Barclays Bank has been in the news recently, but not quite for all the right reasons. An American shareholder activist called Ed Bramson has been pushing for the bank to restructure its investment bank with a view to getting returns up. Returns are typically measured as ROE or return on equity which is Net Income ÷ the value of the equity. Banks prefer to use tangible equity (ROTE) as the denominator as it gives them a more visually attractive higher ratio.
Although Ed Bramson failed to get elected as a director at the May 2nd AGM, his threat still lingers and so CEO Jes Staley is resolutely focussed on hitting his 9% ROTE this year and 10% next. The trouble with slimming down the cost base of an investment bank is that 100% of the revenues are attached to legs whereas only 50% of the costs are attached to legs. Well, that’s how the new Chairman Nigel Higgins so elegantly put it.
