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LONDON (Reuters) - Barclays' (BARC.L) Chief Executive Antony Jenkins is facing a high-wire act to overhaul the firm's investment bank without undermining a division that contributes about half of group profits.
Jenkins, criticized by investors and politicians for raising bonuses this year despite a big fall in earnings, has embarked on the third review of the investment bank in as many years in response to pressure to cut costs and improve returns, which lag other parts of the business such as Barclaycard.
Analysts predict this might lead to a cut in the investment bank's size of up to 20 percent. This would equate to about 5,000 jobs going out of 26,000 and could strip out about 900 million pounds in annual compensation costs.
"The expectation is for something like a 10 to 20 percent cut (in size)," Chintan Joshi, analyst at Nomura, said.
"In the long-term they will have to do more. On a four or five year view, the investment bank could probably halve."
Despite his description of the investment bank as "an essential part" of Barclays, investors and analysts expect Jenkins, a retail banker, to pull out of areas where the bank lacks the scale to compete against Wall Street majors.
"We'd like it to be a smaller part of the bank overall," said David Moss, director of European equities at F&C Investments, which is one of the bank's top 40 shareholders.
"The problem at the moment is it dominates too much. Not only from a capital and product point of view, but also from a sentiment point of view ... everyone spends all their time focusing on the investment bank and not saying what a great business Barclaycard is," Moss said.
Barclays' investment bank made about half of the bank's profits last year but it sucks up half of the group's capital.
Its costs rose to 75 percent of income from 65 percent in 2012, and return on equity (RoE) sagged to 8.2 percent, below Barclays' target of about 10.5 percent and well below the 18 percent RoE for credit card arm Barclaycard.
With income falling, Jenkins is under pressure to show improvement on cost cutting at first quarter results on April 30, although the full investment bank review is not likely to come until May or June, people familiar with the matter said.
It has been an uncomfortable 10 months for Jenkins, 52, dubbed "St. Antony" in the City of London for his pledges to tackle the ills of banking and reform Barclays after a string of scandals. He had to raise 5.8 billion pounds ($9.7 billion) from investors last year to bolster capital and remains under pressure to reduce the bank's leverage and assets.
A problem facing Jenkins is holding on to big revenue earning bankers while trying to cut costs. He is expected to continue to pay up to keep star performers but they will also want reassurance that this third review is the last.
Barclays lost a trio of senior U.S. bankers in August - James Ben, Peter Moses and David Baron who decamped to Rothschild with resumes that included work on some of the biggest U.S. consumer industry deals.
About 700 bankers are estimated to have left Barclays' investment bank in the United States last year. Turnover was about 50 percent higher there than normal, and more than 10 percent of senior staff left, about double the usual attrition, people familiar with the matter said.
Some who stayed raised concerns about pay and its top-ranked U.S. oil and gas bankers team almost quit, sources said.
To keep staff on board and avoid what he described as a "death spiral", Jenkins raised 2013 bonuses for Barclays' investment bankers by 13 percent despite a 37 percent drop in profits, provoking an outcry among investors, who are expected to air their complaints at the annual shareholder meeting on April 24.
Pension and Investment Research Consultants (Pirc) and the Local Authority Pension Fund Forum (LAPFF), two leading advisory groups, have urged shareholders to reject Barclays' pay plans.
Barclays on Tuesday sought to take the sting out of the row by appointing Crawford Gillies to take over as chairman of its remuneration committee to replace John Sunderland, its head for the past two years, who has been criticized for failing to restrain payouts.
"Public opinion is clear that what Barclays has tried to do with bonuses epitomizes an excessive bonus culture in banking. We hope that with Sir John (Sunderland) moving on they will reassess things so that this year's and future bonuses will be in line with legitimate returns to shareholders," Kieran Quinn, chairman of LAPFF, said.
Barclays is not alone in having to scale back investment banking. All banks, grappling with regulations to strengthen them after the financial crisis, have to hold more capital against some operations. This has made many business lines unprofitable for any bank outside the top five in that area.
Banks have also been hit by a slump in revenues for fixed income, commodities and currencies as low volatility hurts trading, and many bankers see that decline as permanent.
Barclays ranked fourth in this business last year with 10.2 percent of revenues for the top dozen firms, according to Reuters data, down from 11.1 percent in 2012 and extending a slide since 2008.
Its equities and advisory revenues have climbed in the last three years and it took more than 8 percent of the top 12 firms' revenues in both areas last year. Those areas are also less capital intensive, so returns should be higher.
Barclays is expected to stick with its areas of strength, including rates trading, where it was second behind JPMorgan (JPM.N) last year, and foreign exchange, municipal finance, futures and options, M&A advisory and debt capital markets, where it ranked 4-6 globally, according to investment banking consultancy Coalition.
But analysts expect cuts in areas like credit trading, emerging markets, securitization, structured credit and equity derivatives. It has already pulled back in commodities and it is considering selling its index business.
It is also likely to pull back harder from Asia, extending a retreat last year that left it largely focusing on serving U.S. and UK corporates there. But it is expected to continue building up in Africa, where it regards it has a competitive advantage.
Barclays declined to comment on the details of the review, but executives have signaled it will be significant.
"You do this once and only once, and it needs to be thoughtful, appropriate and correct," Finance Director Tushar Morzaria, who joined from JPMorgan last year, said in February. ($1 = 0.5976 British Pounds)
Additional reporting by Chris Vellacott. Editing by Carmel Crimmins and Jane Merriman