Barclays New CEO Shake-Up: What to Expect

Antony Jenkins, the new chief executive of Barclays, is to announce a shake-up of the business early next year which will shrink investment banking division Barclays Capital (BarCap) and bankers’ paydays.

Antony Jenkins, chief executive officer of Barclays PLC.
Carl Court | AFP | Getty Images
Antony Jenkins, chief executive officer of Barclays PLC.

The appointment of the ex-head of the retail banking division of the scandal-hit bank to succeed Bob Diamond last week has sparked a review of all business lines and compensation across the board. (Read More: New Barclays CEO to Lead ‘Root and Branch Review’). Diamond’s departure came in the wake of a swathe of damaging stories about the bank, particularly its involvement in the manipulation of the London interbank offered rate (Libor).

Jenkins is now planning to announce a detailed, wide-ranging plan for the business early in 2013, with “every option on the table” a source at Barclays confirmed.

Any writedowns of underperforming units, such as European retail banking, are expected to be announced as part of the review, in an effort to kitchen-sink all the bad news and cast a more flattering light on future performance. Many of the negative headlines have been focused on activities at the investment bank, where profits have been under pressure - the divisions that have been consistently the most profitable for Barclays in the past few years are UK retail banking, BarclayCard, where Jenkins cut his teeth, and Barclays Wealth.

“There is no ‘easy way out’ for Barclays,” analysts at Credit Suisse warned this week as they cut the bank from “outperform” to “neutral.” The bank has not had the kind of post-credit crisis restructuring seen at state-backed banks like Royal Bank of Scotland (RBS). A shake-up on the scale of RBS’s, which has cost around 38 billion pounds ($60 billion) so far, is not expected. Barclays response will probably not be as aggressive because of the lack of state involvement and because the economy is now at a different stage of the cycle than when Stephen Hester became chief executive of RBS .

Neither are hefty headcount reductions on the scale seen at other investment banks, although some job losses are likely as underperforming business units are reduced. This is being described by some in the market as an effective unwinding of the purchase of some of Lehman Brothers’ assets, which were brought into BarCap after the collapse of the American bank. It would have been much more difficult to shrink BarCap under Diamond, who founded and built up the investment banking business. The bank’s major shareholders, who include Qatar Holding, are understood to be broadly supportive of the changes Jenkins is considering. (Read More:What Can Fix UK Banks' Reputations?)

A new head of retail banking is expected to be appointed from within the bank within a month. Jenkins is understood to have not yet determined whether chief operating officer Jerry del Missier, who was instrumental in setting up BarCap with Diamond, will be replaced.

There is also speculation in the market about whether Rich Ricci, one of the bank’s best-paid bankers as head of the investment bank and a key ally of Diamond and del Missier, will stay on at the bank.

Compensation is expected to be affected in most areas of the business, but the higher-earning bankers in BarCap will take more of a haircut. Each 1 percent reduction in the compensation to revenue ratio of the investment bank would boost earnings per share by 2 percent, according to estimates by Liberium Capital.

A spokesman for the bank declined to comment specifically on the potential changes, but pointed to Jenkins’ publicly stated commitment to the universal banking model.

“No-one should think there’s going to be mammoth change, he wants a strong investment bank,” the spokesman told CNBC.

Yet that part of the bank will be targeted in an effort to make it stronger. Return on equity (RoE) is the key measure of performance under new Basel III rules which will impose stricter guidelines on capital requirement. For the investment bank, it is expected to shrink to 6.6 percent this year from 8 percent in 2011, compared to a predicted 9.2 percent for the bank as a whole. One of Jenkins’ first actions was to abandon Diamond’s ambitious target of 13-15 percent RoE.

For Barclays to improve its RoE, one idea being examined is a movement of capital away from the investment bank towards parts of the business perceived as safer.

This could involve shrinking the amount of capital in BarCap by as much as 20 percent, according to Cormac Leech, banking analyst at Liberium Capital.

“If you moved capital into retail banking, you could get more in terms of returns and that would drive up the share price,” Leech told CNBC.

“The key question is how aggressive he will be in shrinking BarCap.”

He believes any major deviation from a 20 percent shift of capital from investment to retail banking would cause concern in the market.

Total revenues for Barclays Investment Bank are likely to fall from 13.3 billion pounds in 2010 to 5.7 billion pounds in 2014 as part of an “aggressive de-levering” of the investment bank, according to Credit Suisse – 38 percent below current estimates of 9.2 billion pounds.

While the investment bank attracts a lot of criticism, the retail side of the business is not immune from the disease of costly scandals. Controversy over the selling of unnecessary payment protection insurance to consumers has hit the retail bank.

Barclays has also been attacked over the mis-selling of interest rate swaps to small businesses, its use of tax schemes dubbed “highly abusive” by the U.K. government, and payments to Qatar as part of its 2008 capital raising. (Read More: Share Price Damage From Barclays Probe)

Written by Catherine Boyle, CNBC. Twitter: @catboyle01