LONDON (Reuters) - Activist investor Edward Bramson’s bid to join the Barclays board is destined to fail, shareholders told Reuters, though he has sharpened scrutiny of its investment banking strategy that Bramson argues has depressed profitability.
When Barclays reports its 2018 results on Thursday, investors will examine whether the trading and advisory business that Bramson believes should be shrunk has improved its performance, and whether those gains are sustainable.
“The onus is now on the Barclays management team to convince the market that their plan is the best way forward,” one investor said. “This probably requires more disclosure on the varying returns within the corporate and investment bank.”
The high-profile dispute between Bramson and Barclays CEO Jes Staley over strategy has helped spark wider debate about the viability of European investment banks, which have in recent years increasingly lagged U.S. rivals.
Barclays rival HSBC on Tuesday for instance reported a slump in fourth-quarter trading revenue, joining other European lenders in seeing a sharp annual decline from stock trading while U.S. rivals prospered.
(Graphic: Investment banks hit by Q4 market rout - tmsnrt.rs/2TVGoOq)
Bramson’s Sherborne vehicle holds 5.5 percent of Barclays stock.
In a letter to his shareholders last December, he criticized the bank’s tactic of using considerable capital and resources to chase modest or volatile investment banking revenues by undercutting rivals, which might beef up market share temporarily but offer poor long-term returns.
Barclays declined to comment.
Barclays’ corporate and investment bank averaged an annual return on equity of 4 percent between 2015 and 2017, compared with 6 percent for Barclays UK and 23 percent for the Consumer, Cards and Payments business, a Reuters analysis showed.
Bramson also said “fortunately timed” tax income benefits and some 900 million pounds ($1.2 billion) worth of non-recurring items put a gloss on the bank’s recent earnings. The bank by contrast said the report showed its strategy working.
Investors said that while Bramson’s board seat bid is unlikely to succeed, it could offer him a “noble exit” from a campaign that threatens his track record in driving lucrative change at target firms.
“I think having been rebuffed by asking the board for a seat he was always likely to take it to shareholders, but that doesn’t mean that he isn’t playing a game,” one investor, who declined to be named, said.
“I’ve always thought he wouldn’t get anywhere and will just have to hope that the business does actually perform better than he thinks it can, and he can exit at a higher share price having nobly failed but without losing investors’ money.”
Barclays shares have fallen 27 percent since Bramson’s stake became public in March last year, suggesting his investors are currently set to take a heavy loss.
Some of Barclays’ recent actions to shore up the investment bank have irked investors sharing Bramson’s perspective, notably the appointment of more than 80 managing directors late last year and the transfer of up to 47 billion pounds of capital to the investment bank, to the perceived detriment of the broader group.
But while some share Bramson’s worries over Barclays’ poor risk-return profile and sagging credit rating - of just one notch above “junk” by Moody’s - it may prove hard to dismantle the bank’s strategy, even if he does win a board seat.
“If he gets on the board then he will definitely add value, but will he be a lone voice and still be seen as an outsider even though he has been voted on?” asked another investor.
Bramson, together with Stephen Welker, co-managing director of Sherborne, has pursued 10 activist campaigns since 2003, six of which saw principals of Sherborne join the target company’s board.
Four of the investments were liquidated without a turnaround effort, including holdings in Scapa Group, Cutera, 4imprint Group and 3i Group.
According to filings, average sterling-based returns on the six completed investments before fees or incentive allocations were more than 110 percent.
All investors contacted by Reuters said they were not surprised by Bramson’s board seat resolution, tabled on Feb. 5, but said his chances of winning a place were slim.
“I can’t see any good reason why we would support his resolution,” a third shareholder said.
“At the moment, we have very little detail on what his alternative plan might be, and some of his reported conclusions look flawed, not least his focus on returns in Markets, whereas actually it is the Corporate bank that really needs to improve its returns.”
Reporting by Sinead Cruise and Lawrence White; Editing by David Holmes