The growing threat of a hard Brexit has prompted many investors to steer clear of British banks. For Barclays Plc Chief Executive Officer Jes Staley, a rupture with the European Union could turn out to be a handy lifeline.
Staley, who has focussed on reviving the UK lender’s investment bank, has set himself a profitability target for 2019 and 2020 that the market still isn’t convinced the company will be able to meet.
Pressures on revenue and margins in the first half have given the US executive no choice but to lower his goal for expenses this year. But pledging to preserve client-facing jobs and income-generating roles at the investment bank may be a difficult promise to deliver on. Something will have to give.
At 9.4 percent in the first half, return on tangible equity surpassed Staley’s target of more than 9 percent for the year, though it was significantly below the 11.6 percent in six months through June 2018. While revenue in the second quarter was relatively steady — down 1 percent to 5.5 billion pounds ($6.7 billion), costs rose by about 6 percent as the firm cut 3,000 jobs and closed branches.
Staley is counting on being able to cut variable compensation and prune investments in projects like digital upgrades to reduce the annual cost base to below 13.6 billion pounds. It may not be sufficient.
Margin pressure is hurting the firm’s UK activities, which account for about 30 percent of revenue. Consumers are refinancing mortgages at the fastest pace ever, locking in rates. Meantime, the bank has become more prudent on its domestic unsecured lending, according to Staley, even if the bank isn’t yet seeing weakness in the UK consumer.
The banks’ markets division, a unit that Staley has sought to rebuild, also had a tough quarter. Fixed-income trading income rose 2 percent before a one-time gain, beating estimates and Wall Street peers. But revenue from equities trading — a business Staley wants to grow — fell by 14 percent from a record quarter in 2018. Crucially, though, the stock unit still lagged US competitors and remains well outside the group of five top firms considered to be the only profitable ones in that business.
Investors will be comforted that the bank increased the dividend and remained committed to stock buybacks, as and when appropriate. A weaker pound, down almost 4 percent against the dollar in July on fears of a hard Brexit, could also be a boon. While it may make cost-cutting tougher, UBS Group AG analysts estimate that half of Barclays’ investment banking revenue and the majority of its international card sales are in dollars.
Staley’s reign atop Barclays since 2015 has been anything but plain sailing. After facing regulatory scrutiny for trying to unmask a whistle-blower, he came under attack from activist investor Edward Bramson, who failed to win a board seat in May.
The CEO says he is confident he can meet returns target for this year. That looks to be a challenge. If he fails, though, the economic damage and distraction of a no-deal Brexit could provide him with some handy cover.
—Bloomberg