Barclays is considering dropping many investment bank clients to increase profits and reduce costs by £1bn.
Barclays’ executives met more than once this year to discuss the restructuring. The codename for the project is Minerva, after the Roman goddess who represents wisdom.
Chief executive CS Venkatakrishnan is being pressured to return more capital to Barclays investors and reduce Barclays reliance on investment banks. A public announcement should be made in February.
Barclays is valued among the lowest of all major banks in the world. The shares are near their lowest level since the Covid-19 Pandemic.
Barclays’ executives considered several radical options, but ultimately opted against them. The most daring option was to raise capital for the purchase of a wealth management or asset management company.
One of the other options was to drastically reduce trading assets in the investment bank by up to 25 percent, and redistribute the balance sheet into the consumer credit card and operations.
Venkatakrishnan, however, is now set to take a more moderate approach after being rebuffed by co-heads Adeel Dainton and Stephen Dainton.
People close to the situation have said that Barclays would likely focus on cutting off ties with their least profitable investment banking customers.
The people said that no final decisions have been made. However, they did stress that the decision was not final. One person with Barclays denied that the number was so high.
The company refused to comment on internal discussions.
Barclays’ client management system is known as “Hector” internally. The top 500 customers are ranked into platinum, diamond and gold bands, which generate the majority of the profits.
Silver is the rest of those who do not deal with Barclays enough, or on a large scale, to give it a decent return.
The review of the group is centered on the investment bank, which has grown to dominate it over the last eight years. It now accounts for £219bn in risk-weighted asset (RWA) or two-thirds.
Regulators force banks to hold equity against RWAs. Barclays should be able boost shareholder returns through dividends and buybacks if it can reduce assets or redeploy those assets into more profitable areas.
People close to the situation said that if done aggressively, cutting its less profitable clients in investment banking could free up as many as £20bn worth of RWAs at a cost less than 10% of the revenues of the division. The person who is close to Barclays, however, said that the final number was likely to come in lower.
Board members have told the division, which includes Barclays corporate business, to develop a plan that will generate a return on tangible equity between 14 and 15 percent, up from the current 11.5 percent, according to the sources.
According to internal estimates, this would require a sharp drop in operating costs as a percent of revenue from 65 to mid-50s.
When Basel 3 comes into force, the targets will be even more difficult to achieve.
Barclays’ executive committee has been roiled by a heated debate over plans to spare its trading operation from a more comprehensive restructuring.
People close to the process have said that executives are considering exiting the US municipal bond market, which underwrites the debt of state and local governments.
The business is only a small proportion of RWAs, so the overall impact would be minimal.
The people said that Barclays was also looking at other weakly performing businesses. However, they would likely be retained as these were deemed crucial to Barclays being a “full service” investment bank.
The first was the loss-making cash equity operation. This included stock trading, research and sales, but would only result in a modest decrease in assets.
The review also highlighted the unprofitable securitised product trading business. This was flagged as a balance sheet-intensive and unprofitable activity. It is however closely linked to the financing side, which makes money, of Barclays’ securitisations business.
Barclays plans to reduce up to 2,000 jobs in the entire group, as it looks for cost-savings of PS1bn.
BX, Barclays’ central hub for back office and IT services, will be the main target of job cuts. The UK consumer lender is also a target, as it’s more expensive to run than its peers like Lloyds or NatWest.
Barclays’ corporate business, where it provides loans and services to large businesses, could be squeezed for cost savings.
One person who was briefed about the discussion said that the lender also planned to reduce its capital burden through more synthetic risk transfer. They are becoming increasingly popular with European banks looking to reduce their capital requirements.