LONDON (Reuters) - Welcome to Barclays: At roughly 6 a.m. on Jes Staley’s first day as its new chief executive next week the Bank of England will tell him whether the British bank has enough money to survive a deep recession.
Barclays (BARC.L) is expected to ‘pass’ the regulator’s financial healthcheck on Tuesday, but already analysts and investors say a tougher test in 2016 could cause Staley to consider cutting the dividend. At least the timing of the ‘stress test’ demonstrates that the job of managing Britain’s third biggest bank is never dull.
That was made even clearer this week when Barclays was hit with its seventh fine in the past six years by Britain’s regulator for past wrongdoing, this time for cutting corners when vetting rich customers in a case where executives went so far as to buy a special safe to keep the identity of the clients secret.
Boston-born Staley, a former head of investment banking at U.S. bank JP Morgan (JPM.N) who fixed a stutter at high school by joining the debating team, faces a raft of challenges.
Taking a similarly brave approach to these problems could result in radical action being taken to revive the 325-year-old bank’s fortunes, analysts and investors say, such as spinning off its investment bank and relocating it to New York.
“Clarity on strategy is needed, with perhaps only a break-up able to crystallize value,” said James Chappell, an analyst at Berenberg. “Our preference remains for a full separation of the investment bank with a listing in the U.S.”
But Staley first needs to define the investment bank’s strategy, after multiple shifts in recent years.
The bank’s latest fine also shows there’s still work to do to put past problems behind it and improve culture and standards, and Staley said when he was appointed a month ago the bank must avoid “adversarial” relationships with regulators.
Other major issues he needs to quickly address is how Barclays plans to separate its domestic retail bank from the rest of the business to meet new UK rules and the need to cut out more costs.
“His urgent jobs are continuing to reduce the capital tied up in the business, how to push up the RoE (return on equity) and push down costs, and what to be thinking about in terms of the mix of the business,” said Chris Wheeler, analyst at Atlantic Securities.
Staley, 58, will not come to Barclays cold. He has already been visiting offices and trading floors in London and New York, industry sources said.
He knows Barclays well after nearly becoming CEO three years ago, when he was the top external candidate to replace American investment banker Bob Diamond, who was criticized by regulators for an “aggressive” culture that encouraged too much risk-taking in pursuit of profits.
But Staley was passed over amid worries there might be a political and media outcry over the cost of buying him out of his JPMorgan contract and the fact that he was yet another U.S. investment banker, people familiar with the matter said.
Three years on and the political climate had now changed, making Staley the obvious candidate once again, if he was still interested, the sources said. He was.
Staley will be paid up to 8.2 million pounds a year, making him one of the highest paid bankers in Europe. Yet he has lost 220,000 pounds ($332,000) even before starting, due to a dip in the value of 6.5 million pounds of Barclays shares he bought three weeks ago.
Staley spent 34 years at JPMorgan, which he joined in 1979 but left after falling out with CEO Jamie Dimon.
The keen yachtsman, the son of a U.S. corporate executive, grew up in Pennsylvania, where he played the trumpet to avoid speaking and then joined the school’s debate team to overcome a stutter, he recalled last year.
“I remember when the letter B scared me,” Staley said in a speech after accepting an award at the American Institute for Stuttering. “And I remember when I would do anything to try to avoid the letter W. A simple question - ‘Why?’ - would terrify me.”
The stutter disappeared and after graduating from Bowdoin College in Maine, Staley moved up the JPMorgan ranks, spending eight years in Brazil and then, back in New York, running its asset management business, and from 2009 its investment bank. But he was demoted in a 2012 reshuffle and left in early 2013 to join U.S. hedge fund firm BlueMountain Capital.
Barclays is just over halfway through a three-year plan to cut 19,000 jobs in an attempt to improve returns and Chairman John McFarlane, who arrived in April, wants to accelerate the turnaround.
“Jes Staley has clearly been hired as an ambidextrous CEO,” said Matthew Beesley, head of global equities at Henderson, one of the bank’s top 40 investors. He cited Staley’s experience in wealth and asset management as areas he could look to expand at Barclays.
Its core UK retail banking and Barclaycard credit card arms are profitable and running well, leaving the investment bank, te least profitable area, in need of the most attention.
Barclays is shrinking the investment bank to focus on U.S. and UK markets and limit it to using 30 percent of group capital, from about half previously.
“It seems clear that the strategy tweaks put in place by John McFarlane are there for Jes Staley to implement,” said Guy de Blonay, manager of the Jupiter Financial Opportunities Fund, an investor in Barclays.
“His priorities will be on increasing returns, not scale.”
($1 = 0.6632 pounds)
Additional reporting by Sinead Cruise; Editing by Greg Mahlich