Make no mistake, banking, and especially investment banking, is a ruthless business.
Wide-eyed and bushy-tailed, my very first job out of uni was with a bank. I worked in the banks securities division I was out on my butt within 12 months. It was just after 9/11. Everyone was cutting back. I was amazed at how cold management were as they delivered the news, and as people lost their livelihoods over a matter of just hours. To this day, nothing has changed.
Barclays (LSE: BARC) (NYSE: BCS.US) has cut 2,700 jobs in its investment bank just this year as part of a wider plan to axe 7,000 positions over three years. Its naive to think that a bank will continue employing staff if the numbers around their contribution to the bank dont add up. As far as this year is concerned, Barclays numbers look far from sound and thats why there has been and will continue to be plenty of redundancies.
A bad look
Heres just a brief snapshot as some of the more uncomfortable numbers: adjusted profits for the half came in at 1.8bn, down around 5% on the year. Investment banking was a big part of that, led by falling fixed income revenues. In fact, the RoE of the investment banking division was well down on other divisions at just 5.7 per cent. Return on equity for the group remains around 7 per cent, after last years capital issuance. Thats not a particularly competitive rate, especially if you compare it against the banks peers. So for my mind, Barclays is not only disappointing its employees, its also disappointing its investors (dividend yield just under 3%).
So what can it do? Well, it can try to attract the best talent by raising salaries and bonuses. Even that, though, could land them in some hot water. For instance, Barclays faced criticism earlier this year when it revealed that its bonus pool would rise from 2.2bn to 2.4bn even though profits fell across the group. It seems the public dont like it when investment bankers bonuses increase when profits go the other way.
Leap of faith
Still, Barclays is taking a punt on this strategy. This is how the CEO, Antony Jenkins, justified it:
I understand completely the sentiment from shareholders and broader society that it feels unreasonable, but if we are going to be a world-class investment bank then we have deal with the compensation structure as best we can.
The bottom line is that, like many of the worlds big banks, Barclays is struggling to find the right balance between being salarycompetitive, and being fiscallycompetitive. At this point I dont believe its got the mix right. It shouldnt be about simply paying people more, it should be about making existing capital work harder. The big salaries are hard for the public to swallow because, since the Great Recession, much of Britain has had to work harder, for longer, and for less pay.
This is a crucial year for Barclays. If it cant turn around the performance of its investment bank, it will lose talent at the top. That in turn will see it become less competitive overall. So cue a morale boosting speech from Thomas King:
We are in a cyclically slower part of the year. For this quarter its usually about September. Its very early days, but September seems to have the hallmarks of what could be a nice, attractive month, were seeing a bit of volatility in the trading business and the issuance calendar is robust..
I think Ill wait until Barclays looks a little more robust.
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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.