Barclays Doesn’t Want to Be Cool

Barclays is the only big European lender that still apes the Wall Street trading powerhouses.
Barclays is the only big European lender that still apes the Wall Street trading powerhouses.

Summary

Few themes have been as unpopular among investors in recent years as European investment banking and the U.K. Barclays wants to double down on both.

Few themes have been as unpopular among investors in recent years as European investment banking and the U.K. Barclays wants to double down on both.

The bank’s shares jumped around 6% Tuesday, despite disappointing 2023 financial results. Pretax earnings fell 6%, but investors cheered the promise of at least £10 billion, equivalent to around $12.6 billion, in dividends and buybacks between 2024 and 2026, as part of a broader strategic overhaul and cost-cutting campaign.

Barclays’s stock trades at around 0.4 times tangible book value—a low valuation matched even by downtrodden Deutsche Bank. Missteps haven’t helped, including its former boss’s relationship with convicted sex offender Jeffrey Epstein and a $361 million hit when employees accidentally issued more structured notes than allowed.

But there is a deeper issue: Barclays is the only big European lender that still apes the Wall Street trading powerhouses. A full 44% of its revenues came from investment banking in 2023. Only Goldman Sachs and Morgan Stanley reported higher percentages. For mergers and acquisitions and equity deals, Barclays and UBS were the only two European banks to crack the global top 10 last year, according to Dealogic.

In the post-2008 era of strict financial regulation, investors prefer financial firms that focus on wealth and asset management, which require little capital and generate high, stable returns. Despite its big investment bank, Morgan Stanley derived 53% of its 2023 revenues from those more attractive areas. Its stock trades at twice Barclays’s tangible book value. UBS has also given priority to wealth management.

Investment banking is particularly out of favor in Europe, where regulation is tighter and players don’t have the scale to replicate the Goldman model profitably. Between 2018 and 2021, Barclays had to fend off activist investor Edward Bramson, who wanted to take a chain saw to its investment bank. When fees exploded during the pandemic dealmaking and trading craze, investors dismissed them as volatile. They weren’t wrong: Trading income fell by a bigger-than-expected 24% in 2023.

Barclays’s home market, which accounts for 30% of its revenues, is another problem. Rocked by Brexit, Britain has underperformed other rich economies in recent years.

The company did say it wants the investment bank to make up about 50% of risk-weighted assets in 2026, from 58% today. It also promised to expand its wealth business faster, and better balance the group’s sources of income.

But Chief Executive Officer C. S. Venkatakrishnan still wants his investment bank to remain large enough to face U.S. competitors head-on. The division has been gaining market share in recent years. “We were the top U.K. investment bank in 2023. This is a title to which I feel we always must aspire," he told analysts during his strategy presentation Tuesday.

Excluding the negative one-off impact of cost-cutting measures, Barclays’s return on tangible equity would have been above the key 10% threshold again in 2023. That seems high enough to warrant buying the stock, given the size of the announced payouts. But for underlying profitability to matter, the “one-off" snafus, litigation costs, tax increases and charges must happen less often.

Not every bank can build its business around catering to the global rich. But if you want to be uncool and still succeed you really need to deliver.

Write to Jon Sindreu at jon.sindreu@wsj.com

 

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