The bank’s retreat from investment banking is not quite what it seems.
Looks can be deceiving. Antony Jenkins, the quietly-spoken chief executive of Barclays, may not look like much of a bruiser, but last week he appeared to demolish in one Powerpoint presentation the investment bank that his predecessor Bob Diamond had spent a more than 15 years trying to build.
At a stroke, he appeared to halve the size of the investment bank, folding £100bn in risk-weighted assets into a ‘bad bank’ and cutting roughly one quarter of the staff in the division. By 2016 the investment bank will consume just 30% of the group’s capital, compared with more than half today.
Radical stuff. But on closer inspection, not quite as radical as it first appears, for at least three reasons. First, the cuts are not as deep as they look. Second, at the end of this restructuring Barclays will still be more exposed to its investment bank than many of its shareholders might be comfortable with. And third, the bank is likely to find that it is easier to announce its new strategy than it is to achieve it.
Let’s start with shrinking the investment bank. RWAs in the investment bank will drop from £222bn at the end of last year to £120bn. This looks like a reduction of 46% until you note that it includes nearly £50bn of RWAs in the investment bank that were held in something called the ‘Exit Quadrant’ – a bad bank in all but name – and which had already been scheduled for exit.
Window dressing?
In other words, nearly half of the announced reduction in the scale of the investment bank at Barclays had already been decided. Moving these ‘bad’ assets from the investment bank into a non-core unit is little more than window dressing. Sure, an additional £50bn or so in RWAs are going to be cut – a bold move in anyone’s books. But a better way of thinking about it is that Barclays had already decided to reduce its investment bank by one quarter, and has now decided to reduce it by another third.
It’s a similar story with the job cuts. On the face of it, 7,000 job losses add up to 28% of the headcount in the investment bank of 26,200. But don’t expect the number of staff to fall by 7,000 anytime soon. First, the cuts are staggered, with 2,000 coming this year and the remainder by the end of 2016. And second, Barclays was careful to describe the cuts as ‘gross headcount reductions’. This means that it will aim to eliminate the positions, but will continue to hire and replace staff in the rest of its business.
Even if Barclays manages to identify 7,000 jobs to eliminate over the next three years – and that’s a big if – it will lucky if it reduces its net headcount by half that over the next three years. Just ask Credit Suisse: it has cut thousands of jobs in its investment bank over the past few years, but the total number of staff in the division is proving remarkably stubborn.
If you assume that in the normal course of business headcount will increase by 5% a year – other businesses such as equities and investment banking may want to grow, while IT and compliance staff breed like bacteria – the investment bank will employ roughly 22,500 staff by the end of 2016, a net reduction of roughly half the headline figure.
And don’t forget that the assets in the non-core business will need lots of people to manage them. The non-core unit at UBS, for example, employs roughly 1,500 staff to look after £40bn in assets, so you might assume that the division would need to have more than 2,000 staff at Barclays. This means that many of the jobs are not being cut – like the ‘bad’ RWAs, a lot of them are just being shuffled from one division to another.
Are you sitting comfortably?
For good measure, even after these radical cuts, Barclays will still be more exposed to investment banking than it looks. Barclays reckons that in three years the core investment bank will represent just 30% of the group’s RWAs, capital and revenues.
But on its own numbers, it will still rely on the investment bank for 40% of its total pretax profits. And in 2016 there will still be £50bn in RWAs – mostly from the investment bank – sitting in the non-core division, dragging down returns for shareholders. Just because these assets are in the bad bank doesn’t mean they have disappeared: at UBS, losses on the legacy assets from the investment bank wiped out all of the profits made in the core investment bank last year.
This means that in total, RWAs across the good and the bad investment bank – shareholders don’t get to choose between the two – will add up to roughly 43% of the group total, compared with 51% today. In other words, by 2016, the investment bank will have shrunk by one quarter in terms of RWAs and by a lot less than that in terms of staff.
A big shift in direction for Barclays? Yes. A break with the past? Indeed. But not quite the demolition job that Barclays would have you believe – or that its shareholders had in mind.