Goldman Sachs is not impressed with chief executive Antony Jenkins' plan for restructuring Barclays. Having previously suggested that Barclays might want to close its investment bank entirely or cut 3,500 investment banking jobs, Frederik Thomasen, an analyst at Goldman Sachs, released a note today suggesting that Jenkins' strategy is over-optimistic tinkering and will need to be revisited.
Thomasen said that that even after Barclays has completed its restructuring programme, its return on equity is likely to remain below its cost of equity, making the overall Barclays' business unviable. That may mean more job cuts to come beyond 3,700 business-wide layoffs Barclays has already announced.
In last week's strategy presentation, Jenkins said achieving a return on equity in excess of cost was a key aim for Barclays. In 2012, Barclays' return on equity was just 7.8%. Goldman puts the current cost of equity across the group at 11.5%. In 2015, Goldman estimates that Barclays' return on equity (ROE) after restructuring will be 10.3%, leaving it 10% out at current rates.
Worse, Goldman says there are several reasons to think Barclays' restructuring plan will founder and that even a 10.3% ROE could be overly optimistic. Rather than ditching its low return businesses (as Goldman had recommended), Barclays intends to reduce costs by £1.7bn between 2012 and 2015 and to improve underlying efficiency to 53%, from 63% currently. At the same time, Barclays is expecting to increase revenues by 13% and to reduce its balance sheet by 10%. Goldman said the plan raises the risk that costs will prove more stubborn than anticipated. It also looks a little like wishful thinking.
"This suggests that the group may eventually face further restructuring," said Goldman, pointing out that Jenkins' strategy also ignores the potential for additional capital requirements resulting from the introduction of intermediate holding company regulation in the US.
Barclays' investment bankers are already braced for redundancies. Last week, Jenkins said 1,800 jobs are being cut from the investment bank, or 7% of the total. By 2015, Goldman said current targets suggest Barclays will cut costs in the investment bank from 63% to 56% of revenues. Unfortunately, current measures may turn out to be just the beginning.
Goldman declined to offer further comment on its research.