Barclays PLC Has Given Up On Its Wall Street Ambitions

UK banks have long dreamt of becoming big players on Wall Street. Barclays (LSE: BARC) (NYSE: BCS.US) was no different and the bank thought it had hit the jackpot when it acquired the US brokerage arm of Lehman Brothers, after one of Wall Street’s most iconic players collapsed.

Barclays tried hard to integrate itself into Wall Street culture, retaining most of the Lehman’s ex-staff, as well as the bank’s headquarters. 

However, Barclays is now admitting defeat and is planning a retreat from Wall Street. This move comes as Barclays’ investment banking income fell 41% during the first quarter, giving the bank the lowest return of its peers.

Barclays’ has finally admitted that is can no longer compete with Wall Street’s big boys and for shareholders this could be good news. 

Slimming down

Barclays announced its intentions to pull away from Wall Street at the beginning of May, within the bank’s strategic update. As part of the plan, Barclays will cut up to 7,000 investment banking jobs this year, in an attempt to reduce costs and improve profit margins. 

Actually, Barclays’ top 1,000 clients generated more than three quarters of the investment bank’s income last year. So, it would appear that Barclays can afford to slim its investment banking division down, concentrating on a few key clients, without affecting sales too much. 

What’s more, Barclays intends to create a bad bank, which will hold €90bn risky assets from the investment bank. These risky assets include some commodities and emerging markets products along with complex derivatives.

Less risk

Taking a step away from investment banking will definitely improve the quality of Barclays’ balance sheet. In particular, at present around 50% of Barclays’ risk-weighted assets are related to investment banking. With the introduction of a bad bank, this figure should drop to 30%.

Further, management has stated that operations from Italy, France, Spain and Portugal are also being placed within the bad bank. This will give Barclays more time to focus on core businesses such as Barclaycard, retail banking operations and the bank’s African arm.

Unfortunately, this slimming-down will cost the company £800m on top of the £2.7bn restructuring costs already announced, although in the end, these changes should improve Barclays’ long-term outlook. 

Shareholder preference

And it seems as if Barclays’ management is instigating these changes in order to improve shareholder returns. The bank is now targeting core return on equity, a key measure of a bank’s ability to generate income from its assets, of over 12%. Barclays’ return on equity was a lowly 4.5% last year, which was one of the lowest returns in Barclays’ peer group.

Lastly, management is targeting a dividend payout ratio of 40% to 50% of net profit, so shareholders should benefit as the bank cleans up its act, cuts costs and improves returns.