How many directors with banking backgrounds does it take to change a lightbulb?
Thoughts on Barclays’ upcoming annual meeting
Barclays’ May 2 annual meeting is almost upon us. It’ll be fascinating to see whether the Q1 results will have pushed shareholders in the direction of Edward Bramson’s anti-CIB strategy. While the activist doesn’t seem to have garnered much public support, Barclays shareholders will certainly be on his side in pushing for better returns.
Q1 numbers for the corporate and investment bank didn’t make for easy reading: pre-tax profits down 30%, total income down 11%, equities income down 21%, banking fees down 17%, corporate income down 13%. CIB consumed 55% of group average tangible equity, on which it generated a 9.3% return. The RoTE of Barclays UK, by contrast, was 16.3% while the consumer, cards and payments business returned 15.4%.
So is CEO Jes Staley right to be doubling down on the investment bank? Is Bramson right in clamouring for the opposite? Who knows? Neither answer will be forthcoming on May 2; it’s a matter of time. The question is: whose side is time on? Staley is reported to be in the process of hacking back investment banking bonuses in order to cut costs. That won’t placate Bramson, who reminded us recently that he has almost GBP1 billion at risk in Barclays – funded, so the FT writes, by a loan/equity derivative combo from Bank of America. (Bet that went down well at Barclays HQ).
Another thing appears clear: Bramson’s clear bewilderment (should that be clearly feigned bewilderment?) at not being greeted with open arms by the Barclays board and straight into a directorship won’t be tamed on May 2. Especially since incoming chairman Nigel Higgins has endorsed the current strategy, and will add directors with banking and/or advisory backgrounds to the board.
A public showdown at the AGM between Staley/the board and Bramson likely won’t play out. That’ll be a shame, since the scene had neatly been set up by Bramson’s April 15 rebuttal of Barclays’ April 11 rebuttal of Bramson’s April 8 letter to Barclays shareholders. (Bramson using that tittle-tattle about what ousted CIB chief Tim Throsby may or may not have told the bank about CIB’s irreconcilable goals and financial returns promised to shareholders lowered the tone slightly. But then again, the tone of the interaction isn’t that high to start with).
For what it’s worth, here’s the potted summary. In the RED corner: Edward Bramson and Sherborne. Their story goes something like this:
· After several years, the board's strategy has not produced positive shareholder returns. Underperformance is down to prolonged pursuit of a strategy that is not grounded in the fundamental realities of the global CIB marketplace. The board has offered no credible reason to believe that persisting with it will produce better results for shareholders.
· Continuation on the existing course represents a threat that more new capital will be needed to underpin CIB activities. Any new capital invested in the CIB will cause immediate destruction of shareholder value.
· A judicious rebalancing of the CIB strategy could reduce the need for new external capital and result in a sustainable and competitive business at much lower risk and cost to shareholders.
· Barclays PLC is in a weak capital position relative to that of its operating units. The risk to shareholders from parent company gearing is magnified by low CIB returns, which absorb the majority of group capital.
· The parent company’s senior unsecured rating is the weakest among global peers and represents an increasingly imminent risk to shareholders. A reduction would leave Barclays with a non-investment grade rating from Moody's, which would hinder its global competitiveness. A downgrade is a very likely catalyst for new capital on punitive terms to shareholders.
· CIB assets have increased by approx. 60% in an effort to generate incremental revenue and use the additional trading activity to bring in other types of business. The strategy has failed to generate any additional revenue or broaden the CIB's more strategically-desirable corporate customer base.
· Barclays' CIB assets are concentrated in products purchased by buy-side customers such as hedge funds and private equity firms, where business can be won more quickly and easily through price reductions or loosening of credit standards. And it produces lower revenue yields.
In the BLUE corner, Barclays, whose lengthy rebuttal on April 11 was twice as long as Sherborne’s April 8 letter and had a distinct personal tilt at Bramson:
· Barclays doesn’t need another strategic overhaul. Bramson doesn’t have requisite banking experience and would be a disruptive and un-collaborative influence. His alternative strategy is unclear and based on multiple factual errors.
· He has a poor understanding of Barclays and its CIB. His analysis is simplistic; he misunderstands the drivers of the business; his analysis is based on a flawed understanding of complex banking organisations and reaches conclusions inconsistent with the data.
· He is not independent and cannot be an objective shareholder representative. He has refused offers to engage with senior management. His suggestion of a “judicious rebalancing of the CIB strategy” is vague but he refuses to explain it.
· Sherborne is selective and misleading in describing Barclays’ CIB positioning, misrepresents the company’s balance sheet risk and recent performance, misunderstands the drivers of the company’s valuation and is selective and misleading in describing Barclays’ CIB positioning.
· Sherborne is a leveraged investor seeking enhanced returns by disrupting the deliberations of the board in favour of its specific interest. Its time-limited derivative position limits its exposure to falls in Barclays share price and narrows its investment horizon to a near-term bias, fundamentally misaligning his interests with those of directors and other shareholders.
Actually, I’m veering towards the latter, since in this case, the back-and-forth between the two camps is just more and more of the same. And it’s getting old. Really old. The narrative is unconstructive, the positions entrenched. I almost wish they would take their discussion off-line. That seems unlikely. More after the AGM.
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27 Apr 2019