* Shareholders want high single-digit returns by end-2018
* Structure of Barclays International causes concern
* Costs, misconduct continue to weigh on investment bank
LONDON, March 14 (Reuters) - From BZW to BarCap, Barclays bosses have spent more than three decades trying to make the British bank a profitable investment banking force, often frustrating its investors.
Now Barclays Chief Executive Jes Staley is being given one more year to deliver on a promise to turn its investment bank into a profit engine able to weather downturns or face demands for a review of the business, shareholders told Reuters.
Staley, feted for his achievements at U.S. powerhouse JPMorgan, pledged to revive Barclays' tired investment banking franchise as soon as he joined the bank in 2015, ending years of under-investment in the wake of the financial crisis.
A slew of ex-JPMorgan high-fliers including rainmaker Tim Throsby and 40 newly-recruited managing directors, have since joined to help revitalise a business that in 2007 delivered 2.3 billion pounds, almost a third of the group's, pre-tax profits.
But returns from investment banking continue to underwhelm, despite a recent turnaround in market conditions, leading some shareholders to set Staley a deadline for an improvement.
"Assuming market conditions remain favourable, then we would really be looking to see high single digit returns on equity for this business by the next year-end, or questions will need to be answered," Steve Davies, manager of the Jupiter UK Growth Fund, and a top 40 Barclays investor, told Reuters.
EARN A RETURN
Barclays, which declined to comment on its investment bank, cheered investors last month by restoring its dividend, wrapping up a restructuring programme involving the disposal of billions of pounds in unwanted assets.
However, investors now want to see if Barclays' beefed-up investment bank can make a sustainable, cost effective and growing contribution to future dividends.
Barclays International - which comprises the Consumer, Cards and Payments business and the corporate and investment (CIB) bank - delivered a return on tangible equity (ROTE) of 3.4 percent in 2017, or 6.6 percent excluding the impact of U.S. tax reforms.
But a fourth quarter ROTE of minus 20.2 percent at the CIB highlights the scale of Staley's challenge, with two key factors - regulation and market conditions - largely out of his control.
Regulations aimed at protecting retail banks from riskier investment banking activities have forced Barclays to tie its high-earning payments and credit cards business to its investment bank on a separate balance sheet.
A former senior Barclays executive who still holds its stock, told Reuters he worried about capital allocation between the businesses and questioned whether the bank should own an investment bank at all.
"The whole unit is neither fish nor fowl and the reality is they are no longer the best owner of that (investment banking) business," the source said.
A third investor, who declined to be named, also flagged concerns about how regulation could undermine efforts by Barclays management to win market share.
"Regulatory reform in the U.S. could make life even tougher as U.S peers are able to deploy more balance sheet into the IB business as leverage restrictions are eased somewhat."
CHEAP BUT RISKY?
Although CIB's pre-tax profit in 2017 fell 22 percent to 2.06 billion pounds, Barclays says a bounce in trading revenues and market share in its Banking and M&A franchises so far this year are cause for optimism.
It also said it would redeploy capital from its corporate loans book to higher-returning opportunities within its investment bank, in a bid to improve its overall profitability.
"Does investment banking perform a useful function? I think in the round it does. It acts as the intermediary between providers and consumers of capital. If that assertion is correct then it should be able to earn a return," said Rob James of Old Mutual Global Investors, another top 40 Barclays shareholder.
Barclays also cut an additional 2.4 billion pounds of risk weighted assets from the CIB in the final quarter of 2017 as part of a plan to relieve the drag on its share price, which is trading around 8 percent down on last year.
But investors have been dismayed at the unit's stubbornly high costs, which jumped 4 percent to 2.4 billion pounds over the final quarter, compounding an 11 percent fall in income.
"Fundamentally, the CIB remains a lower return on equity business relative to Barclays UK and the Consumer, Cards & Payments piece," a fifth shareholder said.
"Barclays can get the right people and systems in place, but if clients aren't trading there is little management can do."
Others are even less optimistic, pointing to a large outstanding settlement for the misselling of mortgage-backed securities before the 2007 crisis and regulatory scrutiny of Staley's role in the attempted exposure of a whistleblower.
"(Barclays) shares are cheap, but that reflects the risk carried by the investment bank and the past misconduct and litigation issues that refuse to go away," said Paul Mumford, fund manager at Cavendish Asset Management. (Reporting by Sinead Cruise, additional reporting by Lawrence White, editing by Alexander Smith)