Staley does not equal an IB expansion for Barclays
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Staley does not equal an IB expansion for Barclays

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Reports that Barclays is preparing to appoint former senior JP Morgan investment banker James "Jes" Staley to the post of CEO should be welcomed by the bank's creditors.

The news sent shares in the bank down more than 3% on Tuesday, as investors reacted to the uncertainty such a hire may entail for the future of Barclays' investment bank. 

Analysts have been saying the appointment of Staley to CEO could mean a change in tack for Barclays restructuring strategy, announced last year and involving a scaling down of the IB to no more than 30% of the group's risk weighted assets down from 50% in 2014, as well as the disposal of much physical commodities trading and other non-core activities.

The strategy update was initially celebrated by investors, who sent the shares up 5% on the day in May 2014 when it was announced. 

Now that investors fear a return to a strategy heavier on IB, the shares are being pummelled.

Staley, an American banker now with hedge fund BlueMountain Capital, rose through the ranks of JP Morgan’s ECM and syndicate operations, before senior jobs in private banking and, later, as head of the investment bank — a sharp turn from the retail background of former CEO Antony Jenkins.

Equity investors fear Staley may pour resources back into IB, increasing the chance of a rights issue.

But the potential hire of Staley doesn't really mean the bank is changing course, yet again.

Barclays is one of a decent handful of European banks that have changed CEOs, and strategies, in the last year. Deutsche Bank, Standard Chartered and Credit Suisse have all signalled big changes in direction with the appointments of their new CEOs.

But Barclays is different. Deutsche Bank was criticised for the lack of detail on its strategic review this year, which was followed shortly after with the departure of Anshu Jain, with Jurgen Fitschen set to resign in May.

Barclays, on the other hand, saw its shares jump on the news of its strategic review, which included enough detail to reassure investors that the bank was finally choosing a path and walking down it. The problem, besides alleged cultural rifts between the retail and IB divisions precipitated by Jenkins’ lack of IB experience, was that it wasn’t walking fast enough for chairman John MacFarlane.

The hire, maybe, of Staley would be an acknowledgment not that the bank made a mistake of shaving down its IB, but rather that, if you’re going to wind an investment bank down, the best person to do so is probably someone with a lifetime’s experience in investment banking.

Someone like Staley would be able to better identify the areas in IB where Barclays has a chance to compete, the areas it already covers well, and the talent it needs to hold on to.

A Staley Barclays would be, simply, a big positive for creditors. Would shareholders and creditors rather have a retail banker with no IB experience, and who was, by the way, the man in charge of the retail bank when Barclays was mis-selling payment protection insurance?

As for shareholders, even if Barclays doesn’t expand its investment bank, it should still do a rights issue. The bank has a less than stellar (still above regulatory minimums, however) common equity tier one ratio, at 11.1% as of second quarter 2015, and a leverage ratio of 4.1%. (Royal Bank of Scotland had 12.3% and 4.6%, respectively).

With low profitability and high costs, Barclays’ restructuring carries a lot of execution risk. A rights issue would ensure that Barclays can keep that plan in place.

Equity investors should put aside their fear of Staley and investment banking, and look forward to a Barclays that knows where its IB can make money, and how to intelligently and surgically excise the rest. A Barclays, perhaps, that finally knows who it is. 

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