Barclays’ investment bank: no longer worth zero, but fast becoming 2nd tier?

Times are changing at Barclays investment bank. 7,000 people are losing their jobs. Ex-Citigroup M&A bankers are taking control. Compliance staff bearing certificates will be mentoring what remains of the firm’s fixed income traders. And the bank’s U.S. equities team is being rocked by the allegations involving its dark pool.

Nonetheless, things are looking up. Sort of. Barclays’ investment bank is on the road to being worth something.

Barclays’ shares have plummeted 17% this year, with a 16% drop since the bank’s May strategy day alone. Currently priced at 206p, Bernstein’s UK banking analyst Chirantan Barua thinks Barclays’ shares could increase to 290p once the restructuring is over. When this comes to pass, he predicts that Barclays’ investment bank will account for 50p of that price – which is a clear improvement to Deutsche Bank’s estimate that Barclays’ investment bank was worth nothing at all back in March 2014.

However, Barua’s Barclays-love-bath is not free of floating nasties. While Barclays’ investment bank may soon be worth something, Barua says it’s also in danger of becoming second tier. And once it’s second tier, it could quickly become third tier, or fourth tier.

The problem now, says Barua, is Barclays’ equities business. Fixed income trading is being scaled back and Barclays’ investment banking business was down 10% year-on-year in 2013. This leaves Barclays’ equities business to carry the torch for revenue growth. Last year, equities did well – with a 23% increase in revenues. In the past few years, Barclays’ equities business has grown faster than the market (see the chart below). This year, things have gone badly wrong.

Firstly, Barua says Barclays’ equities business is being hit by deleveraging in the bank’s repo book. Prime services businesses use short term repo transactions to fund their lending to hedge funds. Less repo-funding means lower prime services revenues, and as Barclays’ is deleveraging faster than most, Barua says it will be particularly affected.

Secondly, Barclays’ successful U.S. dark pool seems to have been fatally affected by the revelations that the bank deliberately disguised the presence of the dark creatures lurking within. Barua points out that the bank’s dark pool had achieved a healthy share of the U.S. market. That now looks likely to disappear.

Thanks to the dark pool’s demise and to deleveraging, Barua predicts that Barclays’ equities revenues will decline by 23.5% in 2014 compared to 2014. He thinks that this will be followed by another 5.3% decline in 2015.

By 2016, therefore, Barclays will no longer be a top equities bank. Nor will it be a top fixed income house. Nor will it be a top M&A house (except, possibly in the U.S.). So where does that leave it?