Now is very much make or break time for Barclays (LSE: BARC). The bank has confirmed plans to cut 19,000 jobs by 2016, with roughly 7,000 jobs going at Barclays’ investment bank.
In its most recent results Barclays reported a 49% fall in pre-tax profit at the investment bank, in part due to more strict regulatory requirements such as risk weighting, which have increased costs.
Barclays will move its non-core assets — worth £115bn — into a new ‘bad bank’, where they will be sold or eventually run down. Some £90bn of these assets will come from the investment bank.
The market reacted with approval and Barclays shares increased by over 7% on the announcements. Will they bear fruit in the long-term for shareholders?
Changing track
Barclays’ chief executive, Antony Jenkins, claims that this is “a bold simplification”. He added that the bank will only operate in areas where it has “capability, scale and competitive advantage.”
Bob Diamond, Barclays’ former boss, had envisioned the bank becoming a fully fledged investment vehicle like Goldman Sachs or JP Morgan, and the present direction is a necessary change of course.
Shareholders have complained that relative to its poor return the investment bank demanded too much capital. A slimmed-down investment bank will require much less, which potentially means more capital can be returned to investors.
At present the investment bank is valued at zero, meaning that any sort of a pick-up could give the shares a welcome boost.
Playing to strengths
Jenkins has been roundly mocked for his persistent references to Barclays becoming the “Go-To” bank for customers. Every bank claims to put customers first, of course, and while it may make for a trite soundbite, it’s understandable that Jenkins is pressing the issue.
More than just overhauling the corporate culture, he has to effect a reputational shift, and restore the trust of an embittered public.
The strategy, then, is laid out. UK retail, Barclaycard and corporate lending — which accounted for half the group’s income in the most recent quarter — will have an even greater role in the bank’s future.
Not that investment activities are being completely phased out. Rather, spurred-on by falling profits from fixed income products and commodities trading, Barclays will focus on its core competencies.
These include advice on IPOs as well as mergers and acquisitions. Barclays did more IPO business than any other bank in 2013, beating Deutsche Bank, Merrill Lynch and other international rivals.
Time to buy?
Shares in Barclays are down 6% so far this year and trade on a forward P/E rating of 10. The shares are out of favour, and the decision to ‘buy’ remains yours to make, of course.