Barclays to create £400bn bad bank

Published May 9, 2014

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Steve Slater London

Britain’s Barclays has reined in its ambitions to be a Wall Street powerhouse as it signalled yesterday a return to its retail banking roots with a plan to hive off much of its investment bank and axe one in four jobs at the division.

Chief executive Antony Jenkins, in his second strategic review since taking over in 2012, will cut 19 000 jobs in the next three years, 7 000 of them at the investment bank, and park £400 billion (R7.1 trillion) of assets in a new “bad bank”.

A slide in trading revenue due to investor uncertainty and tough post-crisis regulation combined with a string of senior staff departures and a row with shareholders over bonuses have forced Jenkins to take a knife to the investment bank, built up under his predecessor Bob Diamond, and once the group’s profit engine.

Jenkins said the recent halt in the trading boom was not just due to a cyclical ebb but partly permanent, as regulators had tightened the screws on large banks in the past 12 months, making some trading activities too costly to pursue. “We will refocus and resize our investment bank to bring balance to Barclays. As currently constituted, it is an unacceptable drag.”

About e90bn (R1.3 trillion) worth of risk-weighted assets from the investment bank will be put in the bad bank, including some commodities and emerging markets products and part of its derivatives book.

The investment bank will retain e120bn of risk-weighted assets and will concentrate on its core US and UK markets and the top 1 000 clients, which generated more than three-quarters of revenue last year.

It will scale back operations in Asia, moving to serve only American and British corporates and key global clients who want to do business there.

The carve-up means the investment bank will account for no more than 30 percent of the bank’s risk-weighted assets, down from half. It will give greater prominence to Barclays’s retail operations in Britain, its Barclaycard credit card arm and its African business.

Jenkins, the former boss of the retail division of Barclays, is parking all the lender’s European retail banking operations in Italy, France, Spain and Portugal in the bad bank, along with some corporate and Barclaycard assets. He said parts of the European operations could be sold or floated.

Outside the investment bank, about half the cuts will be from branches in the UK, Europe and Africa, with most of the rest from operations and information technology.

Investors welcomed the plans, which are designed to boost shareholder returns by 2016. Barclays kept a targeted dividend payout ratio of 40 percent to 50 percent of net profit and is aiming to deliver a return on equity in its core business of over 12 percent. Its return on equity was 4.5 percent last year.

Barclays leapt as much as 6.6 percent to a near three-month high of £2.5945, making it the top gainer in Britain’s FTSE 100 index and an index of European banking stocks.

Jenkins’s plan to drive the bank’s returns over its cost of capital – estimated at 10.5 percent – has been tripped up by a grim trading environment and uncertainty about his vision for the investment bank, which has prompted the departure of some senior employees.

Eric Bommensath, a co-head of the investment bank, will run the bad bank. Tom King, the other co-head, will take over sole responsibility for the investment bank. – Reuters

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