Nigel Higgins, who was named this week as the chairman designate of Barclays, will be taking over a bank that has been wrestling with its soul for over 30 years.
The crucial change of mission came in 1983 when the old Quaker bank decided to take advantage of the looming Big Bang, which would in 1986 deregulate the UK’s financial services industry. The lender decided to add a full-scale investment bank to its traditional retail banking business, a move that has defined Barclays’ history ever since. That choice will lie at the heart of the strategic dilemma facing Mr Higgins.
The current board, led by outgoing chairman John McFarlane and chief executive Jes Staley, is committed to a modern version of the plan embarked upon in 1983. This includes a diversified transatlantic bank with a substantial investment bank.
But on the sidelines sits an activist investor, Edward Bramson, whose investment vehicle has acquired voting rights of more than 5 per cent. Although he has been cagey about the exact details, Mr Bramson reportedly argues that the investment bank is a drain on resources and depresses the share price. He wants to see the capital deployed in investment banking reduced and returned to shareholders.
Debate between these two schools of thought has raged in and around Barclays for more than 30 years. It has been particularly hot since 1998, when the then chief executive Martin Taylor tried to persuade chairman Andrew Buxton to demerge the investment bank from the rest of the group.
At an acrimonious board meeting in New York in October of that year, Mr Taylor said: “The market does not like the bundle of risks and revenues that we offer to investors and its displeasure is picked up in the discount at which we trade. In particular, it penalises us for contaminating our retail business with the risks and volatility of our capital market activities.”
His aim was to reposition Barclays as a consumer bank, but he had not prepared the ground well. The board rejected the plan and he left soon afterwards, taking Mr Buxton down with him.
For the next decade, it looked as though Mr Taylor was wrong and the board was right.
Under the leadership of the charismatic American Bob Diamond, Barclays’ investment bank fired up the earnings of the entire group. The share price stormed ahead, at times trading at twice book value, suggesting that investors regarded the sum of the parts as being worth double the value of the individual components.
The shares topped 700p in the summer of 2007. This enabled Barclays to offer an ultimately unsuccessful all-share bid to buy the Dutch bank ABN Amro. In September 2008, it mopped up the US remnants of Lehman Brothers on the cheap. This bold move appeared to be the crowning glory of the strategy of successive boards: Barclays could finally be considered one of the world’s leading universal banks.
But Lehman’s bankruptcy had sparked the global financial crisis. Investors decided that banks — particularly highly-leveraged investment banks such as Barclays Capital — were not such a good idea after all and savagely re-evaluated the entire sector. Barclays’ share price plunged, bottoming out at 47p in 2009. There has been some recovery in the share price since. But a series of losses, the Libor interbank lending scandal and other conduct charges have wiped out a decade of profits. Barclays shares now trade at little over half their book value, apparently vindicating the position Mr Taylor took in 1998.
If approved by the regulators, Mr Higgins will need to decide whether, as current management believes, Barclays can, as a broadly-based bank, deliver over time and, if so, whether investors will give the bank sufficient credit for so doing and reflect this in the share price.
Two portraits and a space on the wall on the 31st floor of Barclays’ Canary Wharf office might give Mr Higgins some perspective when he arrives from Rothchild. There, in a gallery of former chairmen, a space awaits a picture of Mr McFarlane, who once promised to double the share price over a three to five-year period. Although the outgoing chairman has tidied up the business and held firm to a strategy, the share price, rather than doubling, has fallen during his tenure.
Next door but one is the portrait of Marcus Agius, who was in charge during the halcyon days when Barclays’ shares briefly topped 700p and traded at above book value. A bit further along hangs the portrait of Mr Buxton, chairman in 1998 when the board debated the very same issue facing Mr Higgins. The share price then, adjusted for splits, was 194p; today, it is about 175p.
Shareholders will not want to waste another three decades debating this issue. Good luck Mr Higgins; history tells its own story.