The market warmly welcomed Barclays’ announcement on, may 8th that it was going to slash the headcount and risk-weighted resources of its investment bank or investment company. Its stock price increased 7% on the news. It was about time. Barclays’ 2009 acquisition of the united states business of Lehman Brothers became a bridge-to-far that damaged shareholder value and remaining the lender with an unstable business design. Barclays ranked 5th on the 2013 list of global capital market market leaders by origination of transactions.
But account in this elite group became very costly for Barclays, whose commitment to capital markets following the Lehman acquisition was too much for it to manage, and seriously influenced by set income too, currencies and commodities. These factors have largely destroyed the financial viability of the global capital market business design. Since 2009, the leading banks, typically, have didn’t earn their cost of capital, with eight or nine of the very best ten banks each year producing negative EVA (financial valued added, or ROI less the cost of collateral capital).
For recent years it has been fairly apparent that the global investment banking institutions would need to change their business models significantly to adapt to the times. Citigroup and Morgan Stanley were the first to react with the sale of Citi’s Smith Barney retail brokerage business to Morgan Stanley.
Morgan Stanley’s modified strategy has still not produced an optimistic EVA, but over the past 2 yrs its stock price has risen 125%, more than any of its US investment banking competitors. The next to move were Credit UBS and Suisse, both which announced a Barclay’s like downsizing of investment banking this past year. While UBS dropped in the global investment banking league tables to 9th position in 2013 (and may drop out of the top ten in the foreseeable future), year its stock price outperformed its Western peers within the last. Both banks, however, remain posting negative EVA.
But several of the global investment banking institutions, though maintaining market share, were well out of favor. Barclay’s activities seek to make new friends and come back it to “normal,” which will suggest focusing on UK commercial and retail banking. Deutsche Bank, trading at a miserable 59% of book value and -5.2% EVA, must do something dramatic to free itself – possibly spinning off its London structured investment bank or investment company to the bank’s shareholders.
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For Citigroup and Bank or investment company of America, however, “normal” is increasing beginning to appear to be Wells Fargo, a growing and profitable basic-banking franchise in america. 259 billion at March 31, 2014, is the world’s most effective bank. 4.4%. It funds 71% of its balance sheet (which is almost a trillion dollars smaller than JP Morgan’s) with deposits, and will pay out 55% of profits in dividends and stock repurchases. Wells Fargo increased its syndicated financing activity in 2013, and got in 10th place in the capital market origination desk for the first time with only 13% of its revenues from investment bank sources. Its talk about may rise further as other banking institutions follow Barclays, UBS and Credit Suisse from the market.
June 24 – Reuters (Giada Zampano): “Italy’s anti-immigrant and euroskeptic Northern League begins a petition phoning for a legislation which allows a referendum on whether the country wants to exit europe, on Friday its leader said. June 22 – Wall Street Journal (Eric Sylvers): “Fresh from its victory over the weekend in the Rome mayoral race, Italy’s antiestablishment 5 Star Movement has called for a national referendum on whether the country should do leave the euro. June 24 – Wall Street Journal (Aty Burne and Jenny Strasburg): “Rates on right away loans between banking institutions spiked Friday, an indicator lenders were husbanding their cash as the U.K.