UK housing crisis bodes badly for Barclays' bankers in the US
In a whirlwind few days for the bank of England, we have seen their chief economist Huw Pill signal that a significant rise in interest rates is soon to strike the nation in a bid to counter the inflation resulting from the government’s financial stimulus. With the rate currently sitting at 2.25% but rumoured to rise to levels upwards of 5.8%, the logical fallout of such a rise would be chaos in the housing market. Though in principle rising rates would bode well for the bigger banks, investors are concerned with the reality, the ramifications of which can extend far beyond the British Isles.
Stock prices of the big 4 UK banks: Lloyds, Barclays, Natwest and HSBC, have all plummeted over the past few days and while there have been some sharp increases this morning, there's still a long way to go to make up lost ground. Barclays' share price is down 33% since February. Lloyds' share price has fallen 4% in the past few days. Goldman's share price is down just 20% since February by comparison.
if the UK rout worsens, the danger for Barclays in particular is that its appeal to US employees will be eroded. At the end of 2021, Barclays had over 10,000 employees in America, as a legacy of its 2008 acquisition of Lehman Brothers. It's also been focusing on adding investment banking talent in the US. Former JPMorgan analyst and Centerview Partners Managing Director Jack Sise joined the company in March for what can be presumed to be a large fee considering the M&A boutique’s reputation as a generous payer.
Barclays pays its senior bankers generously. Last year, the average material risk-taker at the bank received £1.4m, which was up 43% on 2019. The number of employees earning over €1M at Barclays globally rose 30% in the same time frame. However, Barclays' bonuses are paid in cash and stock and the stock vests after a minimum of three years. If Barclays' stock is adversely impacted by its presence in the challenging British retail and mortgage market, it's conceivable that its US bankers will conclude that they're better off at US banks whose stock is less challenged.
Barclays are set to announce their Q3 results on the 26th of October. For the moment, JPMorgan's banking analysts are optimistic. Increased market share is expected to mitigation the normalisation of revenues in the corporate and investment bank. Return on target equity (RoTE) across the bank is expected to rise to 9% in 2024, up from 3% in 2020. However, JPMorgan's analysts also note the possibility for negative surprises from the global credit cycle. While rising rates might be good for net interest margins (NIM), they could be less positive for Barclays' UK loan book.
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