Jes Staley. Picture: BLOOMBERG/DANIEL ACKER
Jes Staley. Picture: BLOOMBERG/DANIEL ACKER

LONDON — Barclays CEO Jes Staley should deepen cuts at the investment bank as the industry outlook deteriorates, and focus on its more profitable consumer and credit-card businesses, according to JPMorgan Chase.

The securities unit would generate a return on equity of less than 7% in the next three years, even if it eliminated £600m of costs, analyst Raul Sinha wrote on Thursday. The measure of profitability lagged an average 14% return at its other businesses, he said. JPMorgan also estimates Barclays will have another £4bn of litigation and redress costs until the end of 2018.

A "deteriorating investment banking revenue environment could provide the catalyst for change", Mr Sinha said.

"Weakness will continue to dilute the group’s core returns, partly eclipsing strong franchises in UK retail and corporate, Barclaycard and Barclays Africa."

Mr Staley and chairman John McFarlane are facing increasing calls from analysts and investors to address the underperformance of the investment bank, seen as the main culprit for a two-year slide in shares that has left the bank trading 40% below its book value.

Since joining on December 1, the CEO has cut 1,200 jobs at the investment bank and is exiting nine countries, according to a person with knowledge of the matter. The board is also reviewing whether to keep its Africa business amid capital constraints.

Last week Sanford C Bernstein analyst Chirantan Barua urged Mr Staley to take the "big decisions" to spin off its investment bank with an initial public offering of a reconstituted Lehman Brothers, and sell its Africa unit.

Joseph Dickerson, an analyst at Jefferies International, said it was "unlikely" the bank would be able to sustain dividend payments this year and next.

Barclays’s common equity Tier 1 capital ratio, a measure of financial strength, was 11.1% as of September 30, the lowest of the five largest UK banks.

Cutting the capital allocated to the investment bank 30% and reducing the unit’s share of the lender’s risk-weighted assets to 24% from 31% would boost Barclays’s capital buffer and lower the bank’s cost of funding, according to Mr Sinha.

"This would allow the new CEO to fund a rising dividend and would lead to the market attaching a lower cost of equity, which we estimate is implied at 16.3% at the current price," wrote Mr Sinha, who has an overweight rating on the stock.

Bloomberg