Barclays, Credit Suisse Battle Banker Exodus, Legal Woes
By Elisa Martinuzzi May 5, 2014 2:00 PM ET
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 under heightened scrutiny from shareholders, regulators and legal authorities after they’ve already 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.
“Whether you’re European or in the U.S., what you’re facing is a declining trading environment,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “So where you gain share is on the investment banking side, especially underwriting, and the U.S. banks have been doing that.”
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, 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 bank 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,” Peabody said.
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.
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 note. 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.
Clients — including trustees, fiduciaries and pension funds — could be forced to cut ties with a financial institution labeled a criminal enterprise, some lawyers and bankers have said.
“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 biggest bank posted the biggest two-day loss in almost a year last week 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 shedding 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 ($1.14 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.
To contact the reporter on this story: Elisa Martinuzzi in Milan email@example.com