criticized by politicians as encouraging tax avoidance.

Salz Review

He also hired Rothschild Vice Chairman Anthony Salz to lead a review of Barclays’s culture. In April 2013, Salz found the bank paid bonuses “incapable of justification” and said some bankers “seemed to lose a sense of proportion and humility.”

Less than a year later, Sunderland, the remuneration head, said the bank’s lack of “pay competitiveness was beginning to cause demonstrable damage” to its business, especially in the U.S. There, the number of senior staff resignations, particularly at the investment bank, more than doubled in 2013 as competitors weren’t hampered by EU rules curbing payouts.

The EU has curtailed the proportion of compensation that can be paid as cash bonuses, and starting this year caps bonuses at a maximum of twice basic pay.

McGee Pay

“European pay regulation is clearly a headache for Barclays, which has the most successful U.S. franchise” among European banks, said Philip Keevil, a New York-based partner at advisory firm Compass Advisers Group LLC. “You still need to pay the top producers.”

Hugh ‘Skip’ McGee, head of Barclays Americas, received about 8.9 million pounds in stock, more than any other Barclays executive including Jenkins, the lender disclosed March 18. McGee joined Barclays in 2008 from Lehman Brothers, where he was head of global investment banking.

Barclays’s investment bank posted a pretax loss of 329 million pounds in the last three months of 2013, compared with a profit of 760 million pounds in the year-earlier period. Revenue from fixed-income, currencies and commodities, or FICC, fell 17 percent to 5.54 billion pounds in 2013, as central banks around the world started to withdraw their stimulus from the market causing investors to shift to equities away from bonds. In investment banking, which includes underwriting and mergers advisory, it rose 3 percent to 2.2 billion pounds.

Market ‘Surprised’

“The market was surprised by the last set of results and by the fact Jenkins didn’t have much of an answer,” said Colin McLean, founder and CEO of SVM Asset Management Ltd. in Edinburgh, which oversees about $830 million and holds Barclays shares. “The market wants to see evidence of cost ratios improving this year and for signs he can discriminate within investment banking.”

Compensation as a proportion of revenue increased at Barclays’s investment-banking unit last year, while it fell at Credit Suisse, Morgan Stanley and UBS, according to Wheeler. The measure probably won’t fall below 40 percent before 2016 as bankers push for pay that matches U.S. levels, he said.

“The Barclays CEO now has a major problem,” Wheeler said. The original 35 percent goal was “far too ambitious a target, but retreating back from that will be highly embarrassing,” he said, adding that the bank may appoint new managers for the investment bank.

Lehman Deal

Pressure on Barclays is increasing this year, as first- quarter revenue from fixed-income declines, Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. wrote in a March 13 report. He said he expects it to drop by 21 percent at Barclays, the steepest decline among the eight banks tracked by the firm.

Jenkins inherited a U.S. investment bank with advisory and equity capabilities that enabled it to rank among the top five underwriters of U.S. stock sales in 2012 and 2013, and third among firms that advise on U.S. mergers, according to data compiled by Bloomberg.

While the bank has expanded beyond its fixed-income roots in Europe since then, it is still a laggard in the region. Barclays ranked ninth in underwriting stock sales in Europe last year, behind Deutsche Bank AG, UBS and five U.S. firms, data compiled by Bloomberg show. The bank was the fifth-ranked adviser on mergers involving European companies in 2013.

‘Ill-advised’

“Barclays would be ill-advised to contemplate any radical wholesale withdrawal from investment banking,” said Ian Gordon, an analyst at Investec Ltd. in London who rates Barclays a buy. “To do so would only erode value over the medium term.”

Instead, Barclays probably will scale back parts of its fixed-income operations, such as credit trading and securitization, markets in which it doesn’t rank among the top five players, according to Wheeler.

“The current regulatory regime basically is a disarmament game,” said Crispin Odey, founding partner of London-based Odey Asset Management LLP, which oversees $13 billion and holds Barclays shares. “If these guys are being forced to deconstruct a rates business, which was built in a different era, you could easily lose if you unattach the wrong bit.”

Barclays’s market share in fixed-income, currencies and commodities dropped to about 11.7 percent last year from 13.8 percent in 2011, according to data compiled by Bloomberg on the eight biggest firms in the market. Barclays will continue to lose market share, along with other European competitors including Deutsche Bank, according to a March 20 report by Morgan Stanley.

“Barclays is at a critical juncture,” said Mark Williams, author of “Uncontrolled Risk,” a book on the rise and collapse of Lehman Brothers, and executive-in-residence at Boston University. “Either they follow the Bob Diamond plan of becoming a tier-one global investment bank or abandon the goal and shrink its fleet of bankers.”