Why Barclays Capital is set to go marching on
WHENEVER I speak to a director at Goldman Sachs or Morgan Stanley about BarCap, Barclays Bank’s investment banking arm, I am reminded by them that it takes a very long time to build up a sustainable leading position in the equity markets.
As Barclays geared up for publication of its financial results last Friday, questions were being asked again about its commitment to investment banking.
For sure, BarCap has leapt up the league tables of equity advisory, equity capital markets and equity trading, but the critics say this has all come at too heavy a cost.
Bob Diamond, the Barclays chief executive, has set a rate of return on equity target of 13 per cent by 2013, which now seems too optimistic given that last year’s figure came in at 6.6 per cent.
Barclays blames the recent market downturn and argues that although revenues, for example, in fixed income and commodities, came down by 27 per cent in 2011, this was less of a fall than at Goldman Sachs (-46 per cent) or Bank of America Merrill Lynch (-36 per cent). Barclays also says that its cost income ratio of 71 per cent beats that of rivals such as Citi, BoA, Goldman, Morgan Stanley and Deutsche.
But still it knows there is investor pressure to make some inroads on costs. “I expect BarCap to be one of the survivors and relative winners,” says Ian Gordon, banking analyst at Investec, “but the bank cannot achieve its targeted returns and sustain the existing cost base without a particularly strong rebound in investment banking revenues.
“I expect the outcome to include a more material and sustainable focus on cost reduction in BarCap.”
The question is will it be possible to keep winning new mandates and keep levels of morale high while simultaneously reducing headcount or remuneration?
Fortunately for BarCap the lousy market conditions may work in its favour. For one, it is hard for employees to find better positions elsewhere in a contracting market. And companies are more likely to look for new advisers in fragile markets.
Add to that the fact that RBS has conceded its position at the top table of UK investment banking, UBS is retreating and few other houses are in expansion mode.
Look how aggressively BarCap fought to get on the Xstrata deal and you get the sense that there’s no wavering of commitment to the cause.
david.hellier@cityam.com