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* Investment bank core to Barclays - chairman
* But CEO exit unlikely to stop investment bank cuts
* U.S. arm could lose another quarter of assets
* Barclays investment bank down two to 8th biggest in world
By Steve Slater
LONDON, July 14 (Reuters) - Any investment bankers hopingfor an easier ride at British bank Barclays after ChiefExecutive Antony Jenkins was ousted last week may be in for asurprise.
Retail banker Jenkins spent three years cutting tradingdesks in a bid to boost profitability and curb what politiciansdubbed a casino culture after a series of scandals, alienatingmany Barclays dealmakers and traders.
Yet while new Executive Chairman John McFarlane was quick tosay investment banking would be a key part of Barclays' future,a recent plan to cut more assets is already being implemented,people familiar with the matter said.
Indeed, Barclays told the U.S. Federal Reserve last weekthat assets at its broker-dealer in the United States had halvedsince 2010 and would fall by up to another quarter by July 2016to $185-215 billion.
"It is important to have an investment bank to complementthe wealth and private banking operations, but the returns haveto be improved," said Guy de Blonay, fund manager at JupiterAsset Management, which owns Barclays shares.
The investment bank has gone from Barclays' main profitengine to its biggest drag on returns.
Profit fell by a third last year to 1.4 billion pounds ($2.2billion), accounting for a quarter of overall profits andputting it on a par with the bank's credit card business.
What's more, the investment bank's return on equity was just2.7 percent. While returns were hit by deferred pay, conduct andlegal costs, as well as restructuring charges, it was far shortof the bank's 12 percent target.
McFarlane has said he wants to speed up improvements inprofitability. Investors and analysts say this means "non-core"activities must be sold off faster, and fewer assets should beallocated to trading.
TENSIONS REMAIN
Yet despite a low return on equity and contributing only aquarter of profits, investment banking still dominates attentionand management time at the bank, a legacy of the BarclaysCapital business built up by Jenkins' predecessor Bob Diamond.
A new plan set out three weeks ago and agreed by former CEOJenkins, investment bank boss Tom King and Finance DirectorTushar Morzaria, agreed to cut more assets from the business.
But King disagreed with Jenkins about the scale of cuts andthreatened to retire early, a person familiar with the mattersaid. McFarlane persuaded King to stay, but the row underminedJenkins and contributed to his departure.
"(The investment bank) is where the battle will be won andlost for our stock and our company and we had a CEO who didn'tknow anything about it," said one senior U.S. investment bankerwho asked not to be named.
Over the past two years more than a third of investmentbanking jobs, or more than 8,000 staff, have been axed, first inProject Mango in 2013 and then under Project Electra in 2014.
Sources said tensions remain between London and the UnitedStates, the investment bank's two "home" markets, following thecuts. The U.S. division, largely the former Lehman Brothersbusiness bought by Barclays in 2008, is far more profitable thaninvestment banking in Asia and Europe.
What will go next should become clearer soon. McFarlane hassaid he will give more details about the plan that underminedJenkins when half-year results are released on July 29.
NOT ALONE
Barclays is not alone in trying to decide the best size andshape of its investment bank in a changed regulatory landscape.New bosses at Deutsche Bank and Credit Suisse are also assessing how to refocus to improve returns.
The British bank has to separate its domestic retail bankingbusiness in the next three years under new rules designed togive more protection to savers, and taxpayers.
But it is having a tough time determining its structure,which will in turn affect plans for the investment bank, sourceshave told Reuters.
Ranked the world's eighth biggest investment bank last yeardown from sixth in the previous two years, according toanalytics firm Coalition, Barclays' strongest areas are ratesand foreign exchange trading, municipal finance, mergers andacquisitions (M&A) advisory and debt capital markets.
The banks is expected to cut back in fixed income,currencies and commodities (FICC), potentially allowing it toallocate more capital to advisory activities in the UnitedStates and Britain - to help companies on M&A and equity anddebt capital markets.
Two more radical options would be selling the investmentbank altogether, or conversely, bulking it up by raisingcapital, analysts said.
($1 = 0.6445 pounds) (Additional reporting by Sinead Cruise in London and Dan Feedand Olivia Oran in New York; editing by David Clarke)
