Recalling a decade of chaos at Barclays' investment bank
Barclays is hiring again! Headhunters of the world may want to give Tim Throsby, the new(ish) head of its investment bank a call. As we were first to report yesterday, Throsby has now taken personal control of Barclays' investment bank. He's already hired in BAML's head of rates sales in London and a Goldman FX MD in New York, and reportedly wants to hire 50 to 100 people more.
Barclays likes to point to the steadiness of revenues in its fixed income trading business. This may be true, but the strategy in its investment bank is anything but. In the past decade, Barclays' investment bank has been on a roller coaster of expansion and retraction, as evinced by the history below. All banks go through big changes, but Barclays' has been through more than most. With luck, Throsby's new growth plan won't just be another phase in the cycle.
April 2008: Growth!
Back in 2008, when the financial crisis was still in its relative infancy, then-Barclays CEO Bob Diamond stood up and made a presentation at the 2008 Morgan Stanley European Banks Conference. In those days, Barclays as a whole was generating a 20% return on equity (ROE) and Bob said the investment bank was contributing a lot of this. Business was booming. Barclay's FX sales and trading revenues grew 60% in 2007. Rates revenues grew 70%. Bob said that Barclays was very well positioned for the future and that the bank planned to 'scale up' in commodities, which was benefiting from "a compound annual growth rate in excess of 75%".
September 2008: Crisis, but Barclays' is still fine. Massive hiring in equities
Four months later, the financial crisis was on. Barclays acquired Lehman on September 16th 2008. Eight days earlier, Bob Diamond made a presentation at the Lehman Brothers financial conference. There, he declared that markets were more challenging than they'd been for 25 years, but that Barclays Capital was doing ok: it was winning market share, it was still profitable. There was a "flight to quality across the industry," said Bob, implying that this flight was to Barclays. Clients were "showing their appreciation" and giving Barclays more business, he added. Diamond concluded that: "Markets will continue to be challenging but we believe our model, combined with our focus on driving performance, place us in a strong position to take advantage of opportunities."
It was around this time that Barclays began some massive hiring for its equities business in Europe and Asia. Acquiring Lehman gave Barclays a fully-formed equities business in the U.S. and between autumn 2008 and March 2009 Barclays supplemented this with 210 front office equities staff in London, continental Europe and Japan, and another 250 to support them.
March 2009: Growth! (Thanks to Lehman). Continued huge hiring in equities
By March 2009, Barclays had had six months to digest Lehman Brothers. It was all going well, said Bob Diamond at the Morgan Stanley Financial Services Conference that month. "We believe the new competitive environment and our integration with Lehman will offer us opportunities to grow revenue and return through winning market share, adding new capabilities, and bringing these to an even larger client base," declared Diamond. Growth opportunities for Barclays in FX and commodities were "tremendous," he said. Barclays was, "building the U.S. business" and "expanding the global Barclays Capital franchise."
As 2009 progressed, Barclays made around another 300 hires in equities in Europe and Asia.
June 2009: Growing in Asia!
Three months later, Barclays Capital was still going for growth, with an emphasis on international domination. With established businesses in the U.S. and the UK, this meant conquering the rest of Europe and Asia. At the Barclays investor seminar New York, Bob Diamond and Jerry Del Missier, its former chief operating officer, said the bank wanted to be a top three performer in all its business lines. This would mean investing across fixed income, currencies and commodities in Asia Pacific, along with equities and origination and advisory banking.
Del Missier said Barclays planned to create, "top tier equities and M&A businesses in Europe and Asia over the next three years." In Asia, the bank would focus on Japan initially, said Del Missier, "then building out selectively market by market in a way that's aligned with the opportunities." Barclays had already hired 600 people in Europe and Asia since the end of 2008, he added.
March 2010: Invincibility and growth in Asia
Nine months on, Bob Diamond stood up at the Morgan Stanley Financial Conference and said Barclays Capital was capable of growing and generating profits no matter what. "There’s been a consistent pattern of operating through almost any cycle, of interest rates, credit spreads, volatility, M&A activity, equity markets, inflation. It pretty much doesn’t matter," crowed Bob. "We can execute through the cycle and through various market conditions and I think one of the things that’s highlighted here is there has never been a reporting period with a loss for Barclays Capital."
Such was the strength of Barclays Capital, that Diamond said it could generate returns of 15%-20% across the cycle. This was nothing to do with prop trading, he insisted: "This business has been built on an incredibly powerful client franchise."
Hiring was still happening in Asia. "We’re 80% to 85% done in Europe and over 50% done in Asia," Bob said.
September 2010: Becoming a preeminent global investment bank
In September 2010, Bob Diamond appeared at the Barclays Capital investment banking conference and said Barclays' mission was, “to be the premier global investment bank.” Barclays wanted to be the top three in each of the areas in which it operated, reiterated Diamond. However, there was also some creeping talk on cost cutting, leverage reduction and capital optimization. "Since 2007, our core tier one capital ratio has strengthened from 4.7% to 10%. And our adjusted gross leverage has been reduced from the low 30s to 20x," said Bob.
June 2011: Continued growth in Asia
At the June 2011, investor seminar Rich Ricci and Jerry Del Missier cut Bob Diamond's 15%-20% ROE target to a mere 15% on a Basel 3 basis. Barclays was using its existing capabilities to drive revenues while optimizing costs, said Richi and Del Missier. Asia was still it.
November 2011: Cost cutting everywhere
By late 2011, the cost cutting mantra was gaining ground. Rich Ricci came to the UBS Financial Services Conference and said Barclays was, "eliminating duplication and integrating management, support functions and infrastructure wherever possible." It was also moving to lower cost locations and cutting risk weighted assets dramatically. Structured credit exposures were down 60% since 2009.
Revenues were falling, but Ricci insisted Barclays wasn't doing too badly. "Our performance in the third quarter was resilient relative to peers, and there are several clear signs that our franchise is strong and healthy," he said. " The 15% year-on year decline in third-quarter revenues we saw in Barclays Capital was less than half the decline of our peers, who saw an average decrease of 39%. And our quarter on quarter decline of 22% was again half that of our peers, who declined 40% on average."
In Asia, Ricci said things were still bubbling merrily along. "We’ve nearly completed our Asia Pacific build-out, with India and Taiwan live as at the end of August, and Korea on track to go live in Q1 next year."
March 2012: Unreasonable bullishness
In March 2012, Bob Diamond was at the Morgan Stanley European financial services conference. Net income at Barclays' investment bank had fallen 20% the previous year, but you would never have known. Bob extolled Barclays' achievements: it was top three in M&A in the UK and the US, the equities business was involved in each of the top five IPOs globally (including the top IPOs in Japan and India), the fixed income unit was number one globally, with a market share of 11%. Etc. etc.
Incongruously, Diamond also introduced the sudden notion of "citizenship," with whole slides devoted to this. "We’re committed, quite simply, because our ability to be good citizens is critical to creating long term value for shareholders. This is not philanthropy - it’s about delivering real commercial benefits in a way that also creates value for society," he said.
September 2012: Bob's gone, Project Mango is on
Diamond left Barclays on July 3rd 2012. In September, Rich Ricci, his successor as head of the investment bank stood up and made his 'Project Mango' presentation at Barclays' Global Financial Services Conference. Ricci was characteristically bullish.
Barclays' investment bank had historically “outperformed”, said Ricci. It had been driven by a “force of incremental improvement”. Fifteen years ago BarCap was a mere sterling house, now it was a, “premier full-service global firm.” The fixed income business was, “one of the best flow platforms in the industry, built to last, over many years of relentless client focus.”
Asia was still important. “Only the strongest global franchises will be able to provide a consistent core offering in all three geographic regions,” said Ricci. “And Barclays is among a handful of organisations in that group.”
There was also a little tiny bit about cutting costs.
November 2013: Pulling back from fixed income trading
Rich Ricci was retired from Barclays in April 2013. In November 2013, Eric Bommensath, a French fixed income trader, and then co-chief executive of the investment bank, came to the Nomura financial services conference. Ricci's portrait of a resilient investment bank was replaced by a tale of cost cutting and retrenchment. There was the first mention of capital-intensive "exit quadrant" businesses which Barclays intended to extricate itself from altogether. Bommensath also pointed to the removal of 750 front office jobs from the investment bank earlier that year, along with the concept of 'efficiency through automation and simplification.' But Barclays' investment bank was still in a position of strength, Bommensath insisted.
February 2014: Small cuts by 'automating processes'
By 2014, Bommensath was gone. Retail banker Antony Jenkins had been made CEO in 2012 and Jenkins was starting to find his feet. In Barclays' annual report they said the bank planned to make £350m of annual cost savings by 2015 by automating processes. Barclays increased its investment banking headcount by 600 in 2013 and Jenkins promised to put an end to costly hires: no more managing directors or directors would be recruited in 2014.
May 2014: Huge layoffs, pulling back from Asia and continental Europe
A May 2014 presentation by Jenkins marked the sorry end to the policy of non-invasive cost-cutting. Jenkins said Barclays would be cutting 7,000 people from its investment bank (28% of its total staff). Henceforth, Barclays would be focused on the UK and the U.S. Asia would be pared back, as would the continental European businesses Barclays had built only a few years before. Capital intensive areas of the fixed income business would be closed.
"The investment bank consumes too much capital," said Jenkins. "It doesn't generate returns for shareholders and is too large as a percentage of the group. It's an unacceptable drag on returns for clients...Currently the investment banking is too exposed to volatility in FICC and the group is too exposed to volatility in the investment bank."
Physical commodities, once a big growth area at Barclays were exited. Jenkins said the bank would focus on products which could drive strong returns. These were: credit and equities, short dated G10 rates, spot FX, swaps and derivatives. Emerging markets, another former favourite were shunted into the 'exit quadrant', now renamed as the 'non-core investment bank'.
In future, Jenkins said Barclays' investment bank would be structured as per the slide below. There would be a far greater emphasis on 'advisory bankers', careful cost control and a big push to increase returns by reducing costs. The ROE target was cut 12%+.
March 2016: Jes Staley's strategy for a transatlantic investment bank focused on investment banking and sales and trading
The next big change came in March last year when Jes Staley, the CEO who replaced Jenkins in December 2015 announced his own strategy for Barclays. We've summarized Staley's strategy here, but fundamentally it amounted to a renewed emphasis on the investment bank as a transatlantic entity and to an insistence that the advisory businesses (M&A, ECM and DCM) should not take precedence over sales and trading.
Staley imposed an "indefinite hiring freeze" shortly after his arrival. However, as 2016 continued, he started hiring-in big names from J.P. Morgan, most notably Tim Throsby, an equities man credited with building up the U.S. bank's equities sales and trading business.
2017: Throsby takes control, hits the hiring button
Tim Throsby was made CEO of Barclays' investment bank in January 2017. In May 2017, Throsby took personal control of Barclays' under-performing U.S. markets business and announced up to 100 new hires. Barclays is going for growth again. Long may it last.