Moody’s fears Barclays reforms could be thrown off track

In a blow to executive chairman John McFarlane’s plans to improve returns at the bank, the plan includes slashing costs, cutting down the least profitable parts of the investment bank and re-focusing staff culture on customer service.

According to The Telegraph, investors have broadly welcomed Mr McFarlane’s plans, with shares in the UK-listed bank up 7 per cent since he fired chief executive Antony Jenkins in July and took control as executive chairman.

However, Mr McFarlane has not announced any radical change of strategy, instead preferring to accelerate the existing reform plans put in place by Mr Jenkins.
And analysts at Moody’s fear there are plenty of risks to the scheme’s success.

“Barclays’ profitability remains constrained, however, as a result of weak revenues, and high litigation, conduct and restructuring costs, all of which limit its financial flexibility and heighten the execution risk associated with its business plan,” said the report, written by analyst Alessandro Roccati.

“Additional structural changes that Barclays will have to implement in the coming years to comply with the UK Banking Reform Act, as well as G-20 recommendations on Total Loss Absorbing Capital (TLAC), will further increase the execution risk associated with the group’s restructuring plans.”

Mr Roccati does expect the bank will complete the reforms, but notes that a failure to do so will damage his profit forecasts for Barclays.

Additional costs so far this year include the settlement of a foreign exchange manipulation lawsuit in the US, as well as £600m of expenses related to redress for payment protection insurance mis-selling.

Mr McFarlane has promised tough cost-cutting to reduce the burden of these expenses.

“The group return on equity is 5.9 per cent on a statutory basis, well short of our cost of equity, and our cost-income ratio is 70 per cent, which is high for our business mix,” he said when he announced the bank’s financial results last month.

“We need to accelerate growth in earnings, return on equity and capital generation. We need to sharpen up the productivity of the company, and we need to sharpen the nature of the decision-making processes in the company, they are actually quite cumbersome,” the executive chairman said.

If those changes are successful, then the bank could report much healthier returns for investors, which would be positive for its credit rating, according to Moody’s.

“The firm announced an additional medium-term target cost-to-income ratio in the mid-50s. The additional revenues and cost reductions needed to reach this target, if done prudently, would increase the firm’s buffer against unexpected losses, a credit positive,” said Mr Roccati.