Barclays M&A bankers are back but costs are £260m too high
There is justifiable excitement at Barclays this morning. After the bank announced a set of third quarter results that were better than expected, Barclays' shares initially rose 3.8%, to their highest level in nine years.
Unfortunately, the excitement wasn't due to the investment bank. As the chart below shows, Barclays' M&A bankers did very well compared to last year in the third quarter. But relative to rivals, Barclay's performance in equities and fixed income sales and trading looks more mediocre. Growth in equity capital markets revenues was worst in class; growth in the bank's debt capital markets (DCM) revenues was mid.
The heads of Barclays' investment bank, Cathal Deasy and Taylor Wright, have some big plans for their unit. In a presentation earlier this month, they laid out their intention to increase revenues in the investment bank by increasing ties with the corporate bank and reducing reliance on DCM. Speaking today, Barclays' CEO CS Venkatakrishnan said it's not that Barclays wants to "de-emphasize" DCM exactly; it's just that the bank wants to grow in other areas and for its investment bank to become more rounded.
However, while Barclays is growing the investment bank under Deasy and Wright, it's also supposed to be reducing the bank's consumption of risk weighted assets (RWAs) and attempting to cut the cost income ratio there.
RWA consumption is going well, with a £6bn reduction year-on-year in Q3. Cost-cutting is not so impressive. By 2026, Barclays wants a cost income ratio in the investment bank in the "high 50%s". As the chart below, taken from today's report, shows, it still has a long way to go. A 58% cost income ratio for the third quarter would imply around £260m of cost cuts in the investment bank based on Q3 income, a reduction of 14%.
Source: Barclays
Barclays said at the start of this year that it plans to cut £0.7bn of costs from the investment bank by 2026, and for £188m of those cuts to come from reduced headcount costs. There's little sign of this so far. Operating costs in the investment bank in the third quarter of 2024 were £1,906m, up from £1,804m last year.
The implication is that Barclays' M&A bankers, whose performance doesn't actually look so impressive over a longer time period, may not find themselves lavished with bonuses this year, despite their fine performance in the past quarter. There's also the small issue of the £85m loss relating to the leveraged finance portfolio. CFO Anna Cross today insisted this was merely “episodic” and “normal” but it might discourage generosity, even though it was booked in the corporate bank.
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