Barclays CEO Wants to Raise Bank's Risk Profile

Bob Diamond has decided Barclays must increase its risk appetite amid internal expectations at the bank that a key measure of its profitability will fall or stay stagnant this year.

Barclay's Bank
Barclay's Bank

Barclays' new chief executive is considering increasing the bank's risk profile, in order to hit profitability targets over the next three years, according to people familiar with the bank's thinking.

Mr Diamond, who began in his job in January, has set a target of achieving a 13 percent return on equity by 2013.

However, last year's ROE of 7.2 percent is set to fall below 7 percent this year in spite of deep cost cuts, people close to Barclays said.

Analysts had been projecting a steady improvement in profitability for the bank. The bank is now undergoing a rethink about how much risk it should take on.

Barclays' "daily value at risk" metric, which models potential losses on its trading activities, has fallen by a half since the financial crisis.

"One of our challenges now is that not enough risk is being taken," said one person familiar with the new chief executive's thinking.

The view echoes that of Oswald Grübel, UBS chief executive, who said recently that he planned to increase the Swiss bank's risk appetite. Deals to acquire credit market assets worth up to $20 billion were possible, bankers said.

There could also be further credit card portfolio deals, similar to last month's £2 billion ($3.2 billion) acquisition of the Egg business, and a deal, announced on Monday, to buy £130 million ($209.5 million) of small business balances from MBNA.

It recently emerged that Barclays was looking at a $17 billion deal to acquire assets previously carved out of troubled US insurer AIG , although one person familiar with the portfolio said it was "extremely unlikely" that Barclays would proceed with that transaction.

Mr Diamond set new profit targets in February, as part of a broad strategic overhaul that identified a third of the group as insufficiently profitable.

Since then, however, the outlook for Barclays Capital, the group's main profit driver, has soured. Although performance in January and February had been satisfactory, March had been weaker, bankers said.

According to analysts, Mr Diamond's assumption that the bank would need a core tier one capital ratio - the key measure of financial strength - of only 9 percent was more benign than most rivals.

But Barclays is counting on being able to fund part of its capital requirements with new contingent convertible instruments, or cocos, which will not dilute ROE numbers. A coco was being prepared for the first half of the year, bankers said.