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Diamond takes shine off Barclays

TIP UPDATE: Investment banker Bob Diamond is to take the helm at Barclays in March - and his appointment could mean decline for the lenders' retail operations
September 8, 2010

After steering Barclays through the financial crisis - and having skilfully avoided a state bailout - John Varley, the lender's chief executive, is standing down. He'll be replaced in March by Bob Diamond, the head of the Barclays Capital investment banking arm. But that news has left banking analysts questioning Barclays' longer-term strategy, and the group potentially on course for a clash with the government.

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That's because Mr Diamond has presided over a robust expansion of the corporate and investment banking (CIB) businesses, which has left the lenders' retail operations looking increasingly sidelined. Indeed, Evolution Securities estimates that 76 per cent of Barclays' capital will be supporting investment banking by 2012. "With him [Mr Diamond] as CEO, we would expect the CIB angle of the bank to grow even more, in detriment of the retail angle," says Arturo De Frias Marques, head of banking research at Evolution. "Retail disposals do not look impossible to us going forward."

The trouble is that investment banking isn' expected to be especially profitable. Evolution estimates that CIB-related operations will only deliver a sustainable return on equity of about 12 per cent by 2012 - the global retail business is expected to generate a 16.3 per cent return. "We feel the management changes at BARC [Barclays] are likely to make even more pronounced what we consider to be its main weakness: too much CIB, too little retail," says Mr De Frias Marques. In fact, he estimates that Barclays will generate a return on equity that's below its cost of equity for at least the next three years.

The scale of Barclays' investment banking operations also sets the group up for a clash with the government. The coalition's banking commission is considering whether to force banks to split retail and investment banking operations. But, by the time it reports in September 2011, Barclays could be well on the way to being dominated by investment banking. Evolution reckons that Barclays retail operations will only generate 23 per cent of group net profit by 2012. And other lenders continue to be vocal about this risk. Last week Stuart Gulliver, head of the HSBC's Europe, Middle East and global businesses, told a London banking conference that such a separation would have "significant implications for where we may choose to headquarter our institution".