A detailed look at why and where the redundancies are going to be coming at Barclays Capital
Irrespective of whether Bob Diamond and Barclays have been maligned and how Bob acquits himself in front of the Treasury Select Committee, a process has been set in place. Unfortunately, that process is likely to end in job cuts. Why? And where? Here's our verdict.
Why are there likely to be job cuts at Barclays Capital?
1. Missing the ROE target
The main reason is return on equity. Bob Diamond had set a target of 13% ROE this year. Back in April, Ian Gordon at Investec said this was unlikely, suggesting 7.5% was more reasonable.
In a report out a few weeks' ago, UBS's banking analysts said Barclays needed to focus more intently on ROE to increase its share price. Whoever takes over from Diamond is likely to make this a priority.
Unfortunately, as the chart below from JPMorgan Cazenove analysts clarifies, Barclays - admittedly, like other banks - will need to either cut headcount or cut pay in its investment bank in order to boost ROE to a level considered acceptable to investors. (Click to enlarge)
2. There have been few cuts so far
Under Bob Diamond, Barclays has been comparatively slow to make cuts in either headcount or pay. As the table below from UBS clarifies, competitor European banks reduced headcount between H211 and Q12012. Barclays Capital didn't.
Similarly, SocGen analysts pointed out a few weeks ago that BarCap has done little to reduce compensation costs, noting that:
"The pay reduction process is already under way with a range of banks awarding compensation closer to 33%, versus historical levels of 40-45% and a depressed revenue line. The impact of these lower award levels is not yet showing up in reported compensation due to the effect of deferred compensation, but this is gradually diminishing. The only major exception is Barclays Capital, which awards both high comp/revenue ratios and higher ratios than the reported compensation, which makes it one of the few banks, where the burden of deferred compensation is rising."
3. The growth engine has petered out
In a report issued in 2010, then Seymour Pierce analyst Bruce Packard noted that top line income across the Barclays Group increased at a CAGR of 18% between 2002 and 2009 and that two thirds of this came from Barclays Capital. At that time, Bob Diamond appeared to be implying such growth was sustainable, noted Packard, implying that Barclays Capital would end up accounting for 33 times the revenues of the retail bank in another seven years' time.
Since then, however, revenues have stalled. In particular, the FICC business which was BarCap's main revenue driver is not expected to grow again for some time. As the slide below from JPMorgan Cazenove clarifies, the years from 1999-2010 may turn out to have been an anomaly. (Click to enlarge)
Therefore, as the charts below, from UBS analysts, suggest, FICC revenues are going to stay depressed at Barclays. Equities revenues aren't going to increase to compensate. (Click to enlarge)
Who's going to go?
1. Equities bankers
As the chart below, based upon figures from UBS shows, Barclays has gained a lot of share equities since 2009, but it still remains a second tier player.
BarCap bankers' worst fear must be that whoever takes over from Bob decides to undo his attempt to push into equities sales and trading in much the same way as Stephen Hester has at RBS.
UBS analysts suggest that Barclays could pull back from equities with limited damage to its overall revenues. At a 50% cost income ratio, a 50% reduction in equities revenues would reduce overall profitability by only 10%. By comparison, a similar 50% reduction in Barclays' FICC revenues at a comparable cost ratio would lead to a 33% drop in group net profit. In a situation where Barclays needs to boost ROE and maximise profitability, the decision of who to let go would appear clear. (Click to enlarge the UBS charts below).
2. ECM bankers
BarCap's equity capital markets franchise looks similarly vulnerable. Whilst its new M&A bankers have done comparatively well since 2009, its new ECM bankers haven't. Again, see the charts from UBS below.
3. Asian bankers
In the past few years, Barclays has focused its attention on hiring in Asia. However, as Reuters pointed out last week, it hasn't gone too well: Barclays has hired a disproportionate number of expensive managing directors and doesn't have the revenues to show for it.
“The expansion in Asia has been horrible,” one former Barclays executive told the Financial Times. “There was this mission for global dominance and it’s just not working in Asia. They have to go back to something more modest, maybe just high-street banking.”
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