Just before markets turned in response to the spread of Covid-19, Lloyds’s stock price was roughly unchanged from its level when Horta-Osorio started in 2011, while Barclays’s shares were down nearly 25% under Staley. Both stocks have fallen sharply in the crisis this year, with the less diversified Lloyds the worst hit. They languish close to lows last seen during the financial and euro-zone debt crises, and trade at discounts to peers.
In February, Barclays said Staley was being investigated by the U.K. regulator over how he characterized his relationship with deceased financier and sex offender Jeffrey Epstein. The board unanimously backed him after concluding Staley had been sufficiently transparent with the company.
But questions around Barclays’s strategy have been mounting. Staley staked his success on maintaining a sizable securities unit that could compete with Wall Street peers. Among the handful of European firms that still aspire to run global investment banks, Barclays has the advantage of owning an established U.S. franchise through the Lehman Brothers business it acquired during the financial crisis.
The approach has rightly attracted opposition. Activist Edward Bramson has been pushing for a retreat from trading given its relatively poor returns. Barclays’s U.K. commercial lending business posted a return on tangible equity of around 18% last year, compared with 8% at the investment bank. At the group level, ROTE stood at 9%.
True, a trading surge in the first quarter of 2020 helped the securities unit post better returns than the U.K. business, which had to book provisions for loan losses. But it’s questionable whether this reversal will last once debt markets return to normal activity levels and volatility subsides.
Barclays probably needs to dial back, be more selective in investment banking (as are BNP Paribas SA and Deutsche Bank AG) and look elsewhere for growth. Investors would likely reward a less volatile firm with a higher valuation, strengthening the shares as an acquisition currency. Buying a cheaper peer could go some way towards diluting the risk of the investment bank. That opportunity may however not present itself.
In the meantime, a further pruning of U.K. retail branches (more than half are within a 10-minute drive of each other, according to analysts at UBS Group AG) and improving cross-selling in the consumer bank look like sensible and available options. All told, that could be enough to re-energize the strategy.
As for Lloyds, after almost a decade on the job, Horta-Osorio is one of the longest-serving CEOs in European banking of his time. Having exited state ownership by repairing the balance sheet and becoming more efficient (the cost-income ratio is the envy of European peers) Lloyds is now wrestling with a margin squeeze in the cut-throat home-loans market. It is also exposed to…