cards and payments


Saint Antony Gets Religion: Barclays Chief Executive Declares
Death of Universal Banking

"Universal banking is dead," says Antony Jenkins, chief executive of Barclays, speaking in an interview published in the FT today. Unlike most other heads of universal banks, Jenkins is not blaming regulation or higher levels of equity funding for the demise. Instead, universal banks will be driven into extinction by the required investment in technology to help serve customers.

Jenkins says: "We believe that technology is going to drive competitive advantage in this industry and you can't afford to invest in technology in every place -- so you have to pick where you have that competitive advantage."

This is hugely significant. As recently as March 2014, the Barclays chief executive was still telling newspapers that the bank had to increase bonuses to investment bankers, otherwise staff at the former Lehman Brothers would leave and the bank would enter a death spiral.
Now, Jenkins is to be congratulated for being the first chief executive of a universal bank anywhere in the world to publicly break ranks and admit that justifications given for the universal banking model were simply wrong. We think Jenkins' candid volte face is even more significant than that of Antonio Horta-Osório of Lloyds, admitting that Payment Protection Insurance was not treating the customer fairly.

That led to tens of billions of pounds of mis-selling and conduct cost provisions across the industry. Conduct costs and provisions for 12 of the most-fined universal banks over the last five years have reached £166.63 billion ($261bn), according to Roger McCormick of the CCP Research Foundation.

Shareholders are angry that they are paying the price for management's bad behaviour. This is not just a case of exceptional items or "one offs", but that mis-selling is baked into the nature of the universal banking model and always has been - as this table of mis-selling by Lloyds Bank going back to 2001 shows:

image 1 use

Despite the fact that large banks have been a disastrous investment for shareholders pretty much since they have existed, very few financial analysts have been prepared to question the model. This is because most of them work at universal banks.

One person who did question this as far back as 2010 was Bruce Packard, who worked at the former stockbroker Seymour Pierce, where he calculated that cumulative losses from the financial crisis were five times times higher (or £75bn) in Investment and Corporate Banking compared to UK Retail Banking. No other bank's securities analyst made this simple calculation, but that is hardly surprising. It merely demonstrates how riven with conflicts of interests the universal banking model is. What was surprising was that Bob Diamond, the previous Barclays chief executive was paid between £50 million and £100 million over the years, while the share price collapsed 70 percent, even before the Libor fixing scandal when he finally left the bank. Perhaps the rewards explain other banks managements' devotion to the universal banking model.

The Future
We are looking at a new era. In future, Barclays management will be more willing to sell non-core activities and geographies, and investment banking divisions will be required to deliver value through the cycle. Barclays itself has huge disparity of performance in different divisions, both when measured by Return on Equity (RoE) and, of course, by Return on Assets. For instance, despite the fact the investment bank claimed an RoE of 8.5 percent in FY 2013, Return on Average Assets was just 16bp. Q3 2014 results suggest the Investment Bank has continued to struggle, reporting total income falling 14 percent from Q3 a year ago and RoE in the quarter down to five percent. This is unlikely to represent a sustainable business on a standalone basis.
By contrast the Retail Bank and Barclaycard both deliver 20 percent plus RoE and much higher Return on Average Assets.

We also notice that cash on the consolidated balance sheet has fallen from £106 billion in 2011 to £46 billion as of December 2013. Thus we believe that today's interview could lead to speculation that divisions within Barclays previously considered core will have to stand on their own feet. Given that stressed banks tend to sell their most valuable businesses when under pressure to meet stringent stress tests from regulators, what are the chances that Barclays Africa will have a new owner before this time next year? The wider significance though is that other banks will be asked uncomfortable questions by their shareholders. Inevitably we believe other banks will publicly declare that the era of the universal bank is now over.



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