One can understand why Jes Staley’s self-satisfied tone might irritate your average activist investor. Barclays’ chief executive unveiled the third-quarter update with a very weak boast.
It was the second quarter in a row of “clean results” for Barclays, said Staley proudly. Clean, in this context, means the absence of big bills to cover past bad behaviour or to settle litigation. But six months is no time at all. Save the fanfare for when you can display unblemished profit and loss accounts covering many years.
Still, if one ignores the crowing over nothing, Staley laid out a fair case for why his strategic overhaul of Barclays should be given time to work, which is the main debate around the bank now that Edward Bramson, the supposedly terrifying activist agitator, is prowling around.
Bramson, since announcing control of a 5% stake in March, has yet to utter a meaningful word publicly, but it’s safe to assume he would like Barclays to be smaller in investment banking and to abandon the game of being a European challenger to the big Wall Street firms. According to this vision, Barclays would be more like Lloyds, a plainer, UK-focused bank concentrated on retail and everyday business banking.
In isolation, it’s not the worst idea. Big retail banks can make a packet when they don’t have to pay colossal sums in compensation to customers who have been gouged with payment protection insurance and suchlike. The problem in Barclays’ case, however, is that a purer retail-led model can’t be willed into existence easily. Once you’re on the investment banking merry-go-round, it’s hard to dismount safely or quickly.
Deutsche Bank is currently providing a fine example of how not to do it. The German bank is shedding a few investment bankers, but revenues are collapsing at a faster rate. Its staggered retreat looks clumsy and expensive. Staley’s plan for Barclays’ equivalent unit sounds better – manage the risks properly and avoid the misadventures of former years.
The approach still has to produce the goods, but the strategy hasn’t obviously gone wrong on Staley’s watch. Barclays had a half-decent third quarter in investment banking, boosting revenues from equities and fixed-income trading and gaining market share. The division’s return on equity – a purer financial measure for a bank – is still way below the juicy numbers from the consumer and cards divisions. But Staley makes a fair point when he says consumer-related lending ought to be generating superior returns when unemployment is low in both Barclays’ main markets of the UK and US. Diversification, runs the theory, will come into its own when the economic cycle turns.
The share price remains ugly, of course. At 171p, Barclays is priced at just 65% of its book value, which is another reason why Staley should save the celebrations for another day. But, on strategy, he’s winning the argument. There is a broad acceptance among shareholders that a U-turn would create more problems than it would solve.
Bramson, one suspects, will struggle to stir a rebellion. That’s his problem – and one he’ll have to explain to investors in his Sherborne vehicle. Punting on a UK-based bank ahead of Brexit always looked a strange bet.
guardian.co.uk © Guardian News and Media Limited 2010
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