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Categorized | Banks, Financial

Jes Staley’s contrarian bet on investment banking at Barclays

Posted on November 29, 2016

“Better to be a lucky chief executive than a good one.” This is how one top 10 shareholder in Barclays sums up the performance of Jes Staley almost exactly a year since the 59-year-old American took over as the bank’s chief executive.

Mr Staley himself admits that he has taken a contrarian bet by “doubling down” on the future of Barclays’ investment bank at the expense of selling its large African operations and cutting the dividend in half — both unpopular decisions with some investors.

Yet, for now, this gamble seems to be paying off for the Massachusetts-born former JPMorgan Chase executive. Barclays shares have outperformed most European rivals in recent months, rising two-thirds from the seven-year low they hit immediately following the UK’s vote in June to leave the EU.

“If you can be contrarian with a strategy and get lucky or be right it gives you a lot of wind behind your sails,” Mr Staley told the FT Banking Summit earlier this month. “To a certain extent, the doubling down and committing Barclays to being a tier one investment bank was that contrarian move.”

Close allies of the Barclays boss say he has been helped by “exogenous events”, including a recent rebound in trading of bonds and loans, a key engine of its investment bank. Another share price boost came from the election of Donald Trump as US president, which many analysts expect to benefit banks by producing lower taxes and higher interest rates.

“Externalities have started moving in our favour,” says Sir Gerry Grimstone, the City grandee who became deputy chairman of Barclays shortly after Mr Staley took over. “The steepening of the yield curve, Brexit and the election of Trump — these are all positive for Barclays.”

“The City won’t benefit from Brexit, but New York is likely to be stronger, so our US operations give us a natural hedge against Brexit,” he adds. “We are moving into a position where we are the only significant investment bank left in Europe.”

The contrast with Mr Staley’s predecessor Antony Jenkins is striking. While Mr Jenkins declared in an FT interview two years ago that “the universal banking model is dead” — suggesting a split between retail and investment banking was on the cards — Mr Staley has been far more supportive.

“The single biggest thing I would say he has brought is leadership,” says Sir Gerry. “I was amazed when I came … we had some excellent people but the top table had become almost completely dysfunctional. There was a complete lack of direction as to where the investment bank was going. The empire was in bad shape.”

In strengthening the top management, Mr Staley has hired so many former colleagues from JPMorgan — including his new heads of risk, operations and investment banking — that his former boss Jamie Dimon called Barclays chairman, John McFarlane, to say the poaching had to stop.

Another area where observers give him credit is addressing Barclays’ weak capital position. The bank’s common equity tier one ratio — a key measure of balance sheet strength — has only inched up slightly since he took over to 11.6 per cent and it is still below its 12.5 per cent target.

Yet Mr Staley has promised that by selling most of its majority stake in its South Africa-listed subsidiary, cutting the dividend and accelerating the run down of its noncore unit of toxic and underperforming assets it will add another full percentage point to its capital ratio.

A second top 10 shareholder praises Mr Staley for pushing through the strategy despite the resistance of Mr McFarlane, who ran the bank himself for a period last year. “That was a big and I’m not sure an easy win,” says the shareholder.

Chirantan Barua, banks analyst at Bernstein, says: “I think he did a brilliant job of understanding that capital is the crucial issue at Barclays.”

He adds: “Yes, he has been lucky. But not shrinking the investment bank further was the right thing to do anyway. I have always thought you cannot shrink to glory in investment banking.”

With the Bank of England set to announce its annual stress test results on Wednesday, Mr Barua says he is “still nervous” about Barclays because it “has the lowest capital of the UK banks and the highest macro risk”.

The main risk he identifies is that Brexit could trigger a sharp UK economic slowdown that causes a jump in defaults at its Barclaycard credit card unit. He adds that many of the potential benefits of a Trump presidency are already priced into the bank’s shares, “so the risk is if there is any disappointment on that”.

Mr Staley is convinced that the strong position Barclays gained in the US market from buying Lehman Brothers after its 2008 collapse and the woes of many European rivals, such as Deutsche Bank and Credit Suisse, are already strengthening the UK bank’s position.

“The economics of the broker-dealer function of investment banking are getting better every day,” he said at this month’s FT conference. “Go to any main bond fund and sit down with their main debt trader … and they will all say bond spreads are far wider, bond prices are gapping more, the market is more illiquid, I need to pay more to my broker-dealer to get a trade done than I did two years ago — and that is revenue to us.”

Some investors still worry that Mr Staley’s bet on investment banking — where returns still lag behind its cost of capital — at the expense of Africa’s growth potential may be too short term and could backfire, especially if costs start to slip out of control. For instance, having cut back operations in Asia recently, the bank is now hiring again in the region and loosening a hiring freeze to do so.

“We’ve been told in the past that Africa is an important growth engine and long-term bet,” says the second top 10 shareholder. “It might be the right thing to do now but will it be the right thing in 10 years?”

The recent rally in Barclays shares has taken them within 10 per cent of the 233p per share average price at which Mr Staley invested £6.5m as he prepared to join the bank last year. But the weaker pound means that in US dollar terms — what matters more to Mr Staley — he is still about $2.7m out of pocket. Both he and his investors will be hoping his luck continues to hold.

Further reading

● Analysis: Europe’s investment banks: down, but not yet out
● Lex: Barclays’ margin for error
● City Insider: An uneasy truce