Bond Trading Profits Obliterated At Barclays PLC

The chief executive of Barclays (LSE: BARC) (NYSE: BCS.US), Antony Jenkins, has had a tough time of it recently. He’s been repeatedly asked to justify the huge pay rises he’s given to the company’s investment bankers, even as Barclays’ shareholders have watched their company’s profits fall and their shareholdings dwindle in value.

And Jenkins’ job just got even tougher.

barclaysThe latest interim numbers from Barclays show profits generated by the investment bank’s fixed income trading operations down a staggering 41% year-over-year.

The resultant paltry profits of £1.2 billion compare to £2.1 billion generated in the same quarter of 2013, and are one of the main reasons why Barclays’ investment bank’s pre-tax profits fell by 49%, dragging overall group profits 5% lower.

Higher pay for investment bank staff who are making barely half the profits last year — this is not what a recovery is supposed to look like.

Wages down, but by less than profits

If one wanted to be scrupulously fair to Barclays and its investment bankers, one might note that the total wage bill at the investment bank division also fell 20% to £1.1 billion in the quarter.

However, because income at the unit fell so dramatically, the proportion of money generated going straight back out the door in bankers’ pay packets actually rose, from 41% to 46%!

Some might also defend the bankers by pointing out that the slowdown in this area of trading is a sector-wide phenomenon. Barclays blamed stable bond markets and weak performance in rates for giving clients little reason to trade. Over the weekend, the US giant JP Morgan warned that these moribund conditions looked set to continue, and said its own fixed income and trading revenue would be down another 20% in the next quarter.

However, to my mind this just underlines that the bankers who operate in these markets are grossly overpaid. When the climate for trading is positive they make huge profits, and when it’s down their profits slump.

Paying them for benefiting from the prevailing conditions is like giving a weatherman a bonus when the sun shines!

Cheap if not cheerful

Huge swings in profits at a high-street bank look incongruous in the post-financial era, and doubly so when they’re caused by the so-called ‘casino’ banking divisions.

Indeed, I think there’s a strong case for Barclays spinning off the investment bank altogether, to create a specialist more akin to the Goldman Sachs, to leave the traditional banking division to plod along its own path.

The high street and commercial banking side of the business is doing okay at the moment, and it has some valuable cash cows — especially Barclaycard — that are likely being overshadowed by the market’s dim view of the investment bank.

However, it’s hard to argue that you’re being asked to pay much of a premium for the still-integrated Barclays today.

Its latest net tangible assets per share went up a penny over the quarter to £2.84, so theoretically if you buy today you’re getting a 13% discount to the bank’s wind-up value. The dividend yield is forecast to rise to 4.7% next year, too.

You do need to dig into banks to be confident with what you’re buying – you need to try to avoid skeletons in the cupboard. You also need a reason to have the confidence to hold on when the market sends the shares through the ringer, as it periodically has done ever since banks lost their hallowed ‘safe haven’ status.

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Owain does not own shares in Barclays.