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London - The parent company of Absa Group [JSE:ASA] Barclays
could axe as many as 3 500 investment bank staff and cut its advisory or
equities operations in Asia as part of a broader strategic review aimed at
fixing the bank's culture in the wake of the financial crisis.
The future shape and size of the investment bank is seen as the
most critical part of CEO Antony Jenkins' review, as it contributes
more than half of group profits but conducts the "casino" activities
politicians and regulators are cracking down on.
The British bank was fined $450m in June for rigging Libor
interest rates, which forced its chairperson and chief executive to quit.
Barclays' reforms are not expected to be as radical as those
of rivals UBS and Royal Bank of Scotland, who are pulling back sharply, but
sources say tough choices loom.
Jenkins will need to take action to cut costs and ensure the
business is profitable under tougher new rules, and show the public and
politicians that he has tackled culture and conduct, they said.
Activities that make low returns or lack scale are at
threat, and the bank has said it will also stop anything that may harm its
reputation, like tax advisory and agricultural commodities trading.
Jenkins is not due to unveil his "Project
Transform" until February, but Project Mango, as the investment bank
revamp has been named by the unit's boss Rich Ricci, is close to being wrapped
up.
"Barclays is at an interesting crossroad,"
analysts at BernsteinResearch said in a note to clients.
"On one hand, the bank seems likely to be one of the
winners as competitors exit FICC (fixed income, currencies and commodities) ...
on the other hand, the unit has faced increased hostility from regulators and
investors alike, especially following the Libor crisis."
Uncertain backdrop
All investment banks are reassessing their shape and size,
but regulatory change has created an uncertain backdrop.
The Bank of England told UK banks this week they need more
capital and US regulators signalled they will toughen rules for foreign firms,
both potentially shifting how Barclays views some operations.
The actions of rivals may also sway plans - UBS's pullback,
for example, could open gaps that Barclays may want to exploit.
"There will be a lot of stuff in the middle that's
marginal. He (Jenkins) may not want to commit to what happens to those areas
until the regulations are clearer," said Gary Greenwood, analyst at Shore
Capital.
Goldman Sachs analysts said Barclays could cut 15% of
investment bank staff, or 3 500 of its 23 300 employees, and adjust its
equities and equity capital markets operations outside the United States and
selected European markets, and its M&A advisory across the Asia Pacific.
"We consider a broad-based but organic realignment of
the unit - including balance sheet shrinkage and the exit from subscale
operations as well as cost cuts and staff reductions - the most likely
strategic outcome," they said in a recent note.
The business would struggle to deliver a sustainable return
above its cost of capital due to new capital rules and a 900 million pound
annual hit from having to separate retail and investment banking operations
under new UK rules, requiring the bank to "shrink to fit", Goldman
said.
Ricci, who helped build up the investment bank into a debt
market powerhouse and helped lead a push to be one of a handful of top global
firms, is assessing the business in 54 parts, helped by financial advisory and
accounting firm Deloitte.
Project Mango - named after a fruit that in some cultures is
seen as a symbol of attainment - involves screening activities first for
reputational risk, then assessing culture and leadership, and then deciding
whether they deliver decent sustainable returns, he said.
"We've turned the analysis on its head. We've put the
reputational risk analysis very front and centre," Ricci told lawmakers on
Wednesday as part of an inquiry into banking industry standards.
There would be "demonstrable change" from the review, he said.
