Barclays only partly fixes investment bank problem

Barcs and bites. Barclays has identified the source of its valuation problem, but not a guaranteed fix. On Tuesday, CEO C.S. Venkatakrishnan, known as Venkat, laid out a plan to boost the $30 billion lender’s returns by scaling back the relative size of its volatile investment bank. While shares rose 5%, investors burned by previous false dawns will only believe it when they see it.

Barclays has been agonising about its outsized investment bank for ages. A full 10 years ago former boss Antony Jenkins had created a non-core unit with tens of billions of pounds of corporate and investment bank (CIB) risk-weighted assets, amid concern that the business had swollen to 67% of the group’s total. The CIB fell to 55% of RWAs by 2018, but then ballooned back up to 64% as Barclays’ fixed income business grew. Well before activist Edward Bramson tried and failed to push an investment bank downsizing, investors had voted with their feet over the perceived volatility of the unit’s revenues. That’s still a problem – Barclays trades under 45% of the expected value of its tangible assets at the end of 2024.

Venkat’s fix rightly doesn’t go down the Jenkins’ bad bank route, which according to UBS research created 7.4 billion pounds of cumulative losses between 2014 and 2017. Instead he’s separating the UK corporate bit of Barclays’ CIB to leave an investment bank that currently has 58% of the group’s 343 billion pounds of RWAs. The plan is to cut this to around 50% by 2026, but largely by keeping its own size stable while adding 30 billion pounds in RWAs to Venkat’s UK retail, wealth and corporate operations, and 20 billion pounds to his U.S. credit cards arm. Venkat hopes this will boost the bank’s return on tangible equity from around 9% now to 12% by 2026.

Whether this pans out will depend on two things. In the UK, where Barclays recently bought Tesco Bank for 600 million pounds, elevated interest rates and a flatlining economy may depress demand for mortgages and corporate loans. The higher cost of debt and rampant competition could also make it harder to grow Barclays’ credit cards business. Similarly, the U.S. cards business is only the ninth largest provider in its market – most of the RWA inflation here in any case comes from stiffer Basel capital rules.

The biggest problem is whether investors are OK with an investment bank of even just 50% of 2026 RWAs. Deutsche Bank’s own unit is around 40% of its group total, while at UBS – which trades above tangible book value – it’s only a fifth. Venkat may be doing logical things with the cards he’s been dealt, but it doesn’t mean investors will reward him.