There was a time when investment banking was the one business everyone wanted to be in. Graduates flocked to the main banks. Every financial institution tried to recreate itself as a trading operation, complete with wheelers and dealers and lavish bonuses.
Not any more. This autumn, Swiss giant UBS announced it was dramatically scaling down the investment banking unit it spent billions creating over the last decade to concentrate instead on its Swiss retail bank and its wealth-management divisions.
They might not be the most exciting businesses in the world, but they were a lot better than a business that let traders such as Kweku Adoboli run up massive losses that even his bosses weren’t aware of. The result? A 20% rise in the UBS share price. The message was simple. When a big bank with a strong domestic franchise pulls back from investment banking, the share price goes up.
Shareholders have quite rightly been pointing that out to the new Barclays chief executive Antony Jenkins. Fund managers have been telling him to do a UBS – that is, sell off or wind down the massive Barclays Capital business built up by his predecessor, Bob Diamond, and focus instead on the more mundane British retail bank. Jenkins should listen.
True, Barclays Capital has had a great run. But the time to scale it down has arrived. And if Jenkins won’t, then the chancellor, George Osborne, should step in to break up the British banks into their retail and investment divisions.
Under Diamond, Barclays made a big success of its capital markets unit. It grew from practically nothing 15 years ago into one of the dozen biggest investment banks in the world. Most of that growth was organic – until recently there were few acquisitions. It was an impressive achievement.
With the acquisition of the remnants of Lehman Bros, it was making good progress towards being a major Wall Streetplayer as well – something no European institution has really achieved. Getting out now means giving up on a strategy that has worked well for a decade – and one that has made a lot of money for the company.
On top of that, Barclays Capital is a genuinely major competitor in one of the world’s biggest industries – and Britain doesn’t have too many of those. By contrast, Barclays retail division is just one of several British high-street banks. HSBC created a global retail business – but it has taken decades. It won’t be easy for Barclays to do the same. Despite that, this is still the time to retreat from investment banking. Here’s why.
First, the capital markets are in retreat. You can see that in job cuts, lower bonuses, the decline of mergers and acquisitions and initial public offerings, and the stagnant state of the markets. The banks were essentially manufacturers of debt and they grew when debt was growing. Now that we’ve reached the limits of debt (and in some sectors it’s even being paid down), they can’t grow anymore. That isn’t about to change any time soon. It may even accelerate.
Next, Britain’s relationship with the EU is under strain. A referendum on membership is inevitable and may result in Britain pulling out. A banking union is being formed of which Britain isn’t likely to be part. As that trend gathers pace, the City is unlikely to remain Europe’s key financial centre. But it is Barclays core market. This may turn out to be a tough decade for all City banks – which means you don’t want to own one of the biggest.
Finally, high-street banking is facing a challenging few years. Every other retail industry is being turned upside down by the internet. Financial services have largely been protected by a high wall of regulation. It is a difficult business to get into.
But over the medium-term, it is unlikely the high cost model of hundreds of branches processing small transactions can survive any more than any other high-street business can. Banking can surely be done more cheaply and effectively online – and it’s rarely the old firms that successfully make the transition from physical to online trading. Barclays will have to spend much of its energy over the next decade re-inventing its core business and ensuring that it survives.
Barclays’ strategy worked well for the last decade. Take secure and stable profits from high-street banking and use them to double or treble up in the capital markets. But it has run out of road. The profits in retail banking aren’t going to be nearly so easy to make as they were in the past. And it is not going to be possible to make returns on them in the capital markets.
UBS has had the courage to recognise that the billions spent building up its investment bank had been wasted. Shareholders have rewarded it for that decision – it is better to cut your losses than to keep repeating the same error.
Jenkins should do the same. Drifting and prevaricating are not good enough. And if he won’t? Osborne should force a split between retail and investment banking. Lloyds doesn’t do investment banking, HSBC does relatively little, and RBS has already pulled out of many of the markets. A decision to force a split would mainly be aimed at Barclays – and would be the right move to make if Jenkins won’t do it first.