BARCLAYS FACES TOUGHEST TEST IN INVESTMENT BANKING

The New York headquarters of Barclays, which has
lost market share to Wall Street competitors over the
last few years.

Barclays faces the biggest test in retooling its investment bank. Chief executives at Barclays, Credit Suisse and Deutsche Bank have now all left, meaning new leaders will tackle their respective divisions’ futures. All three have lost market share to Wall Street over the last few years. But Barclays’ shrinking broker-dealer revenue makes it the top contender for further slippage.

Each bank has distinct investment banking challenges. Credit Suisse looks to be the weakest on capital: It allocates equity on the basis of 10 percent of the segment’s risk-weighted assets. Had it done so at 12 percent, as Barclays and Deutsche did last year, its investment bank’s pretax return on equity would have been 5 percentage points lower.

That would still have been comfortably above Deutsche’s, however. Blame its exorbitant cost base, which devoured 77 percent of the division’s 2014 revenue and 85 percent of the top line in the first quarter. If Deutsche’s cost-to-income ratio had been 69 percent, as was the case for Credit Suisse and Barclays in the first quarter, its return on equity would have been 12 percent.

Barclays could also have produced a first-quarter investment banking return on equity of that magnitude, were it not for a huge effective tax rate linked to the foreign exchange market-rigging scandal.

But Barclays has a bigger issue: Its investment bank has shrinking revenue. Credit Suisse produced more investment banking revenue than Barclays last year — a first since Barclays’s integration of Lehman Brothers. Barclays also ceded its sixth-ranked position in fixed-income trading last year to its Swiss rival, according to the research provider Coalition. Of the 14 investment banking businesses tracked by Coalition last year, Deutsche had top-three market share positions in six and Credit Suisse in four. Barclays had that in just one business — rates trading.

The good news for Barclays’s executive chairman, John McFarlane, is that Barclays’ noncore assets are easier to wind down than Deutsche’s, according to Morgan Stanley, and the bank’s first-quarter return on equity improved. But market positioning matters, especially in trading. Despite Mr. McFarlane’s recent backing for the business, Barclays may yet lose more ground in investment banking.

The New York Times