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Barclays Africa evaluating options as UK bank prepares exit

Feb 29 2016 08:17
Matthew le Cordeur and Bloomberg

Cape Town – While Barclays CEO Jes Staley prepares to announce the fate of the lender’s African business, Barclays Africa said its board is evaluating its strategic options.

“We remain committed to Africa, where we continue to be optimistic about our growth prospects and to operate in the normal course of business,” the group that includes Absa and which is headed by CEO Maria Ramos, said in a series of tweets on Sunday and Monday.

“(The) board is evaluating its strategic options in relation to its BAGL (Barclays Africa Group Limited) shareholding. We expect to update the market on 1 March.”

This followed reports in the Financial Times that Staley is planning to announce on Tuesday that the “British bank has decided to exit its African operations in a bold move to refocus the bank on its core UK and US markets”.

Barclays Africa was trading 2% lower at R144.83 on Monday at 08:10.

Staley must convince investors he can improve the investment bank’s profits just as slumping trading revenue batters the industry.

He is leaning toward maintaining the securities unit without pursuing a major restructuring or spinning off the business, according to people familiar with the matter, who asked not to be identified before his presentation on Tuesday.

He probably will lay out plans to exit the bank’s African business and its £50bn of assets, according to a person briefed on the decision. The bank said in a statement on Sunday that its board is still evaluating options for the African unit.

Barclays Africa said “everything you're reading in the media is pure speculation” in a series of tweets.

“Barclays Africa is financially-independent, listed independently and we are not closing our banking operation in Africa,” it tweeted. “(It is) business as usual for us, (and there is) no impact on our clients or employees – your money remains safe with us.”
 
“Barclays Africa formed in 2013, as a strong independently funded group in Africa, JSE listed, regulated by the South African Reserve Bank.

“To reassure you, there's no impact on our clients or employees,” it said. “We're all working to ensure our customers know that it's business as usual for us, no impact on our clients or employees.”

Staley set to redistribute capital from the African business

Staley appears set to redistribute capital from the African business, which had 14% of the bank’s assets and 9.4% of its risk-weighted assets. That business had the only drop in pretax profit among Barclays’ four main units in the third quarter as it was hit by higher impairments and a falling rand.

Barclays has operated on the continent for almost a century and owns a 62% stake in Johannesburg-based Barclays Africa Group, which was built up under former CEO Robert Diamond.

Barclays has four core divisions: two units in Barclaycard and personal and corporate banking that have steady returns of more than 10%; the African business that’s hit by slowing economic growth and a falling South African rand; and the investment bank, which has the lowest returns of the four.

“You’re looking at a dreadful climate, so whatever Staley lays out, there will be questions,” said Chris Wheeler, a London-based analyst at Atlantic Equities. “If Jes is looking for a bounce off his strategy, it has to be very controllable, and the only options are cutting costs and reducing capital allocated to the investment bank.”

Cost cuts

Staley has already taken an axe to the latter unit, announcing 1 200 additional job cuts, exiting most countries in Asia, imposing a hiring freeze and cutting the bonus pool to restrain costs.

The moves have thus far not arrested a two-year slump in shares that has left the bank trading 50% less than its book value. With that valuation at its lowest in more than three years, the stakes are high for Staley’s strategic update alongside full-year results.

Chairperson John McFarlane fired former retail banker Antony Jenkins as CEO in July, blaming him for a slow place of restructuring, and installed Staley, who ran the world’s largest investment bank at JPMorgan Chase.

Staley already has seen European rivals struggle to restructure their securities divisions amid volatile debt and equity markets. Deutsche Bank, which laid out a plan in October to cut as much as half of its trading and investment- banking clients, has lost almost 30% of its market value so far this year and has sought to calm fears about its ability to service debt. Credit Suisse accelerated staff reductions after trading losses drove worse-than-expected fourth-quarter results.

Trading slump

Last year was the worst for fixed-income trading since 2008, according to research firm Coalition Development Ltd. JPMorgan said last week that trading revenue was down 20% so far in 2016 and that investment banking fees will probably slide about 25% this quarter amid the market turmoil.

“The ongoing market weakness is leading to faster restructuring at Credit Suisse and Deutsche Bank because of the stress they are coming under,” said Paul Dilworth, an investment manager at Kames Capital, an Edinburgh-based fixed-income firm that oversees about £55bn including Barclays bonds.

“It’s validated McFarlane’s decision to get rid of Jenkins and bring in Staley when he did, because what they really need is someone to be more knowledgeable about the IB and understand how to redistribute capital and what businesses they should close down.”

‘Too cyclical’

Kames Capital’s Dilworth estimates a spinoff of the African unit could bolster the bank’s capital by 1.5 percentage points, taking it closer to its 13% target. The bank had a common equity Tier 1 level of 11.1 in the third quarter, the weakest of any major UK lender.

“European banks are restructuring against a really difficult background, so what you want now is some really strong revenue growth to support you whilst you’re getting it done, and I can’t see them getting this in Africa,” said Wheeler. “It’s too cyclical.”

Still, investors will also want answers on the investment bank, including who will run it. Staley is already waiting on several newly hired executives from his former employer to join after mandated gardening leaves are up, and investment bank CEO Tom King has announced he will depart this week.

“Investors will be disappointed if they do not get any news on what the longer-term strategy for both the investment bank and the African operations are,” said Julian Chillingworth, chief investment officer at Rathbone Brothers, which manages £27bn and owns Barclays shares. “I would be surprised if they have not been following events at Deutsche and Credit Suisse very closely.”

Barclays may also find little room to cut fat as it seeks to retain top-performing employees when faced with competition from US investment banks. The UK bank cut its 2015 bonus pool for its dealmakers and traders by about 10% to 12%, two people with knowledge of the matter said last week.

“The point is, when you’ve gone through the muscle, you’re going into the bone,” Wheeler said. “And they’re probably into the muscle already.”

barclays africa  |  absa  |  barclays  |  maria ramos
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