Barclays: Bob Diamond's political critics are jumping the gun. As a UK commission begins to ponder whether the country's big lenders should be broken up, the timing of the appointment of Britain's highest-profile investment banker as CEO of Barclays is unfortunate. But Barclays, which unlike some of its rivals does not have the UK government as a shareholder, can appoint anyone it likes. The question is whether Diamond can do what he is tasked with - making Barclays a healthy universal bank.
He certainly faces big challenges. Although Diamond's Barclays Capital reported a 225 percent jump in pre-tax profit in the first half, the non-investment banking bits of the lender are struggling. Though net profit increased at the UK retail bank, bad debts weighed on Barclays' western European retail and continental corporate banking operations. Excluding BarCap, the bank generated a return on tangible equity of just 0.8 percent, according to Morgan Stanley.
Restoring the health of the retail and corporate arms may be easier than it looks. Continental impairments have stayed high at Barclays, but if those across the corporate bank fall to 2008 levels - a trend suggested by recent securitisation data - Morgan Stanley reckons the non-investment bank businesses could make a 13.8 percent ROTE by 2012. That could boost the share price by 28 percent.
But Diamond still faces big strategic questions. Successful retail banking requires local scale, but building this organically is difficult and can generate big impairments, such as Barclays is currently facing in Spain. Acquisitions provide a short cut, as Barclays acknowledged when it bid for ABN Amro in 2007. But most developed banking markets have already been consolidated, while restrictions on foreign ownership mean many emerging markets are off limits. The U.S., where Barclays is rumoured to be examining potential targets, offers scope for expansion. But establishing a significant retail banking presence would require tens of billions of dollars of capital.
Faced with a hostile environment in the UK, Diamond could just cut his losses and turn Barclays into a pure-play investment bank - possibly headquartered in New York. That is probably not Diamond's first choice. But the irony is that the political heat caused by his appointment could sufficiently embolden the UK banking commission to force his hand.
