Barclays CEO Year Review

The CEO of the UK’s second largest bank by assets completes a year. Antony Jenkins was appointed Chief of Barclays in 2012 following the abrupt dismissal of Bob Diamond in the wake of the LIBOR rate fixing scandal. Jenkins is charged with the monumental task of repairing badly damaged regulatory relations and polishing a brand that was closely associated in the UK with reckless
investment banking behavior that caused the financial crisis. The shift in temperament of Jenkins compared to Diamond, was widely lauded by the public, investors and regulators; a modest retail banker compared to an outspoken investment banker. Jenkins quickly changed most the bank’s executives and developed a strategy to further consolidate operations and repair the bank’s
reputation. However, after his first year the retail banking operations continue to struggle, the bank remains the target of several investigations by regulators while settlement amounts continue to mount. The bank’s results for the first half of 2013 were better than the second half of 2012, but the bank is not performing as well as most its domestic competition. With Jenkins turning to investors for nearly six billion pounds to cover a leverage ratio shortfall he may be reaching the end of the inherited understanding as ‘the CEO to replace Bob Diamond’. In his second year, investors will be looking to see signs of a promising future rather than reminders of the troubled past.

What has changed

Shortly after taking the position Jenkins circulated a memo informing employees a new code of conduct was in place and that if they couldn’t accept, they were welcome to leave. To improve compliance he hired the former Financial Services Authority chief executive Hector Sants to Head of Compliance and Government and Regulatory Relations.  Based on a review of the bank’s business operations he developed a strategy titled ‘Transform’ representing: turnaround, return acceptable numbers, and sustain forward momentum. The price tag of the strategy for 2012 was £640 million, and is projected to cost £2.7 billion over the next three years. Total gains from the initiative are expected to generate a £1.7 billion reduction of annual operating expense by 2015. So far, the bank’s cost-income ratio dropped two percentage points the end of June 2013 based on a year earlier to 78%. Total attributable profit crossed into positive territory with £671 million in the first half of the year after a 2012 financial year loss.

Unexpected challenges

UK Prudential Regulation Authority introduced a leverage ratio target in June of 3% to be met by major UK banks and building societies. Barclays had one of the largest shortfalls at £12.8 billion. To raise the capital the bank plans to get half from a rights issue and the rest through retained earnings and exposure reduction efforts. Turning to investors for six billion pounds certainly didn’t
do wonders for Jenkins’ popularity among investors. Barclays’ stock issue is the largest by a UK based bank since 2009. However, the necessary capital raise should put the bank on firmer financial ground going forward and temporarily satisfy UK regulators. The bank has until next year to bridge the total shortfall.

With a retail banking background, expectations were high for Jenkins to turn around the bank’s domestic retail banking market and its card operations. The results of the first half of 2013 showed the bank was to again increase its provision for compensation to consumers for miss-sold Payment Protection Insurance (PPI). The total provision for Barclays is now four billion pounds as of the first half of 2013. This represents 24% of the UK banks combined provision for PPI miss-selling. Excluding this provision, Barclaycard increased income 7% and customers by 25% in the first half of 2013 on a y-o-y basis. PPI is the single largest contributor to Barclays receiving the second most complaints from consumers in the UK as ranked by the Financial Ombudsman Service. The total
number of claims may be starting to slow for the bank, but the total value was twice as much as the last provision increase at the end of 2012. The bank’s retail banking operations in the UK have also been negatively impacted by the miss-selling scandal as well as by limited economic growth. Jenkins continued the course of consolidation in the UK and since taking the top spot has closed
37 branches and lost 200,000 accounts. The bank plans to shed 3,700 more jobs over the next year.

Outlook

Barclays’ CEO is in a precarious situation; while he is charged with repairing the banks reputation, the full extent of the damage is not yet known. In his first year, Jenkins had barely established a new code of conduct before the bank was again making headlines for previous violations. Barclays currently faces legal proceedings regarding misleading statements regarding the value of mortgages sold during the financial crisis, further investigation regarding LIBOR rate manipulation, power trading violations in California, anti-competitive behavior in the credit default swap market, and an investigation relating to its 2008 capital raise from Middle Eastern investors. The outcome of these cases could total billions in fines, restrictions on future operating activities and
further damage to the Barclays brand. Although Diamond may have been CEO while the transgressions took place, public sympathy for bankers in the UK is inshort supply, and negative findings in these matters could cost Jenkins his job. Appointing a retail banker to fix the investment bank was a move to  increase public confidence in the bank, but may not have been the most expedient solution given the complexity of the units operations. After a year it is clear that Jenkins understands why he was appointed and his objectives asreflected by his outlined strategy. Now if only he can implement it before the next unexpected challenge arises.