Why Barclays’ Decision To Revamp Wealth Management Operations Makes Sense

by Trefis Team
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Late last week, the newly-appointed CEO of Barclays’ (NYSE:BCS) Wealth & Investment Management business, Peter Horrell, announced an overhaul which will see the business shrinking its global footprint considerably, to help cut costs and boost profitability. [1] Horrell plans to exit from as many as 130 countries over the next three years – focusing on 70 markets which account for almost 90% of the global wealth management industry. [2]

The decision marks a reversal in the British bank’s strategy to expand its wealth management presence over the recent years, but is an essential step in the wake of continuing weakness in its stronghold of Europe even as regulatory requirements threaten to cut long-term profitability across its operating divisions. Incidentally, competitor Credit Suisse (NYSE:CS) announced a similar strategy for its private wealth business around the same time, with the second largest Swiss bank looking to exit or scale down its presence in as many as 50 peripheral markets (see Credit Suisse Continues To Shake Up Private Banking Business).

We maintain an $18 price estimate for Barclays’ stock, which is slightly above its current market price.

See our full analysis for Barclays’ stock

One thing that becomes clear from the chart above, which summarizes our analysis of Barclays, is that the banking group’s wealth management business isn’t really adding a lot of value to the overall business model in its current form. The biggest reason for this is its low profitability in recent years. Although Barclays has put in considerable efforts to grow the size of assets managed by its wealth management business, this growth has come at the cost of declining fee revenues as well as steeply rising expense figures.

The cost factor has been a particularly painful one, as margins have largely remained around 10-11% since the economic downturn – with the figure not expected to be any better this year either. This is why the plan to focus only on key markets looks like the right way forward, at least over the next few years. Barclays employs about 8,000 people across its global wealth management – a figure that is likely to come down notably once the group exits locations where operations are either running losses or barely breaking even. Moreover, additional cost benefits will accrue in key markets from Barclays’ plans to segregate services to customers with less than £500,000 (~$800,000) under a new “Private Clients” business segment.

You can better understand the impact of improving margins on the bank’s total value by making changes to the chart below.

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  1. Barclays to retreat from 100 wealth markets, Financial Times, Sep 25 2013 []
  2. Barclays to shut wealth management services in 130 countries, Reuters, Sep 26 2013 []
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