Can Jes Staley Fix Barclays Fast Enough?

James “Jes” Staley’s hiring as chief executive officer of Barclays Plc in 2015 came with a sense of déjà vu. Three years earlier, the U.K. establishment drummed out Bob Diamond, the American architect of Barclays’s investment bank who’d risen to CEO. Now another New Englander steeped in Wall Street risk-taking had come to London with a similar playbook focused on growing the bank’s securities unit.

More than two years later, Staley is racing to avoid the same fate as Diamond. First, the U.K.’s Financial Conduct Authority is considering whether he can keep his job after he tried to find out the identity of a whistleblower who raised concerns about one of his hires. Should Staley survive that threat, he faces a countdown to convince skeptics his bet on building a trans-Atlantic investment banking powerhouse will succeed, according to executives, board members, and shareholders interviewed for this article.

Staley has faced down calls to spin off or radically shrink the investment bank, arguing it serves as a valuable counterweight to the consumer and credit card businesses that may be vulnerable to any slowdown in the U.K. economy after Brexit. Barclays is the country’s second-biggest bank by assets, and investment banking was about half of its revenues in 2017.

“Expansion in investment banking won’t pay off because there’s too much excess capacity,” says Davide Serra, CEO of Algebris Investments, which owns about $500 million of Barclays debt and doesn’t hold equity in any U.K. banks. “Staley’s doing what he can, given the challenges, but the potential hit from Brexit and the difficulties faced by all European investment banks are beyond his control.” Strategy and the disruption of leaving the European Union aside, a list of distractions has prompted one of the bank’s largest investors to dub Barclays “the English patient”: legal issues on both sides of the Atlantic, dissenters on the board, and mixed messages from Chairman John McFarlane.

Staley’s newest challenge comes in the form of activist Edward Bramson, whose Sherborne Investors emerged this week as one of Barclays’s biggest shareholders. Bramson is keen to push for change at the bank, says a person familiar with his views who asked not to be identified.

The board will review progress at the investment banking unit during a meeting in New York in November, according to people familiar with its plans. If evidence of a path to sustainable profitability isn’t established by then, Staley’s strategy to boost risk and give more of the bank’s capital to traders will be questioned, the people say, asking not to be identified because they aren’t authorized to speak publicly.

It’s not only Staley who’s on the line. Before hiring him, McFarlane said he favored shrinking the investment bank, maintaining or increasing the dividend paid to investors, and buying more of Barclays’s profitable Africa business. Staley reversed all those positions. The moves left at least one large investor fuming at what he described as a betrayal of the expectations the chairman had set. McFarlane’s boldest goal was to double the share price in three years, but with just a few months until the July 10 deadline for that target, the stock is down about 16 percent. Staley and McFarlane declined to comment for this article.

Barclays and its long-suffering shareholders have been through big shifts in direction before. Diamond left after Barclays was fined for manipulating the London interbank offered rate, the benchmark used to set interest rates on loans. (Diamond wasn’t implicated in wrongdoing.) Antony Jenkins, his successor, was nicknamed “Saint Antony” for his focus on cleaning up the bank’s culture and reducing risk at the securities unit. Staley, by contrast, once seen as a potential heir to Jamie Dimon at JPMorgan Chase & Co., set about rebuilding an investment bank to compete with the best on Wall Street and to poach market share from European rivals in disarray. He and investment bank chief Tim Throsby pledged to reignite “commercial zeal,” telling employees to take more risk and “step up” for clients they’d been turning away during five years of retrenchment.

Leading the rebuilding effort are Staley and his inner circle—a quartet nicknamed “the Beatles” by some internally. Along with Staley, there’s Paul Compton, chief operating officer; C.S. “Venkat” Venkatakrishnan, chief risk officer; and Tushar Morzaria, finance director. All formerly worked at JPMorgan. So far, their results haven’t matched their rhetoric. In the fixed-income trading business, market share dropped to 6.2 percent last year in dollar terms, from 6.9 percent in 2016, data from Bloomberg Intelligence show. Under Bob Diamond in 2007, the business had more than 14 percent of the market, according to analysts at Citigroup Inc.

Barclays also lost ground in equities, an area Staley and Throsby have earmarked for investment, finishing in last place for the third straight year among the world’s largest trading houses. The declines came even after the company pumped an additional £40 billion ($56 billion) of assets into its trading portfolio last year.

Of greatest concern to investors is the investment bank division’s anemic profitability. It returned 1.1 percent on equity last year, a tenth the level at the U.K. retail unit and far below the 16.7 percent return generated by the bank’s international credit card business. Analysts at Goldman Sachs Group Inc. wrote in February that the securities unit may have trouble meeting targets, even if revenue rises 50 percent this year. “We continue to be skeptics of Barclays’s strategy, ” says Richard Smith, an analyst at KBW in London. “The pressure on management must be intense.”

The future of the investment bank has been high on the board’s agenda for years. Late last summer at Cliveden House, a sprawling Palladian mansion on the banks of the River Thames 30 miles from London, they discussed the feasibility and costs of spinning off the division after separating it financially from the retail bank’s operations, two people with knowledge of the meeting say. Heads of various bank functions have been asked to model what it would cost to split their support operations in two, a necessary precursor to such a transaction. So far, the discussions have been only theoretical, the people say, but absent material improvement by November, this could change.

On the board, divisions have widened over Staley’s plan to allot more capital to the trading businesses. At least two directors argue there’s been a structural decline in investment banking earnings because of new capital rules and tougher regulations, rather than just a cyclical slump, according to two people familiar with the board’s discussions.

Investors and board members also question if Barclays has the scale to compete after years of underinvestment. Two of those interviewed say it’s unlikely the company will be able to generate acceptable returns while mired in eighth position in terms of revenue in Bloomberg Intelligence’s global investment bank rankings. “It could take a prolonged period of time to turn around the struggling investment bank, rather than the quick two- to three-year plan outlined by management,” Citigroup analysts led by Andrew Coombs said in a March 13 report.

After a dismal 2017, this year looks somewhat better. Staley has spoken bullishly about the prospects for the markets desks during meetings, according to two of the bank’s largest investors. In an interview in Davos in January, he said a pickup in volatility this year “will be very positive for our trading business.” The bank’s shares got a boost after it said it would return the dividend to where it was, at 6.5 pence a share, before Staley cut it two years ago, and even held out the prospect of a share buyback in the future.

For some shareholders, including Sherborne, which invested £580 million for 5.2 percent of Barclays’s voting rights, the bank’s low valuation presented an opportunity. Sherborne’s Bramson has a record of targeting smaller British financial firms and seeking to influence strategy from within, often by seeking board representation. Sherborne sees an opportunity to double the stock price through a turnaround, says the person familiar with Bramson’s views.

Tiger Global, which bought $1 billion of Barclays stock in November, also sees the bank as a bargain—whether Staley and his team can fix the investment bank or not, according to people familiar with the firm’s reasoning. With the stock trading at about two-thirds of the book value of the company’s assets, they’re betting its valuation can improve. Others agree. “They will recover to book value,” says Alan Beaney, a director at RC Brown Investment Management, who’s held Barclays shares since 2012. “They generate a lot of cash, and at some stage their legacy legal issues will be sorted out. If Staley can grow market share in the investment bank, that’s a bonus on top, but we’re not counting on it.”

There are bright spots. Barclays is set to save about $1 billion in interest expense in the next year as it refinances expensive crisis-era debt—issued in 2008 when the bank was close to collapse—at today’s much lower rates. Also, President Donald Trump’s cut to corporate tax rates promises to increase earnings at the lender, which, after acquiring Lehman Brothers out of bankruptcy in 2008, makes about a third of its income in the U.S.

Still, pending legal issues could erode those benefits. Barclays is engaged in a legal battle with the U.S. Department of Justice, which is seeking a fine over the sale of toxic mortgage bonds. (In negotiations with the Justice Department, the bank sought to cap the penalty at $2 billion, Bloomberg News reported in 2016.) In the U.K., the Serious Fraud Office has charged the company over its fundraising from the Middle East at the height of the financial crisis; the company has said it intends to defend itself on the charges. Then there’s the probe into Staley’s whistleblower actions. “The problem with Barclays, as always, is that it’s mired in controversy,” Beaney says. “They seem to wander from one disaster into another.”

— With assistance by Hayley Warren