Does Bramson’s Restructuring Plan For Barclays Make Sense?

Trefis deep-dives into the rationales behind Bramson’s proposal, and the potential impact on Barclays if it is successfully able to implement the proposed changes, parts of which are highlighted below. Our full numbers behind what Barclays could look like in 3 years if it adopts Bramson’s strategy is available in an interactive dashboard. Additionally, you can find more Trefis Financial Services company data here

Who is Edward Bramson, and what are the changes he proposes for Barclays?

• Activist investor Edward Bramson is the third-largest shareholder in Barclays (NYSE: BCS) (with a stake of 5.5%) through his investment vehicle, Sherborne Investors
• Barclays has been under pressure from Bramson over recent months to essentially shut down all of its securities trading operations – a move aimed at shrinking the British banking giant’s exposure to the capital-intensive trading business while also improving its overall RoE (return on equity) figure.
• Bramson opines that the trading operations lack scale, tie up too much capital, and deliver too small a return
• We believe that Bramson’s strategy makes sense – especially in light of Barclays weak securities trading run over recent years. The bank has also struggled to compete profitably with the U.S. investment banking giants.
• Notably, this has hurt returns for the bank’s investment banking division, with profits being driven primarily by its M&A advisory, and debt & equity underwriting units

Understanding Key Rationales Behind The Proposed Changes

1. Barclays’ Corporate & Investment Banking (CIB) division has margins that are identical to the figure for other divisions – hardly justifying the significant amount of capital it ties down

• Over the last few years, Barclays’ CIB division pre-tax margin averaged around 24% while pre-tax margin for Consumer, Cards & Payment division averaged a much higher 30%.

2. CIB’s Revenue Yield is roughly half that of its retail banking arm, Barclays UK:

• Despite the fact that Risk Weighted Assets allocated to the Barclays UK division are roughly 40% that for the CIB division, revenues for Barclays UK are nearly 75% that for CIB
• As of 2018, Barclays’ UK division revenue yield was 9.8% – almost 80% more than CIB’s revenue yield of 5.5%

3. CIB’s most profitable unit, Advisory & Underwriting Services, contributes less than 12% of total revenue while contribution of Securities Trading is more than 20%

• Another argument supporting Bramson’s approach is the fact that CIB’s most profitable unit, Advisory & Underwriting Services, contributes just around 12% of Barclays’ revenues
• On the other hand, the highly volatile and capital-intensive securities trading business contributed around 23% of total revenues in 2018.

To summarize, Barclays’ securities trading business is volatile, less profitable and lacks the scale required to compete profitably with its U.S.-based peers. As a result, Bramson’s approach to cut back on the investment banking activities has a lot of merit.

How Would The Changes Proposed By Bramson Impact Barclays’ Key Metrics Going Forward?

#1. The Bank Would Exit The Sales & Trading Business 

• Barclays’ securities trading revenues would shrink from £4.4 billion in 2018 to just £1.5 billion in 2020 before being completed phased out by 2021

#2. The Move Coupled With Associated Restructuring Costs Would Weigh On Barclays’ Top Line and Margins In The Near Term

• Barclays’ operating margin is likely to steeply decline to around 10.9% in 2019 due to one-time restructuring charges and elevated funding costs
• But an overall shift towards more stable revenue sources should help this metric reach 20.5% in 2021

#3. However, The Business Model Will Focus On A More Stable Revenue Source

• This radical measure is expected to reduce revenue contribution of Barclays’ Corporate & Investment Banking division to less than 30% in 2021 from 47% in 2018
• At the same time, the Retail Banking’s contribution is expected to jump to nearly 70% in 2021 from around 57% in 2018.

#4. And In The Long Run, Profitability Would Increase – Boosting The Return on Equity (RoE) Figure

• Reducing the higher-risk business should help the bank achieve better profitability in the long run, as the bank was unable to generate constant acceptable returns from its capital-intensive and highly leveraged trading business.
• Better profitability coupled with stable common equity should help the bank almost double its return on equity to around 6.3% by 2021

#5. At The Same Time, Reduction In Trading Assets Would Have A Direct Impact On Barclays’ Risk-Weighted Assets (RWAs)

• Since trading assets make up a significant portion of the RWAs, a reduction in the trading portfolio will lead to a steep decline in RWAs.
• We expect Barclays’ Risk-Weighted Assets to fall by more than 25% and reach around £230 billion in 2021

#6. This, In Turn, Should Help Barclays’ Core Capital Ratio Figure Nudge Higher

• Lower RWAs coupled with stable common equity should help the bank’s CET1 ratio grow and reach around 17.6% – a figure that is 30% higher than the 2018 level of 13.3%.

 #7. Finally, The Freed-Up Capital Would Be Used To Boost Dividends As Well As Share Repurchases

• In addition to reducing the RWAs, the plan would increase Barclays’ cash on hand considerably.
• As a result, Barclays will be able to return a bulk of its excess capital to shareholders in the form of dividends and share repurchases.
• We expect Barclays to return around £2.5 billion to shareholders in 2021- a figure which is more than 3 times the 2018 payout of £0.8 billion

 Conclusion:

• We believe that Bramson’s transformation plan, which includes reducing higher-risk businesses that were unable to deliver constant justifiable returns, could have an overall positive long-term impact on its profitability.
• If Barclays is able to implement the required changes successfully, it would be able to generate much higher returns for investors through a leaner business model.

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