Will Barclays PLC’s Move Away From Wall Street Hit Profits?

As part of its strategic restructuring plan, Barclays (LSE: BARC) (NYSE: BCS.US) announced earlier this year that it was going to wind down its investment banking operations. 

Technically, this move is somewhat of a strategic withdrawal, as Barclays has been trying to make it on Wall Street since 2008.

Barclays made its first foray into the business when it acquired the US brokerage arm of Lehman Brothers, after the Wall Street giant collapsed. Now, the bank is looking to cut 7,000 investment banking jobs this year, in an attempt to reduce costs and improve profit margins.

Moreover, Barclays’ retreat from investment banking will reduce its exposure to risky assets and this should appeal to shareholders. 

Will the bank regret?

Unfortunately, while the retreat from investment banking will mean that Barclays’ costs will fall, it also means that profits will be lower.

Investment banking is a risky business but it can be extremely profitable. However, right now is not a good time to be in the industry — the markets are calm and there is no money to be made.

Nevertheless, investment banking is a cyclical business and sooner or later, demand will pick up again. The question is, will Barclays regret its decision? 

Still, Barclays is not exiting the industry completely. Last year the bank’s top 1,000 clients generated more than three quarters of the investment bank’s income. So, Barclays can afford to slim down its investment banking operations to some extent. 

Focus on core businesses 

As Barclays exits investment banking, the group is refocusing its attention on core businesses. These include the Barclaycard credit card businesses, UK retail banking and the company’s African operations. 

Barclaycard is without a doubt one of Barclays’ more attractive assets. The division was the second largest contributor to group profit before tax during 2013, after investment banking. Additionally, Barclaycard is the number one credit card issuer in Europe & Africa, handling more than half a trillion pounds in transactions per year. 

That being said, some analysts have started to wonder if Barclays’ new simplified operational structure will leave the bank over exposed to the UK economy. These are valid concerns as, after the investment banking diet, the majority of the bank’s sales will come from the UK.

Nevertheless, Barclays’ African operations should provide some diversification. But over the long-term, shareholders should benefit from a more stable bank with exposure to Africa and a leading credit card business.