Diamond’s exit leaves Barclays at a crossroads
By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Bob Diamond has left the building. One day after penning an epic 1,900 word letter to staff pledging to stay at Barclays, the interest rate fixing scandal has forced the UK bank’s chief executive to quit. His is a hard act to follow. And in replacing Diamond, the board faces a critical strategic decision.
If Barclays is to remain an all-singing universal bank, it may well decide it needs an investment banker who knows the UK market – someone like Bill Winters, the previous head of JPMorgan’s London office, or Colm Kelleher, of Morgan Stanley. Since half of the bank’s profit and three-quarters of its assets in 2011 came from Barclays Capital, the investment bank that Diamond built up from the mid-1990s, this may be the most likely course.
But if the board decides to ask what Barclays could or should be, the answer is less clear-cut. The bank should take this opportunity to examine a partial or even total separation of the investment and retail sides.
The investment bank has struggled recently while new rules on capital buffers make it harder to grow returns. Return on average equity in 2011 was only 6.6 percent, miles off the stated 13 percent target, and reliance on volatile investment banking has long led shares in the whole entity to trade at a book-value discount to peers.
Even if the plan is only to focus more on the retail side, the board could signal the change by making a very different kind of appointment. Antony Jenkins, who currently leads Barclays’ retail operations, would be a candidate. Such a change would fit with the trend towards more nationally-focused retail banks clearly seen at Royal Bank of Scotland. It could still be good for investors too – the UK retail arm of Barclays made a 15 percent return on equity in 2011, ahead of BarCap’s 10.4 percent.
But selecting a leader without investment bank experience would be risky, especially if it came with an assumption that Barclays would eventually offload the investment bank, and BarCap bankers started a stampede for the exit.
The ideal candidate may be one who has experience of both parts of the banking industry. But if Barclays’ under-pressure non-execs do go for an investment banker, they will be unlikely to select someone as likely to divide opinion as Diamond. Whoever replaces him, it’s the end of an era.