It is fair to say that Barclays (LSE: BARC) has struggled since the financial crisis. Indeed, the bank has floundered with a lack of strategy for much of the past decade, which hasn’t been helped by constant management changes.
Barclays has had no less than three chief executives since 2012. Bob Diamond, who was forced out back in 2012, supported Barclays’ efforts to become a global investment banking force. However, Barclays’ next CEO, Antony Jenkins, didn’t share this view and worked to curtail Barclays’ investment bank.
Antony Jenkins was unceremoniously fired by Barclays’ new chairman, John McFarlane, over the summer, and now Jes Staley has been lined up to take his place. A veteran US investment banker, it’s widely believed that Staley will continue to implement Jenkins’ plan to shrink Barclays’ investment bank, but at a more measured pace.
What’s more, according to the Financial Times, employee morale at Barclays’ investment bank has improved significantly since Jes Staley’s appointment was described as, “it’s always a positive to have someone who understands the investment banking industry” on board.
Asset light
Barclays’ investment bank generates the most revenue of the Barclays group, although it absorbs more capital and is the least profitable.
Nevertheless, many of Barclays’ other European peers are also pulling back from the investment banking world, which presents an opportunity for the bank, if it is willing to take it.
After ousting Jenkins, McFarlane has pledged to turn Barclays into a “trans-Atlantic bank,” focusing on the UK and US capital markets. But according to City analysts, the bank’s focus on these two key regions will mean shutting down other trading operations around the world. Barclays plans to accelerate the shrinkage of its investment bank in continental Europe, Asia and Latin America to facilitate transatlantic growth.
It is believed that Jes Staley favours the capital-light model of investment banking after he joined that board of UBS, which is pursuing a similar strategy, earlier this year
Return to investment banking
So, there are signs that Barclays’ management is going to reconsider the bank’s decision to shrink its investment bank. This would be great news for investors. While investment banking returns have slumped in recent years, historically the capital markets arm of Barclays has been the group’s most profitable division.
For example, for the first-half of 2014 Barclays’ investment bank contributed 39% of group pre-tax profit.
Moreover, Barclays’ investment bank is the only part of the group that’s currently underperforming, returning this division to growth will remove what has become a significant drag on Barclays’ profit growth.
City figures suggest that Barclays will earn 23.p per share this year, indicating that the group is trading at a forward P/E of 11. Analysts have pencilled in a dividend yield of 2.7%. Furthermore, City estimates suggest that Barclays’ earnings per share will expand 20% to 27.9p per share for 2016.
