(Bloomberg Opinion) -- Jes Staley, Barclays Plc’s chief executive officer, has a new spring in his step. After facing down an attack this year from an activist investor who wanted the British lender to shrink its investment bank, Staley has been vindicated.
While a victory lap would be premature, Staley does have plenty to feel good about. His bank was able to preserve its capital buffers even after taking a further 1.4 billion pound ($1.8 billion) charge related to the U.K.’s payment protection insurance scandal; Staley hopes that will be the last big litigation expense for Barclays.
Pretax profit at the company’s investment bank, which Staley oversees directly, beat estimates in the three months to September as the fixed income and equity trading businesses grew more quickly than their Wall Street peers. The bank’s advisory unit posted its best ever third quarter, another sign that Barclays has been able to maintain market share. The lender has been expanding too in prime brokerage, which services hedge funds, exploiting Deutsche Bank AG’s withdrawal from this area.
Crucially the bump in trading means Barclays is confident that it’s on track to post a return on tangible equity (a measure of its profitability) of more than 9% this year, a significant milestone for the American CEO’s turnaround plan.
Things get a little tougher from this point, though. The bank indicated that it may not be able to hit a target of exceeding 10% returns in 2020 because of the weak economic outlook (and the market doesn’t expect it to). The caution on market conditions coupled with a sense that further cost cuts aren’t being contemplated could disappointment investors.
Staley says there will be multiple challenges in the next year. Income and profit in the third quarter were bolstered by a favorable exchange rate as the pound fell 3% against the dollar. The U.K. economy, meanwhile, is affected by the mess of Brexit. British consumers and smaller businesses are holding on to cash. Low interest rates are putting pressure on bank profit margins.
There are signs too that the credit cycle may be about to turn. Risky corporate loans have been piling up on banks’ books. International lenders are holding more than $2 billion of leveraged loans that they’ve struggled to sell over the past several months.
Speaking to Bloomberg Television, Staley acknowledged that sovereign and corporate debt needs to be monitored. The level of overall debt would be difficult to sustain if interest rates rose, he said, and banks are struggling to place some loan deals. “It’s not a free ride right now,” he said.
Staley reacted to tougher market conditions earlier this year by cutting jobs and lowered the bank’s expenses target to 13.6 billion pounds or below. That’s kept the Barclays cost-income ratio close to a respectable 62%, and the target is still to get below 60%. Like any CEO, Staley says he’d like to improve profit by expanding the bank and investing, not by cutting costs. There are enough clouds on the horizon to suggest he may need both tools if he’s to see his turnaround plan through.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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