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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer’s books include ‘The bank that lived a little: Barclays in the age of the very free market’
On February 20, Barclays’ chief executive C S Venkatakrishnan will be revealing the outcome of a strategic review. Such reviews are a rite of passage for Barclays CEOs. History provides the reasons for such self-examination, as well as clues for today’s management and regulators.
As has become usual for Barclays’ shareholders, the issue is an underperforming share price. This is generally blamed on Barclays’ investment bank arm, which absorbs a majority of risk-weighted assets, produces lower returns than the rest of the business and appears accident prone. Investors don’t like it.
Although the investment bank dates back to 1985, the current strategic bind stems from the great financial crisis. In September 2008, Barclays agreed to buy Lehman’s US equities and corporate finance business out of Chapter 11, completing the quarter-century-long dream of a seat at Wall Street’s top table. Staying there would be a stretch but with Bob Diamond running the investment bank, the anchor of a robust consumer bank and the backing of an ambitious board, investors briefly shed their doubts.
Not so the authorities. The following month, the British government was desperately shoring up the country’s banks through an infusion of state capital. Mistrustful of Barclays’ balance sheet and risk management capabilities, the government pressed it to join Lloyds and RBS in state ownership. That would have killed the investment banking strategy just when the board thought they had it fixed, so they refused.
The Bank of England and its regulatory arm, the Financial Services Authority, were furious. Sceptical of Barclays’ ability to survive, the FSA told Barclays it had until June 2009 to find £12bn to stay out of state hands and that this would have to include the sale of a business.
There was only one big, detachable sale candidate: Barclays’ investment management business, BGI. This once obscure corner of Barclays had been carefully nurtured into one of the world’s biggest fund managers, with over £1tn under management.
During the autumn and winter of 2008-9, Barclays inched its way towards the £12bn capital target, raising money from the Middle East, suspending the dividend and shedding risk-weighted assets. But the regulators pressed it to do more and in June 2009, Barclays agreed to sell BGI for £4bn cash and a 20 per cent interest in the acquirer, BlackRock.
Even though BGI was cash generative and used little capital, there was a modest improvement in Barclays’ capital ratios and regulators were delighted. But investors disagreed, worried that the sale left Barclays over dependent on the investment bank.
Barclays had sold its crown jewels and to make matters worse, in 2012, again in part to meet regulators’ new capital rules, the bank sold its BlackRock stake, also for £4bn.
Over the ensuing years, on the back of its new status as a broadly-based fund manager, BlackRock’s shares soared while Barclays, hampered by a perceived over-dependence on investment banking, flatlined. The arithmetic of this divergence is stark. BlackRock’s current market value is $118bn and Barclays’ interest in BGI would therefore have been worth $24bn if it still owned it. This is only slightly less than Barclays’ total market value of $28bn.
These decisions, though taken under extreme circumstances, were strategically questionable and commercially disastrous. They leave Barclays in its current dilemma, over dependent on capital-intensive investment banking, short of stable, cash-producing businesses and with the shares sitting at less than half of book value.
What would shareholders give to reverse these decisions? That is one question that can’t be answered next week, but “be careful what you wish for” is a message that board and regulators can take away from the events that led Barclays to its current predicament.
