By Neil Ainger
The tectonic plates in banking may finally be beginning to shift with the recent announcement that Antony Jenkins, who currently heads up the retail and business banking side of Barclays Bank, is to take over as the new chief executive officer (CEO). He succeeds Bob Diamond who was forced out in July after the bank’s US$452.5m fine over the Libor manipulation scandal and famously promoted the investment banking side of the business.
The appointment of Jenkins, who previously headed up the group’s Barclaycard card operation and is a career retail banker considered to be a ‘safe pair of hands’, reflects the renewed interest in steady and reliable returns from commercial banking and high street operations. It is seen as evidence of a desire to re-engage with lending to businesses and treasuries, all be it only for the highest rated and most stable corporations, and to pursue safe transactional banking.
His elevation to CEO of Barclays should mean a return to more sensible lending practices, access to credit for firms that can demonstrate they truly need it and have a pay-back plan, and a move away from a tight focus on investment banking and securitisation only. It won’t mean credit for every corporation, with smaller players still struggling to obtain funds as the economic situation worsens. In addition the appointment will certainly not herald a return to the unsustainable pre-crisis loan frenzy that dominated before 2007; but then nor should it.
Jenkins has already admitted that the bank’s culture has to be “modified” and that Barclays made “serious mistakes in recent years”. It is all rather different to the heady days of the mid-2000s when banks might offer good rates to treasurers seeking finance but only if it a loan could be securitised and sold on, with fat fees and profits along the way. This is an investment style of banking to which the outgoing Diamond became associated and for which Barclays is now paying a heavy price. Not only is it facing the fallout from the Libor scandal, which cost many corporations dear in terms of inflated rates, but the mis-selling of unsuitable complex derivatives to small businesses that didn’t require them has also severely damaged the bank’s reputation. There is also the new Serious Fraud Office (SFO) inquiry into improper disclosure of fees paid to those who brokered the investment from Qatar Holdings in 2008, which saved Barclays from having to accept a taxpayer-funded bailout. This is running alongside the existing SFO inquiry - and attendant Federal Bureau of Investigation (FBI) and US regulatory inquiries - into Libor manipulation involving Barclays and other banks.
“The fact that Barclays has made Jenkins its new chief exec is a very significant move,” said Rik Turner, senior analyst on the financial services technology team at the Ovum consultancy, in an interview with gtnews. “First, it is tacit recognition that Diamond, who came from Barclays Capital, may have led the bank in the wrong direction, fostering a culture that culminated in the Libor fixing scandal, even if he was not directly responsible for that activity. Second, it speaks to the broader perception in the market and the country that banks generally need to get ‘back to basics’ in the wake of the global financial crisis. It is no surprise the Jenkins has already told the press he is looking at trimming down the investment banking side of the house.”
Return on Equity Target Scaled Back
One of the first moves of the new man has been to scale back his predecessor’s insistence on 13% return on equity in favour of a more realistic 11.5% target, suggesting that the bank will take fewer risks in future. Again, this may imply stricter lending criteria but the culture change at the bank will surely mean the emphasis will be on much more focused on stringent checks on the investment banking side of the operation - not to mention its pay and staff numbers - as it is mainly this arm of the bank that has landed Barclays in such a sorry state in the first place. Technology budget may also be harder to come by under the new regime as it focuses on banking fundamentals.
Some industry experts have even speculated that Barclays may be broken in two, with the retail section hived off separately from the riskier ‘casino’ bank. Jenkins seemed to refute this in his initial pronouncements that he will continue to lead a “universal bank”. This goes against the advice of Andy Haldane, executive director of financial stability at the Bank of England (BoE), who argued in a recent speech to the Jackson Hole meeting of the world’s central bankers that it might be wise to “make a virtue of necessity” and split off investment banking arms from retail ones in the new post-crash world where costs and restraints on the former are only going to increase.
The new CEO will have to convince the present investment head, Rich Ricci, to support any such cultural or structural changes, or move him on with the support of the new chairman Sir David Walker. Walker recently replaced the departing Marcus Agius and is the only ‘outsider’ to have been parachuted into the new leadership team so far. Barclays Capital, or Barclays investment bank as we must now learn to call it, has £1.8 trillion in gross credit risk on its books at the moment, having used the interim since the 2008 banking crisis to take advantage of the low rates available from central banks and quantitative easing (QE) programmes to drive up profits. This amount is more than the UK’s gross domestic product (GDP) and may well still contain some junk left over from its takeover of parts of the defunct Lehman Brothers book. Defusing this potential bomb will not be easy as values fall in a second economic downturn and a behind the scenes power struggle could well ensue between the different arms of the bank.
Jenkins Rise to the Top
Despite his long association with Barclays - Jenkins started out as a graduate recruit at a South Kensington branch more than 30 years ago and only left for a brief intermission at Citigroup from 1999-2005 - the move up to CEO is still considered a significant break with the past. As Keith Bowman, equity analyst at Hargreaves Lansdown said to The Guardian: “The former head of Barclaycard appears untarnished by the LIBOR scandal, and given his group experience, provides something of a running start.” Walker provides the ‘new broom’ credentials from outside the old leadership team, but then Jenkins too was outside the old BarCap clique that came to run the bank.
Jenkins total pay packet is still very large at a potential £8.61m if certain targets are met, with £1.1m as his basic annual salary. However it is well below that of his predecessor; Diamond received £17m in pay, shares and perks last year, including £5.7m to cover his tax bill, and £20m of share options which were sacrificed upon his departure.
Internal wrangling aside, the real interest for corporate treasurers will be in the lending policies and strategies adopted by the new man at Barclays, especially in its corporate finance and business banking units. Will Jenkins revive a similar marketing exercise to the now defunct Project Merlin UK bank lending targets for businesses? Perhaps he’ll prefer to rely on the UK government’s funding for lending initiative, target Africa for trade finance, or adopt a slowly slowly approach to introducing change.
One thing is for sure and that is nothing is going to stay the same at Barclays Bank … or at least it shouldn’t if the bank wants to remain in charge of its own destiny with a critical government and public looking on. The tectonic plates may be moving in the world of banking but they could still spring back into place unless decisive action is taken quickly to change the culture and win back business and consumer friends. Come next summer, the success or otherwise of this overhaul at the top of Barclays should be apparent just as a new regulatory structure comes into place in the UK, replacing the out-going Financial Services Authority (FSA).