Barclays CEO Jes Staley Gets a Brexit Lifeline

(Bloomberg Opinion) -- The growing threat of a hard Brexit has prompted many investors to steer clear of British banks. For Barclays Plc Chief Executive Officer Jes Staley, a rupture with the European Union could turn out to be a handy lifeline.

Staley, who has focused on reviving the U.K. lender's investment bank, has set himself a profitability target for 2019 and 2020 that the market still isn't convinced the company will be able to meet.

Pressures on revenue and margins in the first half have given the U.S. executive no choice but to lower his goal for expenses this year. But pledging to preserve client-facing jobs and income-generating roles at the investment bank may be a difficult promise to deliver on. Something will have to give.

At 9.4% in the first half, return on tangible equity surpassed Staley's target of more than 9% for the year, though it was significantly below the 11.6% in the six months through June 2018. While revenue in the second quarter was relatively steady – down 1% to 5.5 billion pounds ($6.7 billion), costs rose by about 6% as the firm cut 3,000 jobs and closed branches.

Staley is counting on being able to cut variable compensation and prune investments in projects like digital upgrades to reduce the annual cost base to below 13.6 billion pounds. It may not be sufficient.

Margin pressure is hurting the firm's U.K. activities, which account for about 30% of revenue. Consumers are refinancing mortgages at the fastest pace ever, locking in rates. Meantime, the bank has become more prudent on its domestic unsecured lending, according to Staley, even if the bank isn't yet seeing weakness in the U.K. consumer.

The banks' markets division, a unit that Staley has sought to rebuild, also had a tough quarter. Fixed-income trading income rose 2% before a one-time gain, beating estimates and Wall Street peers. But revenue from equities trading – a business Staley wants to grow – fell by 14% from a record quarter in 2018. Crucially, though, the stock unit still lagged U.S. competitors and remains well outside the group of five top firms considered to be the only profitable ones in that business.

Investors will be comforted that the bank increased the dividend and remained committed to stock buybacks, as and when appropriate. A weaker pound, down almost 4% against the dollar in July on fears of a hard Brexit, could also be a boon. While it may make cost-cutting tougher, UBS Group AG analysts estimate that half of Barclays' investment banking revenue and the majority of its international card sales are in dollars.

Staley's reign atop Barclays since 2015 has been anything but plain sailing. After facing regulatory scrutiny for trying to unmask a whistle-blower, he came under attack from activist investor Edward Bramson, who failed to win a board seat in May.

The CEO says he is confident he can meet the returns target for this year. That looks to be a challenge. If he fails, though, the economic damage and distraction of a no-deal Brexit could provide him with some handy cover.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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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