The extensive round of top management changes at Barclays (NYSE:BCS) is set to be followed up with the remodeling of the bank’s investment banking business.  The largest British bank has been in turbulent waters since it was found guilty this June of manipulating the LIBOR during the 2008 economic downturn. Barclays was fined a record $451 million by regulators, and the stigma attached to the scandal forced the bank’s CEO, COO and chairman to resign in quick succession. While it is in damage control mode, the new management clearly aims at appeasing investors and customers through the proposed plans. The plan would also ease the pressure on Barclays as the British government and regulators have been pushing it to trim down its risky investment banking business in recent times.
We maintain a $15 price estimate for Barclays stock, in-line with the current market price.
The changes proposed and their impact on Barclays’ share value are as follows:
- Debt & Equities Trading Units To Be Merged: The fixed-income, currencies & commodities (FICC) and equities trading and distribution teams that are currently managed separately will be combined under a single business. This should allow Barclays to eliminate various back-end jobs (admin and other support functions) while cutting down on the distribution staff. Moreover, the consolidated distribution staff would likely be responsible for more products as part of the combined unit, thereby improving efficiency by promoting cross-selling. We believe that reduced costs and improved efficiency from this proposal will help Barclays improve its investment banking margins over the coming years.
- Certain Products & Services To Be Discontinued After Review: The investment banking business currently offers various products and services which vary greatly in their risk-return profiles. The new management team is currently reviewing these products and services and will soon arrive at a decision over the products to be discontinued and the products to be shrunk, irrespective of their past returns. The focus on reducing risk will clearly result in slower growth in debt and equity products in the years to come. On the upside though, this move will help reduce income volatility to a great extent.
- Barclays Combines Securities Businesses in Overhaul, Bloomberg, Oct 4 2012 [↩]