Blain’s Morning Porridge 2nd November 2021 – Barclays: fated to another predictable stumble?
“What goes up, must come down…”
This morning: Barclays is the UK’s only remaining big player in investment banking, but what does the sudden departure of yet another CEO mean for the firm? Will it ever get it right? Successful banks showing dull, boring and predictable results often prove fine investments, but Barclays currently fails these tests.
Apologies for delay this morning, but it’s been yet another farcical hike to the office after NotWork Rail and Southwest trains conspired to cancel most trains, delay others and then dump us all on a local train for a two-hour nightmare crawl to London. Problem is no tables (that a normal size person can use) on these commuter trains… so no porridge till I got into office at 10.30 after getting to station for 7.05 trains.
Enough whining…. Back to this Morning’s Porridge:
First up – COP26
On Sunday morning, at 7 am I stood in a howling gale on the shore of Southampton Water to watch the demolition of the towering Calshot Chimney. It’s been there for over 50 years – once part of a massive 4 turbine oil powered power station. The station closed in 2012. It was a fascinating moment watching it sink back into the ground. In due course it will be replaced by luxury housing and a marina facility.
It was kind of apt that one of the UK’s largest fossil fuel power stations was destroyed on the first day of the COP26 Conference in Glasgow. So far at COP26 we’ve heard most of the expected platitudes, watched BBC journalists get excessively excited and listened to the Queen, God bless her, make some pointed comments. Boris might have said something – but dashed if I can remember what… Some really good stuff has emerged – like Merkel focusing on carbon pricing. Don’t give up on it, COP26 is going to spawn a host of new ideas and initiatives – which we will put together post conference.
So instead of losing sleep over climate change this morning, or panicking about how the increasing volatility in bond markets will trigger and equity meltdown, let’s get restless about British banking – again.
British Banking…
Two things matter when investing in banks: How Dull, Boring and Predicable it is? And, how good does it look as a CAMEL?
Barclays traces its roots back 330 years, and is the UK’s last real contender in the big investment banking world. It is certainly boring, but hardly dull after CEO Jes Staley was forced to fall on his sword over his relationship with disgraced financier Jeff Epstein. He’s being replaced with Risk, Markets and Numbers man CS Venkatakrishman – one of a number of senior hires Staley brought with him from JP Morgan. There are questions where Venkat has the personality or industry presence to lead the troubled bank forward and reverse its share price decline under Staley.
Staley met Epstein while the latter was a client of JPM’s private client basis. He’s not the first senior banker to be spiked by ties to Epstein; Apollo’s Leon Black was forced out earlier this year. It will be interesting to see how many other senior financiers discover trips to Epstein’s Caribbean lair came at a high price. What’s bad news for Barclays will be Staley’s promise he’ll fight the accusations against him, meaning it will remain a bad smell over the bank.
Just how investible is Barclays?
CAMEL is an old-fashioned way of looking at banks; understanding how strong is the backing of its Capital, the quality of its Assets, the wisdom of its Management, the sustainability of its Earnings and its access to Liquidity. It doesn’t factor in the depth of its competitive moat or its ability to re-invent itself for the new digital age – a factor undermining all the big incumbent high street banks.
Capital has always been a bit of an issue for Barclays – especially after they “apparently” walked all over shareholders and pre-emption rights in 2008 giving Abu Dhabi and the Qatari’s preferential terms and cash to bail them out – when everyone expected the bank to end up in Government hands like the disgraced RBOS.
Assets is what makes Barclays interesting. It shines dully compared to the rest of the UK pack because of its Investment Banking business… which is also the part of the business most often blamed for its chronic underperformance by activist investors. Staley did produce some spectacular numbers from the investment bank, but at a time when every other IB (except Deutsche and Credit Suisse) was also batting strongly.
Now… the funny thing is: I’ve worked in the City for over 35 years, but I don’t know anyone at Barclays. I’ve worked my way through innumerable rooms full of bankers and met all kinds of high-faluting folk with important sounding business cards – but in all my years of doing so, I can’t recall ever meeting a single memorable person from Barclays. A couple of colleagues from my days at big city banks did go join them, but then they all subsequently disappeared and went off-grid. They were probably culled in one of the successive cost cutting drives Barclay’s CEO after CEO has instituted to try and bring the bank some meaning, purpose or mission.
Barclays may be the UK’s most significant investment bank, but that’s a bit like arguing Kazakhstan has Central Asia’s best navy….Its history this millennium has been scandal after scandal. CEOs don’t fare well. John Varley ended up in court over the rights issues and other irregularities. Bob Diamond was shown the door after libor-rigging scandal. Anthony Jenkins fell out with the board over plans for the investment bank. There is a certain predictability about its management…
Why is Barclays such an under-performer? Management might be the issue. Try as they might successive management teams have failed to either rationalise the investment bank or make it meaningful. While other investment banking groups were expanding to offer one-stop service, Barclays sold its equities business in 1998 to focus on debt. In 2007 they dodged a bullet when RBOS poached its planned acquisition of ABN Amro. They still just about went bust. Just read the history of Barclays over the past 30 years on Wikipedia and wonder how such a saga of successive mistakes and embarrassments has survived. It certainly hasn’t thrived.
The key thing I haven’t yet covered is the Predictability element – as in Dull, Boring and Predictable being good reasons to invest in banks that get it right… the ones that make good strong solid predictable numbers. The only thing predictable about Barclays is unstable management and predictably over-promising and underdelivering.
So… what do we know about the new man, Venkat? Not much and this article on Rueters this morning begs more questions than it answers! Five Things to Know About Barclays New CEO.
Very out of time, and back to the day job..
Bill Blain
Strategist – Shard Capital