It came as no surprise that Barclays [BARC] reported a fall in investment banking income when it posted Q1 results a week ago, given the poor performances already posted by US and European peers.
But whereas JPMorgan Chase [JPM] is nothing without its capital markets side, and Deutsche Bank [DBK] has long been struggling with restructuring its trading floors, Barclays shareholders are getting a say this Thursday on whether the Corporate and Investment Bank (CIB) division is ultimately a crown jewel, or a dangerous liability.Barclays 1-year share price performance, CMC Markets, 01 May 2019
All eyes are on Edward Bramson as the activist investor seeks to use the AGM, which kicks off at 11am, to get a seat on the board and push his vision of a Barclays that sees Lloyds [LLOY] and Royal Bank of Scotland [RBS], rather than Goldman Sachs [GS] and Morgan Stanley [MS], as its competitors.
Q1 results play to Bramson’s hand
For what CEO Jes Staley said “was a pretty straightforward quarter”, Barclays reported revenues of £5.25bn, down some £110m from Q1 2017. Pre-tax earnings swung to £1.48bn from a £236m loss a year ago, when profits were heavily dented by a $2bn charge to settle US allegations over misselling of mortgage-backed securities prior to the financial crisis. Adjusted for litigation costs, pre-tax earnings fell to £1.54bn from £1.73bn.
Revenues were driven down by CIB, where income declined by 11%, according to group finance director Tushar Morzaria. By contrast, UK retail and business banking grew profits from £170m to £585m – despite a fall in revenues due to lower interest margins – while the Barclays International arm saw a 6% uptick in revenues for the “consumer, cards and payments” line.
|PE ratio (TTM)||8.53|
|Quarterly revenue growth (YoY)||-5.20%|
Barclays stock vitals, Yahoo finance, 01 May 2019
Speaking to analysts, management tried to sugarcoat the weak performance in CIB, with Staley noting that despite weak fees, “for the sixth consecutive quarter, we outperformed our US peers on average in the markets business”. He added: “Let me be clear, management is very aware of the execution challenges we must still meet … particularly in the Corporate and Investment Bank.”
But the results will play into Bramson’s hands as the endgame of Barclays’ board battle nears. The activist investor, who has built a 5.5% stake in Barclays, demands a radically shrunk-down investment bank and a refocus on more profitable and less volatile lending activities, like Barclaycard. The latest earnings could hand him the “I told you so” card in his pitch to shareholders.
How do others see Bramson’s offensive?
While few analysts would go as far as saying, as Bramson’s investment vehicle Sherborne did in a letter to Barclays’ board last month, that CIB is causing a “destruction of shareholder value”, some do have reservations over the bank’s positioning in capital markets.
“We view Barclays’ investment banking as much riskier than retail, with potential losses that could easily overwhelm the future earning power of the group, a division that has failed to deliver double-digit return on equity over the years,” Morningstar analyst Derya Guzel wrote in a note last Friday. “Moreover, considering the size of [CIB parent entity] Barclays International relative to some of its US peers, we believe its size is insufficient to create a network effect,” which is key to creating a competitive moat in investment banking, he wrote.
“... Considering the size of [CIB parent entity] Barclays International relative to some of its US peers, we believe its size is insufficient to create a network effect” - Morningstar analyst Derya Guzel
It’s not likely that Staley and the board see CIB as inherently risk-free. But they did insist that the slowdown in revenues was down to “the calendar effect”, and that there is value in pursuing a bigger market share. “[It’s] a little bit harder to have the crystal ball on the revenue environment for CIB, but I … would expect Q2 fees to be certainly higher than Q1, and pipeline looks pretty strong,” Staley said.
In the meantime, Staley’s been taking pre-emptive action. In March, he took direct control of CIB, and in Thursday’s earnings call said: “We will review … further flexibility in compensation costs, particularly in the CIB, depending on the income performance and prioritisation, and adjusting the pace of investment spend.”
Additionally, on Sunday Sky News reported that City body the Investor Forum had written to Staley requesting clarity on the board’s plan for CIB. The CEO may use this opening to get a more direct line of communication with shareholders, sidelining Bramson. And interviews by Reuters with institutional investors, published last week, suggest that few are onboard with the activist’s hawkish tactics.
Barclays’ stock dipped 3.5% to 160p through Thursday, after Q1 results were posted, but had subsequently rebounded to around 166p by Tuesday.