Barclays is asking investors for too much faith

Barclays shares collapsed on Tuesday morning after Jes Staley, presenting his first set of results as chief executive, halved the bank’s dividend for the next two years and slapped a ‘for sale’ sign on its African subsidiary.

After being briefly suspended for the first time since the rescue of Lloyds and Royal Bank of Scotland in 2008, the shares had fallen 10% by midday in London, giving financial media around the world a rare chance to use the word ‘decimated’ correctly.

Banking is in the eye of a “perfect storm”, Barclays chairman John McFarlane said in a statement alongside the results on Tuesday.

Sure, he would say that, after a £2.1bn fourth quarter net loss. But he has a point.

Banks are faced with an unprecedented low interest rate environment, unprecedented capital requirements and an unprecedented era of messy central bank policy.

“The main issue for the group is no longer capital, as some remark,” added McFarlane, “but earnings and returns.”

Sure, he would say that. But despite the bank’s fully-loaded common equity tier one ratio rising 110bp to 11.4% during 2015, that is well short of its 12% target and makes it one of Europe’s weakest lenders by this measure.

If anyone was holding Barclays shares as a dividend play, they probably deserved to lose 10% of market value on Tuesday morning. Ditto with Royal Bank of Scotland, whose shares also plummeted last week after more losses pushed a restart of dividend payments to “later” than the first quarter of 2017.

It is also curious for Barclays’ chairman to point at weak earnings and returns, just as its chief executive is selling off one of its most consistent money makers.

The African operation is one of the biggest players in the region, and it will be interesting to see who might be able to bid for it, and just how big a discount to book value they get. Staley himself said the sale may take two to three years.

It is not a quick fix, and calling it a fix of any sort is a stretch given the unit’s return on equity trounced the investment bank’s in 2015, and was double the group average.

Barclays FC is selling its star player and reinvesting the proceeds in its training facilities and youth academy. It could be years before we see that on the pitch.

Proponents of the move have hailed the simplicity of Staley’s strategy. He is splitting the bank into a ringfenced UK retail business and a “transatlantic” investment bank that will focus on Barclays’ core UK and US markets.

But shareholders could have a long time to wait before simplicity becomes profitable. 

The harsh lesson for those who sold on Tuesday morning is that banks are nowhere near drawing a line under their post-crisis restructuring.

Until last year Barclays was drawing investors’ attention to the growth potential of its African unit, in which it has a 62.3% stake.

Now it is being sold off to free up capital for a re-commitment to an investment bank whose revenues were below its costs in the fourth quarter.

Barclays’ chief problem — spending too much on earning too little — is a common one in European banking, particularly at those firms considered masters of the universe pre-crisis. Deutsche Bank and Credit Suisse are two notable rivals joining Barclays at the wrong end of the equity performance table so far this year.

Despite halving its balance sheet since the crisis, Barclays’ cost to income ratio is 81%. Staley wants to get it down below 60% within a “reasonable timeframe”.

It is a punt, if a calculated one. Staley, and the handful of other bank chiefs clinging on to what remains of the universal banking model, are asking investors for a lot of patience.

Barclays may have replaced the word ‘universal’ with ‘transatlantic’, but the new strategy is still a commitment to do investment banking from the world’s two biggest financial centres.

And this comes at a time when JP Morgan, whose staunch commitment to its FICC division has seen it grab plenty of business from retreating rivals lately, has already warned investors about double digit declines in investment banking revenues for the first quarter.

It is possible that markets will calm and global growth will pick up in the next few years, at which point banks that retreated to their home markets will face the equally difficult task of regaining market share from those that stuck it out.

But global economic data has been dire this year, China remains a problem that can only be delayed for so long, and the European Central Bank is about to dig back into its pockets because a promise of €1tr of artificial liquidity was simply not enough.

To quote Daniel Pinto, head of JP Morgan’s investment bank, in a presentation to investors last week: “At some point, this business will go back to growth. It’s not going to be contracting forever. Europe may grow at some point, capital markets will develop, emerging markets, all that will help.”

Sure, he would say that.