John McFarlane’s plan for Barclays investment bank

Antony Jenkins is out. There will be no more references to ‘Barclaaays’, the ‘Go-To’ bank may become a mere bank, and the cosy clique of Jenkins and ex-chairman David Walker that gave us such innovations as, ‘Christmas Carols for City VIPs’, has been comprehensively dismantled.

So, what comes next? Probably, this….

1. Deeper, faster cuts to the investment bank 

McFarlane says his focus will be, “shareholder returns”. If so, he needs to address the investment bank. As Bloomberg points out, the unit’s return on equity was 2.7% last year compared to Jenkins’ target of 12%. Despite Jenkins’ promise to cut 7,000 jobs from the investment bank in the two years from 2014, headcount in the unit fell by just 2,100 last year with cuts seemingly restricted to a few key areas.  Chirantan Barua, senior analyst at Bernstein Research, points out that this was likely due to the onshoring of technology roles, which offset cuts elsewhere.

Nonetheless, the FCA Register shows that Barclays’ UK investment bank cut just 92 registered staff out of a total of 1,845 between May 2014 and May 2015. The pace of change hasn’t exactly been rapid so far.

Under McFarlane, this is likely to change. Although he said today that he’s “very happy” with the investment banking business which is an important part of Barclays, the bank’s new executive chairman has a reputation for cost-cutting. At ANZ, McFarlane cut the overall cost ratio from 65% to 45% and shrank the investment bank. At Aviva, he reportedly divided the company up into small cells and worked out which were profitable and which weren’t.

2. Bigger cuts to UK fixed income 

Barua thinks Barclays’ problem is the UK-focused fixed income sales and trading business. He’s not alone – in Barclays’ March investor call analysts asked why the bank didn’t dispose of the macro sales and trading business entirely.

The underlying issue is capital. When tangible equity is expressed as a percentage of tangible assets (as per the chart from Bernstein below), Barclays is the least well capitalized of all UK banks. Moreover, capital levels in the core investment bank are far below the target. Cutting the capital heavy fixed income business is one way to resolve the problem. Another is to raise more capital. McFarlane said today that there are no imminent plans for capital raising. “Shrinking makes sense in European FICC,” says Barua.

Barclays’ tangible equity as a percentage of net tangible assets, 2014

Source: Bernstein 

Barclays’ shortfall of tangible equity as a percentage of net tangible assets, 2014 

Source: Bernstein 

3. Less middle management

Now is not a good time to be a middle manager at Barclays. McFarlane used his inaugural interview as executive chairman to lambast Barclays’ bureaucracy. He said the bank has 375 “decision making committees” and that it needs “energy and speed” instead. He also described Barclays as “cumbersome” and “not efficient” and in possession of a “very large bureaucracy.”

4. Double down on the US

If Barclays’ European fixed income business is viciously pared back, what will happen to the Lehman rump in the US which is more closely focused on equities and investment banking? As a reminder, neither business did especially well in the first quarter. 

Barua points out that Barclays’ US business also looks under-capitalized. With net tangible equity across the bank standing at just 3.5% of tangible assets, Barclays falls far behind US banks like Citi (7.6%), Morgan Stanley (4.6%) and Goldman Sachs (4.9%). This will make it impossible for the bank to repatriate capital from the US, says Barua. It also leaves McFarlane with a choice: double down on the US business, or pull back and focus elsewhere.

Barua predicts that McFarlane will double down and that Europe will instead feel the pain. “Closing the US would be a very expensive proposition. That’s a great business and the number of strong US broker dealers is shrinking. What you need to do is to strengthen that business, to beef up capital there and to invest in technology.”

5. Empowerment of Trushar 

McFarlane made no mention of Tom King, chief executive of Barclays’ investment bank since May 2014. Instead, the emphasis is on Trushar Morzaria, Barclays’ CFO, with whom McFarlane says he will, “work particularly closely.”

An accountant by training, Morzaria nonetheless has deep experience in the numbers underpinning fixed income businesses. Between 2005 and 2009 he was CFO for EMEA and CFO for fixed income at J.P. Morgan’s investment bank. Before that he was European controller of fixed income at Credit Suisse. Morzaria joined Barclays as CFO in October 2013. The bank subsequently cut the capital allocated to the investment bank by £92bn and placed £90bn of legacy assets into a non-core bank. This was supposed to address the poor returns in Barclays’ fixed income business, but hasn’t. Under McFarlane Trushar may now be given his head.

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