Barclays still has $600m of costs to cut, but maybe it needs to buy some M&A bankers
Barclays’ released its second quarter results today. They don’t look bad. Profits rose 27% on last year and the business is now generating a passable 9.6% return on equity, which is better than the 7.7% it generated in Q2 last year or the 5.6% it mustered in Q2 2022.
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As the chart below shows, though, not all areas of Barclays’ investment bank are thriving equally. Fixed income sales and trading revenues fell 3% year-on-year in Q2, compared to an increase of 16% and 17% respectively at Morgan Stanley and Goldman Sachs. This was partly the result of a one-off £100m gain from the inflation linked financing business in 2023, but was also because Barclays’ fixed income sales and trading business is skewed towards macro trading, which has been weak this year. CEO Sundararajan Venkatakrishnan wants to build up the stronger performing securitization business, but it hasn’t happened yet.
Venkat may also want to hire some new M&A bankers. M&A revenues at Barclays were up 6% year-on-year in the second quarter, which wasn’t bad in the context of Goldman Sachs (7%) or Bank of America (-3%) but looks insipid alongside the 184% increase at Deutsche Bank.
What’s the difference between Barclays and Deutsche Bank? While Barclays has been losing swathes of senior M&A bankers, Deutsche Bank has been hiring them. DB said in June that it had added 75 managing directors and directors in the past 18 months and 125 bankers in total. Barclays has also been hiring to replace the bankers it lost to UBS and elsewhere in 2023, but not all its new hires are sticking. – Douglas Melsheimer, a tech investment banking MD who only joined from Goldman last year, recently left for JPMorgan.
Given that Deutsche Bank seems to have swept up most of the market share vacated by Credit Suisse and that Barclays is falling down the league tables to the extent that it’s even lost its position at the top of UK M&A, Venkat may want to step up the bank’s M&A hiring. But this could be problematic.
Barclays as a whole still has $600m of costs to cut this year: it promised to cut $1bn but only removed $400m in the first half. It then wants to cut another $1bn by 2026.
At the same time, its targeting a cost income ratio in the investment bank of the “high 50s” in percentage terms by 2026, compared to 63% currently, and a return on equity of over 12% compared to Q2’s 9.6%. To the extent that costs are added, then, Barclays needs to be sure that there will be a short-term return.
Deutsche Bank’s experience seems that this kind of thing is possible, but Deutsche Bank also shopped for M&A bankers when they were at their cheapest last year. Barclays may find repeating the same feat more of a challenge.
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