Opinion: Investment Banking's Worth It
Updated: 10:30am UK, Friday 03 May 2013
By David Buik, Panmure Gordon & Co
The moment that Barclays' Rich Ricci's Champagne Fever charged up the Cheltenham hill on March 12 to take the opener at the festival, I had that feeling that this would be the last time we would see Mr Ricci in that flamboyant tweed suit, as head of investment banking - he is the last vestige of the Diamond era.
The subsequent news of his bonus announced on Budget Day was the overriding evidence required that the change in Barclays' culture, promised by Messrs Walker and Jenkins, was finally being implemented.
However sometimes I feel that commentators on banking have been living on Planet Zog. Ill-informed comment such as 'casino banking' caused the capitulation of the banking sector, is just plain arrant nonsense.
It is generally acknowledged that in paying circa £26bn for ABN AMRO, RBS had bought a 'pup'. Apart from that injudicious and reckless venture, there is no evidence that investment banking triggered the banking crash of 2008, unlike the sub-prime lending efforts in the US, where investment banking played a matinee idol's role.
The UK's problems emanated from poor credit assessment which saw Northern Rock, Bradford and Bingley and HBOS collapse like a pack of cards. Also, the merger between Lloyds and HBOS was cobbled together unnecessarily with indecent haste towards due diligence. Our problems in London were exacerbated by bank balance sheets growing by gargantuan proportions with inadequate regulation.
Without any doubt at all, had Barclays Capital not contributed, apart from one year, between 50-60% of the bank's profits plus a capital injection from Qatar the 'Bald Eagle' would also have been at the behest of the taxpayer.
The public at large may not have liked the cut of Bob Diamond's jib nor the disproportionate bonuses paid. Nonetheless Barclays was a successful 'mover and shaker' in global investment banking. We should also remember that had Steve Ashley's RBS Treasury team not contributed about £9bn to profits in 2008-9 RBS would be in a very parlous state, rather than parlous.
Though some of the responsibility for Libor transgressions has been laid at the feet of investment banking, most of it and that of the huge fines and repayments made on PPI miss-selling are down to general and consumer banking.
Also, let's not conveniently forget the fines for inadequate money-laundering controls incurred by HSBC and Standard Chartered. Barclays' investment banking recently posted a profit of £1.3bn out of £1.8bn - hardly shabby.
Lloyds Banking Group posted much better than expected pre-tax profits of £1.92bn. Lloyds's continued recovery is hugely reliant on the performance of the UK's economy.
Impairment charges were cut from £1.6bn to £1bn. There is no guarantee that this trend will continue.
RBS posted its first net profit of £393m. Impairments are again down by a third to £1.03bn. Much has been achieved in the last few years.
The balance sheet is down by £900bn since 2009. RBS has ammunition to lend to SMEs. However the UK economy is still brittle; so any talk of privatising Lloyds and RBS before 2015 may be precipitous.
Next week HSBC and Standard Chartered post their interim results. Their respective results will be buoyed by significant overseas earnings and in the case of HSBC, also by investment banking revenues.
The failure by Lloyds to sell its 632 branches to the Co-op, following in the wake of Santander jilting RBS at the altar last year will come as disappointment to the Chancellor and Business Secretary Vince Cable, but as no surprise to observers in the City.
The threat of draconian EU regulation creates black cumuli nimbus clouds over the UK's banking sector. We also all understand the need for greater capital requirements. Capital would be much easier to raise without the EU sitting over London like the Sword of Damocles Also more upbeat sentiments from our political masters would be constructive.
Whilst banking competition on the high street is a laudable aspiration, getting the correct regulation of UK banks is even more important.
Though we look forward to Mark Carney's arrival at the Bank of England, he is only human and has just blood in his veins. We should not split our banks up, as Dr Cable and Sir Mervyn King would have us do. Implementing a 'split of assets' will seriously damage London's ability to remain at the head of global finance.
We understand Antony Jenkins's rationale for changing the culture of Barclays. We just hope that Barclays has not thrown the baby out with the bath water by attempting to put investment banking on the back burner!
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