CEO Jes Staley islooking to "adjust bonuses" given weak returns in investment banking.
Speakingto analysts April 27, Staley said that although the corporate and investmentbank division had "one of the best performances in the industry year onyear," surprising analysts in the process, the 7.3% return on tangibleequity remained insufficient. The overall core RoTE was 9.9% in the firstquarter, including 20.5% for the U.K. business.
"Thereneeds to be a correlation between revenue performance and compensationperformance," Staley said. "We will accrue the 2016 bonus poolappropriately given that revenues were off slightly year over year" andbased on what competitors in the U.S. have indicated for the first quarter.
Underlyingpretax profit in the CIB did fall 31% year over year, but total income — orrevenue — was off just 4% to £2.60 billion. "Though assisted by [sterling]weakness, this remains a far better result than we expected," wrote UBSbank analyst Jason Napier, who described the CIB performance as "the maindriver of the beat."
Analystson the call were impressed by the performance in credit, where Barclays seemsto have taken market share. Total income was up 46% to £322 million in thebusiness, although management indicated that this was perhaps attributable tothe CIB's dependence on the flow business and said the business mix couldchange. Based on fees, Barclays improved its position to rank first in EMEAinvestment grade debt and third in global leveraged finance. There were,however, double-digit percentage declines in equities, macro and banking feeincome.
Staleyand CFO Tushar Morzaria emphasized returns as a means of assessing the bank'sperformance. Seen this way, the CIB represents a significant draggiven that the core bank overall achieved an underlying ROTE of 10.7%.
Despiteits 20.5% RoTE, Barclays UK reported a 2% decline in income and a 17% fall inprofit before tax. It was affected by lower fee income and a competitivemortgage market, although it benefited from a lack of customer redressprovisions.
Toraise returns at the CIB and more generally, Morzaria emphasized the importanceof cutting costs and introducing new technology. He said Barclays is "ontrack" to achieve its core cost target of £12.8 billion in 2016 butemphasized that there was more to come and that the cost-to-income ratio had todecline significantly. It stood at 53% for the Barclays UK business in thefirst quarter and at 63% in the corporate and international business, whichincludes the CIB.
Onekey question is whether management can raise returns by cutting costs ininvestment banking. This has proved a challenge in the industry in the past,despite Staley's insistence on a link between revenue and pay.
"Ithink you need an improvement in the revenue environment before the CIB hitshigher ROEs," said a bank analyst who asked not to be named. "I donot see it achieving the cost of capital before 2018."
Investecanalyst Ian Gordon said there appears to be no "silver bullet that is whythe CIB struggles on." He said in an interview that the first quarter wasrelatively decent, "yet the consistent theme of the statement and the callis to keep a lid on expectations.
"TheCIB will remain a drag on group ROE up to [and including] 2018," he added,suggesting that there might be "a solution by 2019."
Staleyemphasized the extent of the work being done in restructuring Barclays, withthe noncore bank due to cut risk-weighted assets to £20 billion in 2017 from£51 billion at March 31.
Analystssuggested that the sale of Barclays Africa Group Ltd., given news , might happen relativelyswiftly. Staley indicated that the Barclays would invest some of the equity tobe freed in higher-yielding businesses such as cards, although Morzaria saidthere was no intention to change the balance of the core business.
Inthe absence of such rebalancing, the unnamed analyst said, he expected the bankto achieve only an ROE of 8% until 2018.
"Barclaysis a stock which does not get near a 10% ROE before 2019," said Gordon,adding that the bank was nevertheless reasonably attractive given that it istrading at barely 60% of tangible book value.