Barclays: new chairman, old tricks

Lather, rinse, repeat. It looks as if John McFarlane, who became chairman of Barclays on Thursday, will repeat many of the turnround tricks he used to good effect at Aviva, whose share price rose by three-quarters on his watch. The UK lender could use some of his magic to haul its lacklustre 5 per cent return on equity to above its cost of capital (and that figure excludes fines).

Harking back to a letter he wrote to Aviva investors in 2012 upon becoming chairman there, Mr McFarlane has written to Barclays investors setting out his priorities. Aviva was in a crisis three years ago following a shareholder spring which cost its chief executive his job.

At Barclays, happily, investors are less restive. But there are similarities in his proposed treatment regime. Under Mr McFarlane, Aviva set out to focus on fewer businesses (turning round or selling weaklings), cut leverage, build up capital, boost revenue and reduce the cost-to-income ratio. He simplified Aviva, allocated capital more carefully, and held managers to account for the returns on that capital.

What worked for the insurer can work for Barclays. Mr McFarlane has signalled his determination to put past errors behind the bank by dealing more swiftly with legacy conduct issues, running off non-core portfolios faster to achieve the bank's target capital levels, judging whether businesses that do not meet Barclays' required returns have any prospect of doing so and either fixing or curtailing them.

Expect him to see business units in terms of red, amber or green cells, as he did at Aviva. While first-quarter results from US banks and Credit Suisse bode well for Barclays' investment bank, with its grim 2.7 per cent 2014 return on equity, it sits uneasily on the borderline between amber (fix) and red (flee). Its drag on ROE is why Barclays trades like a dowdy retail bank on just 0.8 times tangible book value. The group's cost-to-income ratio of 70 per cent (excluding fines) is a reminder that only a bank-wide focus on revenue growth (tricky) and cost reduction (easier) will prevent Mr McFarlane seeing more red more widely.

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