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Close the doors and open the spreadsheets – here comes another bank restructuring exercise. On Tuesday Barclays chief executive officer Antony Jenkins will explain how he intends to create an ethically pure bank which will be fully compliant with new regulations, while also producing a return on equity ahead of its cost of equity. In the first nine months of the year the former was 10.3 per cent, while Berenberg analysts put the latter at 12.5 per cent. Mr. Jenkins has his work cut out.
The bare minimum investors should expect is sharply lower costs. Bernstein estimates that pay accounts for just under 40 per cent of revenue at Barclays' investment bank – Goldman Sachs, JP Morgan and Deutsche Bank all do better. As UBS has demonstrated, cost cutting tends to go down well.
The next level up is more radical structural change, cutting lower-yielding assets with the aim of releasing capital and improving returns. Mr. Jenkins' problem is the investment bank where two-thirds of revenue comes from capital intensive fixed income, currencies and commodities (FICC) activity. A sharp cut in FICC assets – along the lines promised by UBS – would release capital but would also eat into profits. Still, investors should hope for risk-weighted asset cuts both in the investment bank and in weaker operations elsewhere. Moves to close or sell the European retail bank would be good. Macquarie says that RWAs could be cut by £80-billion ($126-billion) or 15 per cent.
What Mr. Jenkins should be aiming for is a bank that is stronger where it is good and absent (not smaller) where it is not – a tighter, more efficient Barclays centred around U.K. retail, European fixed income and U.S. equities. That is not quite the all-conquering bank that Bob Diamond had in mind but Barclays does not have the capital, nor investors the appetite, to create such a thing. Mr. Jenkins needs to turn what he has into something that works for shareholders. He should be bold.