Investment banking: The battle for Barclays
The UK lender has wrangled for decades over whether to maintain its investment bank. Now an activist investor is trying to force the issue
Jes Staley does not act like a man under siege. He comes across as confident and relaxed, but his breezy demeanour belies the fact that Barclays, the bank he has run as chief executive since December 2015, is the target of the most audacious assault by an activist investor on a UK company in recent history.
At stake is the future of Britain’s last remaining global investment bank, which Mr Staley has pledged to protect in the face of an onslaught by Edward Bramson, arguably one of the most successful forces in British activist investing. Mr Bramson is campaigning for the investment bank to be scaled back, claiming Barclays would do better to focus on its UK retail operation and its credit card business.
The bank first revealed that Sherborne, Mr Bramson’s investment vehicle, had built a stake in March 2018, during what was already shaping up to be a tumultuous year for Mr Staley. He was censured by regulators in the UK and US for trying to unmask a whistleblower who accused him of covering up the personal problems of a former colleague he subsequently hired at Barclays.
After narrowly surviving that scandal — which cost the bank $15m in fines — Mr Staley is confident he will prevail in the fight with Mr Bramson. “Having a major player in the global capital markets that is British is an advantage, I think, for Barclays, for our investors, and for the UK overall,” he said in a recent interview on the top floor of Barclays’ Canary Wharf tower.
Following several months of polite stalemate, Mr Bramson in December stepped up his campaign to use his 5.5 per cent stake in Barclays to force his way on to the board and engineer a shift in strategy. An initial attempt to secure a board seat was rebuffed by the bank’s directors in November, and Mr Bramson, the company’s fourth largest investor, now plans to take his fight directly to other Barclays shareholders already frustrated over the slide in the share price under Mr Staley. It sets the stage for a bitter, months-long proxy war that could be decided by a vote at the company’s annual meeting in May.
“This could go either way,” says Philip Augar, author of The Bank that Lived a Little, a book about Barclays. “It will only be settled by Barclays demonstrably succeeding at investment banking, or it failing so badly that shareholders demand it gets out.”
The battle has implications not just for Barclays and the City of London, but also for Europe’s financial services industry, given that it comes at a time of retrenchment among most of the continent’s global investment banks.
RBS, once a major force in capital markets, has vacated the space, while Deutsche Bank, Credit Suisse and UBS are dramatically pulling back. Meanwhile, US players like Jpmorgan and Goldman Sachs are becoming ever more dominant in European trading and deal making. “Will Europe have any global banks left?” asks Ronit Ghose, banks analyst at Citi.
Some investors are wary of American hegemony at a time of tensions over global trade and rising nationalism. “Corporates will want to use a European investment bank,” says Richard Buxton, a veteran fund manager and long-term Barclays shareholder now at Merian Global Investors. “There is an argument for having [one] that is not subject to the whims of the US president”.
The internal fight over Barclays’ global investment strategy has raged for three decades with one shareholder likening it to dancing the hokey cokey — “they have been inout, in-out”, he says.
With “Big Bang” deregulation imminent, the group merged its merchant bank with stockbroker Zoete & Bevan and market maker Wedd Durlacher in 1985 to create BZW. Little more than a decade later, it broke up the poorly-performing division and sold off large chunks to Credit Suisse, leaving Barclays without a presence in equities trading or a mergers and acquisitions practice.
During the depths of the 2008 financial crisis, Barclays revived its interest in global investment banking by purchasing the US operations of Lehman Brothers out of bankruptcy, while also building a large European operation.
Bob Diamond, the architect of that expansion, became chief executive in 2011 only to be ousted less than 18 months later — a casualty of the bank’s role in the Libor scandal.
More recently, Mr Staley’s predecessor, Antony Jenkins, tried to shrink the investment bank, having concluded it could not make decent returns in the post-crisis regulatory environment, where trading is treated as inherently hazardous. Mr Jenkins wanted to reduce the division’s risk-weighted assets — a measure of a bank’s assets adjusted for how risky they are deemed by regulators — from £122bn at the end of 2014 to £80bn, and then halve them again to just £40bn, according to a person briefed on the plan.
But Barclays’ directors got cold feet. Mr Jenkins lost out in a boardroom showdown and was fired in July 2015, opening the way for Mr Staley to take over. Today, the corporate and investment banking division — an amalgamation of the investment bank and the unit that lends to large businesses — accounts for £176bn in risk-weighted assets versus £75bn at the retail bank.
During the Jenkins era investment bankers at Barclays became dispirited, according to several people who worked there at the time. One former employee says the only contact they had with the former chief executive was a “regular memo” demanding that they shrink the size of their trading book.
But under Mr Staley, a Bostonborn trader who spent three decades at Jpmorgan, the division has regained its verve. Some at the bank date that change to the arrival in 2017 of Tim Throsby, a former head of equities at Jpmorgan, to run the division.
Barclays subsequently stepped up its recruitment, bringing in 55 managing directors from rivals such as Goldman Sachs and Credit Suisse. It is also investing £500m in new technology, in part to improve its electronic trading platform.
In more than a dozen interviews, executives and managers at the investment bank say morale improved dramatically once Mr Staley killed the debate over the future of the unit.
Stephen Dainton, the bank’s global head of equities, says Mr Staley has replaced “inconsistency” with “equilibrium”. He says his unit now has the right level of resources but that the bank needs to stop flipflopping on its strategy. “If you look at what separates [Premier League football champions] Manchester City from Manchester United, it is more consistent execution.”
In the third quarter, revenues at the bank’s equities and fixed income trading units grew by 35 per cent and 10 per cent year on year, respectively, outpacing most rivals. However, given the poor performance of some of its Wall Street rivals in the fourth quarter, Barclays may struggle to sustain that kind of improvement. And the corporate and investment bank is still struggling to generate good returns. Its return on equity — a key measure of profitability — stood at 6.6 per cent in the third quarter versus 20.1 per cent at the UK consumer bank division.