Barclays, Credit Suisse Battle Banker Exodus, U.S. Woes
Barclays last week lost three top bankers in the U.S. and Asia before a May 8 strategy announcement that will probably include shrinking the London-based firm’s investment bank. Credit Suisse, which holds a shareholder meeting May 9, is facing potential U.S. criminal charges over its role in helping Americans avoid paying taxes, people familiar with the matter said last week. UBS AG, meeting investors tomorrow, is falling short of profit goals, according to analysts’ estimates.
Europe’s top banks are facing heightened scrutiny from shareholders, regulators and legal authorities after they lost market share in some investment banking businesses to U.S. competitors. Meanwhile key areas of Wall Street revenue are under pressure: JPMorgan Chase & Co. (JPM), the biggest U.S. bank, said last week that it expects trading revenue to drop about 20 percent this quarter from a year ago.
“When banks started thinking strategically about where they wanted to be, they were expecting fixed-income, currencies and commodities to be stronger than today, and that the goal posts on capital would be clearer than they are,” said Eli Haroush, a fund manager at APG Asset Management in Amsterdam, which oversees 352 billion euros ($488 billion).
“At the moment banks have to run very fast in order to not move at all or fall back,” he said. “One of the few items in their earnings they can control is the cost line and I think they know they should do more including on compensation.”
Barclays will now have to compete without some of the key dealmakers it acquired with its purchase of Lehman Brothers Holdings Inc.’s North American operations. Hugh “Skip” McGee, the Lehman Brothers alumnus who received a stock bonus more than twice the size of Barclays Chief Executive Officer Antony Jenkins’s, left last week. That was followed by the departures of Ros Stephenson to Zurich-based UBS and Robert Morrice, the Asia-Pacific chairman and CEO, who is retiring after 17 years.
The Lehman Brothers acquisition helped Barclays in the U.S. The bank ranks higher among underwriters of U.S. stock sales than it does in Europe, according to data compiled by Bloomberg. The firm is also more active on mergers involving U.S. companies than on European deals, the data show.
“If people are departing, and you don’t have continuity in your relationships, that’s a disadvantage,” said Charles Peabody, an analyst at Portales Partners LLC in New York.
Mergers-and-acquisitions chief Paul Parker, another Lehman Brothers alumnus, is planning to leave Barclays in a few weeks and doesn’t have any immediate plans for what he’ll do next, according to a person familiar with Parker’s thinking. Kerrie Cohen, a spokeswoman for Barclays in New York, confirmed Parker’s intention to leave, without elaborating.
Investors are demanding that Jenkins, 52, outline a strategy for the investment bank, the biggest source of income for the firm, after falling behind on targets and boosting pay.
Return on average equity at Barclays’s securities unit, a measure of profitability, fell to 8.2 percent last year from 13 percent in 2012, short of Jenkins’s target of at least 11 percent in 2015.
“On the cost side of investment banks, restructuring will require drastic measures -- on top of the further headcount reductions which are likely,” including reviewing the businesses to maintain to reduce risk-weighted assets, Philippe Morel, a London-based senior partner and managing director at Boston Consulting Group, said in an e-mail.
Barclays could eliminate 7,500 jobs at its investment bank, according to an April 22 report by Sanford C. Bernstein. The European fixed-income, currencies and commodities business may be the hardest hit, with about 5,000 job losses, analysts led by Chirantan Barua said in the report. Cuts of 6,500 to 7,500 equate to between 25 percent and 30 percent of the unit’s employees, the report estimated.
In the strategy review this week, Barclays will say it’s naming Corporate and Investment Bank Co-Head Eric Bommensath to oversee a so-called bad bank of unwanted assets and units, leaving Tom King in charge of the investment bank, a person familiar with the plan said last week. The bad bank will include the commodities business and other units previously assigned to the bank’s “exit quadrant,” including some of the firm’s rates trading, derivatives and other fixed-income assets, the person said.
The challenge for Barclays “is to continue the rebalancing of the group away from being a fixed-income dominated investment bank to being a more balanced investment bank,” UBS analysts led by John-Paul Crutchley said in a May 1 research note. Investors would favor “a restructuring that reduced the overall balance sheet and lowered capital intensity.”
Credit Suisse (CSGN) CEO Brady Dougan, 54, will probably face questions at his company’s May 9 annual meeting about the implications of possible U.S. charges against the firm, the largest of the 14 Swiss banks under criminal investigation in a crackdown on offshore tax evasion.
U.S. Attorney General Eric Holder said his department is readying criminal cases against banks that show financial institutions aren’t too big to prosecute. Improved coordination with regulators is creating a relationship that “will prove key in the coming weeks and months” as prosecutors pursue charges, he said in a video message posted today on the department’s website. Holder didn’t identify any firms that may be targeted.
Clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution found guilty of criminal charges, some lawyers and bankers have said.
Credit Suisse fell 2.3 percent to 27.40 Swiss francs in Zurich trading, the biggest decline in a month. The lender received demands in past weeks for a guilty plea and names of American tax evaders with Credit Suisse accounts, Swiss newspaper NZZ am Sonntag reported yesterday.
“Unforeseen events can occur,” Brad Hintz, an analyst at Sanford C. Bernstein in New York told Bloomberg Television last week. “A criminal charge is going to cause the clients to pull away and you can set off that wildfire in confidence.”
The uncertainty is already weighing on BNP Paribas SA. (BNP) France’s largest bank posted the biggest monthly decline in two years as analysts cut their ratings on the stock, citing concern over potential criminal charges for violations of U.S. sanctions barring business with prohibited countries. BNP Paribas said on April 30 it may need to pay “far in excess of” the $1.1 billion it has set aside for legal investigations by U.S. authorities.
At UBS, which has already retrenched in fixed income and settled a U.S. tax case, the challenge for CEO Sergio Ermotti is getting rid of unwanted assets fast enough and cutting costs. Ermotti, 53, will seek to reassure shareholders at a meeting in Zurich tomorrow that the firm won’t need to review its objectives after the Swiss regulator’s demands that the bank hold more capital to cover legal risks delayed profitability targets last year.
UBS may post a return on equity of 12.9 percent in 2016, missing a target of 15 percent, according to the average estimate of 15 analysts surveyed by Bloomberg.
As of Dec. 31, UBS was about 1 billion Swiss francs ($1.1 billion) short of its cost-reduction target, leaving an additional 3.2 billion francs of targeted expense savings, Citigroup Inc. analysts led by Kinner Lakhani wrote in a May 2 research note. Costs and capital are two areas that will probably be the focus of the investor day, the analysts wrote.
“European investment banks have done about two-thirds of the restructuring,” Davide Serra, founder and managing partner of London-based fund Algebris Investments, said in an e-mail. “UBS has to execute the plan and focus on growing the core while Barclays is catching up.”
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