JOHN VARLEY, the departing chief executive of Barclays, says his priority when he took over in 2004 was to end the British bank’s dependence on its stodgy home market. Along with dodging a bail-out in 2008, internationalising the firm ranks as his biggest achievement—today about two-thirds of its activity is abroad. But another kind of dependence has taken its place. The firm’s investment bank, Barclays Capital, which barely existed a decade ago and which hit the big league after buying the rump of Lehman Brothers’ American business, now contributes most of pre-tax profit (see chart).
BarCap’s reverse takeover of Barclays seems to have been confirmed by the appointment this week of Bob Diamond, its long-standing boss, as Mr Varley’s successor (pictured centre and left, respectively). For some the personnel change, which will take effect in March, is a metaphor for the firm: a talented American with dazzling teeth and a whiff of a personality cult takes over from the posh, self-deprecating Brit with a first from Oxford and a taste for fishing. Those worried about “casino banking” claim Mr Diamond’s arrival is a provocation, particularly since a government-appointed commission is due to examine whether to split up big banks.
A few stock market analysts even reckon it is in shareholders’ interests that Barclays be broken up. An over-reliance on risky profits has depressed the shares, they say, and in any case the firm has evolved into a series of separately run silos. Splitting off the investment bank—even relocating it to New York—would let it grow unencumbered by parochial British politicians. The rest of the firm, which includes retail and corporate banking in Britain, Europe and Africa, a semi-detached South African business, ABSA, and a smallish wealth-management business, could plod along on its own, or even be split up too.
Mr Diamond, who is relocating back to London from New York, where he moved after the Lehman deal, rejects such hysterical talk. “There is no space between John and I and the board on strategy,” he says. Both he and Mr Varley argue that the change in business mix reflects the firm’s opportunism and is partly temporary. In 2007 it tried to buy ABN AMRO, which would have made it one of the world’s largest universal banks. In one of finance’s great escapes, Barclays was trumped by Royal Bank of Scotland, which subsequently needed to be bailed out largely due to the acquisition. By the dark days of 2008 it was the American arm of Lehman that was for sale, which Barclays bought out of bankruptcy for, in effect, nothing.
Whether that was by luck or design is debatable—the memoirs of Hank Paulson, America’s treasury secretary at the time, suggest Barclays tried to buy the bulk of Lehman, including some exposure to its toxic assets, and was, thankfully, blocked by British regulators. (“I could hear frustration, bordering on anger, in Diamond’s voice,” Mr Paulson reports.) But the revised deal has been an outstanding success, boosting BarCap’s profits dramatically.
Housekeeping has pushed Barclays further towards investment banking. In June 2009 it reluctantly sold its asset-management arm for £8 billion ($13.1 billion), which, along with a £7 billion fund-raising from mainly Middle Eastern investors in October 2008, boosted capital ratios. In March 2010 it pared back its loss making consumer-banking activities in some far-flung markets, such as Indonesia.
Yet for all this Mr Diamond is taking over a firm that is still a very long way from being a pure investment bank. In the first half of 2009 BarCap contributed 86% of underlying pre-tax profits. As bad-debt charges decline at the retail bank and interest rates rise, boosting net interest margins at the deposit-taking businesses, the firm should rebalance naturally. Measured by “operating profit”—ie, before bad-debt charges—or by risk-adjusted assets, BarCap accounts for only about half of the firm’s activity.
Mr Varley has long said that the firm’s “aspirational” target should be that investment banking generates a third of profits. Mr Diamond seems less keen on this exact split—“let’s not get hung up on precise numbers,” he says. But he does reckon that for BarCap, “Lehman was four to five years’ worth of growth in one deal,” and that “we do need to get more balanced.”
The benefits to shareholders of an independent BarCap look overstated too. It gains from being part of a bigger, lower-risk firm. At a Lehman Brothers conference on September 8th 2008, days before the American broker collapsed, Mr Diamond emphasised just this, noting that universal banks were proving resilient. Looking back he says the crisis “reinforced” his belief in the universal-banking model.
Barclays does not use retail deposits to finance risky investment-banking activities—at the retail and corporate-banking units, loans already exceed deposits, meaning there is no big surplus of funds to lend to BarCap anyway. But by being part of Barclays, which is implicitly guaranteed by the government, BarCap can probably borrow more cheaply. It has some £220 billion of unsecured borrowings, the vast majority of the group’s total. Were BarCap independent, and forced to pay an interest rate of, say, half a percentage point more, that would wipe out a fifth of its profits.
Of course the idea of the utility subsidising the borrowing costs of the investment bank annoys politicians and regulators. Mr Diamond has two lines of defence. The first is to show that Barclays has got much safer. As well as bolstering its capital it has built up its pile of liquid assets to a massive £160 billion. These could be used to repay debt if borrowing markets froze. The second line of defence is cruder but probably more effective: to join Britain’s other two successful international banks, HSBC and Standard Chartered, in threatening to shift its headquarters from Britain if a break-up is mandated (see article).
Since the crisis Mr Varley has shown a deft political touch, with contrite interview performances on British television. Mr Diamond can electrify a room full of millionaires in Manhattan’s upper east side, but he must now become the banking equivalent of President Nixon in China. Having operated BarCap successfully as a fief, he needs to unite Barclays’ disparate operations—“there’s a lot more we can do to integrate this business,” he says. And having made his name, and a vast fortune, as an investment banker, he now must help persuade the British establishment and public that banks are a national asset, not a liability.
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