An overview and commentary on Barclays' Strategic Review – will it work? (Finadium subscribers only)

On Tuesday February 12, Barclays CEO Antony Jenkins announced a strategic review of the entire banking organization, promising to TRANSFORM (their acronym) the Barclays business and culture and make it the “Go-To” bank for its stakeholders. We evaluate what Mr. Jenkins has proposed in the fixed income and equities divisions and conclude with our opinions for the program’s success.

The Barclays plan is built on a strategic review of 75 business in a five-year transition that is meant to both stabilize and strengthen institutions. From the press release: “Our plan is built on a rigorous review of 75 distinct business units to determine not only their ability to generate an appropriate and sustainable return on equity, but also their strategic attractiveness, including their impact on Barclays reputation.” Apparently this last point, and an emphasis on changing the culture of the investment bank, was met with some derision by New York based employees.

The timeline for the TRANSFORM plan is:
– 0-9 months, stabilize the organization
– 0-3 years, return acceptable numbers
– 0-5 years, sustain forward momentum

This all sounds fine except for stabilizing the organization in under 9 months. Financial markets and regulation continue to be a period of significant transition. While stabilization on the retail banking side may be straightforward, we do not see the same success necessarily happening in the investment banking or trading divisions. We think that stabilization in those areas is more likely an 18 month process. This is not a deal breaker but realism might suggest a different expectation of how fast some of Mr. Jenkins’ goals can be accomplished.

The plan identifies 22 business units within the investment bank that are targeted for review. Two of these units will close, seven will be repositioned, four will be transitioned (whatever that may mean) and 13 will see new investment for growth. Unlike UBS, Barclays has make clear that it sees itself a leader in the fixed income space and is unlikely to make a dramatic moves there. This also means it will continue to keep substantial exposure to the uncollateralized swaps obligations of sovereigns. While Barclays may have a tough time resolving that issue on its own, this does mean that challenging credit repayment conditions for sovereigns could have that reputational risk that Mr. Jenkins is looking to avoid. Barclays also reports strength in equities and investment banking, and no expected major changes are expected to prime brokerage or other securities finance areas (unless hedge funds start to look reputationally sketchy again). Barclays notes that its equities revenues is up from 8th place in 2010 to 5th place in 2012 compared to major competitors.

The one immediate change is that Barclays is closing its Structured Capital Markets group, which means no attempts at regulatory arbitrage that would benefit its clients’ taxes. Since the US IRS is going after BNY Mellon and other banks to pay millions in taxes due to Barclays tax strategies, this seems like a wise move all around. It would stand to reason that this is one of those businesses that Barclays will exit due to “significant reputational risks.”

Barclays also aims to increase its Basel III Tier 1 common ratio from an estimated 8.2% today to over 10.5% by December 2015. This is a realistic timeline for what is expected to be a slow and difficult transition in balance sheet management.

The TRANSFORM program is an ambitious platform to re-orient Barclays towards a complex future. At the same time, it contains vaguely worded language about business transformation to “right-size” divisions and make “proactive” RWA management in fixed income. This is where the real tough work will need to happen and it is not entirely clear how or if the bank will walk away fully successful from this operation. Especially with new regulations, Barclays is entering uncharted waters here while attempting to clean up its reputation and prepare for the future.

The full Barclays presentation on its TRANSFORM plan can be found here.

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