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Part 2

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Even though BGI was cash generative and used little capital, there was a modest improvement in Barclays’ capital ratios and regulators were delighted. But investors disagreed, worried that the sale left Barclays over dependent on the investment bank.

Barclays had sold its crown jewels and to make matters worse, in 2012, again in part to meet regulators’ new capital rules, the bank sold its BlackRock stake, also for £4bn.

Over the ensuing years, on the back of its new status as a broadly-based fund manager, BlackRock’s shares soared while Barclays, hampered by a perceived over-dependence on investment banking, flatlined. The arithmetic of this divergence is stark. BlackRock’s current market value is $118bn and Barclays’ interest in BGI would therefore have been worth $24bn if it still owned it. This is only slightly less than Barclays’ total market value of $28bn.   

These decisions, though taken under extreme circumstances, were strategically questionable and commercially disastrous. They leave Barclays in its current dilemma, over dependent on capital-intensive investment banking, short of stable, cash-producing businesses and with the shares sitting at less than half of book value.

What would shareholders give to reverse these decisions? That is one question that can’t be answered next week, but “be careful what you wish for” is a message that board and regulators can take away from the events that led Barclays to its current predicament.

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On February 20, Barclays’ chief executive C S Venkatakrishnan will be revealing the outcome of a strategic review. Such reviews are a rite of passage for Barclays CEOs. History provides the reasons for such self-examination, as well as clues for today’s management and regulators.

As has become usual for Barclays’ shareholders, the issue is an underperforming share price. This is generally blamed on Barclays’ investment bank arm, which absorbs a majority of risk-weighted assets, produces lower returns than the rest of the business and appears accident prone. Investors don’t like it.

Although the investment bank dates back to 1985, the current strategic bind stems from the great financial crisis. In September 2008, Barclays agreed to buy Lehman’s US equities and corporate finance business out of Chapter 11, completing the quarter-century-long dream of a seat at Wall Street’s top table. Staying there would be a stretch but with Bob Diamond running the investment bank, the anchor of a robust consumer bank and the backing of an ambitious board, investors briefly shed their doubts.

Not so the authorities. The following month, the British government was desperately shoring up the country’s banks through an infusion of state capital. Mistrustful of Barclays’ balance sheet and risk management capabilities, the government pressed it to join Lloyds and RBS in state ownership. That would have killed the investment banking strategy just when the board thought they had it fixed, so they refused.

The Bank of England and its regulatory arm, the Financial Services Authority, were furious. Sceptical of Barclays’ ability to survive, the FSA told Barclays it had until June 2009 to find £12bn to stay out of state hands and that this would have to include the sale of a business.

There was only one big, detachable sale candidate: Barclays’ investment management business, BGI. This once obscure corner of Barclays had been carefully nurtured into one of the world’s biggest fund managers, with over £1tn under management.

During the autumn and winter of 2008-9, Barclays inched its way towards the £12bn capital target, raising money from the Middle East, suspending the dividend and shedding risk-weighted assets. But the regulators pressed it to do more and in June 2009, Barclays agreed to sell BGI for £4bn cash and a 20 per cent interest in the acquirer, BlackRock.

UK’s biggest banks set to report record annual profits

Barclays, HSBC, Lloyds and Standard Chartered will report their financial results for 2023.

The UK’s biggest banks are set to report record-high profits after a year that saw lenders benefit from higher borrowing costs, as they face questions over the outlook for the year ahead.

Barclays, HSBC, Lloyds and Standard Chartered will report their financial results for 2023, on Tuesday, Wednesday, Thursday and Friday respectively.

On Friday, NatWest revealed its biggest yearly profit since 2007, before the global financial crisis, and a fifth higher than the previous year.

The outlook for 2024 may end up being more important than the results themselves

Matt Britzman, equity analyst for Hargreaves Lansdown

The five banks are forecast to make combined pre-tax profits of more than £50 billion, which would be a record-high amount and ahead of the pre-financial crisis peak in 2007.

HSBC is forecast to report a profit of 34 billion US dollars (£27 billion) and analysts are expecting Lloyds to have made £7.4 billion last year, which would top previous record earnings for the groups.

Barclays is estimated to report a £6.7 billion pre-tax profit, lower than highs earned in 2021.

It is also due to update shareholders on its much-anticipated strategy for reducing costs, which is set to involve restructuring.

It comes after NatWest said it was focusing on managing business costs and making the group more efficient amid a tougher climate for the UK economy – which fell into a technical recession at the end of last year, according to official figures.

But bumper profits over 2023 were driven by banks making more money from more expensive loans and mortgages, compared with what they paid out to savers, as the Bank of England raised UK interest rates.

This difference is known as a net interest margin (NIM).

But with the banks having come under more pressure to reward savers, and as interest rates are expected to be reduced this year, the measure could be in sharp focus.

“The outlook for 2024 may end up being more important than the results themselves”, suggested Matt Britzman, an equity analyst for Hargreaves Lansdown, as the “tides look to be turning” for the banking giants after a bumper year.

“As a traditional lender with operations geared toward interest income, net interest margin is key”, he said of Lloyds Banking Group.

“With consumers under pressure, loan default commentary and the value of impairments Lloyds takes will be watched closely.”

He added that the size and scale of restructuring efforts at Barclays will be “the biggest question mark overhanging” the bank.

While investors will be looking for reassurances from HSBC that the global bank has not been impacted by volatility in China’s property market.

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Qantas, the times article not opening, unless you subscribe . Are you able to copy and paste. Thanks

Cont

The former Barclays boss is challenging the Financial Conduct Authority, after it ruled that he had misled the regulator over his relationship with the disgraced financier. The FCA has since banned Staley from holding any senior role in the City. Neither Staley nor Barclays have commented on the report.

UK bank announcements will continue on Wednesday, with analysts expecting HSBC to double its annual pre-tax profits, to $34bn (£27bn) from $17.5bn in 2022.

The London-headquartered lender will have benefited from rising interest rates in Asia – where it makes the bulk of its profits – and the west.

This is likely to result in another significant payout for chief executive Noel Quinn, who was handed a $5.5m package in 2022, including a $2.2m bonus.

Barclays chief executive CS Venkat­akrishnan has a tough act to follow. Just days after rival NatWest revealed its biggest profit since the onset of the financial crisis in 2007, the Barclays boss will be delivering much less cheering news: cost cuts, job losses and restructuring plans are all expected to feature in the bank’s first major strategy update in a decade.

Tuesday’s results will also be a lesson in salesmanship: how to promise better times after reporting yet another slip in annual profits.

Analysts are expecting the chief executive – who is known to colleagues as “Venkat” – to reveal a 4.5% fall in pre-tax profits, to £6.7bn. Although UK lenders have benefited from higher charges on loans and mortgages – thanks to the fastest rise in interest rates since the 1970s – at Barclays those earnings will partly be offset by restructuring costs, which are expected to result in a charge of between £700m and £1bn.

Figures from Barclays’s investment bank is also likely to be a drag on profits, following another sluggish year for deals and public listings. The downturn has already taken a toll on US rivals such as Goldman Sachs and Morgan Stanley, both of which reported their lowest annual profit in four years in January.

But that division’s poor performance could serve to show Venkat is on the right track. He wants to scale down the volatile investment bank side, and lean more heavily on income from wealth management and retail banking (this paved the way for Barclays’s £700m buyout of Tesco’s banking business this month).

The rub here is that he is asking shareholders to join him on what is in effect a U-turn. Venkat’s predecessor Jes Staley, now mired in controversy, spent years resisting pressure from an activist investor who also wanted to see a much smaller, if not entirely offloaded, investment bank.

“Barclays fought off calls from Edward Bramson of Sherborne Investors to spin off the unit, and rebutted suggestions that it did not earn a consistently high enough return on equity to justify the amount of group capital allocated to it,” said analysts at AJ Bell. “A bumper first quarter in 2023 helped to support Barclays’s strategy but the investment bank’s performance has ebbed since.”

The questions now are about the scale and costs of the restructuring plans. Though the costs could eat into bankers’ bonus pools, they are unlikely to have a large impact on dividends. Venkat is expected to soften the blow of another drop in profits with a dividend payout that AJ Bell expects could reach 9.5p a share, up from 7.25p in 2022.

At the very least, it will help distract from more controversial matters, including a recent report by Bloomberg which alleges that Staley stayed in touch with Jeffrey Epstein for years after taking over as Barclays chief executive – despite claims that he cut ties with the convicted sex offender in 2015.

Cont

LONDON/ZURICH (Reuters) - Barclays is in the early stages of considering a bid for Societe Generale's UK private bank, in an effort to expand its business targeting wealthy individuals, three people familiar with the matter told Reuters.

SocGen, advised by Rothschild & Co, has begun inviting bidders to take part in an auction for its Kleinwort Hambros unit, two of the people said.

The French group is also readying a sale of its private banking operations in Switzerland as it looks to shed businesses in a strategy revamp, they said.

London-based Kleinwort Hambros, which in 2022 had more than 12 billion pounds ($15 billion) in assets under management, could be worth up to 700 million pounds in a sale, one of the people estimated.

Among those invited to bid for the unit are Lloyds Banking Group, as well as wealth managers Rathbones and Raymond James, two of the people and a fourth one said.

Rathbones has decided not to participate in the process, a person familiar with its thinking said.

Deliberations remain at a preliminary stage, and there is no certainty that a transaction will materialise, sources cautioned.

Barclays and SocGen both declined to comment.

Barclays' interest in SocGen's British private bank comes on the heels of its acquisition of Tesco's banking operations, as part of efforts to diversify away from volatile investment banking income.

The British bank, led by CEO C.S. Venkatakrishnan, is set to announce a new group strategy on Feb. 20 alongside its full-year results.

Https://uk.finance.yahoo.com/video/investor-sentiment-most-bullish-two-150051430.html?contentType=VIDEO

Https://uk.finance.yahoo.com/news/barclays-plc-lon-barc-largely-062202699.html

Focus: Barclays investors crave simpler bank as CEO Venkat prepares revamp

Barclays' (BARC.L) CEO C.S. Venkatakrishnan is under pressure to deliver a plan this month to win over restless shareholders clamouring for a streamlined business model and higher, more sustainable returns for a fraction of the risk.

The British bank has one of the lowest valuations among peers, with shares down by around 24% in the last year, driven in part by a hefty disposal of stock by a top investor, Qatar Holding, on Dec. 4.

It has also underperformed UK and eurozone banking indexes, data shows.

Eight shareholders who spoke to Reuters -- including four among the top 20 -- favour shrinking its investment bank, offloading stakes in sub-scale businesses or exiting non-core assets entirely, and putting billions back into their pockets.

Barclays' CEO, known as Venkat, has been listening. Speaking at the World Economic Forum at Davos last month, he acknowledged the outsized contribution Barclays' investment bank had made to group profits, and pledged to restore balance and clarity on the make-up of the bank.

In a bid to bolster its British retail bank, Barclays said on Friday it had agreed to buy supermarket Tesco's banking operations.

But with the global economy in flux, buyers of businesses Barclays aims to sell appear to be running shy.

The bank's struggle to secure backers for its UK payment business, reported by Reuters on Feb 1, risks complicating Venkat's aims and shareholder hopes of a swift turnaround.

Barclays, one of Britain's oldest banking brands, lacks focus, according to fund managers who say they are underwhelmed by its risk-adjusted returns.

"The basic problem is this bank isn't boring enough for the majority of its investors," said Sajeer Ahmed, portfolio manager at Aegon Asset Management, which manages Barclays shares.

It is an investment bank with a retail bank attached. Management has tried to spell out the benefits of diversification but this just isn't supporting the bottom line right now," he said.

Many banks streamlined their riskiest activities after the 2008-9 financial crisis, but Barclays set its sights on growing a top-tier transatlantic investment bank from the embers of Lehman Brothers.

The regulation which followed the crisis has made making money from investment banking much tougher, pushing investors to question whether it is time to scale back those ambitions.

Barclays declined to comment.

The bank, which drafted in Boston Consulting Group to help with its revival plan, is due to present it on Feb. 20.

Cont

There are signs short-sellers are retreating ahead of any potential move. Barclays has not featured in the top 10 of EMEA's most heavily shorted large-cap banks since October, research from data firm Hazeltree showed.

Investors who spoke to Reuters expect the bank to upgrade its annual 10% ROTE target to between 11% and 13%. In 2023, U.S. bank JP Morgan (JPM.N)achieved 21%.

"I think people are struggling to believe that higher returns are deliverable and sustainable," said Ben Ritchie, head of developed market equities at Abrdn (ABDN.L).

"But once companies get the credit for consistent delivery, it is a game-changer," he said.

Cont

HIGH RISKS, UNEVEN RETURNS

The investment bank has long been central to Barclays' universal banking business model, which also spans consumer and corporate lending.

But six shareholders said the group's depressed valuation reflected the investment bank's high costs and unpredictable returns.

In nine months through September, Barclays' Corporate & Investment Bank reported quarterly income ranging between 4 billion and 3.1 billion pounds, with quarterly costs of around 2 billion.

Returns on tangible equity (ROTE), a key profitability measure, ranged between 15.2% and 9.2% across these quarters.

The division consumes 63% of group capital reserves, and delivers returns below industry peers, UBS analyst Jason Napier said in a Jan. 11 note.

By contrast, BNP Paribas (BNPP.PA) commits less than a third of group capital to its investment bank, while UBS (UBSG.S) has said it will allocate no more than 25% of risk-weighted assets to its investment banking operations.

Investment banking as an industry also tends to be accident-prone. In 2022, a U.S. securities sales blunder saw the bank's litigation and conduct costs that year surge to 1.6 billion pounds from 400 million pounds the year before.

"Execution is key," said Benjamin Toms, analyst at RBC. "This means no mishaps and a conduct and litigation expense that is closer to 100 million pounds rather than a billion."

INVESTORS LOSE FAITH

Barclays' forward price to book ratio, a measure of its market valuation relative to assets, is at 0.34 -- compared with 0.34 for Deutsche Bank (DBKGn.DE), 0.56 at BNP Paribas, 0.82 at HSBC (HSBA.L) and 0.95 at UBS, based on LSEG data on Feb. 8.

Investors said this reflects doubts about Barclays' mix of businesses, and a growing consensus that a leaner, simpler bank could deliver stronger returns.

Barclays has sub-scale businesses which could fetch respectable price-tags if they were sold, five of the investors said, pointing out that several of these units were unlikely to be more than number three or four in their respective markets.

Disposals from Barclays' Consumer, Cards & Payments (CCP) unit would be welcomed, four of the shareholders said, with one suggesting the international credit cards business applied a "complexity discount" to the bank's overall valuation.

Reuters earlier reported the bank's wider studyof its global payments activities.

Capital unlocked by asset sales could support a more generous dividend or buyback programme or be reinvested in fee-earning businesses like wealth management, three investors said.

"In my opinion the only way the shares re-rate is a meaningful reduction in the size of the corporate and investment bank, and re-focus of the business on forecastable franchise based revenue streams," said Ed Firth, analyst at KBW.

Jefferies analysts expect Barclays to propose a sharp rise in capital redistribution, rising to around 7 billion pounds by end-2025, to help boost flagging shares.

There are signs short-sellers are

Focus: Barclays investors crave simpler bank as CEO Venkat prepares revamp

Barclays' (BARC.L) CEO C.S. Venkatakrishnan is under pressure to deliver a plan this month to win over restless shareholders clamouring for a streamlined business model and higher, more sustainable returns for a fraction of the risk.

The British bank has one of the lowest valuations among peers, with shares down by around 24% in the last year, driven in part by a hefty disposal of stock by a top investor, Qatar Holding, on Dec. 4.

It has also underperformed UK and eurozone banking indexes, data shows.

Eight shareholders who spoke to Reuters -- including four among the top 20 -- favour shrinking its investment bank, offloading stakes in sub-scale businesses or exiting non-core assets entirely, and putting billions back into their pockets.

Barclays' CEO, known as Venkat, has been listening. Speaking at the World Economic Forum at Davos last month, he acknowledged the outsized contribution Barclays' investment bank had made to group profits, and pledged to restore balance and clarity on the make-up of the bank.

In a bid to bolster its British retail bank, Barclays said on Friday it had agreed to buy supermarket Tesco's banking operations.

But with the global economy in flux, buyers of businesses Barclays aims to sell appear to be running shy.

The bank's struggle to secure backers for its UK payment business, reported by Reuters on Feb 1, risks complicating Venkat's aims and shareholder hopes of a swift turnaround.

Barclays, one of Britain's oldest banking brands, lacks focus, according to fund managers who say they are underwhelmed by its risk-adjusted returns.

"The basic problem is this bank isn't boring enough for the majority of its investors," said Sajeer Ahmed, portfolio manager at Aegon Asset Management, which manages Barclays shares.

It is an investment bank with a retail bank attached. Management has tried to spell out the benefits of diversification but this just isn't supporting the bottom line right now," he said.

Many banks streamlined their riskiest activities after the 2008-9 financial crisis, but Barclays set its sights on growing a top-tier transatlantic investment bank from the embers of Lehman Brothers.

The regulation which followed the crisis has made making money from investment banking much tougher, pushing investors to question whether it is time to scale back those ambitions.

Barclays declined to comment.

The bank, which drafted in Boston Consulting Group to help with its revival plan, is due to present it on Feb. 20.

HIGH RISKS, UNEVEN RETURNS

The investment bank has long been central to Barclays' universal banking business model, which also spans consumer and corporate lending.

But six shareholders said the group's depressed valuation reflected the investment bank's high costs and unpredictable returns.

In nine months through September, Barclays' Corporate & Investment Bank reported quarterly income ranging between 4 billion and

But we were kicked out of the ERM after two years, so the damage was limited. And the SET, which put an extra tax on service-sector workers, ended when VAT was brought in seven years later. By contrast, the dividend tax raid has lived on until now.

The other thing that killed equity investment by pension funds was regulation. It is complex, but the changes in prudential regulation were meant to push the funds into supposedly safe gilts and other fixed-interest holdings, rather than supposedly risky equities.

You can see the argument. If you know someone is going to retire in say 15 years, put their savings into Government bonds that mature then. Better to have a mediocre but guaranteed return than the probability (but not certainty) of a much better one.

As it happened, from the 1990s to 2020, fixed interest investments did not do too badly. But that came dreadfully unstuck with the surge in bond yields (and corresponding collapse in prices) from 2021 on.

In any event, now most pensions are defined contribution, where savers bear the risk, the case for safety over performance is far weaker. Long term, equities offer a better return than gilts. Rationally they must be the right choice.

Governments are not good at sticking to the Hippocratic Oath in its short form: 'First, do no harm.' But here's a chance to correct a harm of the past. Reverse Brown's tax raid. It would cost hardly anything. Hunt could do it next month, and Reeves could show a Labour government would be on the side of pensioners by supporting it.

And both parties could commit to reforming regulation so savers get balanced portfolios, rather than be herded into bonds giving zero protection against inflation.

Everyone wants more growth, or at least the three main parties all profess to want it. They also want pension funds to invest more in UK business.

Jeremy Hunt announced reforms in his Mansion House speech in November, and is expected to do more in next month's Budget. Rachel Reeves, his shadow, has just launched Labour's plan for financial services, called Financing Growth. It is certainly a relief to have politicians that don't want to clobber the City. But the Conservative offer is pernickety.

The Chancellor's initiatives were things like a new growth fund in the British Business Bank, a venture capital fellowship scheme to 'support the next generation of world-leading investors in our VC funds', '£20million to foster more spin-out companies, firms created using research done in universities', and so on.

For the Opposition, it's the same sort of stuff, though with fine statements rather than any detail. So it's 'Labour will work with local government pension schemes to set out best practice for adopting similar, cost-effective in-house fund management capabilities' and 'increasing diversity in financial services broadens and deepens the talent pool, and delivers better outcomes for businesses'.

There's nothing wrong with this, but the problem is that neither the tweaks of Hunt nor the grand statements of Reeves tackle the big question: why do UK pension funds not invest in UK equities?

Back in 1997, they and other UK institutional investors owned nearly half of all UK-quoted shares. Now it is 4 per cent. And the answer? It was Government policy that pushed them to do so.

The policy came in two halves: tax and regulation. The tax was Gordon Brown's raid on dividends paid to pension funds. Until 1997, pension funds got a tax credit. So if they were paid £80 in dividends, they got back £20 as a credit. The rationale was that the company had already paid corporation tax and for pensioners at least there should be some sort of rebate.

The numbers did not look huge. It raised £5billion a year and, since pensioners did not realise what was happening, Brown slipped it through in his first Budget that summer without much hassle.

Cumulatively, though, the impact was huge. Not only did pensioners lose the income, they lost the growth in funds that would have accrued from reinvested dividends. The total loss has been put at £250billion over the ensuing 20 years. And of course, now it raises no money because pension funds hold hardly any British shares.

I rank that tax raid as one of the three most seriously idiotic decisions by Chancellors I can recall – the other two being John Major putting the pound into the European Exchange Rate Mechanism in 1990 and, going back even further, James Callaghan introducing the Selective Employment Tax in 1966.

Cont

Https://seekingalpha.com/article/4664778-barclays-0-4x-book-value-while-profitability-and-quality-improves

Barclays Chief Executive Officer C.S. Venkatakrishnan discusses his firm's investment banking division and his outlook for the year ahead with Bloomberg's Francine Lacqua at the World Economic Forum’s annual meeting in Davos, Switzerland.

https://www.bloomberg.com/news/audio/2024-01-18/bloomberg-talks-barclays-ceo-c-s-venkatakrishnan-podcast

By Megan Davies

DAVOS, Switzerland (Reuters) -Barclays CEO C.S. Venkatakrishnan is looking to use the lender's first investor day in a decade to show shareholders it can replicate the success of its investment bank across other divisions to create a stronger, more balanced lender.

"...the investment bank has been successful but it's about 60% of the bank, which is one of the things that I think dampens the valuation," Venkat told delegates at an event hosted by the Wall Street Journal at the World Economic Forum in Davos.

"We need to do better and be clear about what we're going to return to shareholders. And that's what the investor day is about. Clarity on growth, clarity on returns, clarity on the makeup of the bank," he said.

Barclays is due to present an investor update on Feb. 20 after more than a year of studying ways to jumpstart a valuation that has trailed its major European banking peers.

While its transatlantic investment bank has performed in recent quarters, the unit's cost of capital and volatility of returns has spooked some investors, sparking debate on whether Barclays could reduce its overall risk and improve its share price by paring the investment banking business.

"So in part they're right in the diagnosis, then you have to ask what's the cure?," Venkat said, during a discussion about how big Barclays' investment bank should be relative to its consumer and corporate interests.

"In the UK, which is the core of our being for 330 years, we've got to be a preeminent bank. Any strong global bank has to be really good in its domestic market and that has to be the core of our ambition," he added.