(Bloomberg Opinion) -- Barclays Plc Chief Executive Officer Jes Staley has staked his own personal success on rebuilding the British bank’s securities unit. That pursuit of Wall Street stardom may be leading the firm into treacherous territory.
The remnants of a team disbanded years ago is making millions of dollars for the bank by gaming tax loopholes, Bloomberg News reported on Friday. The traders arrange deals that generate profit by lowering taxes on dividends, a practice known as dividend arbitrage. The group may be generating about 10% of the firm’s stock-trading revenue.
While there is no evidence that the deals contravened any laws, the business is controversial and raises the issue of motivation. Is Barclays simply chasing business others won't touch to show shareholders that it is gaining market share? The lender is a bit player in equities, a business Staley wants to grow.
Just weeks ago, Barclays fended off Edward Bramson, an activist investor who sought to install himself on the board in a bid to trim the investment bank. He argued that the firm’s trading business, which he called a “black box with too much leverage,” should be reined it. It now appears that his assessment - albeit a bit rough around the edges – that the bank is going after the wrong kind of business might not have been so off the mark.
Bramson criticized the firm’s excessive focus on hedge fund and private equity firms – customers that can be easily enticed with by providing them with loans. These clients don’t yield as much revenue relative to total assets as those in corporate banking or wealth management, according to the activist. Chasing one-off equity trades with questionable economic objectives such as dividend arbitrage seems to add weight to his concerns: the quality of deals Barclays is pursuing leaves something to be desired.
It’s not exactly the low-risk, recurring income it can count on. Regulators have scrutinized the practices and governments are closing loopholes.
There are other signs that controls at Barclays may not not as stringent as they should be. Last year, the firm’s risk-management systems were downgraded to code amber from green after failing to predict a series of trading losses. It’s not uncommon – Royal Bank of Scotland Group Plc had a similar issue in 2018 – but regulators can demand larger capital buffers as a result, hurting profitability.
While Barclays has been pulling away from its local rivals in gaining market share in recent quarters, Staley has recognized returns at the securities unit are still not satisfactory. So in a recent rejig of the investment bank, he put himself directly in charge of the unit’s divisions, and closer to its decision-making. After reporting a surge in trading revenue – including the equities business – that outperformed U.S. peers in August, Staley said that the firm was once again “running free.”
Investors may question whether that’s exactly what they want. It will be on Barclays’s board now to show that the investment bank is under adequate scrutiny.
To contact the editor responsible for this story: Edward Evans at eevans3@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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